In 2007, as the global property price bubble was about to burst, professional investors gave Morgan Stanley Real Estate Fund VI International $8.8 billion to invest in properties around the world. Some $452.5 million of that money, 5 percent of the total, came from the Pennsylvania Public School Employees Retirement System.
Morgan Stanley has now warned investors it may lose $5.4 billion, or 61 percent, of that total as property values collapse, say the Wall St Journal and Bloomberg Business Week. "That would likely make it the biggest dollar loss in the history of private-equity real-estate investing," says the Journal. "The losses come from investments in properties such as the European Central Bank's Frankfurt headquarters, a big development project in Tokyo and InterContinental hotels across Europe."
Last year, PSERS braced for an even worse loss. As of mid-2009, with commercial real estate prices still falling, PSERS valued its $452.5 million investment at just $80 million - a drop of 82 percent.
That includes $16.4 million the system already got back from Morgan Stanley, and $63.5 million remaining in the fund, according to PSERS' most recent data. The other $372.5 million was gone.
Why the gap between what Morgan Stanley told PSERS last summer and what it reportedly told investors this winter? Does Morgan Stanley see commercial real estate prices bouncing back that quickly? Morgan Stanley officials haven't returned my calls seeking comment.
Don't worry about the future school retirees. They'll get their checks. State revenues and local school property taxes will fill any gap.