UNITED STATES - Morgan Stanley Real Estate is pulling out of the separate account business.

The real estate arm of the asset manager will in future only be a player through its commingled fund operation and the MSREF fund series.

Industry sources suggest the likely reason for this move is higher fees and more control are accessible through a commingled fund structure.

Whereas separate account fees tend to be 1% for the asset management and 70-80bps for acquisition fees, pension fund experts say commingled funds can typically be 2% along with 1% acquisition fees.

Equally as important, this would also allow Morgan Stanley to make all of the investment decisions and gain full control of its activities, compared with separate accounts which tend to be non-discretionary and therefore allow the pension fund to have the final say over any acquisitions.

Morgan Stanley has had some high profile separate account relationships with major institutional investors, including a $2bn (€1.6bn) account held with the Florida State Board of Administration since 2003, and a $500m relationship with the Michigan Department of Treasury.

The Illinois Municipal Retirement System is still working with Morgan Stanley through an account worth $201m - the only separate account arrangement this pension fund has with a real estate manager - so the pension fund now has to decide whether to distribute the assets with its existing commingled fund managers or hire a new manager to oversee the properties.

Its current commingled fund managers include BlackRock Realty, Rothschild Realty, Sentinel Real Estate Corporation and TA Associates.

Both Florida and Michigan have yet to make final decisions on their separate accounts with Morgan Stanley too, but both pension funds could award the assets to one or more of their existing separate account managers.

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