Morgan Stanley's troubled MSREF VI International fund is facing further handovers, following the fund's warning in a document to investors that it could hand back the keys to some of its properties, including German assets.

Morgan Stanley's troubled MSREF VI International fund is facing further handovers, following the fund's warning in a document to investors that it could hand back the keys to some of its properties, including German assets.

Hot on the heels of the fund's handover of its EUR 2.1bn Pegasus portfolio to UK lender Royal Bank of Scotland in January, hotel portfolios are now expected to be handed back to lenders. MSREF’s third-quarter report said that it would return an $800 mln (EUR 589.7 mln) portfolio of 10 European hotels, including Hiltons in Brussels and Barcelona, to lender Barclays Capital. It may also return a portfolio of Intercontinental hotels in cities such as Frankfurt and Madrid, which was acquired for $873 mln in 2006.

Should the hotel portfolios be put up for re-sale, it could have a re-energising effect on the market, said Nick Pattie, managing director of Cushman & Wakefield Hotels in London. 'Prime hotel prices haven’t fallen much and there is strong demand for prime assets from high-net-worth individuals in the Far East and from Middle Eastern sovereign funds. If these portfolios are sold for a good price it could have a very positive impact on the market,' he said.

Global hotel investment levels are up 53% year-on-year in the first quarter, according to Jones Lang LaSalle, citing an easing in global credit markets and a 'noticeable increase' in stock being offered to the market with increased sale activity from banks.

Would-be buyers could also benefit from the fund's plight, said Timo Tschammler, managing director of DTZ in Germany: 'I think that the possible losses [in the MSREF VI International fund] could be great news for would-be buyers, who may be able to negotiate better prices from distressed sellers. But it will also make banks nervous, so they are likely to review their books very carefully.'

In Europe, seven of the fund's acquisitions have been badly hit, including the Pegasus portfolio. The fund acquired the portfolio of German office properties from Union Investment in 2007 in a deal that was financed with $538.3 mln of equity. RBS is 84% owned by the UK government following a multi-billion pound taxpayer bailout last year, meaning that the government will determine what happens to the Pegasus portfolio.

See the April issue of PropertyEU for more details on the problems with the MSREF VI fund. Click on the link below to subscribe: