Morgan Stanley predicts property will outperform other assets

Returns from real estate will probably outperform other assets in the next few years, John Carrafiell, global co-head of Morgan Stanley Real Estate Investing, the biggest property investor among Wall Street banks, has told a private equity conference in London. Demand for real estate investment has been aided by lower borrowing costs and banks' increased willingness to lend, he said. That's as a supply and demand mismatch has underpinned rental growth across the globe, lifting property values, said the executive, who jointly oversees about $60 bn of real estate investments for the bank or its customers.

'We are still in the middle-ish innings of this trend, which may run for four to eight years, Carrafiell said. 'You could almost have invested in any real estate asset over the past four years and have done very well. That game is over and
performance will deviate massively going forward.'

Morgan Stanley is concentrating on emerging markets and mature markets, particularly office and retail assets in Germany, and office and residential properties in Japan, which offer the best prospects for rental growth, Carrafiell said. 'Secondary assets will perform poorly in coming years,' he said, adding that he won't invest in markets where there is oversupply, like in southern California and Florida, or in three or four-star hotels and in US condominiums.

Carrafiell is focusing on new buildings or those being refurbished in 'key world cities,' where there is a shortage of prime office space, to capture the best rental growth opportunities. Property values in cities like Tokyo, Frankfurt and
Shanghai will continue to appreciate, he said. Vacant buildings or those with leases that are about to end are among his targets. They require local market knowledge and the skills to 'sweat the assets,' he said.

Last month, Morgan Stanley bought the Frankfurte Welle office complex and 28 buildings in Frankfurt, Berlin and the Rhine-Main region for EUR 2.1 bn. In the same month, it also acquired Investa Property group, Australia's biggest office owner, for EUR 3 bn

A focus on developments or, in the case of emerging markets like Russia and Turkey, buying stakes in developers, has been another part of this strategy, he said. 'We are the biggest developer in Europe today,'' he said,
adding that the bank has invested in 12 billion euros of shopping center projects in central or eastern Europe. Last month, the bank bought a 25% stake in Warsaw-based developer Wan. It also owns stakes in Russian developers RBI, RosEuroDevelopment and RGI International.

(Bloomberg)