Company: Morgan Stanley Real Estate
Title: Managing Director
Time in current role: 16 years
Biggest accomplishment: Building Morgan Stanley's Asian real estate operation from scratch to $20 billion in assets and more than 200 employees
Short-term goal: To be the number one diversified real estate funds manager in the world
Few U.S.-based investment managers have penetrated the Asian property markets as decisively as Morgan Stanley Real Estate. Whether the firm is buying stakes in a Bangalore developer or securing skyscrapers in downtown Tokyo, the real estate arm of the world's third-largest securities firm has cobbled together a geographically diverse real estate platform over more than a decade. Including its Asian interests, Morgan Stanley (NYSE: MSR) currently manages $60.5 billion in real estate assets.
Leading the charge of the Asian campaign is Manhattan-based managing director Sonny Kalsi, who oversees more than $40 billion in offshore real estate. The firm became involved in Japan in 1997, when it began buying defaulted properties from Japanese banks.
In 2005, Morgan Stanley spent $8 billion on Japanese office and hotel properties. Office property values in Tokyo have tripled over the past three years. Recently, Morgan Stanley has shifted its focus eastward to where the explosive Chinese and Indian economies are spurring heavy demand for commercial real estate.
“There are some really great economic stories unfolding in China and India. Plus, these markets are still very inefficient,” says the 39-year-old Kalsi. The Chinese economy expanded 10.2% in 2006, while India's grew by 8%. By comparison, the U.S. economy grew at a healthy 4.8% clip.
Kalsi believes that growing pains, such as limited transparency and cultural obstacles, still offer plenty of real estate opportunities to the savviest investors. Last year, the firm invested $68 million in Bangalore, India-based Mantri Developers Ltd., which develops residential and commercial properties across the world's second most populated nation.
Mantri represents Morgan Stanley's first Indian real estate investment. Kalsi believes that Morgan Stanley's minority stake in the firm will help Mantri grow its burgeoning development business and that a future IPO for the firm is possible.
The Chinese market presents similar opportunities. In June, Morgan Stanley spent $387 million for a 10% stake in Shimao, a Chinese development firm. Like Mantri, it too is a private company that could test public waters in the future.
What led Morgan Stanley into the overseas property market? Kalsi has a one-word response: diversification. As the world's wealthiest investors look to broaden their global exposure, Morgan Stanley's far-flung real estate funds appear pretty enticing. These investors also expect to generate stronger returns from offshore real estate investments than domestic equities.
Barred from disclosing the private funds' performance, Kalsi says that the returns have been “north of 20%” for several years. Since 1991, Morgan Stanley has launched six real estate opportunity funds that have raised more than $17 billion combined. Two of the funds are weighted toward the Asian markets. None of the funds — each has been oversubscribed — has been liquidated to date.
One big question is how the Asian economic story will pan out. Overheated economies are a major concern, but Kalsi isn't losing sleep over the matter. He sees the risks, but he also believes that Morgan Stanley has minimized its exposure by taking a prudent investment approach.
For example, Morgan Stanley is still reluctant to back direct ownership deals, especially in markets like China where heavy restrictions make investing in assets a challenge. Instead, he prefers that the opportunity funds buy partial stakes in operating companies that own and develop commercial properties in the region.
“We've taken the view that it's more comfortable for us to invest in companies rather than direct properties,” explains Kalsi. “And we only see demand for new product increasing throughout markets like China and India.”