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Goldman Real Estate Fund Lost 98 Cents on the Dollar

Whitehall Street International, Goldman Sachs’ international real estate investment fund, has lost almost all of its $1.8 billion of equity following soured property investments in the U.S., Germany and Japan, according to the fund’s estimates.

By the end of 2009, the fund was down to its last $30 million, a paper loss of about 98 cents on the dollar, an annual report sent to investors last month said. The report said that Goldman was Whitehall’s largest investor, with a commitment of $436 million. Last year, Goldman took a loss of $1.76 billion from all its real estate principal investments.

The Whitehall disclosure is the latest in a string of losses reported by bank-owned property funds that relied on debt, and it comes as the Obama administration is seeking to restrict banks’ investment in private equity funds.

It was revealed earlier this week that Morgan Stanley’s most recent $8.8 billion international property fund will lose as much as two-thirds of its value.

The Whitehall fund, raised in 2005, invested more than half its capital in the U.S., and was also heavily exposed to Germany. While the drop in property values was dramatic in these two countries, losses at the Goldman fund were exacerbated by its dependence on debt.

The letter to investors acknowledges the “negative impact of leveraged investing in a market in which estimated asset values have declined materially”.

“The approach of lenders and regulatory agencies towards upcoming troubled debt maturity issues may meaningfully impact the fund’s ability to hold assets until markets recover or to sell select non-core assets in the near future,” the letter said. “Many banks have been unwilling or unable to extend credit or refinance without steep concessions or additional equity.”

The Whitehall fund has a long life and is not set to end until 2014 at the earliest. So it is still possible that values will improve.

“Our continued focus on restructuring opportunities within our portfolio will enhance the prospects for recovering equity for the fund and our investors,” the letter adds. The fund has distributed $45 million, or 3 percent of committed capital, to investors.

Goldman was able to restructure the debt on several of the fund’s investments, including a $558 million recapitalization of Valencia, a Japanese real estate company. It also has restructured several investments in Germany, including a retail portfolio in Berlin.

Goldman has handed the keys to creditors and locked in losses on other investments, including Daiwa House in Japan and several investments in Germany.

The letter says that the fund’s financial statements received a qualified audit opinion for the year, though “this does not affect our ability to execute the fund’s current strategy and the ultimate recovery period for the fund”.

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