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UPDATE 2-Morgan Stanley freezes German real estate fund


FRANKFURT, May 10 (Reuters) - Morgan Stanley on Monday became the latest bank to freeze its German open real estate fund, as the government mulls a regulatory clampdown on the sector. The U.S. investment bank suspended the sale of shares in its P2 Value fund, which is heavily invested in Japan, in face of possible writedowns on its property holdings and continued market uncertainty. "The market situation is continuously difficult and therefore markdowns cannot be ruled out in the periodic valuations (of the portfolio)," Morgan Stanley Real Estate said in a statement on Monday. Investors have taken fright in recent days after Berlin unveiled possible regulatory changes to the way funds value properties in their portfolios. Rival property funds KanAM Grundinvest and SEB Immoinvest last week announced that they were suspending redemptions for three months. Germany has seen repeated problems at open property funds since investors could redeem their shares at any time despite real estate investments generally being illiquid and long-term in nature. A German finance ministry discussion paper on proposed changes to rectify the problems would require investors to hold funds for at least two years and would force them to accept an equally long cancellation period. Funds would also be required to discount the value of property holdings when calculating the value of the portfolio, a provision aimed at protecting investors from sudden losses but one that has prompted mass withdrawals from open property funds. Morgan Stanley Real Estate head Walter Klug said that some of the ministry's proposals were "sensible," such as the minimum holding period. "But we are against the blanket discounting of portfolio assets," he said. Real estate funds usually use their own appraisers when determining the value of properties in their portfolio, values that are dependent on the development of sales and rental on the property market. Klug said that the bank's objective was to reopen the fund, that he was currently talking to investors and that he planned to unveil a new business plan in July or August. "However, a liquidation cannot theoretically be ruled out, " he said. The P2 Value fund opened in November 2005 and held more than 2 billion euros ($2.7 billion) in assets as at the end of March, with nearly a third of the entire portfolio invested in Japan's currently difficult real estate market. "While the investments in Europe are already picking up again, there is no sign of that yet in Japan," Klug said, adding that the office rental market in particular was stagnant. Morgan Stanley said the suspension of sales announced on Monday would allow new investors to be better informed about their purchase decisions. It had already closed the fund to redemptions in October 2008 at the height of the financial crisis and repeated on Monday that the fund would stay closed until Oct. 30, 2010 due "on the one hand to the high desire for redemptions and on the other to the hesitancy of new investors." FOR A FACTBOX ON GERMANY'S PLANNED CHANGES TO INVESTOR PROTECTION LAWS (Reporting by Jonathan Gould, Andreas Kroener and Kathrin Schich; Editing by David Cowell) ($1=.7453 Euro) Keywords: MORGANSTANLEY/FUND (Reuters Messaging: jonathan.gould.reuters.com@reuters.net; +49 69 7565 1242) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.

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