Morgan Stanley's

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making a big push into real estate.

Last year Morgan Stanley ranked second behind private equity giant Blackstone Group in global real estate acquisitions. And while Blackstone is nailing down a $23 billion buyout of Chicago-based

Equity Office

( EOP) in the biggest-ever office tower deal, Morgan Stanley is quietly working on its own mega-international fund. The brokerage is raising $8 billion for a fund that would look to make acquisitions worldwide.

Clearly, plenty of private equity money has been swirling around real estate. Domestic acquisitions in real estate made by private equity investors surged last year to $62.4 billion, according to Dealogic.

But Morgan Stanley is alone among traditional Wall Street firms in plunging headfirst into real estate. It's the only bulge bracket firm in the real estate top 10 last year, Dealogic says.

Sonny Kalsi, who oversees Morgan Stanley's real estate investment management business, says the company is simply seizing an opportunity to make money.

"Real estate as an asset class was probably not viewed as a traditional asset class 10 years ago, and it clearly is now," says Kalsi. "There is bigger opportunity for arbitrage opportunities. You're seeing a lot of take-private opportunity in the U.S. right now. That's just driven by the fact that in general the average cost of capital of a private investor is lower than the public market because private investors can borrow aggressively at lower financing costs."

Under CEO John Mack's leadership for the past two years, Morgan Stanley has been aggressively working to improve profitability. Mack has begun investing heavily in the private-equity industry (after the firm moved away from it under former CEO Phil Purcell) and building out alternative investments, particularly in hedge funds.

The real estate bets complement Mack's vision of the firm pushing to take on more risk while improving performance.

"John has clearly stated that he would like to see the firm more involved as a principal investor. We've been doing this for a long time," Kalsi says. "The other thing that John speaks about is emerging markets and growing internationally. We're on the tip of the spear of that. We were early into China, we were early into India, we're all over Russia, and we're trying to get all over in Brazil."

Morgan Stanley Real Estate provides investment banking, lending and investment management for the commercial and residential properties.

The brokerage launched its first private equity real estate fund in 1991. It had about $500 million in assets under management and focused on U.S. properties. Today the funds have more than $60 billion in assets under management globally. Investments include minority and majority stakes in U.S. and international real estate operating companies, owning equity and debt securities of those companies.

Last year alone, Morgan Stanley made $27 billion worth of acquisitions across the world, it says.

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"The strategy here is fairly straightforward for Morgan Stanley -- essentially people believe there is an arbitrage for the public market and private market" in real estate, says Barry Vinocur, CEO and founder of REIT Zone Publications.

But Kalsi says it's important that the business make strategic acquisitions that could potentially help other parts of the firm as well as catering to both short-term and long-term investing philosophies.

"There are a lot individual deals that we could do on a one-off basis in places around the world, but I think that it's more important for us in terms of setting strategy to make sure that the top-down story makes sense," Kalsi says. "And that's led us into some of our big calls."

While Morgan Stanley is "underrepresented" in Latin America and other emerging markets, he says, that shouldn't offset more deals in hotels and office complexes in the U.S. this year.

Morgan Stanley's most recent real estate deal was announced in January, a sale of REIT CNL Hotels & Resorts for $6.6 billion. The company is selling the bulk of the properties -- about 51 -- to

Ashford Hospitality Trust

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for $2.4 billion. But after the deal is completed, it will own eight luxury properties under the Hilton, Waldorf-Astoria, Ritz-Carlton and


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brands. The deal is expected to close next quarter.

The strategy might be a good one. Private equity firms typically charge management fees of 1% to 2% and can skim off up to 20% of the profit a fund generates from its investments.

Still, it's no secret that private equity real estate investments can be risky.

Brad Hintz, an analyst at Sanford Bernstein, says the business creates a competition problem with one of Morgan Stanley's bread-and-butter businesses -- investment banking.

"Mack has to deliver improving performance while he is addressing the fundamental long-term problems of the business. Purcell pushed out higher-risk positions," whereas Mack is adding them back, he says. "Fundamentally, those two are competing for the same trough."

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