A Morgan Stanley property fund failed to make $3.3 billion in debt payments by a deadline on Friday, handing over the keys to a central Tokyo office building to Blackstone and other investors, the largest repayment failure of its kind in Japan.

It marks the latest fallout from a series of highly leveraged investments by Morgan Stanley , one of the most aggressive investors in worldwide property markets before the global financial crisis.

The $4.2 billion MSREF V real estate fund missed its April 15 deadline to repay 278 billion yen($3.3 billion) worth of debt packaged in commercial mortgage-backed securities on the 32-storey Shinagawa Grand Central Tower, a property which has seen its value plunge, two people involved in the transaction said.

They spoke on condition of anonymity due to the sensitive nature of the matter.

A Morgan Stanley spokeswoman in Tokyo declined to comment. A New York based spokesman for Blackstone, which holds the most junior portion of the debt and gains the right to market the building for seven months, was not immediately available for comment.

This is the largest repayment failure of debt packaged in CMBS in Japan, according to analysts and industry experts, bigger than the 112 billion yen that real estate investor K.K. daVinci Holdings failed to pay on the Pacific Century Place office building.

MSREF V bought the Shinagawa property for 140 billion yen in 2004 from Mitsubishi Corp <8058.T> and Mitsubishi Motors <7211.T>. The building now houses Microsoft's Japan offices among other tenants.

Morgan Stanley repackaged the loans into 125 billion yen worth of CMBS in 2005, according to a website for Morgan Stanley.

Taking advantage of a run-up in property prices, MSREF V refinanced its debt on the Shinagawa property in 2007 with new debt worth 278 billion yen, twice the value of its purchase and likely yielding a tidy profit for the fund.

The refinanced debt was sold in six different tranches by Morgan Stanley to investors.

(Reporting by Junko Fujita; Editing by Edwina Gibbs and Nathan Layne)

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