Morgan Stanley has returned $700 million to investors after its main real estate fund performed weaker than expected, reported The Wall Street Journal.

The Morgan Stanley Real Estate Fund (MSREF) VII Global totaled $4.7 billion, but only $2.5 billion has been invested, as the bank struggles to find attractive assets. The fund has a deadline of June 2012 to invest the rest of the funds, but two-thirds of investors are expected to approve an extension of the deadline into 2013.

Morgan Stanley has also cut fees to encourage investors to stay with the fund.

The bank closed fundraising in June 2010. Investors in the fund include the Pennsylvania Public School Employees’ Retirement System, China Investment Corp. and the Canada Pension Plan Investment Board, according to Bloomberg.

The fund's investments include retail buildings in Germany and Russia, a $195 million mezzanine loan to a European hotel controlled by the Blackstone Group, and distressed loans in Australia.

The depressed state of the commercial real estate market has dampened the bank's investment activity, compared to the flush days of the peak.

Morgan Stanley manages around $43 billion in real estate assets in total. It lost around $4.4 billion from real estate in 2008 and 2009.

On Tuesday, the bank agreed to a $1.8 billion settlement with the bond insurance firm MBIA on lawsuits over credit default swaps on commercial mortgage-backed securities.