The Church of England (CoE) has lost £40m from a failed investment in two New York apartment complexes, Stuyvesant Town and Peter Cooper Village, which collapsed after the US property bubble burst.

The Church Commissioners, who handle the CoE’s investments, made the deal in 2007 before the credit crunch hit. The investment was a partnership interest, along with other international partners.

However, the investment was struck by a sharp fall in residential property values, and a legal ruling that many apartment rents would continue to be regulated regardless of value or the income of residents.

The disastrous deal, which was part of the Church’s £1.3bn property portfolio, represents less than 1 per cent of its assets. The total value of the Commissioners’ assets at 31 December 2008 was £4.4bn.

A spokesman explained: "Like many property investments, the purchase of Stuyvesant Town was funded by a combination of borrowings and investors' cash. The investor's cash portion, or 'equity' was the first element to bear any loss. The value of the property fell to the extent that it covered only part of the borrowings - the rest of the borrowings, and the investor's equity, has been lost.
 
"Although the owners tried to restructure the borrowing arrangements, this was not possible, and the owner was unable to continue to meet the borrowing costs. In the circumstances, and in the best interests of the residents and lenders, the decision was taken to offer the property back to the lenders."

The Commissioners said they would look carefully at the lessons to be learnt from the loss. They said: “Stuyvesant Town (pictured) offered the opportunity to invest in a large residential complex in a major international city, with Tishman Speyer, a respected world class manager.

“In doing so we believed that the investment would provide strong financial returns and investment diversification. We undertook due diligence in conjunction with external professional advisers and fund managers, including an assessment of the indentified investment risks.”

The loss comes against a background of the Commissioners’ property portfolio outperforming its peer group by an average of 4.6 per cent every year over the last ten years and returning an average of 12.1 per cent each year. Its 'peer group' is the group of property investors measured by the Investment Property Databank, and principally includes UK institutional property investors – such as pension funds and insurance providers.