What is Real Estate Investment Banking?

Although it is a very good investment, the real estate is a very intricate market for investors. Not only does it require a sizable amount of capital, but one needs to do a lot of research on the particular state of the market before investing. Often, interested investors have some trouble trying to find the best source of capital as well as the best agents to handle their investment. Commercial banks are not always a good idea when it comes to capital for real estate, especially when it is a big investment that involves large amounts of money. Even if they can provide credit for investors, their terms may not be suitable for many large scale investors given the dynamics of real estate. Real estate investment banking helps to bridge the gap between creditors and credit seekers.

In a typical situation, an investor will identify the occasion as well as the size of the real estate that they plan to invest in. After identifying their preferred investment location, the investor will then approach an investment bank with their ideas. From there, the job of a real estate investment bank is to estimate the overall cost of the investment, and assess its feasibility given the market prospects and other factors such as taxation. Once they have the estimates, the investment bank then goes ahead to search and identify the most appropriate credit providers for the job. Potential credit providers are selected basing on a host of factors. Usually, the Investment bank scrutinizes their terms and conditions to see if they are suitable for that particular occasion.

In essence, a real estate investment bank borrows the amount on behalf of its client. This part of the job is considered one of the core activities of an investment bank, and it is variously referred to as underwriting. In strict terms, underwriting is a practice that involves borrowing against a given asset or bond. Clients are usually willing to provide these assets, and the investment bank can present the assets to various potential creditors to act as collateral for the cash they want to borrow.

Credit Sources

Usually. Real estate investment banks raise their capital from trading in the market, which may or may not be on behalf of investors. Often, people borrow from these institutions in exchange for the control of their estates. In this case, the bank also acts a real estate agent for their client. The investment bank may also borrow, against the same assets, from other financial institutions, including conventional commercial banks.

Clients

Clients for corporate real estate investment banking range widely from wealthy individuals to large and medium corporates or even governments. Governments are known to have large assets at their disposals, and they can also borrow against special called government bonds. Investment banks usually run a thorough scrutiny of the assets, evaluating the scope of possible investment, the type of asset as well as the risk profile of these assets.

There is actually very little difference between real estate investment banking and other investment banking options today. Perhaps the main difference is the nature of the real estate market compared to the conventional stock market.

Laws in some countries have placed clear guidelines to separate investment banking from mainstream commercial and retail banking. However, commercial banks in many countries also play the part, maintaining an "investment banking" section that usually operates parallel to commercial banking.

Conflict of interest

Due to the intricate nature of these institutions, there have been concerns about conflicts of interest arising from the varying functionality of corporate Real estate investment banking. Since these banks also operate with real estate agents, valuation may turn out to be a problem. There are cases where brokers and real estate agents have compelled invested banks to value their property highly, with threats of withdrawing their investment business to competitors.

According to real estate and investment experts, it is very difficult, practically, for investment banks to serve the interest of both the investor and the credit issuer at the same time. Somehow there will be temptation of biasness, and some institution may have their own vested interests in the valuation and management of the estates.

However, real estate investment banking is one of very few options that potential large scale investors have for raising capital in the real estate industry. The institution handles capital needs for a wide range of activities, including property acquisition, recapitalization as well as ground-up development. Clients are also furnished with advisory services from the banks in order to help them make better investment decisions.