Real Estate Investment Banking – Cash Now Or Cash Later
- June 29, 2022
What is real estate investment banking?
Real Estate Investment Banking (REIB) is an industry-specific group that is created within an Investment banking division of an investment bank. The main objective of this industry group is to handle the needs of all real estate companies by helping raise capital and providing advisory services on great strategic transaction decisions that real estate companies undertake. The REIB model is highly used during Mergers & Acquisitions, partial or full selling of company assets or subsidiaries, and raising capital through debt or equity.
When the group is contracted to provide whole advisory services by a real estate firm on matters of equity, debt issuance, divestment, and mergers & acquisition deals, it fits squarely under the real estate investment banking role. Otherwise, if it’s just partial advisory services on a given segment, it’s referred to as a brokerage role.
The real estate investment banking segment offers customized services to different types of real estate clients. The most common real estate clients that work closely with real estate investment bankers include; REITs, Lodging, Homebuilders, and gaming.
- Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts (REITs) invest in different real estate asset classes such as commercial offices, warehouses, hotels, retail, medical, data centers, and apartments among others. REITs are often required to raise debt and equity so as to buy and develop real estate properties.
Many REITs, tend to invest in one real estate property type although others invest in different real estate properties. The income generated from these real estate investments is paid out in form of dividends as a way of avoiding paying huge corporate income tax while only a small percentage is retained in form of cash.
Since REITs are constantly looking for new acquisition opportunities and construction of new real estate properties, they make good clients for real estate investment bankers as they need capital to actualize their investment objectives.
- Homebuilders
Homebuilders are firms that construct, develop, and sell properties. Their construction projects are based on certain geographies, home types, and different price range for different target clients. The growth of this real estate construction and development sector that home builders are at the center of it is influenced by various key factors including; access to capital, interest rates, population growth, employment rate, and personal income. The high demand for residential real estate makes home builders seek debt and equity offerings to raise capital that will enable them to successfully build, develop, and sell homes to their clients.
- Gaming Hubs
Gaming centers can easily be simplified to mean Casinos that are high-end operated in many urban cities like Las Vegas and Singapore. The main drivers of the gaming industry are gamblers who are ready to spend a huge amount of monies in very expensive restaurants that are famous for sumptuous live entertainment. Because this is a highly-expensive business to run, most casinos also issue debt and equity offerings so that they can raise enough capital to expand and better their operations to continue attracting high-end clients.
- Lodging
Lodging refers to hotels, resorts, and even cruise lines that are the heart of the tourism and hospitality sector. The growth of these sectors is dependent on occupancy rates, advertising, and the pricing rate. Hotels, resorts, and cruise lines always aspire to grow and take their brands to new territories as well as regular upgrading of their amenities. That’s where the real estate investment banking comes in to attend to lodging frequent financial needs and in matters relating to mergers and acquisitions.
- Real Estate Investment Banking (REIB) Vs Real Estate Investment Trust (REITs)
The main difference between REIBs and REITs is in their business model. Real Estate Investment Banking (REIB) focuses on raising working capital and providing sound advisory on strategic transactions to different real estate investment firms and companies. Real Estate Investment Banking is purely advisory where a consultancy fee is charged and does not involve owning real estate properties.
On the other hand, REITs involve buying real estate properties and investing in them just like private equity firms. When an investment property is bought, it’s upgraded and then leased so that it can generate income or sold at a premium rate if it will yield high profits. Real Estate Investment Trusts (REITs) are grouped under the buy-side and therefore, Real Estate Investment Banking (REIB), is grouped as a sell-side.
Conclusion
Experts who work in the Real Estate Investment Banking industry group are known as Real Estate Investment Banking Analysts. They help their clients in the real estate sector secure and invest in profitable projects. They specialize in creating financial models that test various scenarios, presenting factual market reports, and identifying premium real estate prospects. When real estate companies provide viable investment projects such as mergers and acquisitions or business expansion as advised by the Real Estate Investment Banking Analysts, it becomes easier to qualify for investment capital.
