Housing starts, new homes sales, existing homes sales. The economic data that comes out of the housing sector has an enormous impact on consumer confidence and the economy's overall trajectory. The real estate market was historically thought to be a very safe investment—one that seemingly always moved higher. Then the financial crisis of 2008 hit. That recession shined a new light on the market, its players, and the inner workings of the market. Far more complicated than once thought to be, the real estate market has revealed its outsized influence on the economic wealth of consumers.

Many entities rely on investment banks to help them with their real estate projects—whether that's raising money or analyzing the strengths and pitfalls of potential deals. These institutions play a key role in the real estate industry, and tend to be large, global players who capture a big chunk of real estate deals. This article looks at the basics of the real estate investment banking industry, as well as the top five banks that work in this sector.

Key Takeaways

  • Real estate investment banking firms connect those seeking capital for real estate deals with those who provide it. 
  • Banks analyze risk, the location and overall scope of projects, types of assets, and cash flow potential, as well as underwriting, and aiding in property sales.
  • The top five real estate investment banks in Q1-2019 were Credit Suisse, CITIC Group, HSBC, JP Morgan Chase, and Morgan Stanley.
  • The industry is dominated by these entities because of the quantity of underwriting deals and capital real estate investment trusts REITs to continue to invest.

What Is Real Estate Investment Banking?

As a specialty market, the real estate sector requires a thorough knowledge and understanding of local fundamentals, as well as the workings of different vehicles that are used to invest in real estate. For example, real estate investment trusts (REITs) appeal to investors because of their structure. They are required to pay out at least 90% of their income as dividends. But while investors enjoy these high payouts, REITs often find themselves in need of capital—relying heavily on debt and equity issuances. This is why REITs turn to investment banks.

Investment banking is one part of the financial services industry that creates and finds capital for companies, governments, and other entities. By extension, real estate investment banks connect those seeking capital for real estate deals with those who provide it.

Real estate investment banking firms are responsible for a variety of different tasks including analyzing factors like risk, the location and overall scope of projects—anything from new constructions to acquisitions—types of assets, and the potential for cash flow from real estate investments. They also work to underwrite deals, help in the sale of properties, and even take part in joint ventures, mergers, and acquisitions. Real estate investment banking also requires banks to provide their clients with advisory services—which can involve budgeting or market analysis.

The Top Investment Banks in Real Estate

The top five global investment banks in the real estate sector by fees and market share for the first quarter of 2019 were:

  • Credit Suisse
  • CITIC Group (formerly the China International Trust Investment Corporation)
  • HSBC
  • JP Morgan Chase
  • Morgan Stanley

Fees and shares in the real estate sector dropped in the first quarter of 2019 from the same period of 2018. Total fees and shares in Q1-2019 were $1.392 million compared to $1.596 million in Q1-2018—that's a 13% drop. None of the top five captured more than 10% of the market share.

The industry is dominated by these large banks because of the quantity of underwriting deals REITs require as well as the amount of capital needed to allow REITs to continue to invest. Some of the world's largest private equity firms also have a strong presence in the industry.

These firms led the industry because of the amount of underwriting and capital needed by real estate investment trusts.

The Bottom Line

The revolving capital needs of the real estate industry, particularly REITs, makes it a ripe area for investment banks (which are all too happy to gather fees generated from underwriting the deals). Managing the risks inherent in real estate investing—risks which became rather apparent during the last housing crisis—is a top priority for investment banks, which have to make enormous capital commitments to the sector.