Investment Banking Has Quietly Returned to the Dreaded Real Estate Sector

There’s quite a bit of chatter in the mortgage and real estate world regarding rising property valuations and mortgage interest rates going in the same direction. Everyone’s focusing on buying property while it can still be financed relatively cheap, and rates are rising as the Federal Reserve has begun signaling it will begin to end its support of the U.S. economy via quantitative easing. However, an interesting thing has been occurring underneath the major headlines: investment banking has also been enjoying quite a successful run in the real estate recovery as well.

No one has to think back very far to remember the banking fiasco of 2008 when real estate investing literally destroyed entire brokerage houses as the mortgage-backed securities house of cards came apart quickly. That said, the industry and investment sector has not been shunned since that financial meltdown. Instead, real estate investing on a global level has triggered a fee revenue stream that has risen to $2 billion annually, a 54 percent increase since the drop and two thirds of the way to the high point of 2007 with $3.5 billion in banking fee revenues. The revenues coming in breakdown as follows for the first six months of 2013:

  • $2.3 billion from U.S. investing
  • $86 million in Latin America
  • $720 million in Asia

There is no question that the pursuit for more profitable yields has created the revenues. Most of the conservative tools available don’t produce anything viable, thanks to interest rates in banks being kept at all-time lows, forcing investment to go elsewhere. For years conventional bond yields haven’t been much help either. As a result, real estate trusts have become quite attractive. However, investment banking managers and experts looking for even bigger results have moved directly into real estate itself versus working through third party funds.

To make matters even more interesting, various trusts and real estate ventures are maturing now, again becoming ripe for market consolidation. This is the kind of buildup investment bankers want to see; it generates more mergers & acquisition activity, and that in turn generates more banker’s fees.

The one risk to this rising improvement in the real estate sector is, of course, the potential actions of the Federal Reserve over the next few years. Ben Bernanke’s comments have already underscored a desire by the Reserve to get out of buying mortgage-backed securities by mid-2014. If that actually occurs, the economy will be flying on its own completely and could suffer a serious retraction without a crutch to stand on anymore. The results could turn all those profitable real estate positions in sinking mud again very quickly.

For career impacts, those already in the investment banking field and considering specialization, the rise in real estate may be a good wave to catch while it is still swelling. However, for those just coming into the field, putting all of one’s eggs into real estate work would likely be a mistake. The market has the potential to swing wildly in the next year or so, and if the federal pullout in 2014 goes badly, real estate could fall as well as everything else if credit freezes up again. So new investment banking players cautiously consider this area as a primary career path just now.

As a result, while the real estate sector is once again making money, the real question for the investment banking community is, how solid is that area as a long-term risk?

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