AAA Financing In Real Estate

Diversity of methods of investing into real estate (purchasing completed real estate constructions for various purposes; purchasing of land lots for building and without the purpose of immediate building; purchasing title for real estate; investing into shares of the companies which own and manage real estate; investments into investment funds which allocate assets in real estate) gives birth to a wide range of investment mechanisms. One of them is using services of a specialised investment bank operating in real estate and, although this notion is not specified in Russian legislation, an increasing number of companies are using the word combination investment bank in their titles.

In the sphere of investment banking, one can observe two trends: the globalization and specialization of credit institutions. The Russian market echoes the global one: whereas large banks, diversifying their business, establish real estate investment departments (banks Absolut, Reiffeisen etc.), companies are emerging which specialize solely in real estate investments (EUROHYRO, some management companies manage only real estate assets etc.). Separating investment activities of banks, which specialize in real estate, into separate types of business and legislative registration of the respective model of banking system, can guarantee stability of the real estate market, which is proved by world experience.

Concept, functions and features of investment bank activities

The goal of an investment bank is to help an investor who wants to invest into real estate and a company, which needs investments (for example, a developer) to find each other as soon as possible, i.e. to coordinate the financial flow of supply and demand.

Normally, the clients of the investment bank are major investors and developers raising funds totaling several million dollars. Moreover, an investment bank is interested in clients who don’t just ‘need a lot of money’ but who also realize that:

• The primary task of any company is to increase its value. For this purpose the company has to be transparent in terms of submitting financial reports and other information;
• Raising capital is no less important than production activity and it should be regarded as seriously as production tasks, including hiring experts whose services are expensive.

An investment bank also takes into consideration the amount of funds the potential client has already invested, and the opportunities in the field in which the potential client operates. In order to become a client of an established investment bank, the investor must be prepared to invest a substantial sum of money. If the funds are not sufficient, the client will have to refer to a financial consultant-broker, to the ‘fund shop’ or share-investment funds. An investment fund, which combines the resources of smaller investors into a larger initial investment, has a greater chance of being accepted by a financial institution.

The Theory of financial intermediation.

The activity of the investment bank is based on the theory of financial intermediation, the subject of which is the functions, goals and mechanisms of operating. The principles of the theory lead to several conclusions: the role of financial intermediaries in the process of redistributing resources in the economy is significant; saving on the scale of operations and benefits from specializing of financial intermediary are substantial. Consequently, emerging banks, specializing in real estate investment, can solve most topical problems in the market (first of all, raising large investments) and, perhaps, provide market stability.

Definitions and functions.

This new and emerging form of business – investment banking – has already become a reality despite the fact that this type of activity is not recognized by Russian legislation, and this concept is not defined in statutory acts. Nowadays a professional participant of the stock market calls itself an investment bank due to the personal preferences of its owners, or because it has an investment department or corporate finance department (apart from brokerage and dealing which are typical for Russian banks) but not on the basis of some statutory act. An investment bank of the USA is usually called an investment company in Russia, and American concept of an investment company corresponds to the Russian concept of an investment fund. When an enterprise trades corporate and state securities by buying a large stake and selling on these securities to investors, and conducts corporate financing (in the form of raising capital on the basis of issued securities or rendering long-term investment loans), it is called an in

vestment trust in Great Britain or an investment banking house in the USA. Analyzing various sources allows us to single out several features of investment banks:

• Specialization: an investment bank is an institution of a primary market, and raising finance is the basic and governing activity for it. These are credit institutions, which specialize in long-term investment loans in the securities market, as well as in insurance and operations with real estate. Mortgage banks specialize in rendering long-term loans against real estate, land lots, buildings.
• Size of owned capital: investment banks have large capital.
• Range of activities: The field of an investment bank’s activity includes the whole capital market, exclusive retail operations with securities, mid-term and long-term investments have priority.
• Scope of services: A wide range of services includes assistance in selling securities, in mergers and other reorganizational processes, functions of individual and institutional brokers, as well as carrying out sales-and-purchase transactions on its behalf including the managing of investment companies and venture funds, financial consulting and raising financial resources by the way of securities.

EuroHYRO gives the following definition of its main activity: Real estate investment banking supports large real estate investments and transactions with own and external capital (a combination of several finance instruments) by services (real estate mergers and acquisitions), financial advice, and selling the property finance risks (placement or securitization).

Thus, investment banks specializing in the real estate market, is a dynamically developing, large, versatile professional investor, which is interested in long-term direct and indirect investments into transparent projects and objects.

Features, history, law, prospects of development

Global investment banks.

Investment banks appeared in the USA after the crisis of 1929. The Securities and Exchange Commision (SEC) decided to separate bank’s investment and commercial activities. Commissions prohibited commercial banks from forwarding raised funds into corporate securities, which are regarded as rather high-risk investments, but permitted investment banks to do so. In the USA, investor’s funds handover into investment bank’s governing is still documented with bilateral agreement, where allocations of investments are clearly specified and it is constantly repeated that an investor realizes whom it has submitted its funds, and what the bank is going to do with them. In European countries, banking investment activity is not separated by legislation from the commercial sphere: consequently, European banks are more versatile.

Nowadays international investment banks are not actively represented in the market, but they are starting to assert themselves. There are international investment bankers and specialized real estate banks: German EuroHypo, Hypo Real Estate, Liechtenstein Hypo, and Dutch ABN, ING Real Estate (a major player in Poland and The Czhec Republic. We will dwell in more details upon their activity in Russia in our next article. Russian investment banks. As for Russia, it has become obvious in the short period of stock market and banking prosperity that most of the companies, which by the nature of their activity, are investment banks, have no license for banking activity. The formation of investment banking, a new form of business for Russia, was quite dynamic until August 1998. During the period of financial stabilization institutional formation of the securities market took place. As this process proceeded, on the one hand, the market was segmented, and professional participants chose their specialization. On the other hand, there emerged major entities oriented toward diversification and versatilization. The activity of these entities gives one reasons to define them as investment banks, although, according to the legislation of Russia, there is no such activity in the security market, and there are no definition and basic features of Russian investment banking in scientific works. Some professional participants of the securities market (including investment companies and commercial banks) have already named themselves investment banks, and some declared transformation into the investment-banking sphere a strategic goal of their development. After August 17, 1998 many investment banks turned out to be insolvent. At the present time, those investment banks which ‘survived’, are first of all large banks, own substantial accumulated financial resources. The only reference to this type of financial institution in Russian legislation can be found in the program of privatization for 1994: ‘… until introducing regulations by Russian legislation which are to govern activity of investment banks’. This leads one to the conclusion that it is nevertheless supposed in Russia to implement American type of organizing of the capital market institutional structure, i.e. to separate commercial and investment banks and develop the appropriate regulatory structure. At the present time, a Russian investment bank is to have a status of professional participant of the securities market, and also it can be a credit institution. A Russian investment bank of today (single business entity) is usually an investment group, which normally includes a Russian professional participant of the securities market, a management company (share funds, securities), a Russian commercial bank and offshore companies. The activity of Russian investment banks is not as diversified as that of global banks. Among promising development directions for investment banks there are intensification of consulting activity; establishing of the market of corporate bonds; entering the bills of exchange market; markets, previously traditionally occupied by commercial banks (private banking (i.e. rendering personalized banking services, including credit financing and assets management)). Thus, the short term policy of banks marketed as investment banks specializing in the real estate market, can be very dynamic. All the more so, as, due to public organizations and professional market participants’ efforts, the legislation and applied regulatory instruments are being steadily improved. In the longer term, one can expect the enlargement of investment bank business and the diversification of developers’ and real estate investors’ activity. Whereas some time ago in the real estate investment market ‘small predators could prey without much effort’, nowadays more transparent, more dynamic and enlarged markets are emerging, where larger, more aggressive and better-quality investors can succeed. And this means that future belongs to investment banks professionally operating in the real estate market.