Back in the game – revival at last for real estate but the players have changed

As investors place their bets on London’s property market, battered real estate teams are finally seeing a revival after the bleak post-Crunch years. Legal Business talks to the property lawyers who are back at the table.

Any Londoner will tell you that the Capital resembles a mass construction site these days. Around Victoria, for example, the noise of jackhammers perpetually fills the air, the result of a £2bn Land Securities redevelopment project to provide new luxury homes, shops, offices and improved transport facilities. This development has seen City real estate heavyweights Berwin Leighton Paisner (BLP), Freshfields Bruckhaus Deringer, Nabarro, CMS Cameron McKenna, Hogan Lovells and Eversheds lead on the legal side.

Move further east and you’ll find further regeneration, following Mayor Boris Johnson’s rubber-stamping of an agreement in June 2013 with The Silvertown Partnership, advised by Mayer Brown, to transform a 62-acre site at the Royal Docks into a new ‘innovation quarter and destination for global brands’, in a bid to boost the UK economy by £6.5bn.

And in the City, the iconic Gherkin, one of the City’s most distinctive and recognisable landmarks and valued at £650m, is currently up for sale after falling into receivership earlier this year. The development is expected to be purchased by a foreign buyer, with Baker & McKenzie acting for the facility agent for the senior lender syndicate and its receiver, Deloitte.

There’s little doubt among the law firm real estate practices in the UK that property is back with a vengeance. In particular, London has boomed as low interest rates drive investors to chase distressed assets and wealthy foreigners view the City as a safe haven. As a result, the legal market has enjoyed a resurgence in confidence and an uptick in lucrative mandates. For the practice area ravaged first and worst by the credit crunch, it is a welcome revival. Hogan Lovells global head of real estate Jackie Newstead says: ‘The investment market is really strong again. We’re back to really exciting levels of work. It’s not just in London – last year you would have said that – but now it’s about the rest of the country too. All the big cities are a lot busier – there’s so much international money coming into London that domestic funds in particular have had to look outside London because they can’t compete’.

‘Levels of work have definitely picked up, they’ve picked up across Europe,’ says Hugh Lumby, real estate partner at Ashurst. ‘That’s been driven by a number of factors – there’s a huge demand for the London market from around the world, we’ve seen a lot of money coming out of south-east Asia but from North America as well, with clients really paying top dollar for property. There’s a lot of competition and a lot of demand which has kept everyone really busy. We definitely feel there’s more confidence in the market.’

Having turned their backs on real estate post-Lehman, with many law firms shedding fee-earners in droves, a standout real estate practice is once more a pre-requisite. But for those that shied away from commercial property during the downturn, allowing unloved partners to leave and refusing to train up the next generation of real estate lawyers, the question begs as to whether they can successfully reboot their practices. Or will those that kept their commercial property teams more or less ticking over between 2008 and 2013, despite the inevitable drain on profitability and utilisation rates, end up reaping the rewards for remaining loyal to the practice area?

Bricks and water

The most high-profile example of a firm perceived to be visibly retreating from real estate was Linklaters, which has a team now that is, according to certain clients and peers, a shadow of its former self.

Now led by Andy Bruce, who made partner in 2005, the real estate department, despite traditionally being a dominant force with a client portfolio including Lend Lease and JPMorgan Chase, endured a savage restructuring as work became increasingly unprofitable. And while similar re-engineering also befell the firm’s corporate team during the downturn, multiple partner exits in real estate were significant, including Ann Minogue, who jumped ship to Ashurst as head of construction in 2009 and is now a partner at Macfarlanes after moving again in 2013. Exits majorly occurred throughout 2012, including then-practice head Anne Byrne and partner Joe Conder, who moved to Capital & Counties Properties and US firm Goodwin Procter respectively, while partners Huw Baker and Julian Innes-Taylor left for Lawrence Graham that same year, as well as respected finance head Claire Watson, who joined BLP. One high-profile, property-focused general counsel says: ‘We used Linklaters but its real estate team is simply not there anymore – its partners have spread out to other places – and it is not full service.’

But with real estate still accounting for roughly 10% of firmwide revenues, amounting to a healthy £125m, Linklaters says it has 20 real estate partners in London – albeit a number are predominantly finance or capital markets specialists – covering all specialisms, with just under 100 associates. It hired Herbert Smith Freehills property partner Simon Price in September and has secured some big-ticket mandates in recent months, including the sale of Lend Lease’s remaining interests in Bluewater Shopping Centre to Land Securities for £696m, as well as a panel win for CBRE Global Investors.

Bruce strongly refutes the line pushed by critics that the firm is no longer dedicated to maintaining a full-service practice. ‘I want to make clear that Linklaters is committed to real estate,’ he says. ‘We have been misunderstood. Over the last few years we have really focused on delivering what our clients tell us they want: leading practitioners who can tackle complex deals with multi-disciplinary features, not just bog standard conveyancing. We have all the specialist expertise modern real estate deals require and to make the most of that, we join ourselves up internally on a sector basis. We continue to play a role in the London skyline.’

But a real estate head at a rival firm responds: ‘The Magic Circle are looking at a model where they have a very small number of partners who focus on high-end mandates or servicing other departments rather than necessarily providing the full-service or sector-focused approach really needed to do the job effectively. It’s not a priority for people where profits cannot be made’.

For all the talk of Magic Circle players downsizing their practices, Clifford Chance continues to be perceived as a front runner for high-end work and, despite partner headcount dropping from 53 in 2009 to 33 in 2014, it is regarded as having a deep bench of real estate-focused partners (see ‘Major real estate teams’). Ranked tier one in The Legal 500 for commercial property, the firm commonly picks up instructions for marquee work, including advising the Battersea Power Station Development Company on the £1bn extension of the Northern Line to Battersea Power Station, while the property finance team advised GE Capital Real Estate on the £1.4bn acquisition of a portfolio of commercial property loans originated by Deutsche Postbank. Like Linklaters, the firm’s global head of the real estate sector Adrian Levy states that the real estate offering is split across different practice areas and sector groups, but says this has been planned. ‘We look at it in a holistic manner. It’s not just looking at it as a silo of a pure real estate business. Because of that, we have grown from strength to strength in real estate transactions we’re involved in, whether it’s financing or pure transactional work. We’ve done extremely well on that. That’s a combination of our focus and obviously from having good international coverage. From this, we secure work via our overseas network’.

A recovering banking sector has brought new forms of capital into the market, including debt funds, insurers and sovereign wealth funds, meaning the work levied on law firms is increasingly sophisticated, argue the Magic Circle, while the definition of what actually constitutes real estate work for global transactional firms has changed. Levy comments: ‘Investment is significantly coming from the Far East. Now it’s the big players, such as large sovereign wealth funds, that have so much money they’re chasing after similar assets. You needn’t worry about your practice if it moves with the market to the extent where you don’t just do direct investment work. We do distressed work, restructuring, complex financing structures and get more involved with insolvency teams and dealing with bad bank situations. You need to live the same life cycle as the property market. Those that are suffering are more closely aligned with day-to-day management of assets and leasing activity.’

Linklaters’ Bruce agrees: ‘My observation is that post-crisis deals have become more complex and lawyers have had to become multi-disciplinary. Since the crisis, clients have found that deals are more complicated.’

The remainder of the Magic Circle, Allen & Overy, Freshfields and Slaughter and May, all maintain reputable real estate offerings, but it is clear that with smaller, tightly-focused teams, high-end financing work dictates the approach of these firms. Slaughters in particular was noted by one general counsel as ‘very expensive’ and only considered when really necessary for complex deals. So for all the talk of retrenching by the Magic Circle from real estate, these firms have stepped away from vanilla real estate work for tenants and developers, essentially following the money. Whether that strategy can sustain a meaningful practice long term remains hotly debated.

As one real estate head puts it: ‘I don’t think clients buy into firms only wanting to do the cream of the work; they want full service. I suspect that’s the reason why firms like the Magic Circle pulled back from real estate.’

Adding value

It is clear that a handful of City firms outside the Magic Circle, as well as some leading national players, are the usual suspects when it comes to naming the dominant real estate players in the conventional sense. However, margins remain tight and firms are still under pressure from clients on pricing. Firms are finding it hard to offer clients value working from a London-only cost base.

BLP, which by most yardsticks is the strongest overall real estate firm in the UK, has endured a tough time in recent years. In addition to suffering one of its worst-ever financial years in 2012/13, the firm has seen the exodus of multiple partners over the last 18 months – with both its flagship real estate practice and finance teams taking a hit. Notably, property finance duo Andrew Flemming and Jo Solomon moved to Hogan Lovells in July and September respectively, while real estate finance head Laurence Rogers and real estate partner Richard Hopkinson-Woolley jumped ship for DLA Piper’s real estate team in early spring.

2013/14 saw the firm recover financially and little that has taken place at BLP since 2012 has tarnished the image of its real estate offering. Many argue that without its standing in the sector, the firm ‘would effectively sink’. Clients include Canary Wharf Group, Land Securities and private equity house The Blackstone Group and this year also saw BLP take over all of Tesco’s property work, rather than sharing it with Ashurst. The supermarket giant chose BLP as its ‘go-to’ real estate adviser in what constitutes an endorsement of the strength of its signature practice area and an early success for its new low-cost Manchester office – recognition of the fact that a London-only cost base for real estate is unprofitable when a client such as Tesco wants cost-effective advice on vanilla work. Ashurst’s Lumby told Legal Business that pricing pressure from Tesco made handling real estate work unworkable.

Meanwhile, BLP real estate chief Chris de Pury believes much of the talk emanating from other teams in the City of being truly dedicated to real estate lacks substance. ‘Every lawyer talks as if they know this [real estate] sector and they don’t mean it,’ he says. ‘I know this because I’ve had so many CVs landing on my desk.

A competitive environment in real estate means quite a lot of people can buy and sell a straightforward property asset as well as us, a few people can do construction really well; maybe a handful can do planning to the highest standard; and a small band can do disputes, but who is top of the class in all of that? Clients will seek out not only real estate but all the variables within that and the ability to do that in jurisdictions they want to be in. Are we regarded as being the very best at the top level mainstream corporate or finance in terms of breadth and depth and track record? Maybe not. Ask that same question about any real estate sector transaction requiring in many ways the same corporate, finance, funds, private equity and/or tax expertise and the answer is “absolutely yes”.

In contrast, Lumby says Ashurst is focused on high-end work for its trophy clients, such as Westfield, and most clients are happy with that arrangement. He says the firm continues to be ‘competitive on pricing’ but is not looking to pick up the administrative, day-to-day work better suited to national firms offering lower rates outside of London. ‘We’re very much focused on the value-add market,’ he says. ‘It’s where we can add expertise and depth – we’re not churning out leases – it’s complicated deals with tax and finance aspects.’

A focus on value-add at Ashurst is perhaps inevitable given the erosion that has taken place within the team in recent years. Key players departing since 2011 include real estate litigation head Michael Madden to Winston & Strawn three years ago, longstanding partner Martin Wright to Mayer Brown in 2012, partner duo Ann Minogue and Anthony Burnett-Scott to Macfarlanes last year, and Matthew Hooton to Simmons & Simmons, also in 2013. Property was known to be hit in a series of exits in recent years. But Lumby says Ashurst was not alone in losing people ‘at all levels’ as a result of the downturn, and says: ‘There wasn’t a lot of work going through and people were looking to protect themselves.’

However, he adds that income from real estate remained fairly stable post-Lehman. Globally, the team turned over around £45m last year (8% of firm revenues), and backs up its claims to be focused on the largest development projects in the market, including recently acting for Westfield on its joint venture with Hammerson on the £1bn Croydon regeneration, while M&G Investments, Prudential, Oxford Properties and the Berkeley Group sit on the firm’s client roster.

Hogan Lovells is a pioneer of bifurcating service lines between ‘high-end’ and ‘commoditised’ work, with Lovells’ former real estate head Bob Kidby having created its celebrated Mexican Wave model for Prudential over a decade ago, outsourcing lower-value work for its real estate clients to credible regional players, such as Cripps Harries Hall in Tunbridge Wells. And, having launched its own low-cost base in Birmingham this year, Newstead says having the right structure is key to success: ‘There’s a group of firms making money and others struggling. We’re more profitable now than we were pre-recession. It was partly recognising the model that works – for real estate to be successful you need the right sort of leverage. That includes the right style of team to meet the work and having an all-round service with the right people, at the right levels.’

Leona Ahmed, real estate divisional managing partner at Addleshaw Goddard, says the reason Lovells set up Mexican Wave is because firms cannot run a real estate practice where they choose only to do major transactional work for clients – meaning making a real estate practice profitable is not a new problem. As such, she says Addleshaws took full advantage of the Magic Circle downsizing their teams in recent years. ‘A lot of their good people, particularly associates, were leaving and looking at where they could further their careers. We were forward thinking in that regard and hired a lot of them, so we’ve added some very strong real estate lawyers to those we already had. We didn’t lose any clients which is pretty amazing. Having been through a previous property recession and seeing how brutal that was, not to lose any clients is a testament to the commitment that we have made to the sector as a whole.’ With longstanding relationships with Primark and Sainsbury’s in the retail sector, and hires in recent years, including Clifford Chance senior associate Lee Sheldon as a partner last October and real estate funds partner Stewart Womersley from Nabarro in July this year, the firm is intent on enhancing an already substantial practice.

National rescue

Ahmed says one of the key selling points for her practice is that Addleshaws has long-established Leeds and Manchester offices with strong property practices. This enables the firm to service clients effectively at a lower cost-base but through a quality non-London offering, rather than having a back-office feel. In many ways, foreign investors flooding the UK property market but being unwilling to stomach City rates for legal work has played into the hands of national players. Eversheds was one of the first major UK law firms to be hit hard with the decline in transactional work during the global financial crisis, with its exposure to real estate severely taking its toll. Team revenues fell from a boom-time peak of nearly £100m to less than £70m over a period of just 18 months between 2008 and 2009, and the practice faced several rounds of redundancies. Now, with 45 partners in the UK and revenues amounting to nearly £80m (20% of firmwide revenues), real estate is back in vogue: this year the firm took home Legal Business’s Real Estate Team of the Year award for its advice on the high-profile development and letting of The Place at London Bridge Quarter to News Corporation.

And despite this year suffering the departures of the head of its international real estate group William Naunton and tax partner Clive Jones, with a year-long notice period, to establish their own real estate-focused boutique, the firm’s head of real estate, David Watkins, says it is on a recruitment push: ‘Our strategy is to ensure we have the right resource to take advantage of a recovering market. Recruitment is important but so is retention and we’re always trying to attract talent. We’ve made some partners up and there really is some momentum behind the real estate department’.

He argues that having a strong UK-wide practice is a genuine advantage: ‘It is a good time for Eversheds because some of our competitors are struggling to service the full range of real estate services just from a London cost base. Although the market is recovering, prices for legal work will not increase exponentially. The world has changed so it is important not only where the work is undertaken but also how it is undertaken.’

Similarly, DLA Piper is consolidating its offering in real estate. Ian Brierley was appointed UK head of its real estate practice a year ago, and the firm has been on a recruitment drive ever since. Recent hires include RPC’s non-contentious construction and projects head Stephen Malley in July and BLP’s real estate finance head Laurence Rogers and partner Richard Hopkinson-Woolley in early spring.

But given the volatile nature of real estate activity in recent years, with DLA’s London and Middle East real estate practices suffering hard during the recession, Brierley notes there were moments of nervousness before deciding to recruit: ‘During the downturn, we had associates that were not moving on career-wise and making partner because of the market conditions, so we had some natural attrition and we didn’t replace them. We found ourselves like most people wondering whether the market would return and when would be the right time to start gearing up again. That analysis was ultimately what led us to making the changes that we did last year.’

He notes that a broad offering will be the key to DLA’s success, rather than a focus on high-end work. ‘The market’s going to remain busy and we’re fortunate because we have quite a diverse practice so we’re not just dependent on UK investment clients – we have a broad range of skills and clients. Everyone for years liked to tell the market that they like to do high-value, complex property work; the market is still very competitive, there’s no doubt that the value of real estate work has changed, in the clients’ eyes they’ve re-benchmarked it. Anyway, what is today’s rocket science is tomorrow’s execution-only legal work.’

Ahmed remains cautious about what lies ahead, and says: ‘I don’t think we should get ahead of ourselves. There are good strong signs that the market has come back – we’re beginning to see debt being more freely available which is a good sign. Having said that, there’s new and exciting areas opening up for us.’

Total commitment

Ultimately, any reconfiguration or even reaffirmation of real estate practices in the last year is being played out in the context of a wider evolution of the legal services market. While there has always been a distinction between complex, lucrative real estate deal work and day-to-day instructions, this gulf has been widened by increasing pressure from clients for firms to reduce rates and offer value, particularly for commoditised work. City rates have become increasingly unpopular among general counsel looking to outsource real estate work and having to deal with tighter budgets, which to an extent, has paved the way for more flexible firms to monopolise certain types of real estate work and carve out competitive practices.

For many clients, commitment is key. Katherine Laurenson, senior solicitor at Legal & General Property, whose preferred legal advisers include Clifford Chance and Macfarlanes, comments: ‘The world is more complicated. Often, to make the deals make sense and to get the returns you buy something in a bit of a mess, gold dust it and make it good through the legal work. The response we get from firms is very good, but are they investing in real estate? Our firms have responded well to our legal needs and invested accordingly. But this is not common across the legal market. One of the major seams coming out of the recession is that real estate is not making the margins that other work does. A lot of firms consciously downsized their teams or got rid of them altogether. Our challenge has been to find firms that can give us the full service and have good quality well-resourced real estate teams.’

The result is the market is more polarised, with different firms operating on different margins, through different delivery models. But ultimately the market division is the same as that has always existed in transaction-driven practice areas: firms that only want a relationship with deals rather than clients and those that rely on repeat work with active clients who expect total commitment. Choose your side. LB

sarah.downey@legalease.co.uk