The Real Estate We’re In

It’s been a bleak few years for real estate departments but, after an active 2010 with some major headline deals, the London market is picking up as the regions remain in the doldrums. LB looks at a very different kind of property market

Got any advice for a budding young real estate lawyer? ‘Become an accountant,’ laughs veteran Herbert Smith real estate partner James Barnes, as he surveys the moribund UK property market.

The advice may be in jest, but it does sum up how difficult the past few years have been for real estate practices across the UK and the challenges of coping with a shrinking market.

‘Real estate is a cyclical asset class, the problem is that people think that 2005 to 2007 was the norm, it wasn’t.’
James Knox, Berwin Leighton Paisner

It’s a time of flux for property teams – national firms are wondering where revenue will come from in the next few years, while City firms are grappling with their cost base. ‘I just don’t think a real estate group that makes up 20% of a firm is sustainable,’ says Jon Vivian, former head of real estate at SJ Berwin, who left with three partners to join Irwin Mitchell last year. ‘I think the size of teams will decrease because cost is a huge issue. Property companies won’t be prepared to pay £650 per hour for work from a City law firm.’

After the property crash, real estate teams at all firms have taken a beating. Most reported drops in turnover of over 10% last year (see box, ‘Top real estate practices 2009/10’, page 68), with some of the worst performers, such as LG and Burges Salmon, seeing turnover plummet by as much as 20%.

Unsurprisingly, the number of real estate lawyers has also been squeezed and few real estate specialists have been made up. In 2008 the top 20 UK firms made up 67 real estate partners globally. In 2010 they made up just ten. Property lawyers at all firms have had to get used to a very different market dynamic with static revenues and a flat-lined market.

But over the past 12 months the London property market has shown signs of a tentative recovery. Westfield Stratford City, the huge shopping development beside the Olympic Park in East London, has changed hands, the One New Change development in the City has opened to much fanfare and a raft of skyscrapers have continued to take shape across the capital.

Outside of London, however, the market remains bleak, with few developments and large areas where prices have hardly improved since the crash. Real estate has always been a significant part of national UK firms. Whereas the largest corporate and finance deals naturally gravitated towards London, historically the likes of Eversheds and Wragge & Co maintained positions towards the top of the real estate market. With work levels around the UK recovering more slowly from the crash, that means a tough few years ahead compared to their London property counterparts. ‘The economy is far more driven around London now and the straight real estate market is focused on the South East,’ says Arthur Lovitt, head of real estate at Pinsent Masons. For some UK firms that means a significant shift in their business.

Paved with gold

For the international real estate investor London has never been a hard sell. According to LaSalle Investment Management, London is set to be Europe’s most in-demand city in terms of real estate over the next few years – up from seventh last year. ‘Foreign investors feel safe going into London, they know it, they’ve been here on holiday,’ Wragge & Co property partner Toby Askin explains. ‘They also like being able to say that they own half the West End.’

Anecdotally the troubles in the Middle East appear to be fuelling further investment into London. One property partner told LB of a phone call he received last month from a wealthy investor who wanted to get over $1bn out of the Middle East into a safe asset – his first thought was London prime property.

A freeze on new developments in the year after Lehman Brothers collapsed has led to a dearth of office space. New developments like ‘the cheese grater’, ‘the shard’ and ‘the helter skelter’ have followed but as they will only come onstream from next year, prices in the London market have been pushed up and are set to rise further.

The City market has become a mix of new developments and distressed disposals. Banks, like Lloyds TSB, The Royal Bank of Scotland and the Irish government’s NAMA are set to offload large portions of distressed property assets over the coming year. ‘When the recession first bit, people were talking about all the distressed assets the banks owned but it all went very quiet on that front,’ says Jon Lloyd, head of real estate at LG. ‘Since last October we have started to see this work trickle through. I don’t think it will be a flood of work but I do think the banks will start to push out more property.’

All of this bodes well for London’s commercial property sector and suggests that while law firms with strong London practices have had a tough year, they will be able to weather the next 12 months reasonably well.

The latter half of the year was a turning point for several large developments, with Ashurst acting on the £871m sale of a 50% stake in Westfield Stratford City to a consortium of institutional investors in November. SJ Berwin also picked up a number of headline deals, including acting for The Crown Estate on the sale of a 25% share of Regent Street to the Norwegian government pension fund for £448m.

‘2009 was the disaster year, we were not ticking along,’ says Bryan Pickup, a real estate partner at SJ Berwin. ‘But October last year was a turning point for us, we did some major transactions.’

SJ Berwin saw real estate revenues decline by £3m last year, and last November saw the departure of four partners, including well-respected practice head Jon Vivian to Irwin Mitchell. Insiders claim that pressure to hit profitability targets, as well as the firm’s merger talks with Proskauer Rose, were behind the split. In 2008 the team numbered 24 real estate partners –as of this year the firm has just 13. Quite a fall for a practice seen as one of the leaders in the market and which counts British Land as one of its banner clients.

Berwin Leighton Paisner, one of the top property performers and one of the few firms to keep hiring into real estate throughout the downturn last year, saw its real estate turnover drop by 5%. But the firm has already picked up one of the major mandates to emerge since the crisis, advising RBS on ‘project Monaco’, the disposal of nearly £3bn of distressed property assets from the bank’s portfolio. One of the firm’s most recent lateral hires, James Knox, who joined from Linklaters in autumn 2010 is positive about the coming 12 months: ‘I’m feeling fairly bullish about the market. Real estate is a cyclical asset class, the problem is that people think that 2005 to 2007 was the norm, it wasn’t. Levels of real estate are now at a more normal level.’

In the regions

But while London may be facing a property revival, the prospects look less rosy outside the capital. London has long dominated the UK market. Last year the South East accounted for 54% of all transactions in the UK property market by value, according to property company Lambert Smith Hampton.

‘2009 was the disaster year, we were not ticking along. But October last year was a turning point for us.’
Bryan Pickup, SJ Berwin

There are forgotten office, industrial and retail markets outside of London where prices have risen little since the property crash. The UK is now one of Europe’s most polarised property markets, and this focus by investors on London has been hard on firms with a national practice and significant business outside of the M25.

According to LaSalle’s European Growth Index, Manchester is only the 34th most in demand city in Europe, languishing behind the likes of Utrecht, Nantes and Dublin – back in 2006 the city was in 23rd place.

Big deals remain thin on the ground nationally. In July Wragge & Co advised property development company Argent on the £190m sale of the Brindleyplace mixed-use development in Birmingham to Moorfield and the Hines global real estate investment trust. In January, Manchester’s Trafford Centre, the UK’s sixth largest shopping centre, was sold to Capital Shopping Centres. But it was corporate specialists at Linklaters, Travers Smith and Freshfields Bruckhaus Deringer that all landed key roles on the deal, over the regional competition.

Pinsent Masons saw its real estate turnover drop by £3.5m or 11% last year. Like many of its national and London-based counterparts, the firm has cut headcount and squeezed recruitment. It made up 11 partners in 2008, across projects and international construction. In 2010 just one construction specialist was made up.

‘Anyone who says they haven’t cut their work force over the past few years is lying,’ insists Lovitt. ‘There is less work about and we think it’s going to be a static market going forward. So we are focusing on areas of real estate that will give us a bigger slice of that cake.’ For Lovitt that means focusing on the retail market and residential.

Wragge & Co is another national firm that has suffered but has managed to weather the storm better than most. ‘London is more pivotal in real estate than it was before,’ says Adrian Bland, head of real estate at Wragge & Co. ‘Things haven’t changed a lot for us. It’s slowed us down but we think we’ll come through the recession fairly well and we are going to emerge stronger relative to the competition,’ he says.

The Birmingham-headquartered firm saw a 5% drop in real estate turnover last year, one of the smallest falls in our table. This relative success can be put down to a refocus on international clients and the London market. Despite claiming that it is 30% cheaper to operate out of Birmingham, the firm has relocated several Birmingham-based partners to London over the past few years and in January 2010 opened an office in Paris, adding five real estate partners to its department.

Askin, a shopping centre specialist and one of the partners who has made the move to the London office, believes the firm’s national experience leaves it in good shape to compete with the London firms. ‘In the regions we are much more used to hustling for money and work, street fighting really,’ he says.

‘It’s an incredibly different landscape to a few years ago, things have changed enormously.’
Julie Stobart,Eversheds

But it’s national giant Eversheds that has seen some of the most dramatic changes in its real estate department. The firm had two well-publicised rounds of redundancies back in 2008 and 2009 and the firm’s property practice took a significant hit. Like close rivals DLA Piper, Addleshaw Goddard and Pinsent Masons, revenues have fallen and partners have adjusted to a very different dynamic.

‘I won’t kid you, we have had a torrid time, but we think we have got a good breadth of practice now,’ says Julie Stobart, head of real estate at Eversheds. ‘It’s an incredibly different landscape to a few years ago, things have changed enormously,’ she adds. ‘There is pressure on pricing primarily because of a massive drop in work-flow levels.’

As well as making redundancies, the firm put a moratorium on trainee recruitment but reversed that just last year. ‘We had complaints from three to four-year qualifieds that they were still doing work that trainees should have been doing,’ says Stobart.

Back in 2007, real estate accounted for just under a quarter of the firm’s overall turnover, but just three years later the practice has dropped £20m in revenues and now makes up just 18% of the firm’s business. Stobart believes that real estate work will trickle back to the firm and is predicting 5% growth in the practice for 2011, effectively taking them back to 2009 turnover levels. ‘All our offices are budgeting for growth this year. We won’t see double digit growth for a while yet. The growth isn’t coming from the development client base but more investors, primarily institutional investors. We will also see a growth in international work and acting for retailers,’ says Stobart. But given the firm’s additional focus on public sector work, growth could be difficult. Stobart concedes it will remain ‘challenging’.

Burges Salmon also had a particularly tough time in 2009 and 2010, with a 23% decline in its real estate turnover. The Bristol-based firm is pinning its hopes on sector specialisation, and is particularly focused on energy and nuclear. ‘We’ve come out of the dark days with quite a small number of redundancies. We want to ensure that we are well placed for when the market recovers,’ says Richard Clark, head of property investment at Burges Salmon. ‘We are sector focused, so for example we’ve really been looking at transport, energy and nuclear.’ This strategy does seem to be paying dividends, last year the firm advised on a string of regeneration projects for East Devon District Council, including the development of 3,000 homes, a biomass heating facility, a business park and hotel at Exeter Airport.

Bleak streets

It’s been a bleak few years for real estate departments at all firms with revenues and headcount well down. But after more activity in the second half of 2010, the UK market is becoming increasingly polarised; the London market is picking up as the regions remain in the doldrums.

‘In the regions we are much more used to hustling for money and work, street fighting really.’
Toby Askin, Wragge & Co

Either way there are limited growth prospects for property departments at all firms for the next few years. Smaller teams will also have to become adept at dealing with the full range of property issues. Gone are the days when a property lawyer can make do by focusing on a niche part of the market. ‘We are not going to go back to the size of teams we had a few years ago,’ says Mark Gaffney, a Manchester-based partner of Squire Sanders Hammonds. ‘There will be smaller and less specialised teams, where lawyers are generalists.’ That’s a sentiment echoed at Magic Circle firm Allen & Overy by property partner Imogen Moss. ‘You always need to be a real estate lawyer first and foremost, but that’s not enough these days,’ she says. ‘You need to have a corporate and finance basis to make yourself a rounded real estate lawyer.’

But for lawyers who take the long view, it’s not all doom and gloom, real estate has always had its ups and downs as James Knox of BLP explains: ‘Over the full real estate cycle you have busy periods and less busy periods.’ True, but for the next few years at least, perhaps accountancy does hold more appeal. LB

 

	2010			2009
Firm	Revenue (£m)	Real estate as % of turnover	Real estate turnover (£m)	Revenue (£m)	Real estate as % of turnover	Real estate turnover £m
DLA Piper°	581	13%	75.53	585	15%	87.75
Eversheds	355.2	18%	63.94	366	19%	69.52
Berwin Leighton Paisner	191	29%	55.39	176	33%	58.08
Lovells+	541.8	7.5%	40.6	531	8%	42.3
Herbert Smith	450	8%	34.2	444	8%	35.97
Nabarro	113.8	29%	33	126.5	28%	35.42
Trowers & Hamlins	89.4	36%	32.18	89.5	36%	32.22
Pinsent Masons	206	15%	30.9	215	16%	34.4
Addleshaw Goddard	167.5	18%	30.15	173.1	20%	34.62
Ashurst	293	10%	29.3	301	11%	33.11
Denton Wilde Sapte*	167.5	17%	28.48	169.8	16%	27.17
CMS Cameron McKenna	214.4	13%	27.87	240	11%	26.4
Wragge & Co	96.2	28%	26.94	103.4	27%	28.23
SJ Berwin	171	15%	25.65	184	16%	29.44
Shoosmiths	90	27%	24.3	99	25%	24.75
Taylor Wessing	177.8	13%	23.83	188.4	13%	24.3
Mills & Reeve	67.3	30%	20.19	66.6	31%	20.65
Hammonds†	118	16.1%	19	125.4	14%	17.56
Norton Rose	307	5%	15.35	314	4%	12.56

°DLA’s revenues do not include the US. +Now Hogan Lovells. *Now SNR Denton. †Now Squire Sanders Hammonds.