With real estate investment moving out of paralysis post-election, Muna Abdi asks which firms are best prepared to take advantage
The enduring political and economic quagmire in the UK, initially shaped by the 2016 Brexit referendum, provided much of the framework for pessimistic commentary towards the end of the decade on many sectors, not least real estate. But the start of 2020 has brought fresh impetus: ‘The end of Corbynism will encourage most in the real estate market, which is not known for its left-wing leanings. It will also see a return of the uber-rich to London with high-end and luxury residential already experiencing a massive boost,’ predicts Eversheds Sutherland head of London real estate, Bruce Dear.
Real estate lawyers report that paralysis set in as investors were unsure how to price assets but also did not want to overpay, all while waiting for sterling to devalue and hoping for a Conservative government. ‘For the real estate industry, [a Conservative majority] is probably the outcome most wanted in terms of stable economics to help see normal trading conditions resume,’ says CMS Cameron McKenna Nabarro Olswang head of real estate, Ciaran Carvalho.
‘We are seeing a significant increase in new instructions and enquiries since the election,’ says Herbert Smith Freehills (HSF) head of UK and EMEA real estate Jeremy Walden. After years of nationwide uncertainty, a sense of clarity has calmed the market. From big-ticket regeneration projects to office lettings, and with interest flowing from Asia and Central and Eastern Europe, international investors still see the City as an attractive property investment location. But as the market is turning, have the key real estate players in the legal profession remained the same?
Up and down
Real estate investment across the UK was notably subdued last year. According to Savills, total investment in the City for 2019 reached £8.18bn – a 33% drop on the 2018 figure of £12.15bn and a slow stream of deals, coupled with the speed at which they closed, nearly created a standstill.
‘The slowdown was very specific, around sizeable investment transactions. Anything around £300m or more got affected. The impact was either the deals stopped entirely or slowed to a very painful pace.’
Claire Hughes, Pinsent Masons
‘The slowdown was very specific, around sizeable investment transactions,’ says Pinsent Masons partner Claire Hughes. ‘Anything that was around £300m or more got affected. The impact was either that the deals stopped entirely or that they slowed to a very painful pace.’ Walden agrees, however he adds that for the diversified, full-service real estate practices, there was no decline in overall activity, but there were fewer pure investments and more activity across development and long-term projects. Meanwhile, according to DLA Piper head of UK real estate William Naunton, a lot of capital has been deployed to specialist sub-sectors over the last 18 months: asset classes such as senior living, build-to-rent and student accommodation.
London office investment was also down last year, standing at 12.8 million sq ft total take-up, compared to 14.5 million in 2018. However, deals closing after the general election increased investment turnover by 94% in Q4 2019, according to Knight Frank. ‘This government’s commitment to invest in the regions should see a boost in city office markets beyond London, while the capital itself continues to experience strong occupier demand, particularly from the TMT sector,’ notes Dear. The rapidly-evolving model of co-working spaces, jump-started by New York-based company WeWork – now the largest occupier of office space in the world – has become an undeniable trend over the years and has had a significant effect on how traditional developers are approaching their pipeline and customer base.
The obvious exception to the upbeat picture is retail, which seems to be falling off a precipice, given the string of household names entering administration in recent years. A number of property companies are overweight in retail, but the decline in bricks-and-mortar shops in particular has opened up opportunities for repurposing, with more units being redeveloped or even demolished. The cost of reconfiguration for shopping centres is so great that repurposing them into logistics spaces – a sector that has grown – or student accommodation is fast becoming an option, and helps with the shortage of land and other environmental considerations. A recent example is Ravenside Retail Park in Edmonton in north London, which was acquired by Prologis in January from M&G Real Estate to be developed into an e-commerce logistics facility. Prologis was advised by DLA while M&G was advised by CMS.
‘We’re advising clients on how to adapt, be as flexible as possible and ultimately redefine retail assets,’ says Dear. ‘Physical retail’s future, if it has one, will be “experience led” and offer activities, entertainment, and themed food and beverages. Owners and local government have a part to play here: if the will is there, they can forge a new path where retail becomes more about experience and less about shopping.’
Another significant change to the UK real estate market has been the creation of the International Property Securities Exchange (IPSX) in London, the world’s first regulated commercial real estate securities exchange. IPSX would mean that properties can be listed and shares traded without the asset ever being sold. CMS advised the IPSX Group in securing a recognition order by the Financial Conduct Authority to establish the exchange.
The benefit of being able to trade stock in real estate without having to sell the asset could shake up how the market operates and may change the type of expertise law firms need to continue operating at a high level. It may also open the market up to a new class of investors that have the capital for shares in a single asset. The question is whether the market will find liquidity through the IPSX and access capital that is not already available elsewhere. If the IPSX does work, the model could be applied to other key financial centres and change how real estate is handled throughout the world.
For clients, some recent trends in real estate include a focus on the more operational aspects of the business alongside corporate activity. Rob Booth, general counsel of The Crown Estate – one of the largest landowners in the UK – says: ‘We’re doing a lot with digital infrastructure and looking at privacy and information security within our property activity. My team now has to cover agreements for the cloud and infrastructure that sits around the building for the digital flow of information, and all of that is being driven by a shift within real estate organisations away from bricks and mortar and into a more customer-centric model. The ability of our firms to be able to merge that sort of cross-practice or cross-specialism advice into a real estate context is definitely a trend.’
Transactions and transfers
Real estate practices can be broadly categorised into two camps: those providing a full service and those offering advice in niche areas. The same firms have been providing a holistic offering for many years (even although their names have changed through mergers) and continue to operate at a high level in the London commercial real estate market.
Bryan Cave Leighton Paisner (BCLP), born of the merger of Berwin Leighton Paisner with US firm Bryan Cave, remains synonymous with real estate work in the UK, despite its efforts over the years to diversify. It has dominated the market recently with standout deals, including advising Land Securities Group on the £2.2bn development of Nova, an 897,000 sq ft mixed-use scheme. BCLP also advises on the asset management of The Crown Estate’s £7bn central London portfolio in Regent Street and St James.
Hogan Lovells is also typically seen on big-ticket deals, such as advising Argent Related on a £4bn mixed-use redevelopment project in Brent Cross South. In an internal shuffle, the firm appointed its former head of UK real estate, Dan Norris, as its global lead in January, with Oliver Chamberlain replacing Norris as UK head. However, the firm also lost its senior planning partner Claire Dutch to rival Ashurst recently, where she now co-heads its planning team in London.
‘The end of Corbynism will encourage most in the market. It will see a return of the uber-rich to London with luxury residential already experiencing a massive boost.’ Bruce Dear, Eversheds Sutherland
‘People are putting a lot more money into UK real estate than before, and we’re seeing a lot of big deals and regeneration projects,’ says Chamberlain. ‘There’s more optimism among clients across all sectors. It’s too early to see the deals completing, but the sentiment seems to be larger occupier requirements, which will lead to large development opportunities.’
Similarly, HSF has been involved in major regeneration projects, such as advising British Land on the £5bn mixed-use redevelopment of Canada Water. HSF is also advising British Land on the £4bn Broadgate Estate mixed-use office scheme development, with Ashurst advising on construction.
CMS – which benefitted significantly from the merger of the strong legacy real estate practices of Cameron McKenna and Nabarro – advised AXA IM on the pre-lettings for its 22 Bishopsgate office building, with a variety of firms acting for various tenants, including BCLP for Apple, DLA for fellow law firm Cooley and Eversheds for Convene. CMS has also advised WeWork on the real estate, planning and construction aspects of the 133 Houndsditch office development, with K&L Gates advising the landlord’s solicitors, and WeWork again on 99 Queen Victoria Street, while Macfarlanes advised the Oman Investment Fund on the deal.
Meanwhile, Addleshaw Goddard collaborated on the £1.58bn transfer of – and the long-term asset management strategy for – the commercial assets within Phase 2 of the Battersea Power Station development by Malaysian investors Permodalan Nasional Berhad and the Employees’ Provident Fund with Linklaters also advising the consortium, while Norton Rose Fulbright gave advice to Battersea Power Station Development Company on the financing of the purchase.
Once redeveloped, the power station will be home to Apple’s European HQ and include an events venue, residential homes as well as retail and leisure space. The deal is part of the £8bn, seven-phased redevelopment of the area. Addleshaws has been busy in terms of personnel lately, recently appointing Rachel Orton from Squire Patton Boggs and real estate disputes partner Frances Richardson from Linklaters. Meanwhile, Adrian Collins succeeded former real estate division head Leona Ahmed, who now manages the London office.
‘We’re doing a lot with digital infrastructure driven by a shift from bricks and mortar into a more customer-centric model.’
Rob Booth, The Crown Estate
In our 2019 real estate deal of the year, Eversheds and Clifford Chance (CC) worked with the legal team at Network Rail on the sale of its commercial real estate, which is comprised of around 5,200 properties for £1.46bn to Blackstone Property Partners and Telereal Trillium, advised by Kirkland & Ellis, Gowling WLG and Simpson Thacher & Bartlett.
The outliers
Historically, real estate has been one area where the Magic Circle has failed to dominate, typically outgunned by the firms listed above, with most of their practices beginning to shrink in earnest in the mid 2000s. Today there is little visible commitment to a pure real estate practice, with the exception of CC through longstanding clients such as Native Land, which it is advising on the £1bn London Bankside Yards mixed-use development scheme.
Linklaters is typically found advising on the corporate and finance aspects of a transaction, and recently advised Suffolk-based brewery Greene King on its proposed £2.7bn sale to Hong Kong real estate group CK Asset Holdings, advised by CC. But real estate is clearly not part of the Magic Circle’s core strategy and the lack of construction, planning and environmental expertise required for big-ticket projects underlines this.
With a few exceptions, major US firms have also not actively pursued pure commercial property work in London. Outliers include Greenberg Traurig, which has a market-leading real estate practice in the US, and funds and private equity players such as Simpson Thacher, which is active in this sector via work for core clients like Blackstone. Goodwin Procter caught attention recently, hiring real estate investment funds partner Justin Cornelius from BCLP. Other than that, mergers with established UK players have largely helped US players gain traction in the London real estate market, particularly in the case of Bryan Cave, Hogan & Hartson and Mayer Brown. City real estate partners say that major US firms largely do not see UK commercial property as core to their strategy. Says Hughes at Pinsents: ‘The American law firms prefer to go for the much higher-value, larger-billing transactions, and so working on a multitude of asset management-related deals and bringing in the special services of development practice is just not something they’re prepared to do. There are very few Magic Circle law firms that are prepared to do that either.’
‘There’s been a great amount of investment throughout the UK. London is still London with or without the EU.’
Lee Sheldon, Addleshaw Goddard
But high-value real estate deals increasingly involve multidisciplinary elements, with partnerships between US and mid-tier UK firms becoming a common fix to handle the workload. US firms are outsourcing the pure real estate aspects of a deal while they focus on the finance or private equity elements. Kirkland notably partnered up with Osborne Clarke (OC) in the acquisition of a portfolio of assets from UK developer Bravo Group by US real estate investor TIAA. Kirkland advised on the corporate and tax restructuring elements, and outsourced the property aspects of the deal to OC, while Fladgate advised on all aspects of the transaction for Bravo.
Should a shift in market dynamics prompt a change in heart from US firms towards London real estate, competing with well-established UK practices will be challenging. ‘They have to win clients off the UK firms. The reason why there are large real estate teams is because assets throw off a lot of work and you need a lot of people to do them. Many US firms don’t like operating like that,’ says Chamberlain.
Despite the market slowing again last year, the busy start to 2020 has proven just how quickly the market can show signs of recovery, though the rebound is about to run into a global economy being rapidly engulfed by the coronavirus outbreak. ‘There’s been a great amount of investment throughout the UK from international capital. London is still London with or without the EU. There is a growing trend among investors – they start with office investments and then, over a relatively short period, move further up the risk curve into different asset classes and development projects,’ says Addleshaws co-head of real estate and head of investment funds Lee Sheldon. The key players in real estate may have remained the same, but it is emerging trends such as the growth of specialist sub-sectors, the decline of retail and the new IPSX exchange that could redefine the real estate market for law firms in for the long haul.