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Last week brought the gloomy news that the country has slid back into recession. The much feared double dip was to a large extent blamed on the contraction in the construction sector. It would seem that tricky times are ahead for real estate lawyers, but far from tightening their belts, most have managed to regroup in light of changing conditions and carve a niche in the new economic landscape. A sense of optimism abounds and is evidenced by hiring sprees.
Leona Briggs is head of real estate at Osborne Clarke. Her firm made three strategic lateral hires last year: regeneration specialist Raj Mangat joined from Norton Rose; real estate funds lawyer Tim Simmonds came over from BLP; and Peter Day arrived from Wedlake Bell. Briggs explains that these hires were part of a long-term strategy for the firm, where real estate remains a key focus.
Eversheds has similarly taken on three lateral hires since February, from Berwin Leighton Paisner, Clifford Chance and Dundas & Wilson. Bruce Dear, head of real estate investment at Eversheds, explains that many of these hires are part of his firm’s strategy of concentrating on inward investors and domestic investors with strong equity bases.
Certainly, firms with a London office have been buoyed by instructions from overseas investors, notably sovereign wealth and far eastern capital, as well as US real estate investment trusts (REITs), opportunity funds and Middle Eastern institutions that still favour investment in UK property for its transparency, liquidity and quality. Indeed, domestic investors are frequently finding themselves outbid on prime central London properties, such is the continuing demand. For domestic real estate players, at least part of the problem remains a lack of funding, as banks continue to be very cautious in their lending. That is not a problem faced by cash-rich overseas investors, who are more likely to consider debt financing after an acquisition.
Nabarro is one firm to have found itself on the receiving end of the lucrative overseas investor market. Traditionally associated with key domestic property companies such as Hammerson and Land Securities, that were dominating the market in the 1990s and 2000s, the firm made a strategic decision to look outside its traditional client base for work. Head of real estate Ciaran Carvalho explains that, in his firm’s view, ‘no serious real estate practice can simply look at the UK market’. He points to the firm’s decision to open an office in Singapore as part of its global approach. His department is currently acting for the likes of Qatari Diar, Angelo Gordon & Co and the Employees Provident Fund of Malaysia, all of whom have been extremely active in the lucrative prime central London market.
Howard Gill is head of commercial property at Forsters, a firm with a strong focus in the sector, which has made its mark by doing what he calls ‘nuts and bolts property work that large firms are not doing anymore’. The firm’s property group has enjoyed double-digit growth for the second year in a row. Its client base consists of a large number of domestic funds, which have remained active in the market, although he explains that the nature of their activity has had to change. While prime central London properties remain of keen interest to such clients, many are having to consider other opportunities, as demand for prime space continues to outstrip supply. At Forsters, Gill explains, with the secondary and tertiary property markets still suffering, many of his funds’ clients are instead exploring investment opportunities in residential development, as well as in non-core assets such as student housing, data centres and care homes.
Eversheds was involved in one of the key deals involving student accommodation, with the £116m purchase by Legal & General of Battersea-based student accommodation Griffon Studios, a joint venture between Berkeley First and Imperial College, London.
While traditional sources of real estate work (private sector investment and development) may not be what they were, changes in legislation and government spending have led to new sources of work, in particular in the construction, environment and planning sectors. The chancellor’s autumn statement, as well as the National Infrastructure Plan (published in November 2011) have seen infrastructure move up the political agenda. Rail and road infrastructure, in particular, have been targeted for major improvements by government, with a pledge by George Osborne to spend £5bn.
The work is there for practitioners willing to rethink what real estate is about, and also with the necessary add-on expertise in construction, planning and environment. For example, the construction industry’s output figures have largely been blamed for the latest dip in economic growth. However, those departments that have taken a long-term approach have managed to weather the stormy economic conditions very effectively. Eversheds construction partner Simon Oats explains that the firm had to reassess its traditional public sector client base, which was hit hard at the beginning of the downturn three to four years ago. It made a strategic decision to move into more recession-proof areas such as infrastructure and energy, ‘sectors that have to continue, whatever the economic conditions may be’. Acting for the likes of Centrica, National Grid and Network Rail, his department has seen a 35% increase in revenue over the last year and is actively looking to recruit more lawyers. Similarly, those firms that have been able to net a slice of the pie generated by capital projects such as Crossrail and High Speed 2 (the London to Scotland high-speed rail network) are continuing to thrive.
Other non-core areas such as environment and planning are also likely to benefit from changes in the regulatory environment, as well as new legislation. The Energy Act 2011, with its ‘green deal’ provisions and aims of reducing carbon emissions, is likely to provide rich pickings for lawyers. From April 2018 the act will make it unlawful to rent out business premises or residential property that does not reach a minimum energy efficiency standard, most likely with an EPC rating below E. Landlords will need lawyers to assess whether properties meet the necessary standards; any properties that fall below the required level are likely to be unmarketable, with knock-on effects on valuations and rent reviews.
Similarly, the government’s National Planning Policy Framework (NPPF) has created much confusion in planning and is likely to lead to a host of legal challenges as questions remain over its interpretation. At the end of April, in a House of Commons debate on the NPPF, shadow housing minister Jack Dromey said that planning lawyers are likely to ‘make a killing on the back of the confusion and uncertainty that the government is creating’. It is certainly true that although the NPPF was recently cut from a 1,200-page document to a more manageable 49-page guide, questions still remain, especially in the 12-month transitional period when local plans are to continue being taken into consideration in planning decisions.
Polarisation of the market
‘A flight to quality’ is a recurrent phrase when talking to real estate lawyers about the current state of the market, applying as much to the types of law firm being instructed as the types of premises being invested in. In its March 2012 report, leading real estate fund manager Prupim commented on the north/south divide widening with ‘risk-averse investors once again greatly preferring prime over secondary, south over north… and income today over growth tomorrow’.
For the select group of law firms acting for the very active overseas investors such as wealth funds, London-based deals continue to provide the bulk of their work. And even for lawyers acting on behalf of the domestic investors, and in particular the funds, the focus is still inside the M25. Regionally, activity levels remain far more subdued, although some market commentators point to an undersupply of suitable stock in major regional centres such as Manchester.
Eversheds’ Oats nonetheless believes that London still has its own microclimate, and the capacity as well as demand for further office space and residential opportunities. The work is certainly out there, although as the Eversheds model demonstrates, strategic thinking is key in the new economic landscape. Eversheds’ Dear explains that since 2007 the firm’s real estate department has had a ‘laser beam focus on those clients with equity bases, which have the money to spend. Clients with equity are kings in real estate at the moment, due to the debt drought’. Similarly, while construction, environmental and planning departments may have been seen as support services in the past, resourcing them adequately is what could make or break a real estate department.
Maria Shahid is a freelance journalist
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