For our latest edition of WWL: Real Estate, Who’s Who Legal once again conducted dozens of interviews with leading practitioners around the world, from Peru and the Czech Republic to the USA. In general, respondents were positive about the future, with the quantity of work available, particularly in larger jurisdictions, tempered only by the levels of competition in the market, which are having an effect on prices. Markets are strong as yields on real property continue to be higher than many other forms of investment. However, not everyone we spoke to was so optimistic, with tougher times being experienced by practitioners in, for instance, Ukraine, while certain sectors in major markets such as the USA are also variable. We highlight some of the more notable trends below.
The real estate market in the US continues to improve, experiencing growth consistently since the 2008 financial crisis. Legal practitioners we interviewed mentioned the vibrancy of the market, with “a lot of money in the system coming from many different places”. However, there are a few signs that growth is perhaps slowing, with one practitioner stating that “real estate is reaching its peak in the US market”. Furthermore, in the residential sphere, house prices that have been adjusted for inflation are still below their pre-recession levels.
Perhaps the area posing the greatest concern in the real estate market remains the retail sector, particularly shopping centres. The spectre of e-retail looms large over these sites as consumers continue to make significant amounts of purchases online. This is reflected by the interest in industrial spaces, with warehouses and distribution sites being identified by many practitioners as key areas of interest for investors. Amazon is singled out as the main force of this shift away from traditional retail space towards logistics and distribution centres.
However, many practitioners are noting that the bricks-and-mortar element of the retail sector is evolving to adapt to this challenge. One interviewee we spoke to noted that shopping centres are looking to diversify their appeal to consumers by offering more than just a shopping experience, effectively becoming entertainment centres. There is also an effort towards making physical retail locations a collaborative tool with online retail, such as locations for simply trying clothes on, or offering a place to return items – something e-retailers are struggling with, and which one practitioner even cited as an issue that “may kill the e-economy”. This cuts down on overheads and works to minimise the overlap between online and physical commerce that is shrinking the profits of traditional retail outlets.
Another point of discussion is that of interest rates. Various practitioners mentioned the growing interest rates and there is some concern that the rise will “put the brakes on new developments”. One source asserted that any increase in rates will lead to a “reckoning among the buyer community”. The consensus among many of the lawyers we interviewed was that a spike in interest rates would be the main factor for any slowdown in transactions and work for practitioners, and with interest rates set to increase a lessening in activity is a possibility on the horizon.
Overall, however, interviewees were pretty positive about the current state of the US market. “There’s a lot of money in the system coming from many different places,” reported one, who noted that “real estate is strong throughout the US in every sector other than shopping malls”.
While the announcement that the UK would be leaving the European Union has seemingly had an adverse effect on the UK real estate market, many practitioners were pleasantly surprised at the its resilience to the disruption, with one individual crediting the “huge residual strength in the market”. As noted last year, a major factor in real estate’s weathering of Brexit was the foreign investment attracted by the fall in sterling. The tightening of restrictions on foreign investment has decreased the levels of Chinese investment, but as one practitioner notes, other Asian markets are tapping in, allowing the market to better manage the drying-up of Chinese money.
Although real estate prices continue to grow overall, prices in London have flattened over the past year, with the UK House Price Index reporting a fall of 0.7 per cent in prices in the year to June 2018, compared to a UK-wide rise of 3 per cent. However, interest remains strong in European markets, particularly among private equity firms seeking to obtain large returns. These private equity firms are looking towards private rental sector developments, although as one practitioner notes, this market is relatively hard to break into, considering their attractive profit margins. These private rental sector developments are increasingly desirable for investors considering the focus on renting, particularly among younger generations. Much of this focus is fuelled by the historically high property prices, especially in London. One practitioner notes that there is huge demand for these kinds of rental opportunities, with “continuing demand for this over the next few years”.
As in North America, several of our UK-based interviewees noted that the retail sector continues to struggle as e-commerce gains an increasing market share. One practitioner asserted that it is “clicks rather than bricks” in the current market, with the ongoing shift in focus towards distribution and logistical real estate for e-commerce businesses reflecting its attraction for practitioners and developers alike. The recent collapses of high-street retailers such as Maplin and Toys R Us have accentuated the difficulty that many in the market face.
Competition in real estate is consistently strong across the world. One respondent in Norway commented, “When I started out, hardly anyone focused on this work, but now there are hundreds of people in this space.” In the US, one lawyer noted that “legal fee sensitivity is just staggering” and added, “It’s often the first conversation you have with clients.” As one practitioner put it, with the current levels of competition in the US market, “It’s a jungle out there!”
The UK market is still and adjusting in light of the perceived near-absence of Magic Circle firms in the space. One lawyer in the UK noted that gap left in the market has allowed other firms to grow and increase their market share, saying that it was “a big opportunity for firms at the higher end of the market to get involved with complex deals”.
One development that was especially noted by lawyers based in the UK and North America was the increasing presence of regional firms. Competitive on pricing, these firms continue to “scoop up a lot of work on the commodities side”, rather than engaging in more complex high-value deals. Another practitioner noted the importance of technology in allowing these regional firms to stay competitive, to cut prices and to be highly responsive with clients at a lower price point. “A lot of the regional firms are charging less and correspondingly getting a lot of work as a result,” commented one New York-based practitioner.
The real estate market continues to be a competitive and dynamic industry, with practitioners continually looking to the financial markets as a bellwether of the fortunes of the real estate market. Cautious optimism continues to abound in general, despite ongoing uncertainty from factors such as Brexit. However, recovery from the 2008 crash still overshadows many markets, while concerns regarding interest rates and the retail sector mean things are not looking universally rosy.
Despite this, in general, practitioners spoke positively about the state of the market, acknowledging the challenges and opportunities that developing technology and new players pose. Intense competition in legal markets is broadly seen as a sign that things are busy, rather than as a negative factor. Practitioners at the top of the market are confident that their expertise will continue to be valued by clients in the years ahead.