Real Estate 2015: Trends

The challenge for the real estate market today is how to deal with resurgent demand from clients. For lawyers servicing the top end of the market, activity is back to pre-crisis levels. However, with diminished teams and a shrunken selection of lawyers possessing the required expertise and experience, firms are finding themselves doing more work with fewer people.

Staffing Challenges

Speaking with partners throughout the world, it is apparent that staffing issues are a global phenomenon. Many teams want to grow, and they certainly have the workload to justify this, but they are being held back by the challenge of finding the right lawyers to join their teams. On the hiring list are mid-to-senior-level equity partners and mid-level associates. It’s emblematic of the “boom and bust” cycle of the real estate sector: the former are in short supply due to the 1990s crash, while the drop in mid-level associates is a result of the more recent financial crisis, when resources were being redirected to transactional and litigation departments. The very essence of a mid-level associate role, and the experience required, means that few fulfil the hiring criteria. The number of deals they have had the opportunity to work on is far below the ideal required by firms. Those who do meet the criteria are in high demand. Even firms who have their teams in place are coming under pressure from the risk of poaching. In London, several high-paying US law firms are offering significant salaries and bonuses to associates and partners.

Law firms have been on a steep learning curve as they reflect on some of the errors made during the bust years. They’re now focused on ensuring the practice isn’t overexposed to any one type of work or client, and that there is enough work to train younger lawyers. “It’s important we build out certain parts of the practice,” explained one head of department. “We want to attract more development and finance work to ensure we have longer deals in place to train lawyers and keep the team busy if changes are to occur.” This will be particularly important as some of the elder statesmen, currently leading on deals, retire in the coming years.

Choosing a market strategy

With much of the market commoditised, the top players in this guide are all competing for high-end, complex and innovative deals. Different firms have opted for different strategies in playing to their strengths to attract potential clients. To a large extent the geographic scope of the firm and its network dictates the type of clients the firm might represent. Those with Asian offices are looking to capture outbound investment into London and the US, while regional players are looking to domestic clients like pension funds. The US firms also have an advantage when it comes to representing US private equity in the jurisdictions in which they have additional offices. However, in a market such as this, “everyone is busy”.

As the nature of work has altered, the composition of real estate teams has also changed; many firms now count finance experts as part of their offering. Private equity firms, family offices and sovereign wealth funds are just some of the non-bank investors that are flooding the market and requiring a broader range of expertise. It’s often said that the magic circle has all but left the real estate market. Certainly their teams are much smaller, but they continue to express their commitment to the sector and their deal flow demonstrates this. Clifford Chance recently advised UK Asset Resolution on the sale of a portfolio of performing residential mortgage loans worth £2.7 billion to a consortium made up of JP Morgan and British specialist lender Commercial First, while Linklaters is working on the £1.5 billion redevelopment of Elephant and Castle, London acting for Lend Lease. According to peers, speaking about finance matters, “The magic circle dominates the market; you’d be crazy to try to compete.”

 Realigning practices along industry lines

The magic circle is not alone in having to prove its commitment to the real estate sector. A few of the firms we spoke to are currently in the process of rethinking their team structure to organise themselves along industry lines. This requires grouping planning, social infrastructure, finance, funds and other lawyers into a ready-made team for clients looking for the full service. As one lawyer explained, “Clients are driving this change. Construction companies are moving into real estate development and they require a wider breadth of advice focusing on the built environment.” Balfour Beatty announced its intentions to move into property development in March 2015 with an agreement to build and help finance 1,500 homes at the London Olympics venue as part of the redevelopment of the site. Private equity firms are also ramping up investments in real estate as they look to inflate their books with assets that can generate returns for a longer time. Blackstone, which had $26 billion real estate assets under management in 2007, had $81 billion at the end of 2014, and has since announced intentions to acquire more than $26 billion in real estate holdings from General Electric. Simpson Thacher & Bartlett is advising Blackstone on the deal, while Dechert is advising Wells Fargo; and Hogan Lovells, Davis Polk & Wardwell, Weil Gotshal & Manges and Sullivan & Cromwell are providing legal counsel to GE.

The high level of capital from overseas propping up gateway cities has made some lawyers nervous. “Surely it has to stop at some point,” said one San Francisco-based practitioner. The Bay Area has seen a huge influx of capital from Singapore, South Korea and China including most recently the sale of the First and Mission streets mega-development to Beijing-based Oceanwide Holdings at a value of $296 million. In total, Chinese investors have spent more than $600 million on Bay Area real estate during the last two years according to Real Capital Analytics. It’s a similar tale in New York, where landmark deals include China’s Anbang Insurance Group’s acquisition of the Waldorf Astoria hotel for $1.95 billion. Driving the trend is the liberalisation of foreign investment rules, the search for stable investments and the need to accumulate assets to support ageing populations.

Client Pressures

Despite the high levels of activity in the market at present, there has been no easing off from clients when it comes to pricing pressure. According to a recent survey of finance directors at the top 100 law firms, conducted by Thomson Reuters Legal UK and Ireland, pressure to lower legal fees was their biggest concern, with 88 per cent of those surveyed deeming it a high risk to profitability. With clients far savvier and more sophisticated than in the pre-crisis years, there is a growing tendency for banks and companies to use legal panels, where firms are chosen and regularly assessed based on cost and quality. In 2010, Land Securities Group significantly reduced its roster of more than 100 law firms by creating a two-tier system with panel A offering higher annual billings than B. Panel A consists of Berwin Leighton Paisner, Eversheds, Freshfields Bruckhaus Deringer, Hogan Lovells and Nabarro; while panel B is made up of Dundas & Wilson and Herbert Smith Freehills. The company held its last review in January 2013 and its next review is due in 2016. However, as law firms become more confident regarding their deal pipeline they are starting to turn down work that doesn’t pay. “We can be, and are being, choosier,” said one head of department. 

***

 The overall sentiment among international practitioners is one of optimism: markets are rebounding, foreign investment continues to pour into gateway cities and development projects are under way. Despite this, senior practitioners know only too well the cyclical nature of the sector and are keen to promote a balanced practice. 

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