Due to the current poor stock performance of most listed property companies lawyers practising in this sector are constantly being kept on their toes. David Wigan explains why.
If the London Stock Exchange were a stage, then high-tech and telecoms companies would be the Romeos and the Juliets of the performance. Their allure has bewitched even the most phlegmatic of investors.
Listed property companies, on the other hand, would be more likely to appear as Widow Twankey. The property sector has become so unsexy that despairing property directors have said they would be better off selling their properties and putting the cash in the bank. Capital returns on property are lower than the cost of capital itself and property shares are trading at bigger discounts to net asset value, about 37 per cent, than at the height of the last recession.
With fund managers routinely allotting 40 per cent of funds under their control into high-tech stocks, no one knows when things are likely to change.
“The situation is galling because the direct property market is very strong,” says Nick Shattock, a director at London-based investment and development firm Quintain Estates. “But the poor stock performance of most listed companies reflects a failure to consolidate, lack of focus and a fund manager’s instinct to stick with the high-tech sector.”
Not surprisingly, many property companies want to narrow margins and squeeze costs. And law firms are in the front line of the rationalisation process.
Shattock says: “The price of legal services is becoming more and more important. And some firms do not realise how much favour they can get by pressing the client care button. We are a relatively small property company and we still spent more than £2m on legal costs last year. Some of the law firms are going to need to keep on their toes.”
After 20 years as the worst performing asset class, there is only one pure property company in the FTSE 100 list of leading stock – Land Securities. And even Land Securities, which recently announced it was spending £40m on a share buy-back to try to bolster the price of its shares, is expected to drop out of the top table later this year.
Given the dire investment outlook, many are predicting a consolidation in the listed real estate sector. Downsizing and share buy-back programmes are under way, with Hammerson recently mirroring Land Securities’ plans to buy back 14.9 per cent of its shares. The moves are intended to protect the companies against hostile bids. Last month the value of shares in British Land jumped after rumours that a US investment fund was looking for a 10 per cent stake. A total of 16 companies in the listed sector of 120 have instituted buy-back programmes in the last year.
Ironically, despite the doom and gloom in the financial markets, the property market itself is booming, and most top law firms have expanded their property departments over the past year, with the demand for two to four years post qualification experience in London often outstripping supply. The leading players in London – Berwin Leighton, Linklaters, Ashurst Morris Crisp, SJ Berwin, Herbert Smith, Nabarro Nathanson and Clifford Chance – have added to their property departments and are actively recruiting at all levels.
Plenty of work for lawyers, but property companies are pressing for higher levels of service and lower costs in a practice area already known for its relatively low returns.
“We are a fairly demanding client,” says Mark Kingston, European general counsel at US-based Tishman Speyer Properties. “We are looking for quality of legal advice but also quality of service.”
Tishman Speyer uses Herbert Smith and Clifford Chance for the bulk of its property work. And according to Kingston, quality of service is often best judged when the company is not in the midst of a transaction.
“I view working with a law firm as very much an extension of business because it is about understanding our business and the motivations behind the decisions we make,” he says.
Kingston says that Herbert Smith’s and Clifford Chance’s international connections were integral to providing good service but it does not mean that they would always get the work. He says: “We have offices all over Europe and we want the best firm in each location. We sometimes use Clifford Chance in Spain but that’s because they are the best firm there. It’s horses for courses. We are more impressed by individuals than firms, and we prefer to deal with partners wherever possible.”
Quintain, on the other hand, concentrates most of its business in the UK and predominantly in the south east of the country. It uses Nabarro Nathanson for the majority of its corporate work – the firm advised on Quintain’s recent purchase of English & Overseas Properties after winning the work in a beauty parade. Herbert Smith also advises on corporate instructions, acting on the takeover of Chesterfield Properties late last year. Quintain also uses Lovells, the company’s lawyers since its inception in 1992, Manches, and SJ Berwin.
Many property companies are slashing the numbers of firms on their panels to save on administration costs. Last week Regus, the serviced office provider, announced that it was cutting its law panel for property work from 50 firms to two (The Lawyer, 27 March). Andersen Legal and White & Case won the work, valued at $2m (£1.18m) a year, about half the company’s annual legal spend.
Head of legal Tim Regan said outsourcing to two firms would save the company around $300,000 (£189,000) a year. “Geographical factors played a major part in the decision to use the chosen firms – both have a global outlook – but price was also a major factor. Both came up with decent cost proposals, which they could do because of the nature of their partnerships,” says Regan.
Both Andersen Legal and White & Case operate global partnerships – a situation a global operator such as Regus found attractive. The company has 260 centres in 46 countries and plans to open a new centre every three days during 2000. Regus also uses DJ Freeman and US firm Pillsbury Madison & Sutro when its first choices are conflicted out.
MEPC, a property company with a mixed bag of holdings including retail parks, shopping parades and leisure schemes all over the country, takes a different approach. Company secretary John Price says: “While we use Clifford Chance and Linklaters for the bulk of our corporate work we allow different parts of the company to use the lawyers they need to. Overall we use a large number of firms, reflecting our varied and diverse portfolio.”
MEPC is fortunate in that the retail sector is one of the booming areas of the property market. Last year Bluewater – the UK’s, and Europe’s, largest shopping centre – opened in Dartford, Kent. Australian property company Lend Lease was the developer. It was advised by Linklaters on the acquisition, finance, construction and letting of the development. Travers Smith Braithwaite won the letting work and Berwin Leighton advised original site owner Blue Circle.
In November, SJ Berwin advised on the UK’s single largest property purchase when British Land acquired the Meadowhall shopping centre in Sheffield. SJ Berwin, whose property clients include Chelsfield, the Crown Estate, Milner Estates and Hilton Hotels, boasts one of the most active property departments in the country.
Derek Wilson, chief executive of Slough Estates, says his company has stuck with the same solicitors for 80 years. “We have used Nabarro Nathanson for our property work and Lovells for our corporate work since 1920,” he says.
“The message is that law is a personal business and good lawyers are always looking after the client.”
Michael Ashley-Brown, group legal counsel at the Canary Wharf Group, the second largest property company in the country, says that the most important thing external legal advisers can provide is understanding of the product.
“You have to keep a working knowledge of every single transaction,” he says. “We have used Clifford Chance and Ashurst Morris Crisp for 10 years now and one of the reasons for that is that we try to keep continuity with individuals.”
But the fragile nature of the property game is borne out by the fact that while Canary Wharf is one of the industry’s biggest players, it only moved into the black for the first time this year, with half-year profits of £36m. Not bad for a company that went into receivership in 1992, but hardly earth-shattering.
It is not surprising then that Ashley-Brown thinks solicitors need to be kept on their toes. He says: “In February last year we did a letting for 600,000 sq ft with Freshfields on the other side for Citicorp – it was probably the largest letting deal in the UK last year. That was done in 10 days. Clifford Chance put their absolute creme de la creme on it, it was staffed with partners on every section. It wouldn’t have been achievable if we had allowed our lawyers to slip off the boil.”
He believes that the personal touch is as important as low price. He says: “The skill is not in negotiating the lowest hourly rate, it is finding the solicitors who can do the work quickest. Also, if you think your team is losing enthusiasm for the product it always crosses your mind that they may not be the right team. We are reviewing all the time – trying to keep them sharp.” With an eventual 13.5 million sq ft of space to fill when the Canary Wharf project is eventually completed, sharpness will be the legal adviser’s essential quality.
Quintain’s Shattock concludes: “Property lawyers still have a long way to go. We are looking for more set fees, where it is us and not them providing the terms of the relationship, higher levels of service, including reviews of the service they are providing for you, and introductions to people we might be interested in at all levels.”
Leading firms – major clients
Berwin Leighton – Akeler, BA McArthur Glen, BG, Legal & General, Mercury Asset Management, Ministry of Defence, Prudential, Tesco
SJ Berwin – British Land, Marks & Spencer, J Sainsbury Developments, Ladbrokes, Delancey Estates, Chelsfield, Crown Estate
Clifford Chance – Daiwa, Deutsche Bank, Tishman Speyer Properties, Wates City of London Properties, Canary Wharf Group, DG, Depfa, Lehman Brothers, JP Morgan, Burford Group, Railtrack, Rotch Property Group
Nabarro Nathanson – British Land, Capital & Counties, GE Capital, Great Portland Estates, Hammerson, Land Securities, Slough Estates
Herbert Smith – Blackstone Hotel Acquisitions Company, CB Commercial, Greycoat, Hermes, Moorfield Estates, Tishman Speyer Properties, Allied London Properties, Chelsfield, Hermes, House of Fraser, Moorfield Estates, Sun Life
Lovells – BAA, Barclays Property Investment, Brixton Estates, Greycoat, HM Customs & Excise, Mars Pension Fund, Quintain, Slough Estates, Shaftesbury
CMS Cameron McKenna – AMC Europe, Argyll Property Asset Managers, Brixton Estates, DETR, Henderson Investors, PRICOA Property Investment Management, Wellcome Trust, Bass
Ashurst Morris Crisp – NatWest Bank, BG Property Division, Canary Wharf Group, Thames Water Property, Stanhop, IBM UK, Royal & Sun Alliance
Freshfields – Credit Suisse First Boston, Goldman Sachs, London Underground, Pearson, Scottish Widows Fund and Life Assurance Society, Trillium, UBS AG
Linklaters & Alliance – Bass, Development Securities, DIFA, Lend Lease, Lloyds TSB, Richardson Developments, Ropemaker, Royal & Sun Alliance, Security Capital, Smith-Kline Beecham, SPP Investment Management, Swiss Re, Warburg Dillon Read