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Spain: Ghost villa busters
24 March 2014 | By Jonathan Ames
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Forget the ‘pain in Spain’ and those deserted villa newsfeeds, say Spanish lawyers – reforms are paying off and investors are showing their faces again
Far in the distance, from the depths of the bleak, dark tunnel that is Spain’s economic disaster, there is a tiny pinprick of light.
Those with the clearest view and the fastest approach towards it are the country’s business law elite. For them, the recent mantra of “the pain in Spain” is turning this year to “Spain is back”. Turnover decline has slowed at two of the country’s big four firms – Garrigues and Gómez-Acebo & Pombo – while Cuatrecasas Gonçalves Pereira and Uría Menéndez reported increases in turnover for 2013.
“The next year should be pretty good for Spanish business law firms,” predicts Uría senior partner José María Segovia. “Foreigners are returning to the market to buy, as are some Spaniards. It will be a better future for lawyers than for the country in general.”
Cuatrecasas’s international practice coordinator Javier Villasante is equally bullish.
“The worst is clearly over,” he claims, crediting the two-year-old conservative People’s Party government of prime minister Mariano Rajoy with cracking the austerity whip and legislating to weed out historic inefficiencies in the employment market.
All that enthusiasm will be cold comfort for the majority of Spaniards, who are still struggling with a 26 per cent unemployment rate that shows no sign of falling significantly in the near future.
“In the past 40 years, every time we’ve had a financial crisis the main impact has been on employment,” explains Gómez-Acebo managing partner Manuel Martin.
As with so many of the country’s recent ills, the roots to the unemployment catastrophe lie in Spain’s addiction to property booms. Martin points out that, while in more stable economies, construction accounts for no more than 10 per cent of GDP, in Spain that level has historically been closer to 20 per cent.
“The construction business is
labour-intensive,” he adds. “We have to find jobs in different sectors for all those construction workers who are now unemployed.”
So while the general population either spends hours queueing forlornly outside labour exchanges or worrying that they will be soon, the legal profession is hesitantly, but increasingly, licking its lips at the prospect of a higher level economic recovery. Garrigues managing partner Fernando Vives points to IMF forecasts of 0.6 per cent growth in Spain this year.
“Institutions such as Moody’s, S&P, the European Commission and JP Morgan all think the growth will be even bigger,” claims Vives.
Conservative way forward
Top marks go to the People’s Party for reforming labour legislation. Historically, collective bargaining agreements on terms and conditions applied to all Spanish businesses, from corner shops to department stores. It was a debilitatingly rigid system that is now being dismantled.
“The reforms have made Spanish business more competitive,” maintains Villasante. “It’s now possible to negotiate on an individual basis, whereas before employers had the same collective bargaining agreements regardless of business size.”
Meanwhile, Spanish exports are reported to have increased dramatically in the past two years, with some estimates of the rise running as high as 30 per cent. Imports of foreign goods have fallen meaning, says Segovia, that “Spaniards are buying more Spanish-made cars, not BMWs or Mercedes. And the same applies to TVs and washing machines”.
Spain has also effectively restructured its banking and financial sectors. And, adds Segovia, “while there is not wide access to credit there are signs that Spanish financial institutions are again financing individuals, households and small companies”.
More credit, more investment
So far so – well, not as dreadful as it has been for the past five years. Practice areas that firms are targeting in this mood of increasing optimism include corporate and banking work. Both will be driven by increasing foreign investment and a loosening of domestic credit. Compliance, white-collar crime and litigation departments should also see a boost this year.
“For the first time in six years, at the end of 2013 capital markets work started to move,” says Segovia. “We’re seeing new IPOs, debt being issued by corporates, and high-yield bonds being used as a way to finance big corporates. M&A has been slow for the past couple of years but we have the impression that this year it will increase. However, restructuring and refinancing work will probably not be that important because we’ve done so much of it in the past four years.”
“International investment is looking at Spain as it slowly emerges from recession, so corporate and capital markets will be reclaiming their star status, with restructuring and labour taking a second seat. Real estate will also become, once again, a powerful player,” he says.
That last point is difficult to believe, considering an abiding image of the eurozone crisis was the ranks of half-finished and deserted villas in Spain’s tourist regions.
“Normally, business law firms wouldn’t touch the residential property sector,” explains Segovia, “but there are an enormous number of houses and apartments held by banks. They’re selling those assets in packages – bundles of up to 200 apartments or condominiums are regularly being sold by financial institutions.”
Likewise, lawyers maintain the commercial property sector is showing signs of revivification.
Law firms bruised
The mantra that economic movement downwards can be just as beneficial for law firms as movement upwards has been severely put to the test in the past five years in Spain. There is no doubt that practices have suffered, with bottom lines and headcounts both taking a whack.
Being the biggest, it is understandable that Garrigues has arguably taken the hardest hit in terms of headcount reduction. According to figures provided for The Lawyer European 100, the firm shed over 600 lawyers between 2009 and 2013. But Garrigues says the decrease has happened mainly through natural attrition and a hiring freeze. It also shed some people through the closure of three offices in the past three years – Romania in 2011, Almeria in 2012, and Badajoz in January last year.
Despite that example, Villasante maintains that the big Spanish players in general have restructured
gradually and undramatically.
“Spanish firms have not been as aggressive in getting rid of lawyers as their Anglo-Saxon peers,” he says.
But Gómez-Acebo’s Martin sounds a warning note for the coming year.
“All the big Spanish firms had structures designed for the good times and we still haven’t adjusted completely to the new economic situation. There is still some way to go,” he says.
Martin points to squeezed rates as potentially affecting law firm numbers, human and financial.
“Pressure on fees continues to bear down,” he says. “Part of what used to be considered premium work is now commoditised. It’s difficult to grow your profit. You may have more clients and more work, but at a different price.”
Villasante maintains that fee pressure is slightly relieved in cross-border work.
“Two-thirds of transactions in Spain have a foreign component, and for those deals we’re generally able to stick to our hourly rate policies. But for domestic transactions and Spanish clients it’s harder.”
Global legal practices in Madrid are also understood to have suffered in the crisis, but senior players at Spanish firms are not forecasting any mass defections or departures. Indeed, in the past year Clyde & Co and White & Case have both launched in Spain with Madrid offices, while Allen & Overy added Barcelona to its Iberian offering.
“They’re in the same market and are suffering the same pressure on fees as domestic firms,” says Martin. “In some cases they are more affected than we are because they have fewer practice areas. They focus on transactional work and there are no huge deals in Spain now. But I don’t see the big players leaving.”
Segovia agrees, pointing out that not all the Madrid offices of global players are equal.
“There are differences,” he says. “The bigger offices are more or less in a similar situation to the local firms, while the smaller offices have suffered more than us because they were basically transactional practices. The percentage that capital markets work represents at some global law firm offices compared to that at our firm will be up to five times as much.
“But I haven’t noticed a bunch of lawyers leaving global firms for local practices. They may have had slight decreases in headcount, and hiring freezes, but they’re surviving.”
A legal market on the road to modernisation
An additional factor in the Spanish legal market is a controversial government move to reform access to the profession. This year the first tranche of a new breed of qualified lawyer will enter the market.
Until recently the route to qualification involved five years’ academic study with no bar exam. But recent legislation has imposed a regime that involves four years of undergraduate study plus a masters degree and then an obligation to sit a new bar exam.
Those joining law firms this year will be the first through the process. Segovia says the elite law firms broadly welcome the development, but there are concerns.
“New lawyers will be better prepared than previous generations,” he says. “On the other hand, some may think the process is too long and look at other disciplines. It could discourage the brightest students from coming to the profession.”
Even more controversial are government proposals to liberalise the practice of law in a move reminiscent of similar reforms in England. Ministers want to eliminate partially the requirement to be a member of the bar to practise law. One suggestion is that only litigators will have to join the bar, leaving great swathes of transactional lawyers free of the obligation. Another model would see only private practice lawyers required to have bar membership, while in-house counsel would be exempt.
The rationale is to generate greater competition in the sector and, say lawyers, reduce fees.
“Most lawyers oppose the proposals because they will reduce quality and responsibility,” says Segovia. “You will not have the bars monitoring lawyers’ behaviour and ethics, and sanctioning and punishing them when they behave badly.”
Despite objections, lawyers are resigned to reform around the corner this year.
Key figures: Spain
Life expectancy at birth: 82
Sources: IMF, Instituto Nacional de Estadistica, Tradingeconomics.com, World Bank