The real estate blog: The US approach to real estate finance in London

The 2007 global recession had a phenomenal impact on the UK’s real estate sector as financing for properties became much harder to find and fewer sales were completed. With the well of work drying up many UK firms shrunk their real estate teams but US firms such as Goodwin Procter and Paul Hastings took the opportunity to fill the gap in London’s market.

The two firms consider themselves different from the rest of the market through their sector-driven approaches. Whereas many firms will draft in specialist corporate or funds lawyers when work arises both firms have these specialists sitting directly within their teams.

As an example, Paul Hastings’ real estate team includes partners Duncan Woollard, who deals with real estate focused funds, and corporate real estate partner David Ryland.

Woollard joined the firm in August last year after working as a partner in King & Wood Mallesons’ (KWM) international funds practice. Ryland joined Paul Hastings’ ranks from legacy firm SJ Berwin and was the firm’s first departure following its merger with KWM. During his 25 years at SJ Berwin Ryland had focused on commercial real estate and specialised in UK and European property funds, property finance, hotel transactions and developments. The pair now work closely together at Paul Hastings and sit in adjacent offices.

“When they come into a deal which has complex financing, whether it’s on the funds side or whether it’s pure equity, we can come up with an answer to a client within a couple of minutes,” says commercial real estate partner Roberts. “Most law firms will probably get back to you in about a week when you’re having that type of complexity.”

For Paul Hastings real estate is a vitally-important part of the firm’s business with real estate equity, finance and funds work making up about 25 per cent of the firm’s global revenue.

“In London we’re one of the most significant real estate firms from the US,” says Roberts. “In London we possibly have, as far the breadth that we cover, the widest scope of any law firm I’m aware of. The practice covers all elements of finance and we’re particularly well known for very complex real estate finance such as CMBS  [commercial mortgage-backed security] work.”

Building a practice

Since Paul Hastings’ real estate practice was founded in 2009 it has undergone considerable growth and expanded from a team of eight to a group of over 30 lawyers. The firm also boasts high value clients such as Deutsche Bank, Starwood Capital, Capita and Invesco.

Goodwin Procter has also experienced a similar level of growth with around 40 lawyers working within its London office.

Roberts attributes his practice’s growth to the fact that Paul Hastings did not focus on conveyancing, which he describes as a “low-end element” of the firm’s practice, only carried our for clients in conjunction with other high value work. He also believes that Paul Hastings was able to react much quicker to the market than its UK-headquartered rivals.

“The magic circle firms are not as nimble as ours and they weren’t able to manage through the downturn as quickly,” says Roberts. “I think if you asked any of them they’d tell you ‘kudos to Paul Hastings for getting their act together quickly and figuring out how to seize the market when we sat around’.”

Roberts describes the magic circle firms as “late to the game” when it came to picking up restructuring work, arguing that large firms find it much easier to handle transactional work rather than restructurings as a result of the way their practices are organised.

The magic circle

It is true that in the years following the crash of 2007/08 several of the magic circle firms scaled back their real estate offering during the recession. This was most noticeably the case with Linklaters, which saw a considerable shrinking of its real estate department during a firm-wide restructuring. The 2011 cuts affected around 10 per cent of the firm’s partnership, which was the equivalent of around 30 partners.

Now Linklaters’ real estate group consists of six partners although the firm also has 12 partners within its banking and finance practice who deal with real estate finance. It is also understood that Linklaters has around 25 finance associates working on real estate finance deals at any one time.

Contrary to Roberts’ claims that magic circle firms were slow to pick up restructuring work, Linklaters’ real estate finance head Steve Smith maintains that this type of work has long been a staple of the firm’s real estate business.

“For us restructuring is and has long been a powerhouse, especially since 2007/08,” says Smith. “As a firm generally and for the real estate finance practice specifically we’ve done exceptionally well out of restructuring and insolvency.”

“From the onset of the financial crisis, and especially from when Lehman became insolvent, restructuring and real estate restructuring has been a huge part of our practice. My sense is that the magic circle firms have also done very well through their restructuring practices over an extended period of time.”

Goodwin Procter

One of the partners who eventually left Linklaters was global co-head of real estate sector Joe Conder, who joined Goodwin Procter to help launch its real estate practice.

Since then Conder has taken up a role leading the firm’s real estate capital markets group. His team has a number of big-ticket clients and recently advised HSBC Alternative Investments and Hines on £416m sale of Broadgate Quarter to Blackstone. The team was led by Conder and included partner James Spence and associates Martin Smith and Simon Woodcock.

Although Conder says that one of the positives that comes from starting a new practice was building the team from the ground up it does come with its own challenges.

“How do you differentiate yourself in an overly lawyered market?” says Conder. “You do it by being able to deliver the sector offering in a truly sectored way, which means having a team which looks at the asset class in the same way the market does.”

For Conder this means equipping the real estate team to be able to handle all aspects of a deal through the use of lawyers who would not traditionally be part of a real estate team.

This approach also means that non-partner lawyers in the team are able to interact more with their clients while continuing to develop their market knowledge. This differs from the view held by the majority of firms in the market and contrasts starkly with how Linklaters runs its real estate team.

“To be a good real estate finance lawyer you need to be a good finance lawyer,” says Smith, “because at the end of the day it’s secured financing. I think one of the dangers with having finance lawyers that grow up in a specialist real estate group is that juniors don’t get the breadth of training and experience as finance lawyers that they would get in a broader finance group.

“The senior lawyers who work on my deals have all grown up doing public to private, acquisition finance, leverage finance and trade finance which make them more complete debt lawyers when they come to work on and specialise in property specific deals. That’s why most firms who are strong in real estate finance have lawyers that have trained in other areas as well.”

The success of Goodwin Procter’s London practice has also led to the firm opening an office in Frankfurt. Although Goodwin Procter does not disclose its revenue breakdown by office or practice area London managing partner David Evans has cited the firm’s success in the UK as one of the reasons for opening in Germany, which is a major hotspot for the real estate market.

The office is opening in a similar vein to Goodwin Procter’s London office with four former Ashurst partners, two of whom specialise in real estate, being drafted in to oversee the launch. Real estate partners Marc Bohne and Peter Junghänel will help set up the office and will be joined by finance partner Stephan Kock and private equity partner Lars Jessen.

At Ashurst Junghänel and Jessen acted for Samsung SRA Asset Management and advised the company on its acquisition of the 34-storey Silver Tower in Frankfurt. The tower was bought for €450m in January last year. Jessen also acted for DZ Bank and Commerzbank on the financing surrounding the acquisition of ADA Cosmetics. ADA, which produces hotel cosmetics, was purchased by private equity investor Ardian in 2014.

Beware of the bubble

However, this focus does come with some amount of risk. Currently, London’s real estate market it is extremely busy after bouncing back from the global crash. If another crash of this level was to happen again a purely real estate focused team of this size could struggle to survive.

“Where firms got caught out in 2007/08 is that they had oversized teams of real estate lawyers,” says Conder. “You don’t want to be overly invested in one area and under-invested in another. That’s why people got into trouble in 2007/08.”

One of the ways that the firm is safeguarding against dips in the market is through the development of a private equity practice. The practice is currently being set up in a similar method as the real estate team was three years ago and Conder expects it to grow considerably in the coming years.

The team at Paul Hastings is less worried about the impact of the firm’s practice should the market be hit by another crash. This is because of the firm strong focus on restructuring work.

“Giving the nature and complexity of the types of transactions that we work on we’re quite well hedged for a downturn,” says real estate partner Miles Flynn. This is because these sophisticated structurally innovative products need lawyers who understand it in a downturn to help unravel or restructure those deals.”

These safeguarding techniques mean that both Goodwin Procter and Paul Hastings are confident that they can continue to grow even if another crash was to occur.

Roberts even believes that some magic circle firms are attempting to mimic Paul Hastings’ real estate practice model by either hiring externally or moving lawyers from other departments into their real estate teams.

Whether this approach to real estate finance practices will be adopted widely across the market is yet to be seen. However, Roberts fully expects the future to be littered with firms using the model the US firms have pioneered.

Deals

Deal one: Shoosmiths has advised South African retail giant Truworths International on the acquisition of fashion footwear chain Office Retail Group.

The deal was completed on 4 December and was valued at £256m. Office has 109 stores across the UK and Ireland and operates from 47 concessions within high profile retailers.

Partner Kieran Toal led the Shoosmiths team and was assisted by corporate senior associate Sarah Thawley and associate Claire Checketts.

Deal two: Wragge Lawrence Graham & Co has advised longstanding client Primrose Solar on the acquisition of three 5MW solar farms.

The farms are situated at Bedborough Farm in Wimborne, Merston in Chichester and Ashby-de-la-Zouch and were acquired from Solstice Renewables. The first of the deals took place in June and the last was completed at the start of December.

Partner Gareth Baker led the Wragges team, which also included partner Helen Emmerson and associates Mark Knight, Ross Mackay and David Barry.

The deal increases the number of solar farms in Primrose Solar’s portfolio to 13.

Temple Bright advised Solstice Renewables on all three deals.

Deal three: Goodwin Procter advised HSBC Alternative Investments and Hines on £416m sale of Broadgate Quarter to Blackstone.

The team was led by partner Joe Conder and included partner James Spence and associates Martin Smith and Simon Woodcock.