Property gloom

With the dramatic upturn – then the subsequent downturn – in real estate, practitioners are learning to be a bit more fluid in their approach.

Real estate lawyers have always been the poor relations in top 20 London firms and the same might be said of their acolytes, the construction, environment, planning and property litigation lawyers.
They could never compete with their colleagues doing big-ticket corporate transactions or heavyweight commercial litigation in terms of both turnover and profitability. Competing in a legal market in which every firm, from the sole practitioner to the global giant, claimed expertise in real estate inevitably drove down hourly rates to the point where write-off forms littered every top 20 London firm like confetti. If this was not enough, many corporate and litigation partners viewed their real estate colleagues as rank amateurs. As the property cycle moved from boom to bust, conveyancing lawyers practised their Neanderthal skills between a late breakfast and an early supper with little attention being paid to the shape of the practice, the profitability of the work and the succession of salaried partners and fee-earners.
Notwithstanding all this, every top 20 London firm found a ready supply of trainees willing to qualify into real estate. After all, the client base was fun. It included everything from the archetypal property developer with fox-fur coat and ankle chain to the grey patrician tucked away in some remote corner of an institution or pension fund – and between them, a whole gamut of individuals, firms and companies that knew little about real estate, but really needed help.
Real estate lawyers were also seen as a gregarious and friendly bunch who knew how to party. All those brokers and surveyors could be relied upon to keep the beers flowing even if the clients went home. With no single trade association representing the property industry as a whole, the opportunities to skive off were endless. And all this fun could be had while you were paid the same as your corporate and litigation colleagues.
So if that was the price of being viewed as an expensive overhead and being barred from high office, so what? After all, you
might even acquire a spouse or similar bolt-on in the process, and if things did not work out you were still a marketable commodity.
But the world moved on for the top 20 as the millennium passed into history. Real estate became hot. With equities on the floor, real estate was suddenly the sexy sector to be in and if you were in it you certainly did not want to pay tax or stamp duty. As a result, all sorts of structures were
created, offshore and onshore, to mitigate tax and avoid stamp duty.
Corporate real estate was also right up there, as chief executives struggled to make profits and chief financial officers looked to their companies’ real estate to refresh the balance sheet through a series of sales, leasebacks and outsourcing-type deals. In flooded US real estate investment trusts German funds and Irish punters corralled in limited partnerships and there was no time to party anymore – life, or work at least, was serious. A few commercial property lawyers even reinvented themselves and became corporate lawyers with expertise in the real estate sector. How many of you have Clifford Chance partner Iain Morpeth, Herbert Smith partner Chris de Pury or even SJ Berwin partner David Ryland as your role models?
Although everyone has had their head down over the past two or three years, every top 20 firm still devotes a lot of time to shouting its success to the rooftops in the legal and property press. How else can those important rankings in Chambers and The Legal 500 improve? Or how else are real estate lawyers to establish their credibility with brokers in the Dover Street Wine Bar?
The trouble is, this Government does not like the property industry, and so when it hears that it is leaking billions of pounds of tax in the direction of nasty property developers, it does something about it. Many of the scams are now no longer achievable and by the end of the year even more will disappear, with the spectre of stamp duty land tax looming. If that is not bad enough, most sophisticated investors are sitting on their hands this summer, believing the bull run in UK real estate is over. Some are following the real estate cycle into Europe, but few are taking their UK real estate lawyers with them. They do not know the local lingo or the market and do not have the ability to practise local law, but above all, UK lawyers are expensive.
It is a concentration on ‘expense’ that will define the next few years. Total occupancy costs in Central London are huge – the highest in the world – and salaries are immense. A newly-qualified gets paid as much as a consultant surgeon in the NHS, an eight year-qualified (with no prospect of promotion to partner) the same as a half-colonel commanding a battalion of UK forces in Iraq. No wonder every undergraduate covets a vacation placement as the first rung on the ladder to unimagined wealth.
It is not surprising that increased transparency has led to more clients challenging fees and, with asset growth slowing to a halt, performance can only be achieved by driving down costs. The top 20 London firms, which have enjoyed a good two or three years, are back under the cosh again.
What can they do? They can grab a larger slice of real estate work that can be charged at premium rates and rid themselves of the lower-value vanilla and commoditised work, which are not profitable with a high Central London cost base. Clifford Chance, with its global reach in real estate and specialist skills such as derivative real estate products, equity finance and securitisation, may emerge relatively unscathed, as may Slaughter and May, which many years ago downsized real estate to a corporate support function, with partner numbers staying static and leverage increasing. But they are the exception, as Freshfields Bruckhaus Deringer and Linklaters demonstrate, with partners leaving and many senior fee-earners, realising that they are gazing up at a glass ceiling, beating a path to the recruitment consultants.
As to the remaining 16 firms, those without strong central management appear to be cruising along relatively unscathed. But there are the beginnings of an attempt to get rid of unprofitable work such as Lovells’ ‘Mexican Wave’. It is very much a first stab, because it applies to just one client, Prudential, and involves Lovells underwriting the skills of the two firms in Kent and Staffordshire, where it is sending work. Just imagine what impact sub-contracting might have if it were applied to every client’s unprofitable work at Lovells’ real estate department, or for that matter at every other top 20 London firm.
As a consequence, much work that has traditionally been the province of City firms is now heading in the direction of the firms’ regional and national rivals. Firms with a presence in London to bring in the work, and that have offices outside the M25 to service it at a considerably lower rate, are quickly becoming the flavour of the month.
Gerald Bland is national chair of property at Wragge & Co