Surviving the property boom

Claire Smith reports on how medium-size firms are holding their own as the big City firms move in on the commercial property deals.

In the booming market that is commercial property, at the start of the third millennium, one old saying increasingly rings true among law firms – size does matter.

A report published earlier this month claims that the City giants are stealing a march on the medium-size property firms, which far too often do not realise what they can offer the marketplace.

Mark Brandon, editor of Commercial Property 2000, published by New City Media, says: “At the top a handful of firms are drawing away. Chief among these are Clifford Chance and Linklaters & Alliance.

“They can offer a huge property department plus financing practices and extensive international networks, allowing for the first time the truly international client to take a truly international view of property.”

When it comes to what some of the medium-size firms can offer, Brandon is not optimistic. He says: “They have no idea how they differ from other firms or what it is they offer the marketplace.

“They rely on existing clients largely, win relatively few new pitches, and when they do, this is based on a few troopers among the partners who are capable of carrying the entire practice on the strength of their personal charisma.”

David Taylor, head of department at Berwin Leighton, says that the changing nature of property transactions has made the City firms sit up and take more notice.

He says: “There has generally been a change in the way the big City firms view property. There was once a desire not to be in the property business, now many are actively seeking to recruit senior level property lawyers, and that seems to me to be a sea change.

“Someone woke up and realised that property transactions account for a significant proportion of the UK's GNP. And the increasing link between property transactions, financial transactions and corporate work means good property transactions drive other parts of your business.”

Robert MacGregor, real estate partner at Clifford Chance, says: “The market has changed in a way that was beneficial to us. We have always been committed to real estate, and now it brings in so much more work throughout the firm.

“On real estate transactions now, other than the really small ones, the clients are looking much closer at maximising their returns – utilising the optimum financing and tax arrangements.

“That means that a broad range of tax, finance and corporate skills are needed, and that's obviously helpful to firms that have those strengths.”

Not surprisingly the medium-size property firms are quick to defend their position and insist they still have plenty to offer clients.

Clare Deanesly, head of property at Gouldens, says the big firms are not necessarily giving property clients what they really want on a transaction.

She says: “It's very much the quality people who continue to do the quality work, whatever their size. The bigger you get, the harder the quality control is – there is a tendency to be putting the work down to less qualified people.

“Firms with strong identities and strong self-belief will survive whatever their size.”

Deanesly believes that there are a lot of high-quality property clients who are not global and prefer to use medium-size firms which will give them more attention. She says that the big firms do not treat smaller property clients well on a personal level, and that is where the medium-size firms will always have an advantage.

It is a view shared by David Battiscombe, the newly appointed head of department at property-led medium-size firm Finers Stephens Innocent.

He says: “If you act for non-quoted companies then you are very much the right size to service them. As some of the medium-sized companies have grown, firms like ours have grown to adapt to them and mirror them.

“We see ourselves as being adaptable – that is one of the advantages of being smaller, we do not have a massive infrastructure. We are a lot lighter on our feet and quicker to respond to changes in the market.”

One of the ways Battiscombe sees his firm adapting to the changing property client is by its growing awareness of the e-commerce revolution. The recent merger with niche media firm Stephens Innocent has, says Battiscombe, increased the firm's general capability to deal with hi-tech clients, and has particularly boosted its approach to property.

“There is concern that certain retailers are going to be marginalised by e-commerce, and the other impact will be on changing patterns of distribution,” he says.

There is a chance that clients will no longer demand retail space, but will instead sell goods on the internet, needing massive warehouse and distribution networks to get the goods to the clients quickly.

“The underlying point is that nobody can really predict the effects on the property sector of the e-commerce revolution, but we are trying to be ready to react.”

In identifying such an area as important, Finers Stephens Innocent is not only showing that medium-size property firms can be more responsive, but also that they can develop a niche. That, says Battiscombe, counters Brandon's belief that property firms the size of his do not know their marketplace.

Richard Smith, head of property at mid-size Nicholson Graham & Jones, dismisses talk of the big property firms stealing the show.

“This talk about the demise of the medium-sized property firms has been going on so long it's just a joke. We are something like 45 per cent over what we were last year.

“If a department is doing badly at the moment in this sort of market that's to do with the firm, not the size of the firm. There is so much activity you would have to be bad not to do well – and there's no sign of it letting up at all.”

But while a buoyant commercial property market may be benefiting firms across the board now, Brandon argues that the weaknesses will become obvious if recession hits.

“Property is in boom at the moment, and everyone is making money,” he says.

“However, come the downturn, when the weaker clients are being bought by hungry predators – perhaps overseas investors who may turn more naturally to the newly-minted international practices – a number of firms will be facing an ugly problem.”

Simon Cookson, head of property at Ashurst Morris Crisp, does not envisage the end of the medium-size property firms.

He says: “As the commercial property transactions become more complex, different skills are required.

“There will be medium or boutique firms which will have a place in the modern market, but naturally because of the corporate skills and banking skills needed there is a move towards the big firms.

“You have got to have a developed view of what your firm is about. I do not believe the end of the medium-size firms is near. We all have issues that we need to grapple with – business is increasingly competitive and we all need to work out what we are offering.”

The big firms can obviously be far more confident of their staying power should another recession rear its ugly head.

The medium-size property firms could be hit hard – property is after all one of the most vulnerable sectors of the economy – but those which have something to offer the market will not suffer just because of their size.

James Barnes, property partner at Herbert Smith, says: “It's difficult to put a date on when the property transactions became more sophisticated. It's something that has been evolving over a number of years but it has gathered momentum. Different people are looking at property in different ways. The way for medium property firms to cope with it is to build up the expertise that is required.

“There are some medium firms that are doing very well in property, but the way to do better is to change with the market, the same as the big City firms have.”