Without wishing to sound melodramatic, October could herald the start of a new era in real estate lawyering. The Prudential’s property investment arm (PruPIM), the UK’s largest institutional property investor, will take the brave step of implementing an as yet untested approach: a subcontracting model devised by Lovells property head Robert Kidby called the ‘Mexican Wave’. (The name, incidentally, is now protected.)
But before you start picturing row upon row of lawyers waving their arms in the air, this is about trying to create a one-stop shop, managed by Lovells and selling a pick ‘n’ mix of lower fee rates from provincially-based firms and City fee rates from Lovells for the more complex stuff. All with a Lovells satisfaction guarantee. Aside from slashing fee rates beyond the realms of profitability, this is the first real attempt by a City firm to tackle the threat of the major regional players, all of which now have London-based real estate practices and use their ability to shunt work back to lower-cost bases as a key selling point.
With the final details of PruPIM’s new arrangement being put into place, both client and adviser feel pretty excited. Deals with subcontractors Cripps Harries Hall and Knight & Son are about to be finalised, as are the finer details of rates for different categories of PruPIM work.
Their efforts are the culmination of a year-long review. At
the outset of that process, PruPIM director of property legal services Bob Allen says he was more than happy with the quality he was getting on high-value work from longstanding portfolio advisers Lovells and Berwin Leighton Paisner (BLP). But there was concern as to whether PruPIM should be getting its full portfolio service in the City.
Was the routine work being done as efficiently and to as high a standard as possible? In fact, Kidby first approached Allen with the Mexican Wave in embryonic form two years ago as a possible solution. But Allen must be given credit for proceeding with a review of what else the legal market was offering. Expectation was high that he would take his legal spend, worth many millions of pounds a year, to one or more of the regional heavyweights.
Eversheds and DLA were among those hoping for a slice of the work. But so heavily discounted were the partner rates at Lovells and BLP (as low as £210), that the regionals could not compete on price. By contrast, when Kidby’s Mexican Wave model is superimposed on last year’s activity, Allen says it gives him a significant saving.
The extremely high level of trust Allen has in Kidby is clear. There are other key attractions for him. Keeping a lid on management time is one. For PruPIM’s instructing surveyors, the first point of contact will be Kidby’s team, but it could be a Cripps, Knight & Son or Lovells lawyer who responds. Relationship management, including work allocation, control and overall responsibility, will rest with Lovells, although there is sure to be bartering between the firm and PruPIM. At the same time, Allen hopes to keep Lovells on its toes with a small element of City competition by retaining CMS Cameron McKenna on one group of funds. Protection is also key. There has been much discussion about insurance issues to the effect that PruPIM is satisfied it can look to Lovells. The test for Allen now is whether he can really get value out of his spend on these new subcontractors.
There are also obvious wins for Lovells beyond ringfencing its client, not least of which is fees. Out go the historically low partner rates and in come City prices for PruPIM’s more complex transactions. OK, so Lovells is sharing its client. But with firms it has handpicked in the knowledge that they pose no threat to its near-monopoly on the relationship. Another key strand to the deal is a built-in flexibility that allows Lovells to hold back bread-and-butter work for itself (when the market is slow, or it needs to train up assistants) provided it matches the provincial rates.
The crucial test will be whether Lovells can make a profit while investing so much in management, with no fewer than four partners running the PruPIM show. In the meantime, it will be interesting to see how the regional firms react to Lovells’ challenge and whether any other clients dare to
put their legal work at such arms’ length.