Despite an active London real estate market, property teams continue to suffer from hangovers coming out of the recession. Luke McLeod-Roberts looks back at a difficult year for the sector
Property was hit first and hardest during the financial crisis and two years on most of the leading UK real estate practices have still failed to bounce back.
Most practices experienced static growth or dips in revenue.
Pre-merger Lovells, the best performer of the top 20 real estate practices during 2008-09 with a revenue increase of 5 per cent, from £45m to £47m, is a case in point. It fell by 13 per cent last year to £41m. A similar fall was felt at DLA Piper, which saw real estate revenue slide by 14 per cent, from £87.75m to £75.53m, while Addleshaw Goddard’s revenue shrunk by 13 per cent, from £34.62m to £30.2m.
Success in the City
At first glance this is surprising given the recent activity in the London prime real estate market. Examples include DLA Piper’s advice to Funderburk Europe 2 on the acquisition of Allen & Overy’s (A&O) headquarters at One Bishops Square from Clifford Chance client Hammerson. Also Herbert Smith and SJ Berwin advised Al Salam Bank and Evans Randall on their joint purchase of Addleshaws’ London headquarters at Milton Gate from UBS Asset Management. The building was subsequently sold once again to an unnamed Middle East investor.
On the lettings side Berwin Leighton Paisner (BLP) acted for Oxford Properties on the letting of Watermark Place to Japanese investment bank Nomura (one of the largest pre-lets ever to be completed), while Lovells assisted fund manager BlackRock on its relocation to Draper’s Gardens in the City.
But despite this relatively frenetic level of activity, joint head of Lovells’ legacy real estate practice Michael Stancombe points out that high-grade City property is still a “relatively narrow market” and alone is not enough to sustain revenue growth.
One firm that did experience an increase in real estate revenue was CMS Cameron McKenna. The 7 per cent growth rate in the property department was all the more striking because it took place against the backdrop of an overall 11 per cent drop in firmwide turnover. Real estate partner Mark Heighton claims this was because of a well-hedged practice. This includes a hotels sector focus, with deals including acting for Grosvenor on the sale of the Hilton Hotel Liverpool to Taylor Wessing client Ability Developments and work for Dutch entity Citizen M Hotel Group on the redevelopment of two London hotels. The department’s coffers were also boosted by acting on the sale of retail warehouses, “an area that boomed as a result of the weight of money coming in, the fact that it’s safe income and [involves] good tenants”, according to Heighton. Real estate assistance in non-core areas, such as acting for an energy joint venture on its acquisition of sites for new nuclear power stations, also provided a strong income line.
One of the great mistakes made by commentators at the start of the recession was the prediction that banks would flood the market with distressed assets. Transactions such as the White Tower portfolio, which was recently snapped up by Carlyle Group, Schroders and Hammerson, are a rarity. While Camerons has retained a key role since the end of the 2009-10 financial year advising Halliwells on the carve-up of its property obligations, Heighton believes that it will continue to be a “gradual process” over the next three to five years.
“The banks own so much property that it would damage the banks themselves and prices if they flooded the market,” he comments. This is a view that Stancombe echoes, arguing that it will be a ”controlled release”.
Despite a challenging 2009-10, Clifford Chance maintains its position as having the largest real estate practice group, with the best real estate revenue per partner figure of any City practice at £2.15m. Cliff McAuley, global practice area leader, shares the relative optimism expressed among his counterparts at other firms about the year ahead.
“The past two years have been challenging for the global property market, but we’re pleased to see activity beginning to pick up,” he says. “The practice is showing some improvement
in the developed Western economies and, although there’s still some way to go, we expect this upward trend will continue over the coming year.”
With his firm recently completing its merger with Hogan & Hartson, Lovells’ Stancombe is also positive that an upward trend is around the corner and anticipates acting for hotels and opportunity funds.
TOP 20 REAL ESTATE PERFORMANCES, 2009-2010 (Click image to view full version)