Research Trends and Conclusions: Real Estate 2011
With the benefit of over 14 years of research and tens of thousands of votes from clients and private practitioners, Who’s Who Legal takes a closer look at developing trends in the real estate legal marketplace worldwide.
Activity and confidence in the real estate industry is returning as the market begins to rebound. This has been reflected in the results of the research as highly regarded firms continue to increase their share in the market and position themselves for an upturn in activity that is expected to continue in coming years.
POLARISED TRANSACTIONS
In interviews conducted around the world, contributors provided positive feedback regarding the number of transactions they are seeing on the real estate market. While there is some way to go until we see the volume of transactions experienced prior to the financial crisis, interviewees note that the industry is witnessing the beginning of a movement away from distressed assets and towards new “healthy” transactions. One source states that “there is a lot of capital back in the market hungry to be placed. When a good asset becomes available to investors that is not distressed the intensity and pace of the transaction is heightened”. These more aggressive bids are taking place due to the shortage of high-value assets on the market, which is driving up their price. Some lawyers have expressed surprise at the kind of prices witnessed during the most recent economic boom. Due to the low volume of top-end transactions, lawyers are emphasising the importance of establishing and maintaining strong relationships with potential clients. This is in contrast with those real estate assets available on the market that are not regarded as top quality. For instance, they may not involve a prime location or the transactions may be leveraged. With these types of transaction, lawyers are finding that they are taking months, not days, to close – if they close at all. “Finance is no longer the problem”, argues one interviewee; “the market is not yet balanced”. The gap in expectations between sellers and purchasers of real estate continues to be wide as both parties are dealing with smaller margins of profit in comparison with previous years. Lawyers are spending more time than ever at the negotiating table to get deals closed and many of those canvassed state that they are dealing with many transactions that fail to close at all. Legal costs are therefore clocking up for clients in these situations and law firms are increasingly required to cap fees to keep their clients satisfied.
Restructurings continue to be an important source of work for real estate lawyers. A peak of debt maturity in 2012/13 is looming for clients. Lawyers argue that there are a fair number of assets currently “underwater”, where the value of the property is less than the total debt obtained to pay for it. Consequently, many are currently seeing increased levels of transaction that involve the acquisition of debt and expect there to be many more to come in the foreseeable future as investors see an opportunity to be taken by acquiring property cheaply. Many also referred to the fact that banks have been slow in bringing their major portfolios to market as they expect prices to increase.
In the current climate, the market appears polarised between high-end acquisitions, which are selling quickly, and more complicated transactions, which are slow and difficult for lawyers to close. While the market is not in its best shape, we are continuing to see healthy transactions at the top end of the market. Indeed, it will take a few years for over-leveraged properties to be worked out and restructured, for finance to be more available to clients and for expectations to level out between sellers and purchasers. Yet, new and healthy transactions provide a ray of light as it is the first sign that confidence has returned to the real estate industry.
THE LEGAL MARKET FOR REAL ESTATE ADVICE
This graph shows how well the most highly regarded international full-service law firms have fared in the research since 2008. Many lawyers have noted that as the revenue streams that real estate work created fell after the global financial crisis, some firms have slimmed down their real estate departments to reflect the changing economic landscape left over from the recession. Others such as Linklaters and Freshfields Bruckhaus Deringer, have maintained their presence in the real estate market. DLA Piper continues to have one of the largest real estate teams represented in this book. This suggests that most law firms are aware of an increase in activity that is starting to emerge in the real estate industry and are keen to prepare for better economic conditions in the future.
Current conditions in the industry appear to also favour smaller or more specialised law firms. In the United States, Ballard Spahr LLP performs well in the research, increasing the number of its featured lawyers. Real estate boutique Cox Castle & Nicholson LLP expands its representation in the edition, as does Venable LLP. As is the case across the legal market, lawyers note that given market conditions whereby clients are highly cost-conscious, smaller firms have been able to compete on price and have gained market share.
An important observation to be made from these results is that all of these firms have a larger representation in the edition in comparison to 2008, indicating that as real estate activity has slowly come back, law firms are continuing to invest in real estate expertise.
GENERATION GAP
A concern that has continued into 2011 is that law firms are experiencing a generation gap in their real estate departments as a result of associates being laid off during the financial crisis. One contributor argues that “law firms have faced a challenge to ensure that transactions are staffed appropriately”. Another notes that “there exists among many law firms a generation gap between senior staff and associates and it has become a challenge to ensure senior associates have the right level of expertise” adding that “it is not just about loading junior people into the data room but about getting them to understand the problems and the clients too”. It is clear then that there is further investment that law firms will have to make as transactions gradually pick up.
REAL ESTATE INVESTMENT
The graph above shows a selection of the countries that have made the biggest gains in the number of lawyers listed since 2008. Canada stands out with an increase in the number of listings by 50 per cent between 2009 and 2011. Contributors note that they are seeing a flight of capital into Canada and an increase in activity in retail, commercial and industrial leasing and transactions. A notable development in the retail space has been the venture of Target, the second-largest discount retailer in the United States, into Canada with an investment of C$1.84 billion, purchasing 105 sites in all 10 Canadian provinces. Australia has made gains year on year and lawyers have referred to its growing real estate market, with investors from the Asia Pacific showing significant interest.
In Europe, there are positive signs coming from Norway and Germany. Our research shows that these countries are still experiencing many of the difficulties noted above, yet real estate activity has come back stronger than in the rest of Europe. Norway did not suffer as much as others during the financial crisis; the country has a comparitively low debt-to-GDP ratio, and positive interest rate differentials in comparison with most developed countries. The economy also has strong domestic demand and growing exports. In the uncertain economic climate that the Eurozone is currently experiencing, Norway offers investors an alternative.
Interviews conducted in Germany identify that while the real estate market was affected by the financial crisis, confidence has returned and commercial entities are increasingly showing interest in buying up German assets. The German economy grew 3.6 per cent in 2010, the fastest since reunification, as demand for exports increased. Unemployment is falling and retail sales are continuing to rise in 2011 with an increase of 1.4 per cent in the first quarter. Given the positive economic data coming out of the country it is no surprise that the legal market has expanded significantly since 2008.
Overall, while the real estate industry has some way to go in ironing out the difficulties that clients are facing, investment is returning to the market. In the current climate, law firms will need to make further investments in their real estate departments as activity continues to pick up. Lawyers are required to innovate to ensure transactions close, that they remain competitive, and that they play a part in activity at the top of the market. Those lawyers that have demonstrated their qualities to clients and continue to play an important role in the real estate market are listed in the following pages.
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