Property lawyers acquire new skills to play global markets

David Lawson 2002


Property has long been considered the ugly sister of the legal world - dull, often routine and lacking the buzz that inspires high-fliers. But bricks and mortar are changing and lawyers have begun to need new skills to keep pace. A good grasp of languages is a start. Investors are increasingly looking outside traditional local markets for opportunities across Europe.  And this is not just a repeat of previous booms, where buyers squeezed out of London or Birmingham nipped across to Paris or Frankfurt and snapped up an office block or two. Today they are more likely to be taking swathes of property scattered across half a dozen countries.

  That involves yet another language, the curious patois normally heard around the City and Wall Street, as these deals involve complex financial structures based around pooled funds, bond issues and special company vehicles. ‘My friends all went off to be merchant bankers after we qualified and I always felt left behind,’ says one twenty-something  lawyer. ‘Now we all work together again.’

  International deals are still relatively limited. Only two or three of the top public property companies and  a handful of big institutional landlords have ventured abroad. Nor is the UK industry straining at the leash to take advantage of the Euro. An informal poll at this year’s British Property Federation conference saw a large majority suggesting the impact will not be felt for at least five years.

  But the UK is still playing a leading role in a rapidly developing trend which saw cross-border transactions reach almost Euro18.5bn last year – a third of all commercial property deals, according to real estate consultants Jones Lang LaSalle. A good deal of this is coming into the UK from across the Atlantic as American investors flee a recession which has left Europe relatively unscathed.  International bank Morgan Stanley estimates as much as $25bn is waiting in the wings. Meanwhile big German banks and Dutch pension funds are breaking out of home markets too limited for their demands.

   Much of this is passing through the hands of big British names  UK lawyers colonised mainland Europe before US giants could get their foot in the door.  ‘Because we are ahead of other countries, we have been able to export our concepts,’ says Robert Kidby, head of property at Lovell White.  This normally involves structuring special companies to contain portfolios ranging from  Spanish leisure parks to Paris offices and Dutch warehouses. Each is structured to maximize liquidity, spread risk and – perhaps most important – minimize tax burdens. This is where the language of Wall Street is so vital

   That mix of skills is also being tapped by UK clients seemingly immune to the lure of the Euro. Institutional landlords have fallen out of love with property over the last decade because of falling returns and the increasing burden of taxes like stamp duty.  Then some clever financial and legal brains blew the dust off a little-used old friend called the limited partnership, leading to a proliferation of  funds parked off-shore in centers like Luxembourg, Dublin and the Channel Islands.

   Another sign of greater financial sophistication is coming from increasing use of US-style  securitisation of rent flows.. Big players like British Land, Canary Wharf and Capital Shopping Centres have made massive bond issues to give  overseas investors a stake in the UK market. German banks are also following this path leading  Moodys, the investment analyst, to predict that  securitisation could rise 40% this year to more than Euro25bn.

  Occupiers are also challenging their lawyers to adopt new skills to combat sinking equity prices. Thatcherite moves to shed property are being picked up by businesses seeking to concentrate on core activities. Outsourcing is one of the main factors which have revolutionised the lawyer’s role in the last five years, says Kidby. For instance, Lovells had to work out how to package a £2bn deal involving hundreds of leases without going to every tenant to negotiate an assignment. It came up with a ‘virtual assignment’ – a contract of indemnity and management which left the legal position the same.

  So how has this impacted on the way investors and occupiers choose their lawyers? Has it narrowed the choice even further to the ‘magic circle’ of big City names that can offer this rich diet of financial expertise and overseas offices? Not necessarily.  Selection boils down to a mix of contacts, performance and local knowledge.

  Hammerson, one of the few top property companies with overseas holdings, leaves the choice to local offices that run its shopping centres in Germany and France. ‘Development and management requires local expertise,’ said a spokesman. Slough Estates chooses ‘horses for courses’ for its industrial estates in Belgium, France and Germany. ‘Most of the business is in acquisition and leasing and none of the firms we use have UK connections,’ says executive director  David Simons. It deals the same way with business parks in North America.

  Jeremy Lewis might be expected to be far less attached to the UK. His company, Eurocommercial Holdings, is listed in Amsterdam and places funds for Dutch institutions in France, Sweden, the Netherlands and Italy. But the firm was until recently part of Schroders and directs much of its business via a London office. Most of the work goes through local firms ‘It is vital to have local connections and knowledge of how systems work in each country,’ he says.

  But taxation and financial advice is also critical and he relies heavily on UK names for their expertise. ‘They are everywhere nowadays. Picking one is often down to ongoing personal relationships. If you get on well with the people in one firm, you stick to them.’

   In fact, while debate continues to rumble on among lawyers about whether branded offices  or ‘best friend’ associates are the best way of winning international business, clients appear to be more concerned about quality of financial advice.

  David Wright, head of property at Nabarro Nathanson, agrees that he would rarely be involved in single property purchases but can play a central role  organising finance and co-ordinating deals via associate offices.  BGoth Hammerson and Slough keep a strong central control on funding and focus this through London. But Simons admits this is not the kind of sophisticated juggling involved floating pooled funds and holding companies. ‘We are far more conventional.’

    Marcus Shepard is rapidly acquiring juggling skills for Io Group, which is setting up a property fund with AXA Reim which will eventually own Euro550m of industrial estates in France, the Netherlands and Germany. ‘We had no option but to use a major international player as a single co-ordinator,’ he says. Freshfields won the beauty contest but associates of Richards Butler are responsible on the ground in Germany and a group with no international connections is handling France. A further firm is retained in Luxembourg, where the fund is domiciled.

  So does this open an even bigger gap between the ‘magic circle’ of City firms and the rest?  Not, perhaps, as large as might be expected. Nabarro has strengthened its financial clout by bringing accountants into the property team. Graham White, head of property at Slaughter and May, says strong financial and corporate skills may be critical but are no longer isolated to big names.

  International networks have also opened the field. Ashurst’s, for instance, revently handled deals across half a dozen countries for Global Switch.  Even smaller players are getting involved. Pitmans, with a single office in Reading, has handled UK and US floats for Danish partners and regularly acts for US fiorms buying in the Thames Valley.