Real estate is a notoriously cyclical business yet most law firms seem to forget this as each cycle sees hiring and firing usually at the wrong time in the cycle. After five years of recession in the real estate market, firms are laying off lawyers just at the time when there are signs that activity levels may improve. However, firms that do not adapt to the current circumstances will have difficulty competing.
This recession has seen a dramatic fall in the volume of commercial real estate transactions and firms that are truly committed to the sector are adapting to what is generally accepted as the new reality. That is: lower volumes, increasing price pressure and clients demanding better and faster service.
One of the biggest challenges faced by Central London firms is how to deal with asset management work that is generally lower value and fixed price, yet clients do regard it as important in preserving the value of their assets. Firms are looking at legal process outsourcing, the Mexican wave – the practice of outsourcing lower-value transactional work to UK regional firms – and lower cost locations for this work. At Olswang, we are investing in both growing our existing asset management team based in Reading, where we have a lower cost base, and also analysing the way we handle these transactions to see if there is scope for streamlining some of the processes. Reading has proved to be a good location for our real estate practice: it is well connected to the capital and within easy reach for many of our clients. But it is not just a question of doing in Reading some of the work we have been doing in London. It is doing it differently and doing it smarter.
Lawyers are slow to change but the market is not. In many cases, the clients that firms saw as their main source of real estate revenue five years ago are either out of the business or inactive. There is no point in hoping they will return. However, there are new players with new sources of capital and in many cases they are all equity investors with little or no reliance on debt. The capital is coming from the United States, from the Far East and the Middle East. These investors are sophisticated, but in many cases they have not invested in the UK before. They are looking for lawyers that are specialists in the real estate sector and they are not necessarily tied to the biggest firms in the same way that applies to UK institutions with long established relationships. However, they do expect added value in terms of market knowledge and understanding, tax structuring and commercial advice.
At Olswang, our international sector focussed approach is attractive to these new investors and we have seen a growing number of enquiries from them. We are investing in our London team in providing the service that these clients require and not resting on the systems, structures and service lines that applied in the old markets. These clients expect their lawyers to service their requirements in multiple jurisdictions and to introduce them to opportunities giving both legal and commercial advice.
Beware if you are not adapting to the new reality: you will be left behind!