London real estate market stalls, except for top-end commercial property

With investors only really interested in the top-end properties, events both at home and abroad have kept the real estate sector in check.

London’s August riots hardly showed the capital in its best light. In fact, one real estate partner at a City firm talks about how an investor client from Singapore, in London to view some properties, ­witnessed the riots and was so perturbed by the ­violence that he balked and decided not to risk his cash. Fortunately, these kinds of stories are few and far between. Prime real estate products or “big shiny investments” as one partner put it – in London and other parts of the South East have, once again, been the saving grace of real estate departments.

In the first six months of 2011 alone, around $12.3bn (£7.56bn) was invested in offices, shops and homes in London, more than any other city in the world, according to Real Capital Analytics.

The difference this has made for firms is stark. In 2009-10, 16 out of the top 20 real estate practices experienced a drop in turnover; in 2010-11 only three fell.

Norton Rose has entered the rankings for the first time on the back of its merger with Australian firm Deacons, while Eversheds’ real estate department grew the most, from £63.9m in 2009-10 to £81.5m in 2010-11. However, this figure is inflated by the firm’s decision to include projects in its categorisation of real estate. True growth at the firm was around 11 per cent – still a big improvement on the previous year when the team’s revenue fell by 8 per cent.

“The year before was very flat,” admits Eversheds’ head of real estate Julie Stobart, “whereas this year we saw the investor market coming back. One thing that’s helped us is the breadth of our client business. We don’t need much of an increase to see a rise across the board. If 70 per cent of our practice was developer work, we wouldn’t have seen any increase, and the public sector is still not doing anything because there’s no cash and no decisions being made.”

Freshfields Bruckhaus Deringer client Almacantar (which was co-established by former Land Securities director Mike Hussey) was a good example of an investor targeting prime assets. In April 2011 the firm advised Almacantar on its £100m purchase of the Centre Point tower and then in June on the fund’s £80m purchase of the Marble Arch Tower. According to Chris Morris, head of real estate at Freshfields, the deals were a sign that buyers thought they were looking at the bottom of the market.

A big driver behind the growth in the central London bubble has been the influx of foreign investors, from Asia and the Middle East mostly, but also from some European countries such as Germany, as well as the US. And although the investors see London property as sound, joint ventures and other structures are becoming ­increasingly popular as foreign investors look to team up with a UK player who knows the market and can share the risk.

“We’re seeing a trend for corporatisation,” says Clifford Chance real estate partner Mark Payne, who adds that although his group’s turnover has fallen, this is down to lower deal volumes and the team is happy with its market share.

“We’re seeing a lot of deals being done through joint ventures, which plays right to our strengths because we understand real estate and how to structure these vehicles,” he adds.

Unfortunately, not even joint ventures are enough to convince anyone to invest in anything that is not top end. Once you drop down to secondary and tertiary ­properties, activity in the sector falls off a cliff.

“This is the biggest division in the regions I’ve ever seen and the driver is ­international investors who are only ­looking at certain ­locations,” says Lindsay Morgan, head of real estate for Europe and the Middle East at Norton Rose.

As a consequence of the limited prime products, investors have been looking at alternative investments. Student accommodation is one area that has picked up. There is also talk of investors setting up funds for residential property portfolios, but this has been ­speculated on for some time and actual deals are few and far between. Many feel that although it is a sector that shows promise, the returns are not yet there.

Nor have banks started releasing distressed assets in any ­meaningful way, so there has been little pick-up in activity there. However, most partners are confident that in the next couple of years refinancing will provide a steady slew of work.

In short, the figures for real estate this year took a definite turn for the better, but they do not herald a sustained rebound. Fortunately, most firms have already cut their cloth to fit a reduced market. The economic woes of Greece and the downgrading of US debt have ­created a lot of uncertainty, but one thing partners are sure of is that it will be a long time before the market looks anything like it did in 2007 again.

Source:  The Lawyer


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