In this fourth edition of CBRE’s Law in London report we consider how the challenges and opportunities facing London’s largest law firms are affecting real estate strategy.
This is underpinned and supported by our regular benchmark analysis of the CBRE Legal 100, which draws on data from four years' surveys.
The legal sector continues to experience significant change.
Cost reduction remains a major focus through strategies such as intensifying use of space and nearshoring. But increasingly law firms are focused on attracting and retaining the best talent. So a greater emphasis is placed on how space is used, and the look and feel of that space. We are seeing alternative workplace strategies and open play layouts becoming more widespread.
In the competitive London environment it will be the firms that can adapt that will survive.
Among the many financial market considerations being speculated upon in the wake of Brexit is the appetite for bank lending to commercial real estate. A fall in capital values and
consequent rise in LTVs on existing lending could push up capital requirements, making
historic lending less profitable and diminishing the availability of funds for future lending.
However, in analysing some of the more adverse anticipated market scenarios, we find that
any capital shortfall is likely to be minimal – a minute fraction of that facing the industry in the 2008/09 crisis. So, Bank lending to commercial real estate will not be significantly curtailed by capital constraints brought on by post-vote market jitters. Furthermore, recent action by the Bank of England to reduce the counter-cyclical capital requirement will in effect act to dampen the impact of rising RWAs on balance sheets. Of course, other factors may influence lending behaviour on the part of the banks, but restructuring in the UK lending market means that borrowers are far less exposed to one type of lender than was the case a decade ago.
BREXIT PUSHES SPECIALIST SECTORS CLOSER TO THE MAINSTREAM
We approach the end of the first month in our new world with the property market in focus during the initial uncertainties. Headlines about the stresses being experienced by parts of our Fund industry and the early share performance of many REITs suggest a significant shift in sentiment for the real estate market.
The specialist markets have not been entirely insulated from these effects but largely pricing is holding up, with transactions continuing, less volatility in the REITs, and Funds active in our areas. The Healthcare and Leisure markets could now continue and even accelerate their trajectory to the heart of real estate investment strategy.
We share here the activity and reactions around the specialist markets to date, look at what we have seen emerging, areas where there is less clarity and some possible trends as we head to calmer waters.