Editors' Blog

Bursting REIT bubble brings property lawyers back down to earth

Posted 11/06/2007 by Deal Comment

The collapse of the Vector Hospitality's £2.64bn flotation has given a shock to property lawyers, who in recent years have become used to the continuing upward spiral of the UK real estate market.

More worryingly, lawyers are rethinking the prospects for real estate investment trusts (REITs), the much-hyped tax-transparent structure that was supposed to reinvigorate the concept of the listed property company.

After months of crowing about the introduction of REITs and widespread predictions of a surge of work through conversions and new launches, Vector was the big one.

The deal was notable not only for its size as a non-conversion float but also the unusual structure that was to bring together more than 70 hotels across portfolios owned by Alternative Hotel Group (AHG) and banks HBOS and RBS.

The collapse will be a cruel disappointment to SJ Berwin, which was understandably proud of its lead counsel role to Vector. The instruction was the firm’s biggest-ever mandate in the hotel and leisure sector, won off the back of its relationship with AHG.

While no-one is blaming SJs for the collapse, it isn’t a great advert. As one partner puts it: “Sometimes mistakes happen structuring a deal, but no-one really likes to be associated with a high-profile pull-out like this.”

Luckily for SJs, most of the criticism has been reserved for the underwriters. Questions have been raised as to whether several key fund managers were sufficiently briefed regarding Vector's structure. The result was that influential names like Morley Fund Management and Standard Life shunned the float, apparently because of concerns regarding potential commercial conflicts of interest.

One SJ partner comments ruefully: “None of us have shot ourselves yet but clearly it is not what we would have chosen. It would have been the biggest REIT float in the UK and the biggest-ever deal in the hotel sector and we had done our bit, so it’s frustrating.”

DLA Piper, Clifford Chance, Berwin Leighton Paisner and Linklaters are also presumably far from thrilled with the outcome, as they also played significant roles on the deal. Certainly, several of those firms admit to being involved in a series of frantic meetings about the deal last week. Furthermore, adviser firms are likely to face some mark-down on their fees.

So is the REIT market finished before it really began? Real estate partners think not, while there are even hopes that Vector will still get off the ground.

It is also true that, despite the recent buffeting property floats have suffered on the stock market, Vector was a very specific story. The odds are that conversion floats of established property names - such as deals already seen from Slough Estates and Shaftesbury - will face minimal fall-out, even if some of the more ambitious attempts to repackage property for the public markets will have to be scaled back.

However, most will agree with the thoughts of one partner at a top 10 firm, who says: “People were expecting too much from REITs. I don’t think there’s as much investor appetite, particularly for hotels. It was too specialist.”

The wider picture reveals a feeling that UK property is nearign the top of the market; with interest rates on the rise and investors more cautious on property, the going in real estate will be tougher in the months to come.

georgina.stanley@legalweek.com