Colliers Insights Occupier Services | APAC April 2018 LAW FIRM TRENDS AND OUTLOOK REPORT 2018 APAC TABLE OF CONTENTS INTRODUCTION: WATCH THIS SPACE 04 LEGAL TALENT TRENDS: AN ASIA PACIFIC PERSPECTIVE 06 MARKET SNAPSHOTS 08 LAW OFFICES OF TOMORROW 26 FOREWORD Welcome to Colliers’ Asia Pacific Law Firm Outlook 2018. This year, continuing our collaboration with specialists in Asia Pacific across different areas of expertise, we have the pleasure of producing this joint outlook with PageGroup, a leading global recruitment firm. Law firm mergers continue to reshape the legal landscape, as firms seek to expand their reach and ability to service clients internationally. Mergers are having a significant impact upon office accommodation and lawyer moves, during the integration phase in particular. The ability to create and foster a firm’s culture through space and place – both in terms of space efficiencies and brand identity – enables a unique opportunity to adopt innovative technologies and to future- proof the business. Increased competition and cost pressures continue to drive workplace innovation and the need for change in the legal sector. With real estate typically accounting for 10–15% of overheads, firms are increasingly looking to drive greater productivity through their workplace, with continued changes to their office model and utilisation of flexible workspace configurations, particularly in client facing areas. As an alternative to ‘right-sizing’ office accommodation to drive efficiencies, we are witnessing the emergence of non-traditional legal hubs across the region which offer competitive commercial terms, a trend we expect to continue. Advances in technology for the legal sector and the adoption of Artificial Intelligence are two of the wider trends we expect to drive innovation over the coming years, which will have an indirect impact on space requirements due to greater automation of various functions within law firms. The rapid expansion of ‘Red-Circle’ firms is compounding the need to plan ahead, forcing international firms to seek new a competitive edge as the sector faces its own disruption. DAVID WOOD Director | Office Services | Hong Kong +852 2822 0694 [email protected] | 3 INTRODUCTION: WATCH THIS SPACE INTRODUCTION: WATCH THIS SPACE As conduits between the demand and supply side of the legal talent search, recruitment professionals have a unique vantage point on the sector in Asia Pacific. At the kind invitation of Colliers, Michael Page Asia Pacific has assembled a panel of legal team heads from across the region to examine two key questions facing the industry – in what specific sectors and niche areas is demand for legal talent concentrated right now? And what can law firms do to attract the talent they need? The panel’s views make it clear that while the industry has always been subject to change, it is evolving at an unprecedented pace. Broader factors like China’s economic rise and the expectations of a new generation of legal professionals are combining to force law firms to rethink the way they source, retain and structure their teams. These trends will have implications for the property as well as the legal industry in key Asia Pacific cities, where law firms often make up a significant portion of the occupier base. Curated by Michael Page https://www.michaelpage.com.sg/recruitment-expertise/legal | 5 LEGAL TALENT TRENDS: AN ASIA PACIFIC PERSPECTIVE TALENT REQUIRED In the views of our panel talent is most in demand in the following sectors and specialisations: SAY ‘NI HAO’ Reflecting China’s growing regional role, many roles now require Mandarin language skills, and more non-Chinese lawyers are moving aggressively to bolster their Mandarin proficiency. Similarly it’s become more common for senior lawyers to move from global to Chinese law firms, which are relatively flush with cash and may be able to offer better salaries or commission schemes. Investment in commercial and industrial real estate has picked up, LAND HO particularly by Chinese companies, as firms in sectors like logistics and chemicals seek space to build large operations. This will encourage more law firms to seek out real estate expertise. The continued growth of the regional aviation market will fuel demand for aviation leasing, and by extension aircraft financing and structured finance lawyers. This trend will be particularly visible in Hong Kong, where new EYES ON THE SKIES tax concessions will encourage more aircraft leasing companies to base their operations. In Sydney, where construction and infrastructure activity has hit an all- RE-CONSTRUCTION time high, more and more property, project and construction lawyer roles are up for grabs – yet there’s a shortage of skills in these very areas, a legacy of the global financial crisis when building slowed to a crawl. 6 | HOW TO WIN LAWYERS AND INFLUENCE PEOPLE Our panel made it clear that SOME WORK, SOME PLAY across the region, the best Only a few law firms in the region are experimenting with flexible work arrangements, legal talent is highly conscious but they are one step ahead in the race to lure of factors beyond pay and and retain talent, and differentiate their brands. Work-life balance and a sense of purpose are a promotions – and that the growing priority for many legal professionals, who are gravitating towards firms that offer a degree of working practices and spaces flexibility on working hours or locations. of law firms will have to innovate to match. SET A CLEAR CAREER PATH While prestigious firms may still have their pick of candidates, with skill shortages arising in some areas it’s increasingly candidates themselves who have the final say. This means firms have to think about the overall proposition they’re offering, ensuring they set out and communicate a clear vision for progression, and are transparent about promotion or relocation opportunities. REPURPOSE TALENT As talent shortages arise in areas like real estate and infrastructure, in addition to hiring firms should consider offering existing talent the chance to transfer into areas of need, supported by appropriate training and guidance. This will not only help address talent gaps, but also provide the opportunities and variety that motivate people and encourage them to stay for the long haul. CONSIDER THE COOL FACTOR To the current generation of hires, a company’s physical space is an important consideration and speaks volumes about its culture. Many now expect the kind of eye-catching designs and amenities (like pool tables or game rooms) that are already standard at technology companies, but still rare at law firms. A welcoming, well-stocked pantry can also provide a powerful boost to morale. | 7 THE LAW FIRM MARKET SNAPSHOTS Average real estate cost per fee earner (AUD/annum) (’000) based on 1 USD = 0.78 AUD Average space per fee earner (sqm) (net) Average law firm size (sqm) (net) LEGEND MELBOURNE SINGAPORE HONG KONG BRISBANE SHANGHAI SYDNEY BEIJING TOKYO % of CBD market occupied by law firms 9% 6.8% 4% 4.5% 6.8% 1.9% 6.0% 1.0% Average law firm size (sqm) (net) 3,716 3,252 1,115 1,455 1,942 1,355 1,499 2,415 Average real estate cost per fee earner $51.6 $46.4 $23.8 $39.3 $108.2 $65.4 $28.3 $64.4 (AUD/annum) (’000) Average space per fee earner (sqm) (net) 60 56 23 38 47 56 29 33 12–20% 10–18% Real estate costs 8–15% 8–16% as % of 8–12% 8–12.5% 7–13% 10–12% monthly outgoings 0% BEIJING 29 sqm Foreign firm 1,525 Chinese firm 1,000 SHANGHAI 56 sqm 1,355 $28.3 $64.4 TOKYO 33 sqm $65.4 2,415 $108.2 HONG KONG 47 sqm 1,942 SINGAPORE 38 sqm $39.3 1,455sqm BRISBANE 23 sqm $23.8 1,115 SYDNEY sqm $51.6 60 3,716 $46.4 MELBOURNE 56 sqm 3,252 SYDNEY PREFERRED LOCATIONS The ‘core’ precinct, being home to the majority of Sydney’s premium grade assets has long been favoured by mid and top tier law firms. Limited stock has resulted in strong take up of space outside the ‘core’. A recent beneficiary of this trend has been International Towers Sydney (Barangaroo South). A notable transaction in the legal sector saw Baker McKenzie take up approx. 7,500 sqm (80,729 sq ft) across levels 44, 45 and 46 in Tower 1. Baker McKenzie will vacate 50 Bridge Street (its home since 1978) following Herbert Smith Freehills among a few of the top tier law firms moving out of the ‘big end of town’. Herbert Smith Freehills relocated south to the CBD’s ‘mid-town’ precinct in 2013. MARKET OUTLOOK Sydney’s CBD office market is characterised by a supply/demand imbalance favouring landlords. Sustained strong tenant demand (over the past 18–24 months) and limited supply additions have resulted in reduced market vacancy (4.8% as at January 2018) – well below the long term average of 7.3%. With limited supply and withdrawals easing, and a softening of demand, we forecast vacancy to experience a marginal increase yet remain below 5.5%. 2016–2017 saw ongoing growth in headline rents as market conditions turned to favour landlords. The same period saw a decline in market incentives from highs of circa 30–35% of gross rent to current levels of 20–23%. During 2018 we expect to see further reductions, however, we anticipate the market will ‘normalise’ at circa 17–20% depending on landlord rental aspirations and individual building vacancy. Larger, pre-commitment transactions will still achieve incentives of more than 25%. Declining market incentives have impacted law firms insofar as the incentive quantum may not be enough to fund the fitout.