Trends Shaping Private Equity Real Estate: An Interview with David Seymour

David Seymour is a partner in private equity real estate (PERE) at Ropes & Gray – a pre-eminent international law firm renowned for its work with private capital clients.

David studied Law at the University of Manchester before completing the LPC (Legal Practice Course) at Nottingham Law School. He started his career within the Magic Circle at a time when legal work, as he describes it, was siloed into distinct areas; some lawyers worked in real estate, others worked in finance etc., with little overlap between practices.

Beginning in real estate, David worked on several high-profile real estate projects, including British Airways’ move to Heathrow Terminal 5 and the 2012 Olympic Village. This was “really interesting work for high-profile clients,” but David acknowledged a need to define his long-term focus, choosing to specialise in advising investors. This demanded a “hybrid corporate finance and real estate lawyer” to engage in complex client transactions, such as purchasing companies or partnerships.

David felt his previous firm was not the right place to develop into the hybrid lawyer he knew he had to become, “They sit in their tram lines, and they work in their [tram] lines, and they don’t stray out of them.” This prompted a transition to Ropes & Gray, who were establishing a PERE practice in London, offering the “broader diet of work” necessary to upskill.

So, I asked, what is the most unexpected advantage of a top US firm over the Magic Circle? He replies, citing the firm’s culture, “The US lawyers call it hunting in packs.” Colleagues help each other build their practices through sharing opportunities and working as a team. This deeply ingrained culture of teamwork and shared success is a defining feature of Ropes & Gray when compared with the Magic Circle.

In a piece for Ropes & Gray published in July this year, David argued that the commanding Labour government and a moderate economic resurgence could prove beneficial for the real estate market. Since then, however, a lot has changed. I raised the issues around the Budget, which has largely failed to inspire confidence, and stubborn inflation.

David did not, however, entirely share my pessimism: “The Labour government have pledged to relax planning laws to promote development, particularly residential development, […] and that will have positive effects over the next the term of this Parliament.” This optimistic view is despite widespread estimates suggesting the government will fall 400,000 short of its 1.5 million homes target. For David, the important thing was motivation, but, equally, “It’s one thing to say. It’s another thing doing it.”

The Labour government, through partly their own doing and partly not, face several challenges, as David put it, “Inflation is not coming down as fast as anyone has hoped. Interest rates are falling, but not as fast as anyone hoped. We’ve just had a Budget which has raised taxes and the costs on businesses, such as employers’ national insurance, which has put the brakes on investment and will put the brakes on hiring or mean other cost cutting measures.”

David was quick to jump in, though, rejecting “a tale of […] woe.” Ropes & Gray, although not a comprehensive barometer, had seen growth “across the board.” For instance, investment in purpose-built student accommodation, supported by private equity, is thriving. Less apparent, but notable, is an ageing baby boomer generation is creating demand for senior living facilities.

Office space, once an expected victim of the pandemic, is also experiencing a resurgence. There is strong interest in improving older buildings to meet ESG (environmental, social and governance) standards, transforming them into viable assets, and developing new environmentally compliant offices. This also creates an appealing environment to draw employees back.

David shared an example of the new office campus of Partners Group, a Ropes’ client, in Zug, roughly half an hour from Zurich. The campus offers large, well-lit spaces and extensive amenities such as restaurants and changing facilities, in part to attract talent from nearby Zurich or Geneva. This mirrors the recruitment strategy of Big Tech, which invests heavily in office spaces. David anticipates this approach will spread, perhaps becoming a tool for law firms amid an increasingly fierce competition for talent.

An area I was keen to talk about was data centres, the backbone of modern economies. The growth in hyper-scalers (a large-scale data centre) has been driven by demand from tech giants like Google and Microsoft. Each hyper-scale data centre can cost between £500 million and £1 billion to develop. “And so, who can fund that?” David asked me (rhetorically), “You need an investor […] with deep pockets.” Enter private capital. This includes the types of clients David may advise. Think sovereign wealth funds or general real estate funds. All of whom are attracted by long-term, stable leases with blue-chip tenants like Big Tech.

As of March this year, there were 514 data centres in the UK. This is expected to grow, in part from government support. The UK tech secretary announced a £6.3 billion investment into data infrastructure this October.

This will, inevitably, pose challenges. I had previously heard several anecdotes on the absurd power usage of data centres. That, for instance, one data centre uses as much power as the entire city of Oxford. So, I asked whether ESG is a consideration of either investors or operators, David replied “There is an inherent tension in this asset class between the amount of power that they use, the juice they require, and their ESG credentials, at present.” Developers are currently exploring alternative power sources “behind-the-meter” to reduce dependence on the traditional grid.

In particular, nuclear is making a surprising return to the public (or perhaps investor) consciousness — something I raised in our conversation. David was quick to note several considerations, “In the US, they’re not short of land. It is feasible to […] conceptualise a data centre with nuclear power […], either on site or adjacent to it.” Yet sites, such as West London, which hosts several data centres, pose significant political and logistical challenges. Nuclear power’s reputation, whether deservedly or not, is deeply tied to headline tragedies in Chernobyl or Fukushima. The jury is still out on where data centres will find its juice.

Looking to the future, I asked David if there were any trends, positive or negative, facing the PERE market. David responded, “The refinancing of lots of debt.” The pandemic brought low interest rates and higher asset values, in some classes, with many investors borrowing under these conditions. As rates remain stubborn and some asset values decline, many investors will face refinancing challenges. In the UK, 40% of outstanding property loans are due to mature in 2024 and 2025.

David offered two possible outcomes. Investors either accept higher debt costs or are forced to sell assets to repay their loans. David expects the latter, leading to “a flood of assets to the market.” Ageing logistics assets, in particular, may struggle to attract buyers, especially as new developments offer more modern capabilities. The trend is expected to shape the real estate market significantly in the coming years.

Our conversation came to an end, I left with a sense of cautious optimism. There are, undeniably, several challenges: Labour’s self-defeating policy agenda, inflation, interest rates and debt refinancing. But there is still reason to feel somewhat positive: Labour will build homes, rates will (hopefully) come down, and real estate will remain a perennial constant. For law firms and investors alike, the path forward may have some twists and turns, but the trajectory is positive.

By Louis Gilmore