Conveyancing drop offset by diversification

A slump in sales of residential dwellings is having less impact than it may have had several years ago as many law firms have successfully reduced their exposure to conveyancing. National residential conveyancing fees are down an estimated $12 million on the same time last year.

Statistics from the Real Estate Institute of New Zealand (REINZ) show that in the first eight months of 2010, sales of residential dwellings were down 16.3% on the same period in 2009. Sales so far this year are very close to the levels in 2008, when the recession caused havoc in the New Zealand property market.

At an estimated net fee of $800 per side of a conveyance, national conveyancing fees so far this year are estimated to be $61.6 million – well adrift of the $73.7 million estimated for the same time in 2009 and a massive $44 million behind the same time in the boom year of 2007.

The drop in sales is hitting all parts of the country, although some regions are doing better than others. Taranaki is “only” 9.5% down on sales at the same time in 2009, while at the other extreme, Marlborough sales are 30.1% behind.

The owner of conveyancing service KeyTrack New Zealand Ltd, Auckland lawyer Richard Galbraith, says law firms around the country are finding there has been a big fall in the revenue coming from the conveyancing and property sides of their practice.

“My gut feeling also is that from the average conveyancing transaction, the lawyer will generate at least half the revenue again in follow-on work - whether it happens that year or one or two years later. So you’re looking at a lot of revenue which has been chopped from the pockets of law firms,” he says.

In Waikanae, Kapiti Law partner and NZLS Property Law executive commmittee member Jane Stevenson says the decline in the property market has had a particular impact on elderly people who want to sell their homes and move into a retirement village.

“They can’t sell and that means they’re kind of stuck,” she says.

Ms Stevenson says while most New Zealand law firms are not dependent on conveyancing, some could be finding it tougher with cash flow.

“The beauty of conveyancing is that you get paid on settlement,” she says.

While a sharp drop in house sales may have had a profound impact on many law firms five years ago, it is evident that most have reduced any “conveyancing exposure”.

Margaret Wellwood, who is a partner at Hastings law firm Kelly McNeil, says she has seen many lawyers reducing their dependence on conveyancing work.

She says there is an ageing population throughout New Zealand and many lawyers have found they are able to replace conveyancing work with providing assistance to their older clients through restructuring their affairs or working on moving to a retirement environment.

David Roughan at Whangarei’s Northlaw says the shift away from conveyancing has been into estates, trusts and the fast-developing field of Elder Law.

Richard Galbraith believes that most legal practices around New Zealand have made an effort over the past decade to reduce the percentage of conveyancing to total turnover, to counter exposure to market downturns.

“Most firms see the value in conveyancing,” he says. “Unless you’re very strongly boutiquey in terms of having a niche practice, you’re crazy to turn away conveyancing because it does lead to other forms of work. However, even small practices have decided to make an effort to reduce their overall exposure in case the market drops off – which is exactly what has happened.”

Mr Galbraith says he would expect that there has been a noticeable shift in firm revenue sources because of the current situation.

“Traditionally when the conveyancing market is going well, in the mid-sized firms the property and commercial sides often carry the litigation side of the firm. Then, in a market like this, what tends to happen is that the property and commercial sides struggle, but of course litigation increases because people are trying to get out of contracts or people just tend to become more litigious when they’ve been more likely to accept things and settle in the past.”

NZLS Property Law Section Chair Chris Moore says he is sure that lawyers are partially filling the conveyancing revenue gap with other transactional activities by being more proactive in the trusts and business advice areas. However, he has doubts whether there is sufficient work to completely fill the gap.

Although the bulk of conveyancing transactions are based around residential dwelling sales, the commercial property market is also an important part of the work for firms in larger centres. Mr Moore, who is a partner in large Auckland firm Meredith Connell, says the commercial property market is very strong in the well-located, well-tenanted areas where the price is under $3 million.

One strategy in a downturn is to compete for business by lowering prices. New Zealand conveyancing fees have been regarded as very competitive on an international basis. While there is evidence that there is still strong competition on price, it also appears that the situation is not as cut-throat as it has been.

“There is a big variance of fees now,” Richard Galbraith says. “Some firms are going in one direction by saying that conveyancing is a tough job and they’re going to increase their fees and if they lose a few clients, so be it. Other firms are obviously charging fees where I don’t know how they really survive, and this must be hurting them when they need high volumes with low profit.”

Kelly McNeil’s Margaret Wellwood believes there has been a bit of a settling in conveyancing fees.

“I don’t think there is quite the cowboy activity that was going on previously. I think they realised they just can’t exist by doing the throw-away silly fees that was going on in the bigger cities.”

David Roughan of Northlaw thinks some of the conveyancing fees being charged now are unsustainable, particularly in the current depressed property market. However, the competitive element remains: “You will never succeed as the cheapest lawyer and there will always be a cheaper lawyer turn up.” He is always surprised that such practitioners attract clients. “You don’t go to the doctor or the surgeon who is the cheapest.”

In Dunedin, O’Neill Devereux partner Todd Whitcombe says he thinks the market for conveyancing fees is still relatively competitive.

“They’re certainly not as low as they used to be, and we’ve actually increased ours in the last couple of months,” he says.

Mr Whitcombe says low fees are not the key to success in any property market: “We still pride ourselves on our service at a competitive pricing.”

This is something NZLS Property Law Section chair Chris Moore endorses. He says while there is a lot of undercutting in the conveyancing market, there are firms which take a more strategic view, which is that they will provide a full service on residential conveyancing and believe that a higher charge is justifiable.

Experienced conveyancing practitioners around the country are expecting the downturn to continue for some time. There is general agreement that while there might be an upturn as spring moves into summer, interest rates are likely to remain where they are for some time yet and it will be some time before house sales pick up.

One bright spot was the release of the Roost Home Loan Affordability report at the end of September. This showed August had the best level of home loan affordability in a year, and predicted that affordability would continue to improve through the last four months of 2010 with subdued house prices and flat-to-falling interest rates. The 1 October tax cuts will also have a boosting effect on disposable incomes.

Residential Dwelling sales January to August inclusive (REINZ figures)

	2010	2009	2008	2007
NZ Total	38,542	46,061	38,507	65,919
Estimated Fees*	$61.6 million	$73.7 million	$61.1 million	$105.5 million

*Estimated net average of $1,600 in conveyancing fees per sale (lawyers act for two parties).

Residential Dwelling sales January-August and estimated fees ($million)

Branch	2010	2009	2010	2009	Decline
Auckland	13,297	15,247	$21.275	$24.395	12.8%
Canterbury-WC	5,653	7,066	$9.045	$11.306	20.7%
Gisborne	288	352	$0.461	$0.563	18.2%
Hawke’s Bay	1,344	1,710	$2.151	$2.737	21.4%
Manawatu	1,413	1,923	$2.261	$3.077	26.5%
Marlborough	455	651	$0.728	$1.042	30.1%
Nelson	1,013	1,161	$1.621	$1.858	12.7%
Northland	944	1,150	$1.510	$1.840	17.9%
Otago	2,253	2,608	$3.605	$4.186	13.6%
Southland	1,001	1,227	$1.602	$1.963	18.4%
Taranaki	1,204	1,330	$1.677	$1.813	9.5%
Waikato/BOP	4,877	6,111	$7.803	$9.778	20.2%
Wellington	4,459	5,068	$7.134	$8.109	12.0%