Law firms are rethinking their ambitions in Gulf cities amid complaints that the Middle East is still over-lawyered. But as Pui-Guan Man reports, this has not stopped a spate of regional openings

In Abu Dhabi Herbert Smith Freehills (HSF) has been looking in recent months to sub-let half its office space on the 23rd floor of the prestigious Al Sila Tower. The firm stresses it remains committed to the city, but its move nonetheless reflects a broader readjustment of international law firm ambitions in the UAE capital.

"It's no secret that we are looking to sub-let half of the floor we originally let," says Zubair Mir, head of HSF's Middle East operations, before adding that "we are not looking to return the lease in any way".

He explains: "What happened was we bought an entire floor in Dubai which became more full than we expected, so when we negotiated in Abu Dhabi we took out more space than we needed to try to avoid the situation of not having enough room."

HSF is not alone in rethinking its needs in Abu Dhabi. Hogan Lovells closed its outpost there last year and transferred its work to the firm's Dubai office, having decided that it made for a stronger regional hub.

And with local lawyers pointing to a slowdown in Government projects work in Abu Dhabi, it is not surprising that many international firms are finding it hard to make an impact.

Husam Hourani, managing partner at Al Tamimi – winner of Legal Week's award for Middle East Law Firm Of The Year 2013 – says: "The big players in Abu Dhabi like to keep only three or four firms close – probably the magic circle and perhaps one or two US firms. So new firms planning to open in the capital will struggle. We've seen several firms in Abu Dhabi downsize rather quickly."

And, as Hourani points out, the situation in Abu Dhabi is just one element of a tough environment for international law firms across the Gulf region, particularly in view of the scarcity of lucrative projects work. While increasing appetite for disputes is a cause for some optimism, along with signs of a tentative recovery in Dubai, the Middle East still has too many firms fighting over too few mandates.

"International firms are suffering," Hourani says. "Firstly because of aggressive competition, especially between tier one and tier two firms, where the fight on fees is making business unprofitable. And secondly because key partners and associates are being relocated, leaving lawyers here to rely solely on the firm's brand to develop and maintain client relationships."

Joss Dare (pictured), head of Ashurst's Middle East practice, adds: "The legal market, like all businesses, must respond to its environment – so, eventually, there will either be fewer lawyers or more deal flow.

"Recent signs have been towards an uptick in activity generally, but it is difficult to predict how the scale of this relates to the high number of lawyers on the ground."

Philip Norman, a disputes partner at Simmons & Simmons in Qatar, agrees that international firms are finding it tough to maintain a Middle East foothold: "As recent history shows, some of those that have come in, but not been as successful as they anticipated, have pulled out.

"There are also changes in-house, with a high turnover of people in legal or GC roles. A lot of investment goes into developing relationships so when people move on after two or three years it can be challenging as relationships need to be rebuilt. Any legal practice in the Middle East is going to have to be dynamic and work very hard as it's an extremely competitive market experiencing lots of change."

Carry on regardless

Yet these tales of caution from established players have done little to stem the flow of new arrivals from the UK and US, with many firms still eager to win a share of the region's wealth. 

This is particularly true in Dubai, which is regaining some of its lustre as the pre-eminent Middle East financial centre after teetering on the brink of default four years ago.

This year alone has seen Baker & McKenzie pick up a Dubai presence by merging with respected UAE firm Habib Al Mulla, while Baker Botts ramped up its presence there by poaching an eight-partner team from Norton Rose Fulbright. 

Elsewhere, Wall Street firm White & Case won a licence to practise in Dubai and Morgan Lewis & Bockius poached a team from Vinson & Elkins to launch in the city. 

Charles Engros, managing partner of Morgan Lewis' international practice, says: "Dubai's role as an intercontinental crossroads between Africa, Central Asia and Europe was the primary driver for us. We view Dubai as an increasingly important hub for commercial activity in the Middle East and North Africa, and we think there are significant opportunities for us in structured finance and debt capital markets, funds and oil and gas.  

"We also perceive a beneficial amount of investment from the region through outbound private equity structures."

Addleshaw Goddard is also expanding rapidly in the region with new offices in Dubai, Qatar, and Oman. Other firms setting up shop in Dubai in the past year include CMS Cameron McKenna and Stephenson Harwood, while several others such as Shearman & Sterling have expansion on the agenda.

Despite fears about market saturation, Eversheds' Middle East chairman Chris Jobson predicts that "in the next couple of years, we will see at least half a dozen more firms open somewhere in the Middle East". 

Beyond Dubai

While Dubai continues to entice international law firms, it is more of a mixed picture elsewhere in the Gulf region. Local partners say Bahrain's efforts at becoming a financial hub have "taken a nosedive" after the 2011 Arab Spring, with one saying: "There's nothing in Bahrain now, not like it used to be five years ago. The troubles and social problems there were larger than the Government."

Jobson comments: "Bahrain remains very political. People don't talk about it the way they did five years ago. As a financial centre, it's drifting away."

Elsewhere, DLA Piper is the only international firm with a base in Kuwait after Dentons shut its permanent office. The market there is dominated by local firms such as Al Ruwayeh & Partners and expansive regional players such as Al Tamimi.

DLA's Middle East managing partner Abdul Aziz Al-Yaqout (pictured) says, however, that the jurisdiction is one of his strongest performers: "We're very upbeat about Kuwait. The three main areas of growth for us are Kuwait, Oman and Iraq, where landmark oil, gas and projects deals are being made. We have the most Arabic lawyers compared to any other international firm in the region, which makes us stand out." 

DLA is also buying more office space in Dubai, offering a neat contrast with the experience of HSF in Abu Dhabi. 

Casting further light on the reason why Abu Dhabi is struggling to catch up with its neighbour, one local partner says the problem is that the UAE capital is comparatively "sleepy, conservative and too close to Dubai".

Richard Briggs, executive partner at Hadef & Partners in the UAE, echoes the view that the legal business in Abu Dhabi is still conservative: "Compared to Dubai in particular, Abu Dhabi has less of a culture of lawyering and using lawyers. It would not therefore surprise me if some of the more recently arrived firms were struggling. It's not the legal market that some of the international firms would wish it to be, which often surprises given Abu Dhabi's strong international business standing."

Abu Dhabi is creating a new financial zone of its own to try to challenge Dubai, but it will be a difficult task. David Salt, a Qatar-based partner at Clyde & Co, says: "The financial hotspots in the Middle East are the financial centres in Dubai, Qatar and Bahrain – now Abu Dhabi is establishing one. But the question is whether there is any room for any more."

Doha doubts

Meanwhile in Doha, Qatar's capital (pictured), cranes and skyscrapers crowd the city, with many lawyers comparing it to Dubai under construction 20 years ago. Yet during a recent visit by Legal Week, only a handful of people could be spotted around the financial district.

"An impressive skyline is being built, full of these towering buildings, but I think a number of them are not yet fully occupied," explains Salt. "The market in Qatar is relatively small, but seeing intense activity, if slow-burning, in terms of advisory work. Currently Qatar is, however, massively over-lawyered."

The question on every lawyer's mind in Qatar is whether it can fill these buildings in the run up to the 2022 FIFA World Cup after its successful bid to host the event – and whether they will stay full afterwards. It is estimated there are about 45,000 to 56,000 hotel rooms in Dubai, and perhaps 10,000 in Qatar, which its Government plans to increase to 90,000.

Salt continues: "The interesting question is how will they fill these up post-FIFA? Some say Qatar will have the infrastructure for a city the size of Chicago, but maybe it'll end up with a population the size of Guildford. Qatar needs something else after it to keep its momentum. What will fill the space after all the excitement?"

All in all, it seems Qatar's attempt to lessen its reliance on oil and gas and boost infrastructure work has yet to bear lasting fruit, despite intense activity in terms of advisory work on projects and litigation. Simon Roderick, Allen & Overy's Middle East managing partner, says: "2022 will generate plenty of work for lawyers, but that work is only just kicking off. The Qatar legal market is at an earlier stage in its evolution than Dubai or Abu Dhabi. 

"As we have seen in the UAE, the level of sophistication in dealing with external law firms increases as the economy matures. This is partly a function of the increasing sophistication of in-house teams, a development we are witnessing with several large Qatari entities."

Jobson adds: "The legal market in Qatar is unrecognisable compared to the past two decades. It is receiving enormous amounts of attention: geopolitical, financial and legal." But he adds that even though there have been pockets of intense legal activity, "the country is not frothing yet in terms of infrastructure development".

Others draw attention to the small size of Qatar's client base. Ahmad Anani, a highly-rated corporate specialist at Latham & Watkins, says prized clients such as Qatar Petroleum, the Qatar Investment Authority, the Qatar Foundation and telecoms group Ooredoo have about 15 to 20 firms competing for their work.

"Given how small the market is, firms entering the market would find it tough to crack the long-standing relationships," Anani says. 

Neighbouring Saudi Arabia may lack the glitzy appeal of its regional neighbours, or their relative freedom, but it is becoming increasingly valued as a solid and profitable market given heavy state spending on infrastructure. 

Scott Campbell, a corporate partner at Linklaters' Dubai base, says Riyadh is "not as over-lawyered as the UAE", but warns that may be on the brink of changing. "There are lots of firms starting to come in with significant price cuts, which is hurting the market," he says. 

But those attracted to the jurisdiction face high hurdles, says Clifford Chance's Middle East managing partner Graham Lovett, who has formed a mixed partnership with Riyadh association firm Al-Jadaan & Partners that will start in 2014.

"Riyadh is a tough market for many firms," Lovett says. "It's often difficult for global firms to find good local lawyers to partner with. The working environment is also a challenge. As with other regional countries, pricing is very competitive and firms are pitching at artificially low prices either to win work from a specific client or sector, or in some cases just to keep existing lawyers busy. 

"The other challenge with Saudi Arabia is recruiting lawyers who are prepared to work in a country that doesn't have some of the expatriate trappings of other regional centres. Balanced against that is the quality of work on offer and the size and scale of some of the projects and transactions."

In for the long haul

Looking at the Middle East as a whole, some partners question whether many new entrants will last the course. Dare predicts that a slow deal flow will push out some arrivals: "In five years, common sense tells me it'll go the other way and some firms might start to leave. 

"There is deal flow here, but it can be hard for new entrants into a heavily lawyered environment to access it. Firms moving here now will find everyone else is already in town. They will need to make sure they have a solid initial client base to work with and a highly focused strategy or they are likely to struggle."

Campbell notes that firms in the UAE were "more interested in opening five years ago than they are now though we have seen some recent new entrants to the market", adding that the market seems a little more settled now.

He also counters the view of some rivals about the problem of staff longevity in the legal departments of big clients: "There does seem to be more client loyalty than before in the region. Relationships seem to be settling and clients are valuing longevity more – it is less of a transient region than it used to be." 

For another Dubai-based magic circle partner, stability can bring its own problems. "It can be hard to break into some panels," he says. "Some corporate panels might have five key firms on them."

In addition, international firms continue to find it hard hiring local talent, as top Emirati legal graduates tend to shun private practice in favour of Government or the judiciary.

Another magic circle lawyer in Dubai says firms also face fierce competition for recruits from banks and big regional companies, both of which offer faster career progression: "Emirati talent is difficult to find. We've looked at it but it's very hard. Graduates don't want to start at ground level and work for 11 to 12 years only to maybe get into the partnership. 

"They'd rather go in-house and fast-track it, which takes about five to six years off the track. It's impossible to attract lawyers given the difference in hours too."

Local hiring is a particularly pressing issue for firms outside Dubai's financial centre, which are required to have a minimum percentage of Emirati employees.

Bakers is among the firms hoping to make a push on retaining talent, and is looking to work with the Government and law schools to promote the attractions of private practice to qualifying lawyers.

Bakers' UAE chief executive Rob Morris (pictured) says the influx of firms to the region has helped push legal education up the agenda, although there will be no quick solution.

"Given our position of having a local and international perspective on training, we will be working with the Government to assist them on establishing a framework and continuous improvement in this area," he comments.

What is clear is that even if the brightest Middle East law graduates are seduced by the siren call of Western law firms, they can expect a pretty robust challenge building their practices in such a competitive region. The Gulf remains as attractive as ever, but many firms will fall by the wayside in pursuit of a share of its riches.

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