Extract from Marc Gilbard’s CEO letter to Investors (Q1 2020)

Communication:

At a time like this, unprecedented as it is, it is hard to gauge what the appropriate level of information flow and direct contact with one’s stakeholders should be. What might be described as a search for the ‘Goldilocks’ quotient. The quantity of information should be sufficient to be give reassurance through its regularity, relevance and degree of detail, whilst the quality of the content should ensure all pertinent information is passed with transparency, exactitude (as much as is possible) and considered salient commentary.  These are difficult goals to achieve in a highly stressed, fast changing, challenging environment where there is the need to run hard to stand still and where the future is so substantially unpredictable. The temptation is to overshare or hide under the covers. At Moorfield we have tried to find the balance but please let us know how we can improve.

In any commentary, whether in good times or bad, I think it is appropriate to be clear what is fact and what is opinion. As such, I find it difficult not to harshly judge the media when so much of their commentary is a confusing mix of fact, conjecture and poorly disguised political bias. The media has a huge challenge and that is 24/7 coverage – they want people to listen and to read and to keep coming back for more. As a result, there is no good story unless it can be dramatised or politicised, and so any measured truth can often be subordinated to histrionic opinions, often from those not suitably qualified, with facts loosely sprinkled amongst time wasting speculation. The quantity is too great and the quality is too anemic!

Let’s also remember that as important as any one event can be, there are other crucial happenings in the world for us to be aware of, so I suggest the media also has a responsibility to keep us informed of these. News flow would be so much more informative if it did not fixate quite so narrowly, and by being more expansive it would also solve its own problem re the needs of relentless coverage. Our world is a jigsaw, made up of many pieces, from the global to the domestic, and we need to be able to place the majority of those pieces to see the entire picture take shape. If we have the appropriate provision of information then we can democratically decide what is important, rather than having it decided for us (in antitheses of the quote by Winston Churchill; ‘The best argument against democracy is a five-minute conversation with the average voter’).

For Moorfield, for business generally and for society at large, COVID-19 has been, is still and will continue to be hugely impactful on almost every aspect of our working and socialising. It has materially changed how we look at our lives, the fragility of them, how we manage them and how we behave, and I have no doubt that this pandemic will continue to dominate our news, views and daily customs until a greater degree of normality can return and another story takes its place – unfortunately, but most likely, this story will be the inevitable economic recession – including job losses/bankruptcies, and whose decisions have made the outcome worse. As always, we will want someone to blame, and I think China will take the overall prize with a few domestic fall-guys chosen as runners up! During and post any crisis I watch in fascination as the best and the worst in people come together as such comfortable bedfellows.

This is not a soap-box moment for me about communications, it is intended as a brief critique on the importance of information flow and of its accuracy, from someone who has now lived through a variety of crises. It is also my introduction to a brief commentary on what we have experienced to date and might lie ahead of us, a communication from my perspective:

COVID-19 Commentary

The Politics:

• My understanding is that from the beginning of this pandemic, the government and its health/scientific advisors have focused on herd immunity, but through controlled contagion by employing containment. Why this strategy? Because there was no vaccination against COVID-19, it infected indiscriminately, and its rate of reproduction/infection (R) was very high, too high to effectively contain in the time it would take to find a vaccine. This meant that most people would likely succumb at some point, symptomatically or asymptomatically. In addition, there was no drug immediately available to alleviate the symptoms. As such, a large number of symptomatic people, with no known medical relief available to them, would be the early outcome unless drastic measures were taken. The resultant pressure on the NHS would be extreme, particularly if they all occurred around the same time. Hence the need to ensure there was a sooner ‘and’ later infection sufferance, as this would mitigate against an unmanageable patient peak for the NHS. This meant the goal was clear – contain the infection as much as possible early into the outset and allow it to spread more slowly over time. Keep the infection curve as flat as possible and the R<1.
• As serious as this contagion rate (and lack of vaccine) made the virus in terms of numbers of people likely to be infected, a strategy of gradual herd immunity could be sensibly employed because the majority of those infected were surviving.  Given the circumstances, this would likely prove to be the quickest way to return to some form of normality and enable the wheels of the economy to start turning again. However, the virus was unfortunately proving to be a particular killer of the elderly and vulnerable but although this is very tragic it does mean that containment of the least economically productive part of society can be prolonged, until a vaccine or symptom alleviation is found, and the economically productive can return to work as long as R<1. In my view this is where we will end up in the relatively near future.
• But why take so long to introduce the containment directives? The answer lies in the fatigue that people feel in following such restrictive rules. The government wanted to wait until it was certain that the virus was spreading too fast and so becoming a threat to the capacity of the NHS infrastructure.  Any sooner and people would not adhere for long enough (resulting in a deferred peak) and any later too many people would be symptomatic (resulting in an early peak). Peaks were obviously the greatest fear for the NHS capacity.
• With a mixture of scientific and medical facts stated daily, alongside some ‘Nudge Unit’ tactics, many people became very anxious and quickly saw the sense of containment to control the contagion. However, some people did not and initially fought against social restrictions, both publicly and privately. However, I believe that these attitudes materially changed when Prime Minister Boris Johnson came so close to a COVID-19 death. As a result, the cumulative impact of the fear tactics employed to ensure people stayed at home might now prove an obstacle in terms of getting people to return to some form of normality in their lives.
• The guidance for a phasing back towards a normality of sorts has now started with some vague timelines suggested, all with the caveat of a brake if the infection rate picks up again (R>1), locally, regionally or nationally. However, national tolerance for the poorly thought through policies currently being pursued is falling fast.
• There is now a mixture of those fatigued by lockdown, who want to leave the house and see the wheels of the economy and society turning again, alongside those who remain very nervous to leave their homes.  I think this divide will be with us for many months to come. It is already being seen at the national level – between England, Scotland, Wales and Northern Island as well as at domestic and personal levels. In fact, I suspect an increasing divide will appear once again between those who are willing to play by the rules and those who are not.

The Economics:

• Right from the beginning of the considerations around containment, the government has been aware of the impact on the economy. The reference to a ‘tipping point’ has been made on many occasions meaning, in this case, at what point does the negative impact on our economy of the containment strategy become more severe in physical and mental health terms than COVID-19. Unfortunately, redundancies and bankruptcies are rising, and I suspect will get materially worse before better, especially as the government reduces its financial support measures.
• The government was admirably quick to respond with its job security and business support packages. The cost was going to be vast but at least their intentions were good, even if the implementation left a lot to be desired. However, in their good intentions they might well be creating an as yet undetected potential for social unrest. Post the GFC we have seen a growing movement that can be referred to as the ‘haves’ and the ‘have nots’, which basically translates into the rich get richer and the poor get poorer. Basically, this is a reflection of imbalanced wealth distribution. Inflation may not have been that apparent in the measured basket of goods and services, but it was certainly beneficially present in commodities such property, art, classic cars, wine and other areas enjoyed by the wealthier and older generations. Since the GFC, the UK has also had the Brexit referendum with many of the younger generation blaming the older generation for damaging their future wealth prospects because of our European divorce (see later for my perspective on this). Now, because COVID-19 is particularly lethal for the elderly, it could be argued that lockdown is focused on the preservation of elderly lives. Therefore, the enormous financial cost to the nation of the lockdown is most likely to be suffered by those pursuing careers (and future generations) and not those already heading towards the end of theirs or already in retirement. Perhaps the young will once again feel their futures are being blighted by those already enriched.
• Lockdown was a relatively simple instruction to give – some areas of grey of course but largely black and white. Whereas phasing back is a multi-coloured perspective and fraught with the potential for difficulty, hostility and confusion. I am certainly not going to try here to cover the phasing back of the different parts of our economy and society, however, I think some very clear guidelines from the government are essential, to inform behavior at the personal and corporate level across the many different sectors and areas of life. Too restrictive or dictatorial and they will soon be ignored and people will abide by their own rules, whilst too lax or lacking in direction and there is a risk of a second wave of infection and a halt to any economic recovery. I believe that micromanaging should be avoided and, given sufficient macro guidance, individuals and companies will be able to work out for themselves how best to behave – which is likely to be very bespoke at the outset but returning to normality if the virus proves controllable.
• It is clear that some sectors have suffered much more than others. All areas will have been impacted by this COVID 19 lockdown experience, most negatively, and whereas some will have deferred their income and capital profits, there are those sectors and companies that will continue to suffer long term, assuming they survive at all. The sectors that most obviously stand out to me are retail, travel, hospitality and leisure. Although there will also be many other impacted areas, such as those that are oil related or reliant on international supply chains.
• There will be people who are considered vulnerable (by themselves or by others), or who live with those that are, and they will certainly feel more cautious going forward. Perhaps their lives will have changed permanently as a result. But whatever your personal circumstances, and whether you are an employer or an employee, we will all have been reminded of our vulnerability, our fragility and our impermanence – and it’s not a comforting experience. Will this change how we work, socialise, travel etc. – and if so, what will the ‘new-normal’ be for the majority?
• I would suggest a progression towards the new-normal will also be experienced in phases – probably three. The first will reflect the clear and present danger of COVID-19 still amongst us. The second will reflect the hangover of COVID-19 and the third will be what becomes the settled new-normal – and in my opinion it will look quite a lot like the pre-COVID-19 ‘old-normal’. Why? Because this is what has happened coming out of every crisis I have lived through or studied. Speculation currently abounds of the material changes in our lives that will take place because of what we have experienced, it always occurs during and immediately post a crisis, and this is to be expected! But people like the comfort of familiarity and not as much will change as the speculation predicts. Some things do change of course, hopefully for the better, and there can be an acceleration of changes already under way, especially through acceptance of advantageous technology, but vast COVID-19 related employment and social change is unlikely in my opinion. As a caveat to this opinion, I will not be correct if COVID-19 comes back to materially disrupt our lives again any time soon, or another such virus emerges – so let’s hope not, as we have managed to avoid such global events since the Spanish Flu in 1918. The question is whether globalization and over-population is materially increasing the risks of pandemic repetition.
• As the future unfolds and some normality returns, we will need to remain aware of the levels of government, corporate and personal debt, as this will need to be repaid at some point with the extra interest costs funded in the interim. The debt load may prove to be too much for some, and the hangover will likely require higher taxes and restrict growth in the future. In the UK, I don’t think the government will embrace austerity in the way it did post the GFC and will instead opt for an increase in spending, especially on the NHS, encouraging on-shoring and infrastructure in an effort to promote growth.

EU & Brexit:

• My observations so far have been UK centric but I will make one brief comment on this COVID-19 experience that is related to the EU and the Eurozone. Once again, I am reminded of the difficulties that exist in uniting 27 countries that might share a political-economic union but have vastly different social and economic outlooks.  I continue to fear that the EU is in danger of fragmenting and I also believe the Eurozone with its common monetary policy is a broken experiment that is continuing only because it will prove too disruptive to bring to a close. Let’s hope I am wrong and the EU and Eurozone find their shared interests and purpose more compelling than their differences. I have to admit to finding some comfort in the fact that the UK is soon going to be independent, able to strike trade agreements with other major economies (unfettered by the EU) and has The Bank of England and its own courts of justice determining what is best for the nation. The government now has a majority, and so can govern, and is looking to invest in the major regions to support devolution. I suspect we may even manufacture more on-shore now we have seen our vulnerability to international supply chains (although I am not getting carried away as companies and individuals will still vote with their wallets). Maybe Brexit will even prove to be well timed!

Healthcare:

• Before setting out and personalising what we will be doing at Moorfield, in our three phased return to work, I do think it’s worth making one final general national comment on the issue of healthcare and wellbeing.  I believe that there was already material momentum in the improvement of, and investment in, the healthcare space – primary healthcare, care homes, nursing homes, retirement living with care, life sciences, etc. I predict that increasing levels of private capital will now be joined by significant sums of public capital (in and outside of partnerships) focused on the need for greater capacity and efficiencies along with an understanding that health should be considered a matter of national security. Bill Gates, amongst others, saw this threat many years ago and warned of its eventual impact. Herein lies opportunity.

Moorfield Group Phased Return:

• As a general statement, Moorfield will continue to be led by Government guidelines.
• As another general statement you will notice that I refer to ‘flexible working’ and not ‘working from home’ – as the former I see as progressive and the latter I see as regressive.
• Moorfield thinking is morphing from ‘stay at homes and save lives’ to ‘go to work and save the economy’. Albeit with the ongoing need to protect the elderly and vulnerable.
• Phase 1 is now in place and is simple corporate guidance allowing all employees to return to the office, if they consider it necessary to do so, but to tailor their own flexible working.  The Moorfield team has been divided into two sub-teams. Each sub-team has an allocated week (alternating) to enable them to go to the office whilst also limiting the risk of broad simultaneous infection and enabling easier social distancing. Many safety measures are already in place in the office such as gloves, masks, hand sanitizer, deep cleaning (incl’ electrostatic), thermometers etc – and with a no guest and no socialising policy until further notice. Flexible hours will enable travel to be bespoke to each individual.
• Phase 2 will result from the further lifting of Government restrictions and involve a greater effort by employees to attend the office. For many positive reasons I believe it will be important to bring the team physically together again more regularly, but in a managed way. Safety measures and bespoke flexible working will still be employed but will become more about reasoned personal choice and less about corporate policy. Limited work and social engagement will be acceptable whilst still employing social distancing and caution (staying alert!).
• Phase 3 will be our new-normal. I do not have a timeline for phase 2 or 3 but my guess would be that phase 2 begins around July and phase 3 is around September. The Moorfield new-normal will, in the majority, be a continuation of what was in place pre-COVID-19 together with an acceleration of the changes already happening as a result of our ongoing awareness of improved working practices including:

• • One corporate policy cannot be expected to suit all and can cause harm if administered without flexibility and tolerance.
  • Acceptance that flexible working can prove highly beneficial across multiple fronts
  • Mental and physical health (wellbeing) should be a corporate priority
  • Awareness of how your own health can impact others.
  • More space not less is needed between workstations
  • Greater use of video calls – good for time management and our ESG pursuit.
  • Ongoing awareness and increased focus on the benefits (and failings) of technology.

Real Estate:

• I think we can all assume that the ‘lower for longer’ mantra is going to continue into the foreseeable future. Low growth, low inflation (as measured) and low interest rates. Although I have no doubt that we will also hear much speculation over future inflationary pressures generated by the huge increases in money supply, as there has been since the GFC and the introduction of QE.
• Low interest rates and low relative yields will continue to prove a positive for real estate, especially if combined with asset inflation. As such, I believe real estate will continue to be an important part of a balanced investment portfolio. Perhaps the equities denominator needs some recovery to really make the argument, but I suspect that’s not too far away once the initial COVID-19 impact on corporate earnings is behind us.
• I have also mentioned investment by the government through infrastructure to support devolution, and herein also lies opportunity for real estate investors.
• However, not all real estate sectors will emerge equal or will have suffered equally. The winds of change were already blowing through the traditional and alternative real estate sectors and COVID-19 has helped focus our understanding of where there is fragility versus resilience.
• This note is not the place to comment on the various sectors as I want it to remain a higher level commentary, but I am pleased that at Moorfield we decided some years ago to steer away from cyclically sensitive areas of the real estate investment market and focus on those that were demographically, socially and needs driven, where there was apparent supply-demand imbalance. This shift does require a much greater understanding and expertise in operational asset management but I suggest that is a skill all real estate companies need to develop to remain current as leases get shorter, life cycle costs get greater and consumer appeal gets put to the top of the delivery list.
• I reman very disappointed with the UK government in how it perceives real estate investors and landlords. Suffice to say it remains a sector that is low hanging fruit in the search for additional tax revenue and has yet to see any meaningful support through the COVID-19 period of income loss stresses. The sector is considered by many as the ugly face of capitalism despite its very meaningful contribution towards the UK GDP (c.7%) and the millions it employs and houses.