Introduction:
Societal trends:
- For many years, and especially from the outset of Covid, we have been repeatedly asking the same two questions of the world in which we live:
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- Are the changes/events we are experiencing permanent or temporary?
- Are these changes/events new to the world or a progression/acceleration of existing trends
- At Moorfield, we believe these two questions have always been important to ask from a strategic investment perspective. The answers and the resultant decisions should be carefully considered and not made in haste, especially when an unexpected event has occurred, as decisions made in haste often result in repentance at leisure! Demographic and societal observation and trend analysis is key to answering these two crucial questions and will relate to most areas of business – with a resultant impact on investment performance. Disruption of the existing and the emergence or maturing of the new/immature in the real estate markets is what we have studied at Moorfield for the last 25 years – and this approach has served us well.
- An obvious current example of asking and answering these two questions is on the lips of most office workers. Firstly, what does flexible working actually mean to me and my employer and going forward will I be working from home (or living at work!) permanently? Secondly, is this a progression/acceleration of an existing trend or is it new? The latter (i.e. new) tends to have greater short-term consequences as people are more unprepared. The answer may lie somewhere in the grey areas of both questions, but understanding that is equally important i.e. many office workers will not be exclusively and permanently working from home but there will be increased locational flexibility offered by most employers, and this was an existing trend pre-Covid. However, although flexible working is therefore not new, the speed of acceleration since Covid is almost as impactful currently in its disruption as if it were. Uncertainty and concerns over the future of office use is reflecting this.
- But before I leave this section, there are two areas worthy of special attention, where we have seen permanent change and a fast acceleration of existing trends:
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- The shock of nature, where events occur beyond our control – Covid has reminded us of our fragility. Maybe we will all now pay proper attention to the impact of climate change.
- The imbalance in our societies between ‘the haves and the have nots’.
- At Moorfield, both of these ESG imperatives are being actively pursued. We have committed to be operationally carbon neutral by 2030 and embedded carbon neutral by 2040. We are members of Real Estate Balance (realestatebalance.org), we have signed up to Get The Gen (getthegen.com) and also Speakers for Schools (speakersforschools.org) where we hope to help improve diversity, inclusion and social mobility. Furthermore, we have also signed up to the UN Principles of Responsible Investing.
Politics:
- Having had a very poor start to the Covid pandemic, the UK government has been very fortunate (luck and/or judgement?) to have purchased large amounts of Covid vaccines very early in their trials. At the current time this bet would appear to have paid off with many millions now receiving their injection and a series of ‘release from lockdown’ dates being proposed, assuming infection rates continue to fall.
- It is increasingly apparent that where the government has not done so well is protecting the financial services industry from off-shore attacks post Brexit. Strangely neglected in the Brexit negotiations, despite the UK being the world’s top net exporter of financial services with a financial trade surplus of £60.3bn in 2019 – and employing 1m people. The government must tackle this issue immediately if London is to retain its financial dominance.
- Unfortunately, the UK still does not have the benign political environment that we would all like to experience after the recent turbulent years. It would seem that political challenges and disruption in the near term are now more likely to come from Scotland rather than from a confused Labour opposition party. Whilst the Labour party seem unable to focus on a unified strategy, it is fair to say that the SNP in Scotland have a very clear one – independence at whatever cost. I have yet to be told how Scotland can afford to be independent from the rest of the UK but the SNP will not let such a fact cloud their arguments.
- On a more positive note, devolution of powers and moving government departments away from London, and dispersed throughout the Country, may help hold-back and possibly lower the rising tide of Regional dissatisfaction – this is medium-to-long term in its impact rather than short-to-medium, but additional government expenditure to support this strategy (i.e. on infrastructure and employment) will be positive for wealth generation in the Regional cities.
Economics:
- There appears to be an increasing school of thought that as we exit the worst of the Covid world we are going to experience a hedonistic bounce-back period that will lead to material inflationary pressures, higher interest rates and a few bubbles that will eventually need to burst.
- Our view is that over the next 3-5 years the economy will indeed experience a post-Covid recovery growth period and then fall back to a lower growth environment. This will result in a spike in inflation in the short term but will not be seen by the Bank of England as needing material rises in interest rates. If investors see through the bounce-back and believe we are heading back into a world of low growth, low inflation and low interest rates (with higher unemployment) then real estate will continue to attract steady flows of global investment capital. However, if meaningful interest rate rises are forecast and seen to be longer term in duration then real estate yields will have their current yield gap with the risk-free rates eroded and be under pressure to rise.
- Residential real estate is the only real estate sector to have shown to be a true hedge against inflation.
Real Estate and Conclusion:
Over the 37 years I have been a property professional there has been a material change in the skill set needed to own and manage this asset class. During this period, property has become known as ‘real estate’ – and real estate is not just about the ‘traditional’ sectors of retail, office and industrial, but instead also involves many different sectors (now referred to as ‘alternatives’) including those that are consumer facing and operationally intensive, such as leisure and hospitality, healthcare, residential (in its various forms) and many others as well. Even those traditional sectors now have shorter leases and need to be much more actively managed to ensure they remain fit for purpose and occupied. So real estate investing needs operational expertise and Moorfield was early to this party having built our own in-house operational platform for our student accommodation business in 1997 – and we have remained on the front foot ever since. Life cycle costs, branding, marketing, technology, consumer awareness and much more besides are all now on the astute investors check list.
My final comment is how I see the real estate sectors revival/progression taking place. In my opinion it will be materially different between and within the sectors. I believe we should expect a K shape performance in all, to a greater or lesser degree. I need not explain what I mean by this as it is obvious after the predictions and descriptions including U, V, L and the Nike Swoosh! But, what determines where you are on the two arms of the K will be important in each sector to achieve the returns on equity we seek.