08 May 2019

Irish REITs: Scale transactions may offer valuation read-through

Today’s Irish Times covers a number of upcoming scale property transactions that may offer a valuation read-across for the Irish REITs.  


To start with the PRS sector, Marathon has instructed joint agents to sell a portfolio of 815 residential units (mostly apartments) spread across 16 developments (all but 50 of the units are located in Dublin, with the rest in Cork). This will be the largest disposal of a portfolio of buy-to-let assets in the Irish market to date. Marathon’s units are 98% occupied and delivering annual rental income of €14.7m (although the ERV is said to be €17.7m). Taking standard buyers’ costs into account, the €240m guide price implies an initial gross yield of 5.9%, rising to 7.1% when ERV is achieved. The book value of IRES’ portfolio assumes a gross yield at fair value of 6.1%, so a transaction price at or above the guide will have favourable read-through for the country’s largest private landlord.


Turning to the office market, the newly developed (by a joint venture comprising NAMA, Oaktree and Bennett Group) Five Hanover Quay building at Grand Canal Dock (South Docklands) is coming to market today with a €190m guide price, implying a net initial yield (after adjusting for standard acquisition costs) of 4.25%. The building offers 160,000 sq ft of Grade A office accommodation and 40 parking spaces and is fully occupied with a WAULT of 12 years. HBRN’s Docklands office exposures were in the books at an equivalent yield of 4.8% at end-September (end-March results are due later this month), so the Five Hanover Quay valuation underlines the potential for favourable NAV moves when HBRN releases its FY19 results.


There has been a busy start to 2019 in terms of scale property transactions, which reflects both the continued attractiveness of the property market here and a shift in ownership towards long-term income oriented funds over the more opportunistic entities that got involved earlier in the cycle.


Irish Economy: NTMA lines up syndicated transaction

Ireland’s NTMA has announced that it plans to launch a new benchmark bond maturing in 2050 by syndication.


The agency has appointed six joint leads for the upcoming transaction. Given the recent tightening in Eurozone Sovereign yields, we would expect strong appetite for this sale, which will help to further build out the Irish curve. The last syndicated transaction in January, for a new 10 year bond, attracted €18.1bn of demand for the €4bn issue.


In light of the decision to proceed with a syndicated deal, the NTMA has cancelled the bond auction that was scheduled for Thursday.


In terms of pricing, taking account of where equivalent Eurozone debt is trading, we would expect this to come in the 160-170bps range, implying a negative real yield for ~30 year money. Considering that: (i) the blended cost and maturity of the existing stock of public debt stands at c. 2.4% and c. 10.5 years respectively; and (ii) the State is on course to run a second successive (albeit modest) general government surplus this year; this move to refinance costly legacy borrowings at a cheaper rate while terming out the stock of debt is an eminently sensible move.


Brexit update

The UK Government held three hours of talks with the Labour Party yesterday but the opposition claimed that the Conservatives’ proposals on a customs compromise was ‘a million miles away’ from an acceptable proposal. That said, both sides agreed to meet again.


Meanwhile the pressure on Theresa May to step down early continues to mount, with the PM urged by 1922 Committee Chairman Sir Graham Brady to set out a timetable for her departure. However media reports suggest that Mrs May is planning to announce she will step down in mid-July. Also de facto Deputy PM David Lidington conceded yesterday that the UK would have to participate in elections to the European Parliament on 23 May.


Chinese update

Figures released earlier this morning showed that China’s trade surplus had deteriorated sharply in April. Customs data showed that China’s trade surplus had narrowed to CNY 93.57bn yuan from the 219.69bn recorded in March, disappointing sharply against consensus expectations for a more modest fall to 216.75bn. Underpinning this was a 10.3% year-on-year surge in imports (consensus +3.0%) as well as a sharp slowdown in export growth to 3.1% (consensus +8.0%). Overall, the figures suggest that the deterioration in global growth is continuing to weigh on Chinese export flows and serve to underscore the importance of the US and China reaching a satisfactory conclusion to the current dispute.


However, some reassurance, at least on China’s domestic demand position, comes from the surprisingly robust import reading. Note that Chinese Vice Premier Liu He will now travel to Washington on Thursday for an abbreviated round of trade talks with the US administration, having originally been scheduled to arrive on Wednesday for three days of negotiations. Investors will be looking to see whether the two sides can salvage a trade agreement that stops the US from increasing tariffs on $200bn of Chinese imports from 10% to 25% at 12:01am (ET) on Friday.


Thought of the day

Clarida talks inflation

Fed vice chair, Richard Clarida stayed on message when he released pre-prepared comments yesterday afternoon. Mr. Clarida said that the Fed feels that “monetary policy is in a good place right now” and doesn’t see a good case to either raise or cut rates. He was in agreement with the overall Fed assessment that the current ‘soft’ inflation patch is “temporary” in nature, pointing out that their main aim was to get the inflation rate back to the elusive 2% level.


When asked about the possibility of the Fed tweaking their current monetary policy, with the introduction of ‘price-level targeting’ being introduced he simply said that “some of the ideas that have been put forward theoretically but in practice they have not been tried because there are some important implementation challenges that we would have to look at seriously,”


Economic releases

UK 08.30 Halifax house prices
UK 09.15 BoE’s Ramsden speaks in London
UK 00.01 BRC Retail Sales
CH           Trade talks: Chinese Vice Premier Liu to visit Washington
CH           Trade balance
NZ 03.00 RBNZ Announcement
GE 07.00 Industrial production
SA           South African general election