A new report on Hibernia REIT

14 May 2019

We have released a new report on Hibernia REIT (HBRN) today.

HBRN recently closed its latest better-than-book value property sale. It is returning most of the proceeds through a buyback, which to date has been executed at an 17% discount to NAV, in-line with HBRN’s current valuation. Its closest peer, GRN, which recently put up a ‘for sale’ sign, trades on a 6% NAV discount. The other two REITs trade in-line to 13% above their end-2018 NAVs. 
-17% to +13%
Where Ireland’s REITs trade relative to their end-2018 NAVs
In terms of the fundamentals, Dublin’s commercial real estate market remains characterised by buoyant demand (from occupiers and investors alike) and disciplined supply additions. On disposals, HBRN has completed four property sales in the past two financial years, receiving proceeds that we estimate were, on average, 9% ahead of book value. 

HBRN will report FY19 results on May 23. We have updated our forecasts to incorporate recent newsflow and moved the valuation basis to end-FY22E NAV (and dividends in the intervening years). If you haven’t received a copy of the note, please contact the Sales desk.

Focus on the labour market

The last UK labour market release reaffirmed that conditions remain tight. Figures show that the unemployment rate held steady at its post-1975 low of 3.9% in the three months to February. This was accompanied by a robust 179k rise in employment over the quarter pushing the employment rate up to a record high of 76.1%. 

We expect that upcoming figures will continue to paint a picture of a solid labour market in the three months to March. This might even have been reinforced by workers deployed in preparations ahead of (what was) the planned Brexit date at the end of March. 
 
Broadly we expect the tight jobs market to give rise to slowly increasing pay growth pressures over the year ahead. 
Our expectation therefore is that we will have seen the unemployment rate hold steady at 3.9% in the three months to March. Broadly we expect the tight jobs market to give rise to slowly increasing pay growth pressures over the year ahead. However, over the near term pay growth might actually nudge down a touch. Indeed, for the upcoming forecast our best bet is that headline pay growth will hold steady at 3.5% (3m yoy) whilst stripping out bonuses we look for a moderation from 3.4% to 3.3% 

Today’s releases 
09.30 UK Average Earnings Index
09.30 UK Labour market release
10.00 EZ ZEW Economic sentiment

China bites back: Yesterday we saw a further step-up in the trade dispute between the US and China after Beijing announced it would increase tariffs on $60bn of US goods (Beijing said 2493 items coming from the US would have tariffs increased to 25% from June 1). This was the Chinese administration’s response to the announcement of a step-up in tariffs on Chinese imports into the US (to 25% on $200bn worth of trade) which was enacted on Friday.

Yesterday the Trump administration announced a plan to hit Beijing with a further $300bn of Chinese imports with 25% tariffs. However, there would be a comment period running until 24 June, when President Trump will make a final decision on whether to proceed with the tariffs. The mood was gloomy through much of yesterday amidst defiant talks from both Beijing and Washington, giving little hope to investors that earlier progress in trade talks could be salvaged.

However, some slightly more favourable rhetoric has emerged overnight after a top Chinese diplomat, Wang Yi said the two sides have the “ability and wisdom” to reach a trade deal that is good for both and adding that there was still hope to resolve the issue in a friendly way.

Risk off:  Meanwhile President Trump reiterated that he and President Xi would be meeting at the G20 in Japan and said that it should be clear in “three or four weeks” if a US trade delegation’s trip to Beijing two weeks ago was successful. He even went so far as to say “I have a feeling it’s going to be very successful,”.

Risk sentiment suffered badly yesterday amidst worries over the escalating trade conflict. Unsurprisingly the Shanghai Composite and US stocks suffered particularly sizeable losses, with the S&P 500 closing 2.4% lower. Reflecting the risk off mood, government bond yields fell broadly whilst the spread between the 10-year US Treasury and 3 month paper turned negative, in a warning about investor’s gloomy assessment of the outlook.

The yuan also, unsurprisingly, has been under pressure over recent days (currently at 6.8776). However this morning sentiment has settled somewhat following the comments overnight. The Shanghai composite is 0.25% lower whilst the S&P future points to a gain of 0.5%.