US-China trade war

31 Jul 2019

Hibernia REIT: Q1 update

Hibernia REIT issued a Q1 trading update this morning, which highlights further developments for the group relating to rent reviews, letting activities and acquisitions.

Hibernia has settled six rent reviews since its year-end on March 31st, all of which settled at or above ERV generating an uplift in contracted rent of €1.2m p.a., a further two reviews have terms agreed which would double existing rents to €1.0m and two more reviews are outstanding with ERVs in excess of current passing annual rents of €1.4m. The vacancy rate in its in-place office portfolio has increased from 12% at y/e to 15%, but this is due to two tenants moving out of 19,000 sq. ft., which was previously flagged, and the acquisition of 10,000 sq. ft. of vacant offices. Encouragingly, particularly in the current strong market, if all vacant space currently under offer completes, the vacancy rate in the portfolio will fall to 5%. The majority of the available space is in the Forum, Central Quay and the recently completed 2WML.

Hibernia has also spent €7.9m acquiring an industrial/office unit in the Malahide Road Industrial Estate in North Dublin with a view to long-term potential (not dissimilar from its strategy at Slaney Road in our view) and €7.4m on a number of other small acquisitions adjacent to existing assets.

Irish Economy: Central Bank raises growth forecasts 

In its latest quarterly bulletin, the Central Bank of Ireland has increased its economic growth forecasts for both this year and next.

The CBI now sees growth of 4.9% in 2019 and 4.1% in 2020, notable uplifts of 70bps and 50bps respectively. These forecasts reflect both strong expansion in underlying domestic demand and a better-than-expected export performance in the first half of the year, particularly against a weaker international outlook. The CBI expects growth in compensation per employee to continue to trend higher and reach 3.6% this year and 4.1% in 2020. This, in turn, gives rise to some concerns about the lack of spare capacity in the economy and the risk of overheating with the CBI calling for such risks to be addressed through tighter fiscal policy to manage demand pressures – easier said than done however, given the current parliamentary arithmetic in Leinster House.

The above forecasts are predicated on the avoidance of a no-deal Brexit however. In such an eventuality, the CBI notes that there would be a significant weakening of activity across many parts of the economy. However, it still sees the economy expanding by 0.7% in 2020 in the event of a no-deal. Employment would be 34,000 lower by the end of 2020 and, while obviously very disruptive, it is important to note that employment expanded by 81,200 y/y in Q119. 

Notwithstanding the turmoil in Westminster, and the potential negative impact on this side of the Irish Sea, the CBI expects the positive domestic outlook to persist in a status quo scenario.

FOMC to cut 25bps

The FOMC announces its latest policy decision tonight at 7pm. We see a 25bp cut in the Federal funds target range to 2.00-2.25% as the most likely outcome. Interest rate pricing points to an 81% chance of a 25bp cut and a 19% chance of a bigger 50bp reduction. 

Given the relative resilience of domestic US economic data, we see a rate cut tonight as precautionary and as such judge that the Fed would be reluctant to dive in with a bigger half point reduction. We also note that even the most dovish current voting member on the FOMC, St Louis Fed President James Bullard, has argued that a bigger reduction would be too much at this stage, implying just a quarter point move is on the cards. 

With markets fully expecting an easing tonight, what matters will be the steers from Chair Powell (press conference at 7.30pm UK time) on the policy path here forward and whether today’s easing will be the first of several cuts. 

US-China trade talks & Chinese PMI’s

Talks between US and Chinese officials in Shanghai broke off early this morning. Whilst there has been no official comment, the earlier than expected end to discussions would suggest that little progress was made during the first face-to-face negotiations since President Trump and Xi brokered a truce at the G20 at the end of June. 

Chinese PMI survey data for the month of July, showed a slightly differing performance for the manufacturing and non-manufacturing sectors. Manufacturing rose to 49.7 from 49.4, very marginally ahead of the 49.6 market expectation and may provide some reassurance that manufacturing may be recovering modestly from the recent weak patch. Meanwhile, the non-manufacturing index fell back to 53.7 from 54.2 and against expectations of 54.0.



UK GfK consumer sentiment rebounds

GfK reported that its consumer confidence index had risen two points to -11 in July, beating consensus and Investec expectations for a steady -13 outturn. All but one of the index’s five components rose on the month, with robust gains seen in consumers’ assessment of the climate for making a major purchase and in their year-ahead outlook for their own financial situation. The one exception was households’ judgement of the economic situation over the past 12 months, which was unchanged from June.

Economic Releases

10.00  EZ   CPI

10.00  EZ   GDP

13.15  US   ADP Nonfarm Employment Change

19.00  US   FOMC Statement

19.00  US   Fed Interest Rate Decision

19.30  US   FOMC Press Conference