21 Feb 2019

IRES REIT acquires 52 residential units in North Dublin

IRES REIT has announced the acquisition of 52 housing units and 61 car park spaces at The Coast, Baldoyle, Dublin 13 (North Dublin) for a total purchase price of €13.96m (including VAT but excluding other transaction costs).

This acquisition was funded by IRES’ existing credit facility. The development was finished in 2006 and is well-served by transport links (including within 500m of Clongriffin DART (light rail) station). It is 12km from Dublin City Centre and 11km from Dublin Airport. The units are also close to a number of large employers including the State postal monopoly, Mylan, Niche Generics and the Baldoyle Industrial Estate. The units comprise a mix of apartments, houses and duplexes (18 one bed; 16 two bed; 12 three bed; and six four bed).


Some 38 units are currently let, with the other 14 available for immediate lease up by IRES. Based on current annualised passing rents and the lease-up of the remaining 14 units, the asset is expected to generate a gross yield of 6.1%. This is well above the 3.85% prime Dublin PRS yield and while we would expect a suburban location such as Baldoyle to have a higher yield, the margin points to the potential for yield compression once the vacant units are let out.


This latest acquisition brings the IRES portfolio to 2,895 units (including 164 pre-purchase units due to be added by 2021). Comprising less than 2% of the enlarged portfolio, this deal is not a game-changer for the REIT but should instead be viewed as further evidence of management’s ability to close out accretive deals, even in the hotly contested Dublin PRS space. The company reports FY18 results on Friday, please see our recent report (7,000,000,000 reasons to Buy, published 24 January) for more detail on our investment thesis on IRES.


Bank of Ireland: Staff pay increase of 3.1% agreed


Bank of Ireland and its main trade union have agreed a new pay deal that will see most (90%) of its workers receive an average 3.1% pay increase this year, according to reports in today’s Irish Times.


However middle management grades will once again not be part of this pay deal, with any pay increases for these grades dealt with on a discretionary basis. Middle management has been an area where BIRG has sought to limit pay increases and reduce total headcount as the Group seeks to simplify the organisational structure between customers and senior management. AIB has recently agreed a similar c.3% pay increase for its staff, and both of these pay deals are indicative of the rising wage inflation pressures in the Irish economy and the financial services sector in particular, this at least somewhat due to Brexit-related relocations to Dublin and a very competitive market for labour.


We see this rising cost backdrop as a slight headwind to earnings growth for all of the Irish banks in FY19, albeit BIRG is in the middle of a 5 year cost take out programme which aims to reduce underlying opex by 10% in nominal terms (management) and c.20-25% in real terms (our view). FY18 results are out next Monday (25th Feb).


Irish Economy: NTMA cancels another €500m of legacy debt


Ireland’s NTMA yesterday announced the cancellation of another €500m of the Irish 2049 Floating Rate Treasury Bond (€1.0bn of which remains outstanding following this move).


These bonds are linked to the landmark IBRC transaction in 2013, which was a major milestone on Ireland’s journey back to creditworthiness. To date the NTMA has repurchased €14.0bn (nominal) of the €25bn of bonds issued as part of the ‘Prom Note’ deal, with €0.5bn of these repurchases taking place in the year to date. All of the bonds were held by the Central Bank of Ireland, whose holdings have previously attracted adverse comment from the ECB relating to monetary financing concerns, although Frankfurt has since acknowledged the progress made in reducing the stock of IBRC-related assets. While the effective servicing cost of the IBRC-related bonds is immaterial (as the Central Bank repatriates most of its profits to the Exchequer), the repurchases serve to improve the optics of Ireland’s headline debt metrics.


The continued tidying up of legacy matters is another reminder of the progress the State has made in recent years. We expect that the remaining IBRC-related bonds will be repurchased over the medium term, several decades ahead of their scheduled maturity dates (which run to June 2053).


Brexit and UK sovereign rating on negative watch with Fitch:


UK PM Theresa May held important talks with European Commission president Jean-Claude Juncker yesterday evening. The “positive spirit” to the talks seems to have cleared the way for the two sides to actually get back to working out how the EU and UK might be able to agree the assurances on the Irish backstop, though there clearly remains quite a bit of work to be done. There will be three elements to the renegotiation talks. Efforts will made to see how the following could be achieved: i) guarantees to emphasise “the temporary nature” of the backstop via “appropriate legal assurance”: ii) changes to the political declaration on future EU-UK relations to “increase confidence in the focus and ambition of both sides”: iii) efforts will also be made to look at “the role alternative arrangements could play in replacing the backstop in future”. This is clearly a welcome development for Downing Street, desperate to show some progress ahead of a vote in UK Parliament next week. At this stage however it still looks as if the next scheduled vote on 27 February would be a vote a progress report from PM May, rather than a meaningful vote. She is also desperate to show progress amidst the increased signs of turmoil within her own party, not least after three pro-remain MPs quit the Tory party to join the new Independent Group yesterday. Highlighting how little time is left now on the Brexit clock, Fitch has put the UK’s AA credit rating on “negative watch” over growing Brexit uncertainty, in what was an unscheduled update.


FOMC cautious


Overnight the Federal Reserve released the minutes from the 29-30 January FOMC meeting, where policy was kept on hold but where the Fed took a decidedly more cautious and dovish tone. The minutes themselves provided some insight into the Fed’s shift in its policy communication to one of patience. In terms of the economy itself the Fed was clearly concerned about the downside risks to the global growth outlook, with a number of factors put forward, most prominent among them were global risks primarily related to concerns over the slowdown in the Euro area and in China. However these were not the only risks cited, unsurprisingly trade tensions were noted, as well as Brexit, a rapid reduction in US fiscal stimulus and market volatility. 


Patience needed


Perhaps the most notable aspect of the FOMC minutes was the discussion over the Fed’s balance sheet and the current policy of allowing maturing assets to run off (the current policy allows for a maximum monthly reduction in the balance sheet of $50bn). The majority view on the committee was that the policy of balance sheet reduction should be ended by the end of this year, with many on the committee preferring an early announcement. There was also some discussion over the composition of the final balance sheet, where the preference is for the Fed to gradually reduce the holdings of Mortgage Backed Securities, replacing them as they redeem with US Treasuries.  Finally on interest rate policy there were no clear hints, with the minutes themselves highlighting a general view on the committee that they were prepared to be patient as they awaited clearer signs on the downside risks. Markets were relatively muted following the minutes but the dollar has resumed its downward trajectory versus the euro as we open this morning, whilst 10 year Treasury yields have nudged up close to 2.67% overnight.



Economic releases


09.00 EZ PMI

12.30 UK ECB Minutes

13.30 EZ ECB’s Praet Speaks

13.30 US Core Durable Goods Orders

13.30 US Jobless Claims

13.30 US Philadelphia Fed Manufacturing

14.45 US PMI