06 Aug 2019

IRES REIT: Completes landmark Marathon deal

IRES has announced that it has completed the Marathon acquisition, comprising 815 residential units across 16 high-quality developments and costing €285m, a deal that was first announced on 14th June.

This landmark deal for IRES will see it increase its residential portfolio to 3,587 units. 94% of the acquired units are in Dublin, but the deal will see it expand its footprint beyond Dublin for the first time with 50 units being in a single development in Cork. The acquired portfolio currently generates an annualised gross rental income of €14.2m (€1,486 on average per occupied unit per calendar month), and is estimated to be reversionary by approximately 21% (although capturing this reversionary potential will take time given the current rent cap regime). 98% of the units are leased and the remaining 18 units are available for immediate leasing – something that should not take long in the current environment. The portfolio will generate an initial gross yield of c.5.1% growing to c.5.5% by year three (and assuming the lease-up of the vacant units). The acquisition was funded through a successful placing which raised net proceeds of c.€131m and expanded debt facilities, and the deal will be accretive to earnings in its first full year.

IRES has expanded its portfolio 10-fold from its initial seed portfolio through a three-pronged growth strategy of acquisitions, forward-purchase agreements and its own developments.

Irish Economy: Services PMI slips to a three-month low 

The latest AIB Ireland Services PMI release shows that business activity expanded at the slowest pace in three months during July, as external conditions continued to deteriorate. 

The report shows the first reduction in foreign demand since November 2016, with Brexit uncertainty in particular weighing on customer orders. Given this deterioration, we are unsurprised to see that growth in hiring by Irish services firms has slumped to a six-year low. There are indications that margins are under pressure, with a sharp increase in expenses amid higher transport, fuel and staffing costs, while the rate of output charge inflation softened to a three-month low in July. 

Nonetheless, the headline Services PMI reading of 55.0 in July (versus June’s 56.9) is still consistent with a reasonably good overall picture, although developments across a number of Ireland’s key trading partners do give one a sense that things are likely to get worse before they will get better. Indeed, 43% of panellists are confident of a rise in business activity from present levels in 12 months’ time. 

Taken together with last week’s Manufacturing PMI release, the Composite PMI dropped to 51.8 for July from the previous month’s 54.4 and indicating the slowest increase in business activity since May 2013 (when Ireland was in the EU-IMF Programme). Given Ireland’s hyper-globalised economic model, it is unsurprising that the country is being impacted by adverse developments in the world economy. Conversely, were policymakers to de-escalate Brexit and trade tensions, this should see growth in Irish economic activity shift back into fifth gear. We model headline (GDP) growth of 4.3% in 2019, which represents a sharp moderation on the 2018 outturn of +8.2%. 

Irish Economy: Public finances surprise to the upside in July

The latest Fiscal Monitor from the Department of Finance (DoF), released before the start of the Bank Holiday weekend, reveals a very strong performance in July. 

Tax receipts in July came in at €5.3bn, €239m or 4.7% ahead of profile (target) for the month and 11.1% above year-earlier levels. This outcome was principally driven by ‘beats’ by corporation tax (€269m ahead of profile) and VAT (€125m ahead of profile), which were partly offset by a €142m undershoot in the income tax heading (which the DoF attributes to timing issues, saying this should be reversed when August’s data are published). July’s performance means that year to date receipts, at €32.0bn, are 0.4% ahead of profile, which compares to the 0.5% miss relative to profile that was recorded in H119. 

On the expenditure side, total gross voted (discretionary) expenditures of €36.6bn in the period to end-July were €179m or 0.5% lower than profile, with spending on both current and capital items below what had been pencilled in by the DoF. The report also shows that the cost of servicing the national debt, at €3.8bn in the opening seven months of the year, was €90m or 2.3% lower than profile, helped by the low yield environment. 

After excluding transactions with no general government impact, the year to date underlying balance of -€2.0bn is €740m better than profile. While the slower economic backdrop (see our PMI comment elsewhere) is a concern, we remain confident that Ireland will post a second successive annual general government surplus in 2019. 


US/China trade spat escalates

Overnight, the US Treasury announced that it would designate China a currency manipulator after the USD/CNY rate surged through the 7.00 (US line in the sand) threshold for the first time since 2008. 

In a statement detailing the decision, the US Treasury claimed Beijing had a “long history of facilitating an undervalued currency” by actively intervening in the renminbi. China’s commerce ministry has responded by warning that it may apply further tariffs to US agricultural imports that were traded after 3 August (i.e. the day after President Trump threatened additional tariffs on a further $300bn of imports from China). It also confirmed a Bloomberg story that state-owned companies have been instructed to stop purchasing US agricultural goods. 

Overall, the Treasury’s surprise decision has served to fuel fears that the White House may intervene to weaken the greenback, potentially opening up a new front on the US-China trade dispute and arguably making it more challenging for the two sides to row back. However, the PBoC has taken steps overnight to mitigate the weakness in the yuan. It set the daily reference rate at a firmer 6.9683 per dollar and announced it will sell CNY 30bn of bills in Hong Kong on 14 August (i.e. draining offshore liquidity and making it more expensive to short the yuan). 

After yesterday’s US bloodbath, where the three main US bourses dropped anywhere between 2.9% and 3.47%, Asian markets have recovered somewhat, with the Shanghai Composite now down just over 1.5% after dropping over 3% earlier in the day. On a slightly brighter note, the three main US indices are posting gains at the European open.

Brexit and no-deal worries

UK focused investors continued to eye a no-deal Brexit after the PM’s senior aide Dominic Cummings told colleagues that UK PM, Boris Johnson, would not quit even if pro-remain Tory MPs voted with Labour in an effort to take down the government, via a no confidence vote. 

These reports reinforced concerns that available channels to limit a no-deal Brexit might be even more limited than thought, despite talk yesterday of a unity government being considered by pro-remain MPs, to force through a Brexit deadline extension after a Johnson government defeat in a no confidence vote. Worries have also been exacerbated by comments from the EU, who yesterday said that there is no basis for any further Brexit talks, whilst the UK continues to insist on making changes to Theresa May’s withdrawal agreement. 

It is no real surprise then that sterling’s slide continues unabated with the benchmark EUR/GBP rate is in/around the £0.92 level for the first time in almost two years.

BRC Retail Sales Monitor (July)

The British Retail Consortium (BRC) reported that trading conditions had remained challenging on the high street in July. Annual total sales growth grew by just 0.3% in July, whereas like-for like sales saw a 0.1% uptick. While both measures saw an improvement from their respective June declines of 1.3% and 1.6%, nevertheless they represented the weakest July outturns since the BRC figures began in 1995. Admittedly, the annual comparison remains challenging, with sales having been boosted in July 2018 by the FIFA World Cup. But the fact that sales have not seen a more marked rebound in July on the back of the shift to record temperatures after a washout June, perhaps belies a weaker undercurrent to the consumer backdrop.

Economic Releases

15.00 US JOLTs Job Openings

17.00 US FOMC Member Bullard Speaks