25 Mar 2019

IRES REIT: Forward funding deal to deliver 118 houses

IRES has today announced that it has entered into contracts for the forward purchase of 118 houses under development by Glenveagh Properties PLC at Balbriggan and Donabate in North Dublin.




The larger (78 units) of the two parcels of houses will be coming from Taylor Hill at Balbriggan, a commuter town of c. 22,000 people. The scheme is well served by road, rail and airport infrastructure and close to a range of amenities. The other 40 units are located at the Semple Woods scheme in Donabate (another commuter town with a population c. 7,500), which is c. 19km south of Taylor Hill and also well served by transport and social infrastructure.


Construction of the units is well advanced, with the properties due to be handed over in turn-key condition to IRES in phases before the end of this year, with all of them due to be leased up by Q120. Management is guiding a gross yield of c. 6.7% based on expected rents and the fixed price cost of completion.


IRES has a three-pronged growth strategy encompassing forward-purchase deals; its own development sites; and outright property acquisitions. To this end, this attractive deal fits with the group’s modus operandi and, alongside the other forward-purchase agreements the group has entered into, it will help towards bringing the portfolio to over 3,000 units. 


Glenveagh Properties: Announces forward sales and a pre-let


As discussed elsewhere this morning, Glenveagh has agreed the forward sale of 118 units at two sites to IRES REIT. It has also announced the pre-let of a proposed 250-room hotel at Castleforbes, its large site in Dublin’s north Docklands.


The 118 units comprise a combination of two, three and four bed homes at Taylor Hill Balbriggan and Semple Woods Donabate and have a gross development value of €38m (average of €322k). As this transaction was included in the group’s 451 units “sold, signed or reserved” as at 6th March, this announcement will not move it closer to meeting its full-year 725 unit target, but it appears well on the way to hitting this target nevertheless. The hotel pre-let is with Whitbread plc (owner of Premier Inn) and the addition of this agreement to Glenveagh’s mixed-use scheme is an interesting development as it progresses the residential element with planning authorities.


Although the forward sale agreement with IRES does not add any “new” units for 2019, it does highlight the range of sales options that Glenveagh has at its starter-home sites. 


Irish Economy: External uncertainties weigh on an otherwise bright outlook, we pare headline (GDP) growth forecasts for 2019 (from 4.5% to 4.3%) and 2020 (from 3.8% to 3.3%) 


Today we release our first Irish Economy Monitor of 2019. The quarterly publication provides an overview of developments across the economy along with setting out our forecasts.


While the international backdrop has become more unsettled, the Irish economy continues to exhibit signs of strong, broad-based growth. February’s PMI readings ranged from 54.0-60.5, indicating that the pace of growth expanded at a faster rate than had been seen in January (admittedly, Brexit developments may weigh on March’s reports).


The consumer backdrop remains very favourable. The economy is adding 1,000 jobs a week (total employment was +2.3% y/y in Q418) and unemployment is at a post-crisis low of 5.6%. Wage inflation has accelerated to a post-crisis high of 4.1% y/y, nearly seven times the rate of increase in the CPI.


Despite output having quadrupled in the past five years, the most striking feature of the housing market remains a mismatch between supply and demand. We see this continuing to apply upward pressure on both house prices and rents, particularly outside of Dublin. Asking prices in the capital are 46% above the national average, more than three times the differential in disposable incomes, so the Central Bank of Ireland’s macro-prudential rules (which place loan-to-income and loan-to-value limits on the majority of front book mortgage lending) are having a sharper effect on Dublin’s housing market.


A mismatch between supply and demand is also evident in the non-residential markets. Office take-up in Dublin was a record 3.9m sq ft in 2018, while the underlying vacancy rate has fallen to just 5.6%, implying that there is less than 3m sq ft of available space across the city. While new build will help to meet some of the occupier demand, we think that regional markets are well-placed to benefit from Dublin’s limited availability. The narrative is similar in the industrial market, where 2018 take-up in Dublin (3.3m sq ft) was the second-highest on record, influenced in part by supply chain relocations relating to Brexit. In contrast to many other developed markets, bricks-and-mortar retail continues to perform solidly, an outcome which is likely due to a combination of factors including the strong economic backdrop; the effective absence of new build activity since the crash of a decade ago; and Ireland’s relatively low population density.


Ireland’s exporters enjoyed a vintage 2018, with the trade surplus reaching an all-time high of close to €1bn a week. The national accounts measure of exports increased by 8.9% last year, with imports advancing by 7.0% on the same basis. Recent downgrades to global growth, protracted Brexit uncertainty (our expectation is that the ‘May deal’ or something approximating it will eventually secure parliamentary backing) and disruptions to trade flows have prompted us to modestly pare our export growth forecasts (and, by extension, our headline GDP projections).


In contrast to what is going on across the Irish Sea, the political backdrop here is looking strong and stable. The minority government is fortified by an extension of the ‘Confidence and Supply’ deal with the main opposition party (Fianna Fáil) until 2020. We are mindful of May’s Local and European elections, where polls suggest that the main gains will be made by the ruling Fine Gael party and Sinn Féin. Such an outcome may make Fianna Fáil conclude that avoiding a general election for as long as possible might be the safest option to go for.


In terms of the public finances, the country looks like it is on course for a second successive underlying fiscal surplus, while the headline debt / GDP ratio is on course to move below 60% in the near future. The recent drop in Eurozone yields is a tailwind for the Exchequer, with Ireland’s 10 year yield (58bps at the time of writing) standing at less than a quarter of the weighted average interest rate on the national debt. This points to further helpful interest savings as more of the expensive crisis-era borrowings are refinanced.


In acknowledgement of the transformation that has taken place in the economy, we have retired our previous slide on the State’s contingent liabilities (the last of the State-guaranteed liabilities in the banking sector rolled off in 2018; all of the government guaranteed senior debt at NAMA has been redeemed; and system funding of the domestic banks has long returned to pre-crisis levels) and introduced a new slide on competitiveness indicators. There are some legacies from the crisis that have yet to be fully shaken off – NAMA is down to its last €2.4bn (by book value) of loans, which compares to a peak of €35bn (or €28bn if you disregard the assets that were temporarily warehoused at the agency following the liquidation of IBRC). Mortgage arrears remain a challenge for the banking system, although this issue has been tempered by 22 quarters of improvement. 


Largely reflecting the more uncertain external environment, we have trimmed our 2019 headline (GDP) growth forecast by 20bps to a still impressive 4.3%. For next year, we now see growth of 3.3%, down from 3.8% previously. While these are slower rates of expansion than what we have seen in recent years, they are still comfortably above trend. In any event, a moderation is not unwelcome given how the combination of buoyant growth and diminishing ‘slack’ in the economy was starting to nibble away at Ireland’s competitiveness. 


UK this week 


Following a shambolic week last week, yesterday’s newspaper headlines all featured a Cabinet plot to oust Theresa May as PM and replace her with either David Lidington or Michael Gove as a ‘caretaker’. This conspiracy appears to have died a sudden death, but we seem to be no nearer to a resolution of the wider Brexit issue. Mrs May met key ERG members at Chequers yesterday to gain support for her deal, but reports suggest that this was unsuccessful with the PM refusing to agree to step down as a condition for the ERG’s support. It is not clear that the third meaningful vote will take place at all this week and a Cabinet meeting this morning will discuss the way ahead. This afternoon the PM will make a statement in the House on last week’s events in Brussels but an amendment from Oliver Letwin, if called and passed, looks set to allow MPs to take control of Commons business to enable indicative votes on various alternative Brexit options. To head this off, it is possible that the government itself proposes that these votes take place. Such a debate could take place on Wednesday, although this is not yet confirmed. We also note that the government will be laying the secondary legislation this week to enable the default Brexit date to be moved back by two weeks to 12 April, from 29 March.  We would still judge that ‘no deal’ risk is relatively modest, albeit higher than it was a week ago. But the situation in Westminster remains far from clear at this point and is likely to become a lot less clear should May lose in MV3.  Obviously UK economic data will take a backseat to Brexit developments, which will continue to be the driver of domestic market movements. Nonetheless there are a number of releases on Friday, amongst these will be the latest estimate of Q4 GDP, GfK consumer confidence and household lending figures. 


US this week 


The US data calendar is more extensive. Given the Fed’s more dovish March meeting, US Treasury markets have rallied (US 10yr now 2.52%) and the curve has flattened to price in an almost 50/50 chance of a cut by the end of this year. Therefore any data which hints at a softening in US economic activity could extend these moves. As such notable figures include Q4 GDP (final estimate), the Fed’s preferred measure of inflation (PCE), housing market data (permits, starts, new home sales) and consumer confidence. 


Europe this week 


Within the Euro area the key focus continues to be on the extent of the current soft patch. Recent weeks have witnessed some very tentative signs of stabilisation (January industrial production, February PMI), but more concrete signals are needed. After Friday’s thoroughly disastrous European PMI print, all eyes will be on confidence readings from several member states, the IfO from Germany and Euro area lending data, whilst top of the billing will be the ‘flash estimate’ of March HICP inflation. 

Thought of the day

Market sentiment deteriorated on Friday with the S&P 500 closing down 1.9%, Asian markets have followed the US lower today with the Shanghai Composite falling 2% and the Nikkei down 3%. Driving the moves in equity markets have been movements in the bonds, where a rally late last week has seen sovereign yields across the world fall, indeed German 10-year Bund yields are negative (-0.02%) for the first time since 2016. However the key point that has turned sentiment is the inversion of the US Treasury curve, where the 10-year yield has fallen below 3-month rates. Typically markets have interpreted the inversion of the curve as a precursor to a US recession, hence the curve inversion is adding to pre-existing market concerns over global growth.

Economic releases

09.30 EZ ECB’s Coeure Speaks

10.00 US FOMC Member Harker Speaks