24 Jan 2019

IRES REIT: New report

We release a report on IRES REIT today which focuses on the dynamics in the residential property market in Ireland.

According to JLL, there is €7bn of institutional money chasing PRS assets in Ireland at this time, which represents a 40% uplift on the amount of capital that was estimated to be seeking opportunities in the space a year ago. The sector’s very strong fundamentals (from the perspective of the owners of assets) look set to endure into the medium term.

 

Despite an uptick in housing output, new build remains well below even the low end of the range of estimates of new household formation, with the tail of unmet need continuing to grow. We believe that the rental market will be particularly challenged from a supply perspective, as the elimination of negative equity could spur an exodus of ‘accidental landlords’. Demand is underpinned by strong growth in total employment (+3.0% in Q318) and labour earnings (+3.2% y/y in Q318) – a function of the buoyant growth in the Irish economy (we see GDP +4.5% in 2019). While Brexit poses downside risks to the Irish economy, there is ample evidence (the most visible being the record 109 cranes over the capital) that Dublin is benefiting from the relative policy certainty on offer from this side of the Irish Sea. All of IRES’ current portfolio is located in Dublin.

 

US Government Shutdown

 

The U.S. Senate will today vote on separate Republican and Democratic proposals to end a partial government shutdown, now in its 33rd day.

 

A bill already passed by the Democrat-led House of Representatives would provide stopgap funding through February 8, allowing the shuttered agencies to reopen while the two sides debate border security. It does not contain money for President Donald Trump's desired wall at the U.S. - Mexico border.

 

This is the first attempt at finding a path to end the record-long government shutdown.

 

No change in the deposit rate

 

The ECB announces its policy decision at 12.45pm today with the press conference set to follow at 1.30pm. We expect a firm ‘no change’ decision with the deposit rate very likely to remain at -0.40%, the main refinancing rate at 0.00% and the marginal lending rate at +0.25%. The key for today will be how far the ECB goes in adjusting its assessment on the risks to growth. The account of the December meeting conceded that the balance of risks was moving to the downside and revealed that arguments had been made in December in support of shifting the assessment from ‘balanced’ to ‘down’.

 

Temporary weakness

 

Given the spate of consistently weaker Eurozone (EZ) data in recent weeks, we expect the Governing Council (GC) to indicate that it now considers the risks to growth to lie to the downside. Importantly though, this shift would still enable the ECB to maintain its key message on interest rate policy i.e. it expects key rates to ‘to remain at their present levels at least through the summer of 2019’. Members expect the current period of weakness to be temporary. A recovery in the car industry is expected to emerge over the spring and a thaw in global trade tensions would support the pace of activity and therefore keep the GC’s monetary policy plans intact.

 

20bp-40bp tightening by end of year  

 

It goes without saying that if the duration of the EZ downturn is more persistent and this morning’s mixed French & German PMI data in no way helps to assuage that, everything will change. The ECB will fear that this will alter the labour market dynamics and therefore the inflation outlook. We recognise that our forecast of a 0% deposit rate by end 2019 is vulnerable. But our view is that a pick-up in Eurozone activity remains more likely than not over the coming months, which suggests that a 20bp-40bp tightening should remain on the cards this year.

 

Economic releases

 

09.00 EZ PMI

12.45 EZ ECB Interest Rate Decision

13.30 EZ ECB Press Conference

14.45 US PMI