09 Aug 2019

IRES REIT: NRI and NAV both slightly ahead of expectations

IRES’ H119 results reveal a solid performance. 

Net rental income of €22.7m was +17.6% and 1.1%, while the 81.6% NRI margin was +130bps y/y. EPRA EPS of 3.5c. The board intends to declare a dividend of 2.7c in respect of H119. Elsewhere, the NAV came in at €1.47.

The portfolio metrics are strong, due to a combination of IRES’ operational focus and supportive market conditions. Average monthly rents of €1,598 are +3.8% y/y. 

At the end of H119 IRES had 2,771 units. Since the start of H2 it has added 815 units through the previously announced Marathon transaction, while the group has a further 298 units contracted under pre-purchase agreements. In addition, its development assets are estimated to have the potential to accommodate 628 units (of which 200 have planning permission; the State planning authority will rule on an application to deliver 428 units at Rockbrook in the coming weeks). IRES is not resting on its laurels, however, with management signalling that it continues to “seek accretive opportunities in urban centres of scale”. 

The recently completed Marathon deal and the units arising from the pre-purchase agreements (once fully delivered) will bring IRES’ portfolio to 3,884 units, representing growth of 45% from the end-2018 total. 

Irish Economy: Annual rate of inflation at a 13-month low

The latest CPI release from Ireland’s CSO shows that the annual rate of inflation tumbled to just 0.5%, a 13-month low, in July. Goods prices were -1.5% y/y while services were +2.2% y/y, with the differential between domestic conditions and the external backdrop a key factor behind this outturn.

The main items pushing up on the annual rate of inflation are Housing-related items and Restaurants & Hotels, while falling Clothing, Food, Furnishings, Transport and Communications prices tempered the extent of the rise in the overall cost of living. 

Housing-related prices were +4.0% y/y, led by a 5.7% rise in rents, which is a function of the mismatch between supply and demand in the Irish residential property market. One curious figure within the Housing category is that mortgage interest costs were +2.9% y/y, which runs contrary to the general fall in mortgage rates in Ireland. One possible explanation for this is mix effects (a lower proportion of tracker mortgages among the households surveyed). Repair, maintenance and home improvement (RMI) costs (+2.7% y/y) and utility prices (again +2.7% y/y) also show an increase. 

Restaurant & Hotel prices were +2.3% y/y, an outturn that is influenced by the VAT increase that the Irish government put through in last October’s Budget (and which took effect in January of this year). 

We suspect that there is a sterling effect at play across a number of the segments that posted a decrease in prices on an annual basis, given the presence of so many UK players on the Irish high street and in the country’s retail parks. In July, a euro bought 2.3% more sterling than it did a year earlier. Clothing & Footwear prices were -1.6% y/y and Furnishing & other Household Equipment prices were -3.8% y/y. 

Elsewhere, Transport costs were 1.2% lower y/y, helped by reductions in airfares and retail fuel prices. Communications prices dropped 6.8% y/y, led by a sharp fall in telephony costs. 

With the upward pressure on prices arising from a buoyant domestic economy being partly offset by ‘imported deflation’ from elsewhere, the muted overall inflation rate is contributing to a material advance in household real disposable incomes. Other CSO data show that average weekly earnings were +3.4% y/y in Q119, helped by tighter labour market conditions (the unemployment rate stands at 4.6%, having fallen by 120bps in the past 12 months). 

Irish Economy: Growth in housing completions slows 

The latest New Dwelling Completions data from the CSO show that 4,920 residential units were completed across Ireland during Q219. While this is +11.8% y/y, it still represents the slowest annual pace of growth since Q413. The CSO has also revised down last year’s completions by 4% from the initial estimate of 18,828 to 18,016 units. 

Of the 4,920 completions in Q219, 1,328 of these were one-off housing units (+15.5% y/y), while housing schemes (2,834 units) showed muted growth of just 2.6% y/y. Apartment completions jumped 55.6% y/y to 758, but clearly still modest in terms of the absolute number of units built. 

Of the above completions, 1,546 units (36% of the total) were delivered across Dublin’s four local authorities, -13.7% y/y which is a disappointing outcome given that the capital has a particularly acute shortage of housing. 

On a four-quarter-moving-sum basis, completions were 19,334 in the period to end-Q219, the highest in the history of this series (which dates back to the start of 2011). However, these completions are well below even the low end of the range of estimates (30,000 – 50,000) of annual new household formation in Ireland. Therefore, the path of least resistance for both residential prices and rents lies to the upside. 

The rate of growth in housing completions in H119 was +16.8% y/y. Off the ‘old’ base of 18,828 completions in 2018, were the H119 growth rate to be maintained for the FY this would produce 21,982 completions this year, bang in line with our 22,000 forecast. However, the downward revision to the 2018 base means that, ceteris paribus, completions look like they could end up being closer to 21,000. Such an outturn would be, at the margin, unhelpful in terms of our assumptions for the contribution to wider economic growth from housebuilding. 

Italy readies for elections

Differences between Italy’s coalition parties appear to have become irreconcilable after the League voted against a motion by partners the Five Star that had aimed to block the Turin-Lyon high-speed railway (or TAV). League leader Matteo Salvini has called for a fresh election, citing the TAV vote as evidence that the government no longer has a working majority, to which Five Star leader Luigi Di Maio has responded by stating his party is ready for and not afraid of a snap poll. 

Resultantly, Prime Minister Giuseppe Conte has announced that he will begin proceedings to recall parliament so that a vote of confidence can be held in the government. Italian daily Repubblica reports that the likely election would most likely be held on 23 October, however this can be postponed to next year if President Sergio Mattarella were to appoint a technocratic government in the interim as Corriere della Sera suggests he might. 

The split in the coalition has seen 10-year BTP yields surge 20bps to 1.73%, with the spread over equivalent maturity Bunds now standing at a five-week high of 232bps.

UK Q2 GDP data due

Later this morning we will receive the first estimate of UK GDP for the second quarter of 2019. We expect this to show that economic momentum has grounded to a halt after the robust 0.5% first quarter rise. However, Q1 figures were boosted amidst stockpiling ahead of the initial end of March Brexit deadline. 


Over Q2, a halt in this stock building and some element of de-stocking will have weighed on the figures and particularly so for the industrial sector where we expect output to have been about 1% lower than in Q1. In addition, a Brexit related re-scheduling of auto sector retooling has also dampened the Q2 manufacturing sector readings. 

We do not see GDP growth in the red in Q2, despite expected falls in output in the construction and agriculture sectors too, as we see services output having risen over the period; we are pencilling in a rise of 0.2% 3m/3m for the UK’s largest sector. Taken together we look for flat GDP with output standing 1.2% up on year ago levels, down from 1.8% in Q1. 

We do not expect the subdued Q2 GDP figures persisting into Q3, where we expect a return to growth. One supportive factor in Q3 will be that the absence of auto sector shutdowns in July, as is typical, will boost the industrial sector at the start of period as the seasonal adjustment still ‘expects’ the July shutdown to happen.

Japan GDP growth beats forecasts

In a world of slowing growth and downbeat expectations the Japanese economy's Q2 growth provided an upside shock overnight, coming in at 1.8% on an annualised basis (+0.4% q/q)  where consensus looked for a more modest expansion of 0.5% (+0.1% q/q), a welcome shock in a pessimistic economic landscape.


The data failed to stimulate any significant market moves however, with the yen moving marginally up to near 106 from 105.6, whilst JGBs and the TOPIX did nothing out of line with the rest of the Asia-Pacific region overnight.

Economic Releases

09.30 UK GDP

09.30 UK Industrial Production

09.30 UK Manufacturing Production

13.30 US PPI