31 Jan 2019

IRES REIT – strong demand for latest PRS asset to come to market

In another sign of the strong demand for private rented sector (PRS) assets in Ireland currently, the Irish Independent this morning reports that the 214 apartments under development at Cualanor in Dun Laoghaire, South Dublin by the Cosgrave Group have “secured several offers in excess of €100m from up to six competing bidders”.

The latest phase of this large residential development was brought to market by agents last November with a guide price of €95m, and a preferred bidder is now understood to have been selected. Patrizia Immobilien and Tristan Capital Partners have each acquired previous phases in this development (spending more than €200m between them in the process) and both investors are said to have been amongst the interested parties in the latest phase.

 

JLL recently reported that there was €7bn of institutional money chasing PRS assets in Ireland at this time, with the bids reported this morning being the latest manifestation of this strong demand. The sector’s very strong fundamentals (from the perspective of asset owners) look set to endure into the medium-term and it would not be a surprise to see yields in the PRS sector move lower than the 4% level currently being quoted by agents CBRE.

 

Bank of Ireland Group – Increase in longer term mortgage rates

 

Bank of Ireland yesterday announced an increase in some of its longer term fixed rate mortgages, raising the 5-year and 10-year product pricing by 20bps to 3.2% and 3.5%, respectively. At the same time it has slightly reduced its 1-year and 2-year fixed rates by 10bps to 2.9%. The 3-year fixed rate mortgage remains unchanged at 3%.

 

Previous to these changes, BIRG offered a flat 3% rate on all of its 1-5 year fixed rate mortgage products, implying a slightly inverted term margin curve on the fixed rate mortgage product suite, given wholesale funding costs and related swap curve pricing. The BIRG decision to increase some rates is in contrast to a general trend for rate cuts within the market over the last 12-18 months (notably by AIB on variable rates and both Ulster Bank and PTSB on fixed rates). The updated mortgage rates now build in a price matrix with a more consistent implied margin across the curve, and suggests the bank is comfortable with its current market share and the level of competition for new business within the market. The decision to increase longer term rates also fits with the 3% cashback offer which accompanies most of its mortgage products and which is intended to retain clients for a minimum of 5 years (1% of the cash back is payable after 5 years).

 

We have previously noted that with new origination within the mortgage market set to more than double over the FY17-FY22e period (from €7.3bn to c.€15bn under our forecasts), Irish banks (AIBG and BIRG in particular) need not be overly sensitive to any small changes in market share, with the overall growth, rather than individual position, within the market doing most of the hard work on volume growth. As such, we see the BIRG decision on mortgage pricing as consistent with this viewpoint and should provide a good balance for the bank on market share vs margin management. We see no near term impact on NIM or EPS, and make no changes to forecasts as a result of this decision.

 

Policy on Hold

 

The Federal Open Market Committee (FOMC) opted to hold policy steady at its meeting yesterday evening. As such the Federal funds target rate range was maintained at 2.25-2.50%, matching market expectations and our own view. This followed the 25bp increase in the target range announced after the 18-19 December meeting. The FOMC also confirmed that it was still pressing ahead with its plan to run down QE holdings on its balance sheet, reinvesting maturing securities only up to its maximum cap of $50bn a month ($30bn Treasury securities and $20bn mortgage-backed securities). However whilst the Fed did not adjust the current policy stance which it judged to be “appropriate”, there was a clear shift in the Fed’s thinking on how policy might or might not be adjusted over the course of the coming months. 

 

Fed preach patience

 

The FOMC’s new policy statement published today included its new buzzword ‘patient’ which has featured heavily in recent comments from Fed participants. This mantra was also repeated numerous times by Fed Chair Powell in his press conference today. Indeed, the Chair clearly pointed to the Fed being in wait and see mode now, as he highlighted the extent to which the weaker global economic backdrop and the US government shutdown had shifted the Fed’s thinking since its 18-19 December gathering. This shift into a pause was also evident in the statement which removed a reference to “further gradual increases in the target range for the federal funds rate” being warranted whilst also talking of muted inflation pressures. A December statement reference to the risks to the global outlook being “roughly balanced” was also absent from this statement.

 

Further hikes in doubt

 

Amidst a press core keen to know if this might be the end of the tightening cycle or a shorter lived pause, the Fed chief refused to be drawn. He was clear that this would depend on how “cross-currents resolve” and how the US economy performs this year. We have for some time argued that whilst US inflation metrics look set to soften over coming months, the Fed will press ahead with a couple more rate rises as the tight labour market triggers further gradual increases in pay growth. Furthermore, we do not expect a weak showing for the US economy this year, though this judgment is dependent on a favourable resolution to US-China trade talks. Indeed, this latter issue is likely to be one key factor the FOMC is watching as it eyes whether to make any further policy adjustments over coming months. Markets have clearly reacted to the prospect of a delay to the next move (or more Fed permanent pause), with the USD now weaker, US Treasury yields are lower and US stocks have also made solid gains. Markets now see a higher likelihood of a rate cut in 2019 than a rate hike.

 

US-China Trade Talks

 

Talks between high-level officials began yesterday with little indication that China is considering US demands. The United States is essentially demanding that China downsizes its economic aspiration to become a supreme world leader in such fields as robotics and electric cars.

 

These are the highest-level talks since Trump sat down with Chinese President Xi Jinping in Argentina on December 1st and declared a 90-day truce to reach a lasting deal to end the trade war. While no resolution is expected this week we should at least see a package of proposals presented. However, the differences between Beijing and Washington are vast.

 

Both sides have until March to reach a deal or more tariffs will be slapped on China.

 

Economic releases 

 

10.00 EZ GDP

10.00 EZ Unemployment Rate

10.15 EZ ECB’s Mersch Speaks

13.30 US Initial Jobless Claims

15.00 US New Home Sales