11 Feb 2019

Residential rental growth moderates in Q418

Ireland’s largest property website, Daft.ie, released its latest (Q418) report into the residential rental market yesterday. As expected, the report shows a moderation in the annual rate of growth in rents across Ireland, with the exit-2018 rate at 9.8%, versus 12.4% at the end-H118 stage.

Within Ireland there is a divergence in rent inflation, with urban areas (where the in-place rental stock is subject to annual inflation limits of 4%) posting slower growth, while the pace of increase is picking up in rural areas (where no such limits apply).

 

The report notes an increase, albeit from a very low base, in the availability of rental accommodation in Ireland. On 1 January there were 3,641 properties available to rent across the country, +11% y/y. It remains to be seen if this growth endures, given the sizeable mismatch between housing output and new household formation.

 

According to Daft, average asking rents across Dublin, where all of IRES and HBRN’s portfolios are located, were +8.8% y/y in Q418, although this headline figure should not be mechanically applied to the REITs’ assets given the rent caps. National housing output (18,072 units in 2018) is well adrift of even the low point of the range of estimates (30,000 – 50,000) of annual new household formation, so our sense is that the path of least resistance for the REITs’ rent rolls will remain to the upside for some years yet. These dynamics have positive read-through for the value of the housebuilders’ landbanks also.

 

Irish Economy: Construction PMI moderates in January

 

The latest Ulster Bank Construction PMI release shows that the rate of growth in activity cooled in January, with the headline index slipping to a three month low of 54.6 in January (December 2018: 56.3).

 

For a fifth successive month growth was concentrated in the Housing (55.7) and Commercial (55.4) segments, with Civil Engineering (46.4) stuck in recession.

 

The report shows that New Orders growth remains sharp, which is underpinning continued growth in sector employment. On a less helpful note, input price inflation quickened to a four month high in January, with raw material costs (notably for steel and insulation) blamed for this. Likewise, suppliers’ delivery times lengthened yet again last month, although the latest deterioration was the weakest since July 2018. In any event, business sentiment improved to a three month high in January, with 49% of panellists expecting to see a rise in activity over the coming 12 months, 45% no change and only 6% a decline.

 

All three Irish PMIs posted slower growth in January, which is not a particular surprise given the Brexit uncertainty. How events play out at Westminster in the coming weeks will likely prove pivotal in terms of determining the growth trajectory for the remainder of 2019.

 

Yew Grove: Expands into Waterford

 

Yew Grove REIT (YEW) announced on Friday that it has exchanged contracts on an office asset at IDA Ireland’s Waterford Business and Technology Park.

 

The €4m transaction price implies a keen net initial yield of 8.56% after accounting for all purchase costs.

 

The asset in question comprises 36,845 sq ft of open plan office space arranged over three floors. It is tenanted by Tech Mahindra Business Solutions (whose parent’s market cap is €9bn) under a 20 year lease with a break in five years, and SE2 Information Services Ireland Ltd under a five year lease.

 

This looks like a good deal for YEW, snapping up a good asset with quality covenants and lengthy income visibility at an attractive yield. At the end of 2018 YEW had uncommitted headroom of €13.7m under its revolving credit facility, so this purchase utilises about a third of that available investment capacity. Given the healthy levels of transactions in (and the strong fundamentals of) the Irish commercial property market, we would not be surprised to see further deals from YEW.

 

Irish Banks: Brexit continues to drag on SME investment

 

The latest AIB/Ipsos MRBI Q4 Brexit Sentiment Index, released this morning, shows that SMEs in both Ireland and Northern Ireland have continued to cancel or delay investment and expansion plans due to the Brexit uncertainty. 35% of SMEs in Ireland and 40% in Northern Ireland had cancelled or postponed investment plans as a result of the ongoing uncertainty, with 68% of Irish SMEs and 62% of Northern Irish SMEs believing Brexit will have a negative impact on their business. Notably, however, SMEs in Northern Ireland seem more optimistic on the risk of a hard border returning, with only 10% of these believing expecting it vs 27% of Irish SMEs. However, in our opinion, there is a risk these readings will have deteriorated in recent weeks given the recent developments on Brexit since the start of the year.

 

For Q4 2018, the index registered a score of -41 in Ireland (Q3 -41), and -31 in Northern Ireland (Q3 -35). The Index shows SMEs operating in the food & drink sector are most pessimistic (-53), notably ahead of retail (-45) and tourism (-42).

 

We believe the lack of clarity on Brexit, one way or the other, will continue to act as a significant drag on the willingness and ability of Irish SMEs to invest in their businesses in 2019, with new SME lending by the Irish banks remaining weak until the back end of the year, at the earliest, as a result. This will therefore push the much needed ‘inflection point’ for a basing and growth in the total outstanding stock of Irish SME credit out into 2020, and limit the potential for any material balance sheet growth in the Irish banking sector this year.

 

UK this week
 

The focus in the UK will be a debate on a motion relating to Brexit in the House of Commons on Thursday. A vote is expected to follow this as Parliament grapples with which path to take Brexit forward on. With Brexit uncertainty and global worries continuing to act as a headwind to the economy Thursday’s MPC decision and Inflation Report suggests that the BoE is likely to sit tight on policy until a clearer picture of the outlook emerges. The UK also has its fair share of data releases this week. Chief among these will be Q4 GDP where we anticipate the pace of growth slowing to +0.3% q/q from Q3’s outturn of +0.6%. January inflation data will also be keenly watched; we suspect the targeted measure of inflation (CPI) will edge down to +2.0% y/y. Aside from these releases, the RICS housing survey and retail sales data will fill the UK data calendar across the latter half of the week.

 

US this week

 

In the US the government has now been fully open since 25 January, before which a partial government shutdown had endured since the 22 December 2018. One side effect of the shutdown was the postponement of official data - some of those are now due this week and include retail sales (Thursday). Additionally other notable releases due include CPI inflation and industrial production. However the prospect of a renewed shutdown looms large. The 25 January agreement funded the government through until Friday 15 February but if Congress and the White House fail to reach a more lasting agreement by then the government is set to re-enter a partial shutdown.

 

EZ this week

 

The continued focus is on whether the current soft patch in economic data is becoming more pronounced. As such figures to watch in this week include December industrial production figures, where we would note that figures from a number of member states (Germany, Spain) were dismal last week, raising further question marks about Eurozone momentum. The 2nd estimate of Q4 Eurozone GDP is due on Thursday and follows the ‘preliminary flash’ which saw GDP growth recorded at +0.2% q/q. The first estimate of Q4 German GDP is also due, where we suspect the economy will manage to skirt a technical recession following Q3 GDP growth of -0.2% q/q.

 

Brexit update

 

On Thursday UK MPs are set to debate a government motion, with that expected to outline the government’s plan to continue talks with Brussels and try to extract the necessary concessions on the Brexit process and the Irish backstop in particular. MPs are then expected to vote again on a series of amendments, which might limit the PMs flexibility going forward.  The government is seeking to quell a rebellion by guaranteeing another amendable motion will be brought back before parliament “no later than 27 February.” Note that this would not be the next meaningful vote, which the Sunday papers are speculating might even be pushed right back until a week before Brexit after the European Council on 21 March. Note that these worries about such a compressed timescale will underpin amendments brought forward this week. Indeed the Sunday Times is reporting that the Shadow Brexit Secretary Keir Starmer is looking at an amendment which would “compel the prime minister to hold another ‘meaningful vote’ before February 26”.

 

Economic releases

 

09.30 UK GDP

09.30 UK Manufacturing Production

16.15 US FOMC Member Bowman Speaks