Irish REITs: JLL data confirm a buoyant 2018 for deals

11 January 2019

The latest Ireland Investment Market Report from JLL reveals a strong finish to last year, with €1.1bn of assets trading in Q418. The full-year total of €3.6bn is the third highest (following the €4.5bn of assets traded in each of 2014 and 2016) in the history of the series.

Given the popularity of PRS at this time, it is no surprise that residential saw the biggest share of investment in Q4, accounting for €399m or 37% of total volumes. Office was next on 28% of volumes (€301m). Dublin continues to dominate activity, accounting for 87% of the value of deals in Q4 (and 85% in the FY), but outside of the capital a healthy €539m of assets traded last year.
 
Looking ahead, JLL anticipates €3bn of volumes in 2019, which compares to the long-term (15 year) average of just under €2bn per annum. Supply is expected from loan sale workouts, asset recycling and investors looking to capitalise on the CGT exemption period. There are a number of risks, however, given the uncertain external backdrop.

The elevated volume of activity in the investment market is creating good opportunities for the REITs in terms of acquisitions and (to a lesser extent) selective recycling of capital.

Irish REITs: Yields stable but trending stronger

CBRE released its latest (January 2019) yield sheet yesterday, which suggests a mostly stable backdrop around the turn of the year.

There were no changes in reported yields across the residential, office and industrial segments, although CBRE notes a generally weaker trend across retail assets (unsurprising, given the well-documented structural headwinds), and a strengthening trend across industrial and the prime segments of the office markets in Ireland’s urban centres.

With the market in late cycle, most of the yield adjustment post the crisis years has already taken place. Nonetheless, structural kickers in the shape of Brexit relocations and chronic supply shortages in a number of segments, allied to a wall of capital chasing real assets (see JLL comment elsewhere in this note) mean that yield compression remains a very realistic prospect for the residential, office and industrial segments.

AIB Group: Agreement to see 3% staff pay increase
 
According to reporting in this morning’s Irish Times, AIB management and unions have agreed on a new pay deal that will see the majority of AIB staff receive an approximate 3% pay increase this year.

The pay increase, which is expected to be applied to up to 80% of staff, was agreed after conciliation talks with the Workplace Relations Commission (WRC) and will be comprised of two parts – a performance related increase and a fixed element to cover the cost of living. Some staff will also receive an additional increase as AIB seeks to get rid of its currently complex staff grade system.

While there remains some disagreement between AIB and its FSU employee union over other pay and condition issues, we take the agreement to be a positive development as it reduces the risk of any escalation in the situation going forward. However we would note that this inflationary cost environment is one of the headwinds we have noted for AIB given the relative lack of other significant cost-saving catalysts likely to arrive in the short to medium term at AIB (which is in comparison to the large cost saving programme currently being implemented at Bank of Ireland).

Irish Economy: NTMA announces its Q119 auction schedule

Ireland’s NTMA yesterday published its auction schedule for the remainder of Q119.

Subject to market conditions, the agency expects to conduct one bond auction on 14 February, with a T-bill sale slated for 14 March.

Earlier this week the agency raised €4bn from the syndicated sale of a new 10 year bond. This set fundraising activity for 2019 off to a good start, with the agency looking to raise €14-18bn on the bond market this year.

House of Commons set to hold its third day of Brexit debate

Today will see the House of Commons hold its third day of Brexit debate ahead of next Tuesday’s meaningful vote, which is expected to take place around 7pm.

There are a couple of points to note from the last 24 hours. Firstly you have seen two Tory MPs offering their support to May’s Brexit deal, having previously been opposed. George Freeman and Trudy Harrison are the first Conservative Party MPs to publically switch their vote in favour of May’s deal and, whilst there still remains sizeable opposition to May’s deal within the Tory party, the switch in positions yesterday may suggest that with the clock running down and few other sensible options on the table more MPs may switch sides and back May in order to avoid a no deal scenario.

Secondly there is some talk that the government may back an amendment put forward by Labour’s John Mann on social and environmental policy in the hope that it may bring a few Labour supporters on board. And finally, really just to clarify a point, but still worth noting, is that Jeremy Corbyn has not himself formally confirmed that he would bring a motion of no confidence in the government should Theresa May lose the meaningful vote next Tuesday.

UK data

This morning sees a raft of UK data, including UK GDP for November. October saw a 0.1% uptick overall, but with significant headwinds in manufacturing (-0.9%) and construction (-0.2%). While we expect November will see varying degrees of recovery in construction and manufacturing sectors, ascertaining how the all-important services sector performed is key, and a more challenging proposition. For one, the ONS reported that retail sales volumes had soared 1.4% in November. Though this was largely down to ‘Black Friday’ seasonality issues, it will nevertheless flatter the distribution, hotels and restaurants category. At the same time, the services PMI (which excludes retailing) fell sharply to a 28-month low of 50.4 in November. Upon consideration of these factors, we have pencilled in a more modest performance for the services sector in November. On that basis, we see a repeat of the 0.1% expansion from October.

Alongside the GDP data we have manufacturing output and industrial production and UK trade figures. Trade figures in October were disappointing, showing deficit in goods widening. Largely underpinning this was a £1.5bn rise in imports in the month. One possible driver for this might be precautionary Brexit-related stockpiling, which has been reported both anecdotally and in various surveys, although the volatility of trade figures prevents us from concluding this with too much conviction.

Fed speakers stress “patience” and data dependence

FOMC members continued to air their views on the future direction of monetary policy, with six Fed members speaking yesterday. A more unified pattern emerged amongst the speakers today with a number of them highlighting that they would remain data dependant, and that was no preset course for a specific number of hikes in 2019.
 
St Louis Fed president James Bullard and Fed Vice chair Joseph Clarida, both speaking for the first time since the FOMC minutes were published this week struck a dovish tone. Clarida noted that the fed could “afford to be patient”, while Bullard went further, stating that he believed the opportunity to normalise rates had now closed, and claiming that the Fed overreached with their hike in December (a move he voted against). Fed chairman, Jerome Powell speaking for the second time this week again stressed that he would remain patient on rates.

Most noteworthy perhaps was Charles Evans, speaking for the second time in two days, after suggesting on Wednesday that 3 hikes in 2019 were still a possibility. He softened his tone significantly, admitting that he had perhaps been “a little bit slower to appreciate the concerns that some have expressed from the financial sector”, he also highlighted that the Fed could afford to look at the data for a number of months before making a decision on future policy changes.