Trade War

02 Aug 2019

Irish REITs: agents highlight positive trends in Industrial sector

A couple of reports from local property agents yesterday highlighted the favourable dynamics currently at play in the Dublin industrial market.

JLL reported strong activity levels in Q2 with take-up of 1.04m sq ft in the quarter representing a 12% increase on Q1. Take-up of 2.0m sq ft in H1 this year was 57% higher y/y but close to the level seen in H218. Interestingly, more than two-thirds of take-up in Q2 was for secondary grade space, but this was attributable to a shortage of prime space rather than due to demand from occupiers. This dynamic is feeding through to rental levels – although prime rents remained steady in Q2 at €9.75 psf, secondary rents moved higher to €7.00 psf from €6.75 in Q1. The outlook remains positive but JLL cautioned that activity levels may well be lower in H2 as active demand for prime space is struggling to find suitable space.

It was a similar message from Knight Frank, which reported 93,414 sqm (2.1m sq ft) of industrial take-up in Dublin in H1 – a 77% y/y increase by its figures. It also speaks of “persisting excess demand” and a strong appetite for investment opportunities in the sector, which is supported by further rental growth expectations. We suspect Brexit-influenced supply chain recalibrations are having a positive effect on demand for industrial and logistics space.

New tariffs

Trade frictions took an unexpected turn of events overnight with US President Trump announcing the imposition of a 10% tariff on the remaining $300bn of Chinese goods not covered by the existing tariff rounds. These new tariffs are set to enter into force on 1 September. 

The surprise announcement from the President effectively ends the trade truce, which President Trump and Xi brokered at the G20 summit in late June, and follows just days after US officials visited Shanghai for talks, which ended early. The suggestion from the US side is that the Chinese have failed to follow through on promises to increase their purchases of US agricultural products, while also demanding that Beijing should stop selling Fentanyl to the States. 

The S&P 500 fell 0.9% overnight and Asia is weaker with the Shanghai Composite falling 1.7% and the Nikkei down 2.1%. 

No response

At the time of writing, there had been no response from the Chinese, but the introduction of additional US tariffs risks an escalation in what is an already delicate situation. 

Note that the latest tariff round covers many consumer goods, which had previously been avoided and could have a much greater direct impact on consumers should retailers decide to pass on the additional costs rather than swallow it themselves. President Trump left open the door to further talks but he also suggested that the 10% tariff could be increased to 25%. The latest escalation in trade tensions represent a renewed and increased downside risk to the global outlook in what is an already softer backdrop this year, particularly in the manufacturing sector.

Tories lose by-election seat

The Liberal Democrats regained the seat of Brecon and Radnorshire from the Tories in yesterday’s by-election, with Jane Dodds overturning an 8038 majority to beat incumbent Chris Davies by 1425 votes. The Brexit Party came third with 3331 votes, pushing Labour into fourth place on 1680. Consequently, the Prime Minister now has a Commons working majority of just one, which will make the task of passing Brexit legislation even more challenging, while also making the government more susceptible to losing a vote of no confidence. 

Oddschecker shows that betting markets expect that if there were to be a general election in 2019, that October to be the most likely month with odds of 5/2 offered.

Nonfarm Friday

The June US labour situation report showed a solid rise in jobs, with the nonfarm payrolls standing at +224k, a clear step-up from the soggy +72k in May. 

Overall, hiring indicators have presented a mixed assessment of the health of the jobs market since then. We continue to see reports that hiring may be restrained by a lack of available workers, while manufacturing hiring is being held back by worries over the sector’s current gloomy outlook. Our best guess is that the pace of job gains will ease back somewhat in July, amidst a softer manufacturing hiring picture in particular, perhaps also as the lack of available workers in other sectors caps gains. 

Overall, we are pencilling in a rise of 180k. We note that the hiring drive for the 2020 census provides an added element of uncertainty to government hiring numbers, amidst a 33k net rise in net government jobs in June.

Economic Releases

09.30  UK   Construction PMI

10.00  EZ   Retail Sales

13.30  US   Nonfarm Payrolls

15.00  US   Michigan Consumer Sentiment