Irish REITs: CBRE comments on the commercial property market

11 Apr 2019

CBRE has released its latest quarterly reports on the Dublin office and industrial / logistics markets. In the office market, the CBRE analysis shows a very good start to 2019, with record Q1 take-up of 107,200 sq m (1.2m sq ft) which was 28% above year-earlier levels. 

 
There were 49 office transactions inked during the quarter, with three of these involving premises of 100,000 sq ft or more in size. Of the 49, 32 involved Irish companies, 10 UK firms and four US firms. TMT companies continue to be the main driver of demand, accounting for 61% of take-up. Financial companies accounted for 20% of demand, followed by Business Services and the public sector (5% apiece).  
 

This strong demand saw the headline vacancy rate tumble 70bps in the quarter to just 5.39%. Within that, the Grade A vacancy rate in the key CBD postcodes of Dublin 2 and Dublin 4 was just 3.9%. Prime rents and yields were stable at €65psf and 4.00% respectively, with the former reflecting a market where capacity additions are disciplined. Indeed, of the 30 schemes under construction in Dublin at the end of Q119, which will collectively deliver 370,000 sq m (4m sq ft) of space, 47% has already been pre-let or reserved. CBRE does, however, see some scope for prime office yield compression given where Dublin stands relative to other large European cities.

Turning to the industrial and logistics sector, CBRE estimates that take-up was 95,623 sq m (1.0m sq ft) in Q119, which is around 25% above average quarterly take-up since Ireland exited the EU-IMF programme in late 2013. Prime rents and yields were steady at €9.85 psf and 5.1% respectively in Q1, although CBRE sees scope for prime rents to climb by up to 6.5% over the coming 12 months due to good demand, while yields are also expected to trend stronger. The vacancy rate at the 25 most modern industrial and logistics parks in the capital was little changed at 8.28% at the end of Q1, with six of these parks having no vacancy.
 
There is a familiar feel to these reports from CBRE, which showcase the strong fundamentals of the Dublin office and logistics market. The read-through from this to the Dublin-focused GRN and HBRN is very positive, while the tight supply is also likely to divert some investment to the regions, which offers potential benefits to YEW.
 

ICG: Announces sale of Oscar Wilde

ICG has announced that it has entered into a bareboat hire purchase agreement for the sale of its Oscar Wilde vessel to MSC Mediterranean Shipping Company SA for a total gross consideration of €28.9m, payable in instalments over 6 years to 2025. The purchaser will be obligated to complete the sale in 2025 (rather than having an option for purchase).  The book value of the vessel was €7.7m so ICG will book a healthy profit on disposal in FY19 (the final profit will depend on the cost of any pre-delivery work required) as well as boosting its cash resources.
 

This move by the group is not unexpected given that the Oscar Wilde, which had operated on the Ireland-France route, was essentially surplus to requirements since the arrival of the WB Yeats and the group had indicated that it was examining its options with regards to the Oscar Wilde. Nevertheless, it looks to have secured an attractive price for an asset that was built in 1987.
 

Flextension

Last night saw the EU offer PM Theresa May a longer extension than she initially requested. After lengthy discussions that went on into the early hours, the EU finally offered the UK a new Article 50 extension that moves the Brexit date to 31 October 2019. The EU itself was split on the length of the extension, with France pushing for a harder line and a shorter extension.
 
In terms of the path from here, PM May will return to the UK today and attempt to sell the longer extension to her Cabinet. Notably it is likely to face some opposition given that the October exit date now means that the UK will have to take part in European Parliamentary elections unless there is a miraculous turn in events and the UK is able to pass PM May’s Withdrawal Agreement - in such an event the UK would be permitted to leave earlier than 31 October. Talks between the government and the Labour party are also set to continue today but whilst the government has described them as being constructive, Labour continues to accuse the government of being unwilling to move on red lines such as a permanent customs union.
 

No ECB policy change

Yesterday the ECB kept policy unchanged, as was expected. Therefore the key policy rates were held at -0.40% (deposit rate), 0.00% (refi rate) and +0.25% (marginal lending rate). The ECB also reconfirmed its updated guidance that interest rates were expected to remain at their present levels ‘at least through the end of 2019’. The ECB acknowledged that data since the last meeting (6-7 March) had confirmed the continuation of the slowing in economic activity that had begun in 2018.
 

The President did note that there were tentative signs that some of the idiosyncratic factors exerting downward pressure on the Euro area economy were beginning to fade. However it was also noted that a slowdown in the global environment also represented a headwind. The ECB still judged risks to the growth outlook to be tilted to the downside. 

Negative interest rate concerns

More significantly President Draghi officially acknowledged that the ECB would consider the mitigation of the possible side effects of negative interest rates, via as markets have named it, a ‘tiered deposit rate’. We have long argued against a negative deposit rate, considering it to represent an effective ‘tax’ on banks given the almost €2trn of excess liquidity in the euro system largely as a result of QE.
 

Given the prolonged period of negative interest rates (the deposit rate first entered negative territory in June 2014), there now appear to be some concerns at the ECB that negative rates could actually be detrimental given the impact on bank profitability. Mr Draghi was at pains to make it clear that there had been no discussions on any type of instruments and that work was only just beginning on the assessment of the side effects of negative rates. Nonetheless given Mr Draghi’s references to June’s meeting, more may be known in the coming months. One final point, is that should the economic outlook deteriorate further a tiered deposit rate could arguably make it easier to cut the deposit rate again. This may therefore attract opposition from ECB hawks. 

FOMC minutes (Mar)

Minutes of the March meeting of the Federal Open Market Committee (FOMC) were released overnight. These showed that the FOMC judged there to be “significant uncertainties” surrounding the economic outlook, leading “several” participants to judge that rates could “shift in either direction”. Against this backdrop, the FOMC signalled that it would be “patient” in assessing whether signs of weak growth in Q1 would persist in subsequent quarters. But though some participants indicated that it might be “appropriate” to modestly raise rates later this year, the majority thought that the outlook would likely warrant leaving rates unchanged. Overall the minutes suggest the FOMC wants to keep its options open, albeit with a hiking bias maintained amid a lack of discussion over the possibility of cutting rates. We therefore see little reason at this stage to change our forecast for one hike in the Fed funds target range to 2.50-2.75% this year (in Q3).
 

Economic releases 

13.30 US PPI

14.30 US FOMC Member Clarida Speaks

14.35 US FOMC Member Williams Speaks

14.40 US FOMC Member Bullard Speaks