09 Jul 2019

Irish REITs: CBRE comments on the office and industrial markets

CBRE released its Q219 Dublin Office and Industrial & Logistics MarketView reports after the market close yesterday. 

To start with, the Industrial & Logistics space, the research shows a “solid” H1 for the sector, with take-up of 173k sq m up nearly 60% year-on-year. There were 70 transactions in total. While rents were steady in Q2 (at €106 per sq m), the agents expect to see growth of as much as 6.5% during the second half of the year, helped by the combination of healthy demand and constrained supply (the average vacancy rate across the 25 most modern industrial parks in Dublin was just 8.37% at end-Q2). Prime yields were steady at 5.1% at end-Q219. 


Turning to the Office market, the report reveals a steady Q219 performance, with take-up of 45k sq m bringing the H1 total to 152,201 sq m. Some 99 transactions were inked during H1, little changed on H118’s 105. Interestingly, the public sector accounted for an outsized 41% of take-up during Q2. Significantly, there was just under 400,000 sq m of demand at end-Q2, which on our maths exceeds the vacant stock in the city (the vacancy rate was just 5.65% at end-Q2). Prime headline rents and yields were stable at €65 psf and 4.0% respectively at end-Q2. CBRE sees the potential for yields to harden further, particularly given the recent shift in Sovereign bonds. 


On the latter, we note news of the disposal of a 31 acre Docklands site by Origin Enterprises in Cork, which should over time lead to a large mixed-use (office and residential led) scheme in the country’s second largest urban centre.

Irish Economy: Car sales slow in H119

Vehicles licensed for the first time data from the CSO, released yesterday, show that while new car sales had a reasonable end to the period (+3.8% y/y in June), they were still -6.5% y/y for H119 as a whole. Sales of new goods vehicles were -8.1% y/y in H119.


While imports of used (second hand) vehicles rose in H119 (cars +2.8% y/y, goods vehicles +0.1% y/y), this was not enough to offset the drop in the new vehicle market. There had been a lot of substitution (due to the weak sterling) of new for second hand vehicles sales post the Brexit vote – for example, in 2015 (the year before the UK’s referendum) there were 121,110 new car sales and 47,217 used (but new to Ireland) car sales, while in 2017 (the first full year after the vote) new car sales were 127,045 to used sales of 92,508 (last year it was 121,157 new to 99,456 used). We wonder if concerns about the external environment have prompted consumers to be more cautious when it comes to ‘big ticket’ purchases. 


Of course, another factor at play here is the shift away from traditional fuel types. Sales of new diesel cars were -20% y/y in H119, while sales of new electric and hybrid cars were +69% y/y in the same period. As mentioned above, consumer caution about the likes of Brexit and the trade spats may be weighing on sales of big-ticket items. In this regard, we note that core (ex-auto) retail sales were +5.8% y/y in volume terms (with the value of those sales +4.2% y/y) in Q119. 

Irish Economy: NTMA confirms bond auction details

Ireland’s NTMA yesterday confirmed the details of the first of its two scheduled Q319 bond auctions. 


Subject to market conditions, it will tap the 1.1% Treasury Bond 2029 (which closed at a yield of 0.12% yesterday) and 1.3% Treasury Bond 2033 (yesterday’s closing yield was 0.47%), raising a total of €1bn in the process. 


Assuming a satisfactory conclusion to this auction, it will bring funds raised on the bond markets so far this year to €11.25bn, which compares to the full year funding target of €14-18bn. The blended rate at which this €1bn will be raised at compares favourably with the 2.3% average interest rate on the existing stock of debt. With the State running a surplus, these funds will be used to retire the very expensive legacy debt, which is clustered around the shorter end of the curve. 

Ocado - Weaker than expected H119A

Ocado this morning issued slightly weaker than expected H119A results reporting a FD EPS of –19.77p impacted by a £99.0m exceptional charge related to the net cost associated with the write-down of Andover CFC and associated assets. At the Group level, the company reported a 53.5% drop in EBITDA to £18.1m, despite a 10.3% increase in revenue to £882.3m. At a divisional level, the company reported a 4.6% decrease in retail EBITDA to £43.4m, despite a 10.2% increase in revenue to £811.5m. The Solutions division was loss making, reporting a £16.2m loss in the six-month period, having generated £70.8m in revenue. 


Looking forward, incorporating a £15m impact on Group EBITDA from the Andover fire and £10m from share schemes, management considers that EBITDA performance for FY19 “is in line with market expectations”. The company is guiding “”further growth” in Retail underlying EBITDA on the back of Retail revenue growth of 10-15%. Solutions revenue growth will be slower given the loss of Morrison’s fees plus £10-15m in additional operating costs as previously guided. 


While we consider that these numbers are behind expectations, the Ocado story is one of longer-term growth expectations in the Solutions business as the global CFC development programme rolls out rather than short-term performance in the UK-based Retail business as it rolls into a JV with M&S. As such, any anticipated share price movement will possibly be tempered by future expectations.

Origin Enterprises - Cork docklands site sold for €47.5m

Origin Enterprises this morning announced that it has disposed of its 31-acre site at South Docklands Cork to O’Callaghan Properties for a cash consideration of €47.5m. The transaction is subject to the satisfaction of a number of conditions, including the granting of various permissions and approvals and the relocation of the Group’s existing operating business in the site to an alternative location in Cork at an economically viable cost. Origin is guiding that the estimated gain on disposal will be c. €3.5m. This is not an unexpected development given the size of the site and its location in Cork Docklands, where a lot of redevelopment work is already in progress. 

Trade Unions back a second referendum

The Labour party took a significant step towards firming their anti-Brexit stance yesterday. UK trade unions who provide significant funding, and help to guide policy in the Labour party, agreed that the party should back a second referendum. 


Labour leader Jeremy Corbyn, has been repeatedly criticised for his soft stance on Brexit, first for running a lacklustre campaign for Remain, then for failing to provide strong opposition against May’s deal and most recently for failing to fully commit to a second referendum. The party had a disastrous run in the EU elections, which saw Labour lose ground to Lib Dem’s and Greens, two parties which had firm policies to oppose Brexit and back a second referendum. If trade unions succeed in shifting Corbyn’s opinion, whoever wins the Tory leadership race will face significant pressure for a second referendum from parliament. 

BRC retail sales monitor suggests Brexit drag

British Retail Consortium’s June retail sales were down 1.6% year-on-year on a like-for-like basis (-1.3% y/y total sales). This represented a slight improvement on the -3.0% in May figure which was the worst decline on record. The difficult conditions facing the retail sector over a longer period were also evident in today's report, with the 12-month average of -0.1% representing the worst 12-month average since April 2012. In terms of June, the weak reading was a result of a number of factors, which boosted the reading in the same month last year, including the football World Cup. The BRC also noted that ongoing Brexit uncertainties led consumers to put off non-essential purchases, which also looks to be a continuing theme.


Brent waiting for a breakout

Last week, OPEC extended their cuts for 9 months instead of 6, however, oil fell shortly after the announcement. The latest meeting is reminiscent of the last OPEC meeting where a surprise cut was followed by a sell-off. Similar to the last meeting, there was a delay in the press conference, which set a negative tone and could have been suggestive of indecisiveness. Combining this decision with the IEA’s latest call on OPEC's production, 29.6m b/d in Q419 and 28.1m b/d in Q120, suggests that OPEC plans to oversupply the market into the next year - bearish not bullish. 


The market also experienced increased geopolitical risk as an Iranian vessel was impounded by the UK on Thursday. The tanker was allegedly bound for Syria in breach of EU sanctions. Iran responded by saying they should impound a British tanker as reprisal, adding tension at a time where Iran has already breeched the terms of their current nuclear deal.


For oil’s near term future, summer demand will likely be key and US inventory numbers will inevitably be the barometer of this. The API figure will be released today and official DOE numbers tomorrow. Last week’s low of 62 $/b is the next downside target for Brent, while pre-OPEC meeting highs just under 67 $/b is the upside target.

Economic Releases

13.45  US      Fed Chair Powell speaking

16.15  EC      Philip Lane Q&A on Twitter