River in city

07 Feb 2019

Irish REITs: Korean fund to buy Charlemont Exchange

Today’s Irish Independent reports that South Korean fund Vestas Management is to buy the Charlemont Exchange office scheme for €150m. Separately, Amazon has confirmed that it is to take up all of the 200,000 sq ft under development at the nearby Charlemont Square.

If confirmed, the Charlemont Exchange transaction will be the first ‘mega deal’ (€100m+) of 2019. The 4.5% gross yield implied by the €150m price tag is a record for refurbished office stock in the capital. WeWork is the tenant at Charlemont Exchange; it has sub-let about a third of the 121,270 sq ft to Amazon. Amazon is also to let the nearby Charlemont Square, so this neighbourhood will shortly be home to about 2,500 employees of the internet giant.


This is the latest in a series of investments by Korean investors in the Dublin market, which underscores the city’s attractive fundamentals. The reported yield achieved by Charlemont Exchange has read-through for GRN in particular, as the latter’s nearby newly developed 5 Harcourt Road office building (also let to WeWork) is on its books at a gross yield at fair value of 5.2% - this appears to be too conservative.


Irish Economy: A good finish to 2018 for Dublin


The latest Dublin IHS Markit PMI, released today, shows a faster rise in Dublin business activity in Q418.


The headline PMI ticked up to 57.8 from Q3’s 57.3 outturn, with this improvement contrasting with the moderation in growth seen elsewhere in Ireland during Q4. All three segments of the private sector that are covered by the report (Services, Manufacturing and Construction) posted growth, with the expansion in Construction leading the way (in its case, at the fastest rate since Q217).


The downside of Dublin’s economic boom is increased capacity issues in the city. Unemployment (5.3%) was 40bps inside the national average in Q4, with (effective) full employment leading to growing reports of skills shortages; the rise in property prices (+9.3% y/y) and rents (+9.5% y/y) reflects the mismatch between housing supply and demand; and office vacancy rates in Dublin’s suburbs (6.7%) and city centre (4.3%) are both at 10 year lows. These capacity issues are likely to lead to move investment being pushed out to secondary cities and the regions.


Cairn Homes: Board changes


Cairn Homes this morning announced the appointment of three new independent non-executive Directors, Jayne McGivern, Linda Hickey and David O'Beirne, while Chief Commercial Officer Kevin Stanley is to leave the group.


These appointments come following a review of the structure, composition and capability of Cairn’s board, led by its Nomination Committee and assisted by consultants Korn Ferry. Jayne McGivern is currently global EVP of Development and Construction for Madison Square Garden plc and has had previous roles with Redrow plc and Multiplex plc. Linda Hickey is currently Head of Corporate Broking at Goodbody Stockbrokers, a role from which she will be retiring in April 2019, while she is also independent non-executive Director at Kingspan Group plc. David O’Beirne is a former Managing Partner of the law firm Eversheds Sutherland, Dublin, is currently a Partner in its Corporate & Commercial Department and brings to the Board almost 40 years’ experience of commercial and company law. Leaving the company is Kevin Stanley who has been with the group since before its IPO and was MD of its Student Accommodation business.


Brexit weighing heavy


The Bank of England’s Monetary Policy Committee (MPC) is set to convene for its first meeting of 2019 later today. Given the substantial Brexit uncertainty, our expectation is that policymakers will be firmly in wait-and-see mode. We look for unanimous votes to leave Bank rate at 0.75% as well as to maintain the targeted stock of gilts and corporate bonds at £435bn and £10bn respectively. The policy announcement itself and updated Inflation Report (IR) projections are due midday, with Governor Mark Carney’s press conference following at 12:30pm. Policymakers may well have the feeling of déjà vu, with the political stalemate yielding little progress by way of a Brexit ‘solution’ since the MPC last met in December. But while the current state of affairs is relatively unchanged, this masks a continually evolving situation in Westminster which poses sizable bimodal risks to the UK economic outlook. In the face of this Brexit ambiguity, we expect the MPC to judge that the best course of action at this juncture is to simply sit on the side-lines awaiting further clarity.


Hike in May


The most crucial determinant of the inflation forecast will be the Bank’s labour market assumptions. Since the MPC last met, the unemployment rate has edged back to 4.0% and both total and ex-bonus earnings growth have remained at post-2008 highs. With this in mind, our expectation is that the MPC will still continue to judge that further rate hikes are necessary. We have pencilled another 25bp hike in for May, but caution that this is highly dependent on the timing of Brexit as well as the eventual form in which it takes. Subsequently we look for two further hikes across successive six month periods until Bank rate reaches 1.50% in May 2020. But while the policy obstacle of Brexit should hopefully be resolved by next year, it could well be superseded by a global reversal in policy direction by central banks. For one, there is mounting speculation about when the Federal Reserve’s FOMC will embark on its next easing cycle now that it is signalling a pause in tightening. Our base case for two 25bp hikes in 2019 appears vulnerable as a result. If a rate cutting scenario materialises next year, as some expect it might, it will be interesting to see whether this has a knock-on effect on the MPC’s own normalisation plans.


A special place in hell…


UK PM Theresa May heads to Europe today to meet EU & EC presidents Donald Tusk and Jean Claude Juncker. She is hoping to renegotiate the Withdrawal agreement to deliver on her promise to parliament to revise or remove the backstop, however the prospects of any progress today is unlikely. May has suggested 3 possible changes, i) a time limit to the backstop, ii) an exit mechanism which can be unilaterally triggered by the UK or iii) an as yet undefined technological solution which allows for frictionless trade and no physical infrastructure. Her first two suggestions have been dismissed out of hand, and the third has so far been mocked due to the lack of details provided by the UK so far. To make matters worse, Donald Tusk set a negative tone ahead of May’s visit tweeting yesterday that there was a special place in hell for those who promoted Brexit without a plan, Jean Claude Juncker stated that they would not accept the idea that the Withdrawal agreement could be reopened.


May doesn’t seem to have much hope of progress either, as it seems that she will attempt to delay her own self-imposed deadline of 13/02 to return to parliament for a vote on a revised deal. Reports suggest that she will attempt to push the vote out to 25th February, but that could cause consternation amongst opposition, who were promised an opportunity to take further votes on the 14th (possibly forcing May to request an extension) if she fails to deliver a revised deal by the 13th.


Economic releases 


10.00   EC        EC publishes Winter forecasts

12.00   UK        BoE announcement & inflation report

12.30   UK        BoE press conference