04 Jan 2019
Glenveagh: Unit sales above expectations in FY18
The average selling price (ASP) was €287k, a little lower than expected given the sales mix being weighted towards its lower priced product.
Glenveagh Properties issued a trading update this morning for the year ended 31 December in which it reported unit sales of 275 for FY18, ahead of company guidance of 250 and our forecast of 259, reflecting strong demand for its first-time buyer product at the affordable end of the market.
The average selling price (ASP) was €287k, a little lower than expected given the sales mix being weighted towards its lower priced product. Revenues totalled approximately €84m, which is €4m above our forecast, but includes land sales of €5m. Gross margin was 18%, but we understand underlying gross margin (excluding the land sales) was close to our forecast of 16.9%. Looking forward, Glenveagh has signed or reserved 202 units for FY19 which, together with the likely sale of 90 units at Herbert Hill to an institutional buyer, underpins its unchanged guidance of 725 unit sales this year. All required sites are open to meet this target. The company has reassured on the cost front – 75% of its FY19 build costs are now fixed and the group has not altered its guidance for build cost inflation of 4% p.a. It also announced the acquisition of a 500-unit site in Douglas, a suburb of Cork city, for €25m.
Irish Banks: Mortgage approvals on track for €10bn in 2018
Data released this morning from the Banking & Payments Federation of Ireland (BPFI) show that Irish mortgage approvals totalled €896m in November, a 3.3% increase on the same month in 2017 and bringing cumulative approvals for the first 11 months of the year to €9.47bn. This represents an +8.9% increase on the same period in 2017, with the 12 month cumulative total now at €10.07bn, leaving us on track for around €10.1bn in total approvals in 2018, the highest annual total since the current series began in 2011.BPFI mortgage approvals have proven to be a very reliable estimate of the pipeline of future demand for residential mortgages, with a strong correlation between approvals and 12 month forward drawdown activity. As such, the latest data support our recently updated (late November) forecast for €10.05bn in drawdowns in 2019.
The average value of approved mortgages was €218,459, flat vs October 2018 and -1% vs November 2017. However, it is noteworthy that the value of approved mortgages for FTBs continues to rise y/y (+3.5%), while the average value of approved mortgages for mover-purchasers continues to fall (-2% y/y, but likely to fall materially further in December due to base effects).
The trend in mover-purchaser mortgages supports our view of a moderation in the higher end of the property market (and Dublin in particular), and our expectation (included within our December banking sector note) of a slight step down in growth within the mortgage market in the next couple of years when compared with our prior forecasts.
Irish Economy: Services PMI cools in December
The latest IHS Markit Services PMI for Ireland shows a moderation in the rate of growth in activity in December. The headline PMI came in at 56.3, a 13 month low, from November’s 57.1 outturn. The sequence of growth in the sector does, however, now extend to 77 months.
In contrast to the Manufacturing sector, where Wednesday’s PMI release revealed the weakest growth in New Orders in eight months, today’s Services PMI release shows that client demand ticked up into the year end. This was especially true in the case of the TMT sector. New Export Orders also rose at a faster pace, with the UK mentioned in dispatches as an area of strength.
Unhelpfully, input cost inflation quickened to the fastest in four months, driven by rises in fuel, utility and insurance bills and higher staff costs, while the rate of charge inflation softened last month. The unhelpful read-through from this for margins didn’t deter companies across the sector (the survey covers TMT, Business Services, Financial Services and Transport & Leisure firms) from adding to staffing levels at a sharp rate, however. Increased labour resource, in turn, led to a cooling in the rate of backlog accumulation to a 27 month low.
Services firms remain optimistic on the outlook for 2019, with 42% of panellists expecting to see a rise in output this year.
The Composite PMI (the weighted average of the Services and Manufacturing PMIs) for Ireland slipped to 55.5 in December, a nine month low, from November’s 56.6 outturn. Nonetheless it is still consistent with a good pace of growth, albeit one that is somewhat slower than what we saw for most of 2018. Our headline GDP assumptions for Ireland are 7.2% for last year and 4.5% in 2019, so the direction of travel implied by the Composite PMI is in-line with our expectations.
Irish Economy: An Exchequer surplus in 2018
The final Exchequer Returns of 2018, published last night, show that Ireland ran an Exchequer Surplus of €105m last year. On a general government basis, while it will be April before final figures will be published by the CSO, the Department of Finance (DoF) suspects that this will show a surplus equivalent to 0.1% of GDP, versus a Budget Day (October) forecast of a deficit of the same magnitude of GDP.
Tax receipts surged 8.3% last year to an all-time high of €55.6bn, 2.6% ahead of guidance. Half of the €4.3bn annual uplift in revenues is attributable to Corporation Tax receipts (+27% y/y and 22% ahead of profile, or target). Some of that growth is due to the adoption of new accounting standards, but FDI wins (see IDA comment elsewhere) are clearly a major factor behind this increase. Income tax receipts rose 6.2% y/y, broadly mirroring combined growth in employment and earnings. The VAT take of €14.2bn was +7% y/y, reflecting a strong consumer backdrop, while the 8.6% y/y decline in Excise Duties is influenced by timing issues (relating to plain packaging legislation for cigarettes) and sterling (new car sales fell by around 5% last year). Capital taxes (Stamps, CGT and CAT) were all up by between 14% and 21% last year, reflecting growth in both transactions and asset values and the previous utilisation of tax losses generated post-crash.
On the expenditure side, total net voted (discretionary) spend jumped 8.7% y/y in 2018 and was 1.6% higher than target, due mainly to a €634m overshoot in day-to-day healthcare spending. Capital expenditure was raised by nearly 40% on 2017 levels, with most of this increase targeted at housing. Happily, national debt interest costs were €312m or 5% lower than expected, due to favourable funding conditions and secondary market actions by the NTMA.
These are very good numbers from the DoF, although they had been hinted at in November’s Exchequer data. The return to surpluses is a welcome sight given the more uncertain external backdrop, which may put pressure on some of the tax headings this year.
Irish Economy: Updates from IDA Ireland and NAMA
Yesterday saw both IDA Ireland, the State agency tasked with attracting foreign direct investment (FDI) to this country, and NAMA, the entity tasked with resolving the domestic banks’ property loans in the wake of the crash, release 2018 year-end updates.
IDA Ireland’s update shows that multinational employment has climbed to a record 229,057 jobs, +9% y/y. One in every ten people with a job in Ireland are directly employed by a multinational enterprise, while average full-time salaries at IDA Ireland’s clients is an impressive €66,000 versus the national average of €46,402. The results also show that a record 58% of IDA employment is now outside of Dublin, with all regions seeing growth in employment last year (led by the 14% increase in headcounts in the Midlands), making a mockery of claims in some quarters that the agency is excessively focused on the capital. On Brexit, the IDA said that over 55 of the investments secured in 2018 were related to Brexit relocations, involving more than 4,500 jobs.
NAMA generated an impressive €3.3bn in cash last year, bringing cumulative operating cashflows since inception to €44bn. With the loan book having reduced to an estimated €2.3bn at end-2018 versus the initial €31.8bn portfolio, it is mainly preoccupied with its residential delivery programmes; the Dublin Docklands SDZ (where 2.7m sq ft of commercial space will be delivered); clearing the residual €1.1bn of subordinated debt (by end-Q120 at the latest); and winding down its remaining assets. Management are sticking to their previous guidance of a €3.5bn surplus, an assessment which looks excessively cautious given that retained earnings stood at €3.7bn at end-June 2018 while the asset base has been significantly de-risked in recent years.
The IDA figures are very strong and suggest that the risk to our estimated economy-wide employment growth of 3% in 2018 is skewed to the upside.
US employment data due at 1.30pm:
After yesterday’s surprisingly disappointing US ISM manufacturing print (54.1 v 57.9 consensus), all eyes are now firmly on the US employment data, due at 1.30 this afternoon. The November jobs report showed non-farm payrolls rising by 155k, down from October’s 237k rise. Here the softer reading likely reflected several factors. Firstly, some of the strength in the October reading likely reflected a rebound from Hurricane Florence which saw September’s non-farm payroll gain stand at just 119k (Hurricane Michael did not have the same initial hit to payrolls in October). Second, leisure and hospitality job gains were weak, probably in part reflecting the impact of the wildfires in California. Similar to market consensus, we are pencilling in a 180k rise overall, up from last month’s 155k.The main (U-3) unemployment rate held steady at 3.7% for the third consecutive month in November. We suspect that it will remain at the level for a fourth month. However we continue to flag the importance of the ‘U6’ measure of labour market slack, which gives a broader guide to spare capacity in the jobs market. This measure actually rose to 7.6% from 7.4% (the highest rate since June), perhaps in part explaining why pay growth has not been more rampant over recent months. Indeed, average hourly earnings rose by 0.2% on the month in November, but the year-on-year rate was steady as expected at 3.1%.
Powell to speak at 3.15pm:
As global equity markets continue to reel and with the US government still in partial shutdown, it probably went unnoticed that the US two-year Treasury yield dropped below 2.4% on Thursday afternoon, standing below the effective federal funds rate for the first time since 2008. I’m sure Fed chair, Jerome Powell will be mindful of this as he takes the podium later this afternoon at the American Economics Association event in Atlanta, Georgia. Given the recent market turmoil and the even more recent shift in sentiment surrounding the Feds rate path, Mr. Powell’s comments will be most keenly watched.
UK services PMI (December)
Figures released by IHS Markit this morning showed that the services PMI had climbed from 50.4 to 51.2 in December. While this marked an overshoot of consensus expectations for a more moderate rise to 50.7 (Investec 50.4), it was not enough to make up for November’s decline with the index still standing a full point below October’s 52.2 outturn. Year-ahead expectations among service sector firms also softened for the third consecutive month, with the optimism component now standing at its second-weakest level since March 2009. While the combination of today’s improvement and Wednesday’s manufacturing PMI (+0.6pt to 54.2) pushed up the composite PMI from 50.8 to 51.4,IHS Markit reports that the PMIs for Q4 as a whole are indicative of GDP growth of just +0.1% (qoq) in Q4 following the +0.6% recorded in Q3.
Additionally Bank of England lending figures were released for the month of November. These showed that the number of mortgages approved for house purchase softened from October’s 66.7k to a seven-month low of 63.7k (consensus 66.0k), while net mortgage lending fell by £0.6bn to £3.5bn (consensus £4.0bn). There has been little discernible market reaction on the back of this morning’s figures, with cable broadly steady at $1.2673 following the release.
Today’s economic calendar
13.30 US employment data
15.15 Powell speech