Investec Ireland Economic Research
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Investec Ireland
Economic Research
Irish Commercial Real Estate:
Foundations in place for further growth
Fundamentals are supportive with Brexit a structural ‘kicker’
Regions set to benefit from Dublin’s low vacancy rates
Ireland has the distinction of having been the fastest growing economy in the EU28 in three of the past four
years. The latest national accounts show that the economy exited 2017 with a strong tailwind behind it (GDP
+3.2% q/q in Q417), with high frequency data confirming a good underlying performance in early 2018. A
pleasing aspect of this growth is its broad nature, with the multinational-oriented part of the economy and the
domestic-facing sectors both showing positive trends.
JLL Commercial Property Indices
950 930
880
850 830
780
750
730
680
650
630
550 580
530
450 480
Q411 Q312 Q213 Q114 Q414 Q315 Q216 Q117 Q417
Capital ERV (RHS)
Source: CSO Source: JLL
Data from the real estate agents showcase how the commercial property sector is benefiting from this favourable
backdrop. Total take-up in the Dublin office market (which accounts for c. 80% of the total stock across the
country’s urban centres) was a record 3.6m sq ft in 2017, a remarkable 20% above the previous peak of 3.0m sq
ft in 2007. Office rents are at an all-time high and the vacancy rate is flirting with its all-time low. With limited
availability of Grade A space in Dublin city centre, we see the capital’s suburbs and Ireland’s secondary cities –
Cork, Limerick and Galway – playing an important role in meeting the needs of occupiers in the coming years
(45% of gross jobs created by the multinationals here in 2017 were in locations outside of Dublin). The
government’s Project Ireland 2040 capital plan will see €116bn of investment in infrastructure projects to enhance
regional accessibility, among other priorities. The narrative is similarly positive in the industrial market, where
prime rents have climbed 52% over the past four years. As with offices, we see Brexit as providing a structural
‘kicker’ to demand, with the segment set to benefit as companies revisit supply chains. Rounding off the
commercial property space, the retail market is a key beneficiary of the positive transformation in both the labour
market and household finances. While sterling weakness has weighed on new car sales here, the other
segments of the retail market are performing resiliently.
JLL data show that capital values have risen by between 63% (industrial) and 104% (office) from the trough. With
strong demand (both in terms of take-up and investment), substantially reduced vacancy rates and disciplined
supply additions, we see scope for continued growth in rents and further yield compression.
1
Contact Details:
Philip O’Sullivan | philip.osullivan@investec.ie | +353 1 421 0496 Ronan Dunphy | ronan.dunphy@investec.ie | +353 1 421 0468
To view the full range of Investec Research & Insights go to www.investec.ie/researchA supportive economic backdrop
An examination of the latest economic data reveals a good start to 2018 for the Irish economy. The PMIs point to
a sharp rate of expansion, albeit not quite at the blistering pace seen at the end of last year. Tax receipts are
+3.5% y/y in Q118, with this growth rate expected to quicken as the year progresses. The unemployment rate
continues to reduce, standing at a nine-and-a-half year low of 6.1% in March, -20bps in the year to date.
Mechanically, were you to hold quarterly GDP flat on the Q417 outturn, this would imply that Ireland will grow by
5.5% in 2018 in GDP terms, keeping the country up towards the top of the EU growth charts (where it has been
in three of the past four years). These positive economic fundamentals bode well for the prospects for the
commercial property sector in Ireland.
As alluded to above, the labour market remains a key source of good news. Total employment rose 2.9% last
year and is now just 1% below the peak reached during the Celtic Tiger period. Excluding the construction sector,
employment is 4% above its pre-crisis peak. Total multinational employment stood at a record 210,443 at end-
2017, having grown 31% since end-2012. The employment component of the PMIs suggest that labour market
conditions should continue to tighten in 2018, which should apply further upward pressure on wages (these grew
by 2.5% y/y in Q417).
Positive labour market trends Core retail sales on the rise
2,300 18 140
2,200 16
130
2,100 14
120
Q105 = 100
2,000 12
'000
1,900 10 110
1,800 8
100
1,700 6
90
1,600 4
1,500 2 80
Q198 Q100 Q102 Q104 Q106 Q108 Q110 Q112 Q114 Q116 Q118 Q105 Q406 Q308 Q210 Q112 Q413 Q315 Q217
Total Employment Unemployment Rate (RHS) Volume Index Value Index
Source: CSO Source: CSO
This rising employment and wage growth, allied to muted overall inflationary pressures (the CPI was +0.2% y/y in
March) should deliver another good year for the retail sector in Ireland. Core (ex-auto) retail sales were +3.8% y/y
and +6.3% y/y in value and volume terms respectively in February. It should be noted, however, that headline
retail sales are still being dampened by sterling pressure on the motor trades, with new car sales -3.9% y/y in the
year to date while imports of second hand cars are +8.1% y/y in the same period. This follows the 10.5% y/y
decline in new car sales and 31.9% y/y jump in imports of second hand cars that was recorded in 2017.
The most pressing issue in the country remains a chronic lack of housing, notwithstanding ongoing improvements
in new build activity. Official completions were 19,271 units in 2017, +29% y/y, but this is still well adrift of even
the low end of the range of estimates for new household formation in Ireland (30,000 – 50,000 per annum). We
foresee 21,500 completions this year and 24,000 in 2019, but this level of new build remains too low, leaving the
path of least resistance for both prices and rents to the upside.
Turning to trade, January saw record monthly goods exports of €12.4bn, helping to produce a new all-time high in
the monthly trade surplus of €5.6bn. Elsewhere, the export component of the Services PMI has posted 16
successive months of expansion. Taken together, these point to another good year for exports in 2018, following
a very strong 2017 (the national accounts measure of exports rose 6.9% last year).
The public finances are an unsurprising beneficiary of the positive economic developments detailed above. We
see an annual General Government surplus in 2018, the first since 2007. General Government debt stood at
72.1% of GDP in Q317, well below the H113 peak of 124.2%. Helped by State asset sales, it could be sub-60%
by the end of this decade. The State is not the only player in the economy that has radically improved its balance
sheet. In cash terms Irish household debt (€142bn in Q317) is at its lowest level since Q405, while the ratio of
household debt to disposable income has fallen to 140.2%, well below the peak of 215.4% recorded in Q409.
2
Contact Details:
Philip O’Sullivan | philip.osullivan@investec.ie | +353 1 421 0496 Ronan Dunphy | ronan.dunphy@investec.ie | +353 1 421 0468
To view the full range of Investec Research & Insights go to www.investec.ie/researchWhile the sun appears to be shining on Ireland, there are a number of risks at this juncture. The UK’s Brexit
negotiations are a key focus for Ireland. While the country has reduced its exposure to the UK over the years (in
1926 it was the destination for a remarkable 96.7% of Irish goods exports, versus 13.4% in 2017), it remains a
very important trading partner. In this regard, the outcome to Phase I of the negotiations late last year brought
welcome reassurance, particularly in terms of trade on the Island of Ireland and between Ireland and Britain (and
beyond), although some of the detail remains to be worked out. Furthermore, the 21 month transition period after
March 2019 provides some welcome breathing space (and we suspect that it might be extended). The gradual
normalisation of monetary policy by the world’s leading Central Banks may have implications for Ireland. More
than 40% of Irish mortgages are trackers with an average 100bps fixed spread over the ECB base rate, but while
those borrowers are likely to see modest increases in interest costs over the coming years, other borrowers could
see the cost of their mortgages come down given where SVR and fixed rates are here relative to elsewhere in the
Eurozone. A greater concern for us is any adverse developments in the currency markets arising from the Central
Bank moves, given Ireland’s unusually high degree of openness to international trade. Political developments in
the US and the Eurozone also merit close monitoring in the coming months.
Record new job creation by MNCs Dublin Crane Count
20,000 90
17,500
80
15,000
70
12,500
10,000 60
7,500
50
5,000
40
2,500
0 30
2007 2009 2011 2013 2015 2017 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18
Source: IDA Ireland Source: The Irish Times
Economic backdrop underpins a positive outlook for Irish commercial real estate
The implications from all of the above for the commercial property sector in Ireland are favourable. Ireland is
highly leveraged to international developments, with exports and imports summing to a remarkable 208% of
nominal GDP. The strengthening external backdrop has been a feature in significant growth in the gross number
of jobs created by multinationals (MNCs) in Ireland (a record 19,851 in 2017, up 7% y/y and twice the level of a
decade ago) which, in turn, helped to deliver record office market take-up of 3.6m in 2017, 20% above the
previous peak and equivalent to c. 8% of the Dublin office stock.
It should, of course, be noted that while the capital punches above its weight in terms of attracting inward
investment, it is not the sole destination for MNC employment. IDA data show that of the 210,443 jobs across the
MNCs at end-2017, 122,125 (58%) were located outside of Dublin. Furthermore, over the past five years 51% of
gross job creation by MNCs was in locations other than the nation’s largest urban centre.
Dublin’s skyline has become rather crowded of late with cranes. There were 71 of these over the capital in April,
up from 34 in February 2016 when The Irish Times commenced its monthly census of the machines. Some
observers have queried if the growth in activity represents an unsustainable pace of development, but (as
explored later in this report) we are not sold on that argument, given that: (i) the vacancy rate is flirting with its all-
time low; (ii) this is the first wave of development that has a substantial brownfield element to it, so ‘net’ additions
are much less than what gross completions suggest; and (iii) many of the new offices that are being built are pre-
let as opposed to speculative projects.
While Brexit poses threats for many parts of the economy, it represents an opportunity for the commercial
property market. There has been a steady flow of investment wins for Ireland which have been either overtly or
implicitly linked to the UK’s decision to leave the EU. The most visible manifestation of this so far has been in the
office market, but over time we would expect to see significant recalibration of supply chains, which should
provide a structural lift to demand in the industrial segment. Finally, although the retail segment is the least
exposed to international trends, its prospects are bright, with this outlook firmly underpinned by the positive
developments in the labour market and household finances.
3
Contact Details:
Philip O’Sullivan | philip.osullivan@investec.ie | +353 1 421 0496 Ronan Dunphy | ronan.dunphy@investec.ie | +353 1 421 0468
To view the full range of Investec Research & Insights go to www.investec.ie/researchOffice
Take-up and prime rents are at a record high in the Dublin market, where the vacancy rate also flirts with its all-
time low. Elsewhere, the prognosis for regional markets is encouraging, in part due to the capacity constraints in
the country’s main economic hub.
Dublin office take-up ('000 sq ft) 2017 Dublin Take-Up by Source
4,000 Other
15%
3,500
Serviced
3,000 Workspace
5%
2,500
TMT
2,000 Public Sector 46%
10%
1,500
1,000
500 Professional
9%
0
Fin Serv
2007 2009 2011 2013 2015 2017
15%
Source: JLL Source: Savills
Last year’s Dublin office take-up of 3.6m sq ft was 20% higher than the previous peak of 3.0m sq ft in 2007 and
also well ahead of the average annual take-up over the past 10 years of 2.1m sq ft. The technology sector has
been a major source of demand (on average it has contributed 37% of annual take-up in the past five years), but
in recent times there has been a uptick in take-up from the State (a function of the ongoing strengthening of the
public finances), the financial services sector (helped by a return to growth in credit outstanding in the economy)
and serviced workspace providers (Savills report growth in take-up from this area of 169% to 188,400 sq ft in
2017,which is 5% of total Dublin take-up).
Dublin Office Vacancy Rate Prime Headline Rents €/sq ft
25% 65
20%
55
15%
45
10%
35
5%
0% 25
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Q411 Q412 Q413 Q414 Q415 Q416 Q417
Source: JLL Source: JLL
This strong take-up has helped to push the headline vacancy rate down to the current level of 7.8%, which
implies that there is 3.7m sq ft of available space, or roughly the same as the take-up figure for 2017. There are a
number of important points to consider here, however. Firstly, an element of this headline vacancy rate relates to
obsolete stock, so this figure overstates the ‘real’ vacancy rate. Secondly, high quality Grade A accommodation is
in very short supply – CBRE estimates that the vacancy level for this class of building is sub-3% in the Dublin 2
and 4 postcodes in the centre of the capital.
The development ‘tap’ was turned off after the onset of the recession. Some 17m sq ft of office space was built in
Dublin in the six years to the end of 2008. In the following six years just 1.9m sq ft was completed. Helped by the
strong take-up detailed above and the removal of antiquated stock (research from Savills show that 26 office
blocks totalling 1m sq ft have been demolished since 2014), the vacancy rate sharply retreated from peak and
prime rents climbed from the trough of €26-30 per sq ft in H212 to the current level of €55-65 (and even higher in
a small number of cases) per sq ft, where they have settled for the past two years. Rising rents transformed the
economics of new build and resulted in the return of cranes to the Dublin skyline – 71 in April, which is more than
double the 34 that loomed over the city in February 2016 when The Irish Times commenced its monthly census.
4
Contact Details:
Philip O’Sullivan | philip.osullivan@investec.ie | +353 1 421 0496 Ronan Dunphy | ronan.dunphy@investec.ie | +353 1 421 0468
To view the full range of Investec Research & Insights go to www.investec.ie/researchThis growth in activity has prompted speculation in some quarters about a potential bubble in the office market.
However, we see these fears as overblown and, if anything, we are more concerned about the low level of
available high grade stock in the capital.
Dublin Crane Count Dublin Office Construction (m sq ft)
90 4.0
3.5
80
3.0
70
2.5
60 2.0
1.5
50
1.0
40
0.5
30 0.0
Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Source: The Irish Times Source: JLL (historical), GRN (forecast)
As shown above, some 1.8m sq ft of office space was completed in Dublin in 2017, which is half the take-up last
year. Some 2.5m sq ft is due to be completed this year, with a further 1.7m in 2019. Beyond that, Green REIT
sees a minimum of 1.7m sq ft in 2020 (between schemes currently under construction and projects that it views
as “probable”), rising to a maximum of 3.8m sq ft if “possible” (’50-50’) / “unlikely” schemes proceed. Given the
strong take-up, we see the current market dynamics of low vacancy, high rents being sustained into the medium
term – indeed, the prospects for whether or not the large “possible” / “unlikely” stock pencilled in for 2020 actually
materialises are almost certainly tied to demand given the banks’ reticence to lend on speculative projects.
Cities' Office Stock (m sq ft) Share of Gross MNC Job Wins
60%
50%
40%
Cork, 6.2
30%
Dublin , 48.0 20%
Limerick, 4.1
10%
Galway, 3.3 0%
2011 2012 2013 2014 2015 2016 2017
Dublin Cork Galway Limerick Rest of Ireland
Source: Cushman & Wakefield Source: IDA Ireland
A winner from the tight supply in Dublin is likely to be the country’s secondary cities – Cork, Limerick and Galway.
Analysis by Cushman & Wakefield shows that these had vacancy rates ranging from 8.6% (Galway) – 19.7%
(Limerick) at end-2017, implying 1.7m sq ft of available space. With 24% of new jobs from IDA Ireland supported
companies (i.e. multinationals) going to those cities in 2017 (another 21% went to other regional locations) and
prime rents ranging from €30-33 psf, 45-50% below prime Dublin City Centre rents, we would expect those cities
to punch above their weight in the coming quarters in terms of investment wins. In the longer-term, the
government’s €116bn ‘Project Ireland 2040’ infrastructure plan should direct more growth to the regions.
The latest CBRE data show that prime Dublin CBD office yields were 4.00% in April 2018, with suburban Dublin
at 5.25% and provincial rents ranging from 5.75-7.00%. Prime Dublin yields offer a 308bps pick-up over the Irish
10 year yield, which compares to the long-term (25 year) average of 74bps. This differential is supportive of
investment activity, with €497m of office assets changing hands in Q118, as per the latest JLL data, while six of
the 10 largest deals in the period were in the office market. However, following several years of unusually strong
transactions activity (€12.4bn of transactions over the 2014-2016 period, versus a long-term average of €1.8bn
per annum) we see the profile of deals shifting towards more granular opportunities (as opposed to large loan
sales etc.) and a stronger regional presence (ex-Dublin sales made up 26% of Q118 volumes).
5
Contact Details:
Philip O’Sullivan | philip.osullivan@investec.ie | +353 1 421 0496 Ronan Dunphy | ronan.dunphy@investec.ie | +353 1 421 0468
To view the full range of Investec Research & Insights go to www.investec.ie/researchIndustrial
Total take-up across the Dublin industrial sector was a healthy 2.5m sq ft in 2017, which is slightly ahead of the
average annual take-up of 2.4m sq ft over the past decade. The latest CBRE data show a strong start to 2018,
with take-up of 771,000 sq ft in Q118, +41% y/y.
Industrial take up in m sq ft Industrial Rents per sq ft
5.0 € 10.00
€ 9.00
4.0
€ 8.00
€ 7.00
3.0
€ 6.00
2.0 € 5.00
€ 4.00
1.0
€ 3.00
Q213 Q214 Q215 Q216 Q217
0.0
2006 2008 2010 2012 2014 2016 Prime Secondary
Source: JLL Source: JLL
The above take-up chart would likely be stronger were it not for a structural undersupply of modern industrial
stock in the Dublin market. JLL data show that secondary stock has been the main subject of take-up in each of
the past 18 quarters (with an average share of 64% over that period), followed by prime (24%) and tertiary (12%).
This undersupply arose as a result of muted completions activity until relatively recently, which combined with
solid demand to place the upward pressure on rents shown in the above chart.
Helped by the improved rents, the JLL Property Indices show that capital values across the industrial sector have
improved by 63% from the Q213 trough. This has likely been a key factor behind a step-change in the mix of
sales and lettings, with the former accounting for 46% of take-up in 2017 versus 77% in 2014.
Sales v Lettings take-up (sq ft) JLL Industrial Capital Values
1,600,000 700
1,400,000
650
1,200,000
1,000,000 600
800,000 550
600,000
500
400,000
200,000 450
0 400
Q213 Q413 Q214 Q414 Q215 Q415 Q216 Q416 Q217 Q417
350
Sales Lettings Q411 Q412 Q413 Q414 Q415 Q416 Q417
Source: JLL Source: JLL
The slight fall in capital values that was recorded in Q417 was a function of the trebling in stamp duty in October’s
Budget. In that regard, we believe that this move is a blip and that ‘normal service will be resumed’ in 2018, with
capital growth supported by ongoing rent increases and, possibly, a further tightening in industrial yields.
Prime rents have steadily climbed from €5.75 per sq ft in Q214 to the current (Q118) level of €9.50 per sq ft.
Generally speaking, €10 per sq ft is the level at which new build starts to make sense (so rents are modestly
below replacement cost in Dublin, with a wider differential in the regions). To this end, it is no surprise that, of the
modest construction activity that has been observed in recent quarters, a number of those new units have been
design-and-build units pitched at a very high level of specification. For example, Green REIT has agreed to let a
new purpose-built unit at its Horizon Logistics Park in Dublin to a luxury goods retailer at a rent of €30.30 per sq ft
on completion (expected in Q318). Green is one of only three developers (the others being private developers
Rohan Holdings and Mountpark) that we are aware of who are delivering new industrial space at this time.
6
Contact Details:
Philip O’Sullivan | philip.osullivan@investec.ie | +353 1 421 0496 Ronan Dunphy | ronan.dunphy@investec.ie | +353 1 421 0468
To view the full range of Investec Research & Insights go to www.investec.ie/researchTurning to yields, the latest CBRE data show that prime Dublin industrial yields were flat at 5.50% in April 2018.
Other segments of the industrial market offer higher yields, with secondary Dublin on 8.00%, prime Cork at
7.75% and ‘provincial’ at 10.00%. At the time of writing the Irish benchmark 10 year yield stands at 92bps, so all
segments of the industrial market offer a very strong pick-up to the Sovereign both in absolute terms and relative
to historical – in the case of prime yields the current 458bps pick-up over the Irish 10 year Sovereign yield is
almost double the long term (since Q193) average of 245bps. While Sovereign yields in general are expected to
rise over the coming quarters, we would not expect this to pose a threat to valuations in the industrial space given
the unusually wide differential that currently exists.
Prime Industrial Yield The vacancy rate has sharply reduced
12.0 700 25%
600
10.0 500 20%
8.0 400
300
6.0 200 15%
%
100
4.0 0 10%
2.0 -100
-200
5%
0.0 -300
Q193 Q196 Q199 Q102 Q105 Q108 Q111 Q114 Q117
0%
Spread vs Irish 10 year (bps, RHS) Yield H113 H213 H114 H214 H115 H215 H116 H216 H117 H217
Source: CBRE, Bloomberg Source: Lisney data for Dublin, Investec estimates
In terms of the outlook, we would expect the supportive macroeconomic backdrop to underpin ongoing steady
demand for industrial accommodation across Ireland. This cyclical support is likely to be augmented by a
structural kicker from Brexit-related requirements – our view has been (and remains) that companies are likely to
revise their supply chains to reduce the risk of disruption from the tail risk of a ‘hard’ Brexit. Many of these
occupiers will need larger-sized Grade A facilities (Cushman & Wakefield estimates that there is active demand
for 20 large boxes of in excess of 2,000 sq m at this time), but the lack of available stock in this category (as
evidenced by the high share of take-up that is accounted for by secondary units) will pose a challenge for firms
and put further upward pressure on rents.
We see the pharmaceutical and medtech sector (which accounts for the majority of Irish merchandise exports);
outsourced distribution and fulfilment (particularly as a result of Brexit); data centres (Ireland’s climate provides it
with a competitive advantage here); food and beverage (the largest indigenous exporting sector); and technology
as the key sectors driving demand into the medium term.
However, until prime rents climb above the critical €10 per sq ft level, a meaningful supply response to this
demand is unlikely to materialise. A complicating factor here is the high street banks’ continued reticence to lend
against speculative projects (Central Bank data show that the stock of credit outstanding for investment and/or
development in commercial real estate has steadily reduced from a peak of €17.3bn in Q111 to €8.5bn at end-
2017), so there may be a lag after the €10 level is breached while developers secure pre-lettings before new
supply begins to come on stream. Lisney estimates that the vacancy rate in Dublin was 11.5% in Q417 (while the
7.9m sq ft of available stock in the capital equates to 3.3 years of typical take-up, we suspect that a meaningful
share of the vacant stock is obsolete) and 14.7% in Cork, but this is well below the vacancy rates of a number of
years ago (21% in Dublin in H113 as per Lisney and 19.7% in Cork in 2013 as per DTZ Sherry Fitzgerald).
With that being said, we would anticipate ongoing completions of very high spec (and higher-than-market rent)
facilities in response to the needs of cost insensitive occupiers.
We are also likely to see occupiers increasingly turn to regional locations in Ireland given Dublin’s capacity
constraints. We note that some local authorities in the capital have rezoned land from industrial to residential use
in response to the housing crisis, which complicates an already tricky planning process for would-be developers
of stock in and around the country’s main urban centre. Other regions are less constrained and also offer lower
costs (including much lower residential costs for employees) than the capital.
All in all, the scene is set for ongoing progress for the industrial segment over the coming years.
7
Contact Details:
Philip O’Sullivan | philip.osullivan@investec.ie | +353 1 421 0496 Ronan Dunphy | ronan.dunphy@investec.ie | +353 1 421 0468
To view the full range of Investec Research & Insights go to www.investec.ie/researchRetail
The employment components of all three Irish PMIs suggest that the total number of people at work in this
country will eclipse the previous (Q407) peak of 2.24m in the first half of this year (Q417: 2.23m). The
unemployment rate stands at a nine-and-a-half year low of 6.1%. Other CSO data show that average weekly
earnings have firmed to an all-time high, with consumers' purchasing power further bolstered by the modest
income tax reductions that have been a feature of each of the past four Budgets here. In a further boost to
consumers' finances, household net worth has risen 66% from the Q212 trough and is now 1% below the
previous (Q207) peak. Within that, the stock of household debt has fallen to a level last seen at the end of 2005.
Positive labour market trends Record average weekly earnings €
2,300 18 740
2,200 16 730
2,100 14 720
2,000 12 710
'000
1,900 10 700
1,800 8 690
1,700 6 680
1,600 4 670
660
1,500 2
Q198 Q100 Q102 Q104 Q106 Q108 Q110 Q112 Q114 Q116 Q118 650
640
Total Employment Unemployment Rate (RHS) Q108 Q210 Q312 Q414 Q117
Source: CSO Source: CSO
Concurrent to the above developments, we have observed a step-change in consumer confidence in Ireland,
which firmed to its highest level in 17 years in January. The annual rate of change in the CPI has been sub-1% in
every month since February 2013. The latest reading (for February 2018) showed growth of +0.5% y/y. Muted
overall inflationary pressures have underpinned solid growth in real earnings here.
Muted inflation aiding consumers Confidence at a 17 year high
8 150
6
130
4
110
2
% Y/Y
0 90
-2
70
-4
50
-6
-8 30
Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Jan-18 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Jan-18
Source: CSO Source: ESRI-KBC Consumer Sentiment Index
These positive moves have coincided with a marked improvement in retail sector indicators. Core (ex-auto) retail
sales volumes have risen 25% from the trough. In February they were +6.3% y/y. The recovery in value terms,
while still sharp, has lagged the volume uptick. This is due to two main factors. Firstly, an element of discounting
was still needed by retailers to stimulate sales after Ireland exited its deep recession, while more recently this
phenomenon has been replaced by what we believe to be imported deflation arising from the weak pound - both
direct (many UK retailers have operations here) and indirect (Irish-headquartered retailers have likely trimmed
prices to avoid leakage of sales to the neighbouring jurisdiction).
Helped by this discounting, most segments of the retail sector have shared in the recovery. The latest (February
2018) data show that nine of the 13 segments posted annual growth in volume terms, with the same proportion
posting annual growth in the value of sales.
8
Contact Details:
Philip O’Sullivan | philip.osullivan@investec.ie | +353 1 421 0496 Ronan Dunphy | ronan.dunphy@investec.ie | +353 1 421 0468
To view the full range of Investec Research & Insights go to www.investec.ie/researchCore retail sales on the rise JLL Retail ERV Index
140 890
130
840
120
Q105 = 100
110 790
100
740
90
690
80
Q105 Q406 Q308 Q210 Q112 Q413 Q315 Q217
640
Volume Index Value Index Q411 Q312 Q213 Q114 Q414 Q315 Q216 Q117 Q417
Source: CSO Source: JLL
One area that has been particularly negatively impacted by sterling is the motor trades, which likely reflects the
'big ticket' nature of purchases in this segment, which incentivises consumers to shop around. Having troughed at
54,432 in 2009, annual new car sales subsequently rose 61% to 141,931 in 2016, but since the UK's vote for
Brexit sales have fallen, -11% in 2017 to 127,045 and -3.9% yoy in the opening three months of 2018.
Imports of used (second hand) cars have gone the other way, standing at 47,217 in 2015 before almost doubling
to 92,508 last year. In the year to date imports of these vehicles are +8.1% y/y.
Apart from the motor trades and some margin pressure in certain segments of the retail sector, the narrative is
one of ongoing resilience, underpinned by rising employment and earnings.
These fundamentals have helped sector ERVs to climb 34% from the Q114 trough (as per the JLL Indices), with
capital values increasing by 78% from their low point. As with the industrial segment, some weakening in capital
values was observed in the final quarter of last year, but this is explained by the impact of the trebling of stamp
duty on commercial transactions. Helped by rising rents, we would expect capital values to return to growth in
2018.
Turning to yields, the prime end of the retail sector fell to as low as 2.5% during the so-called Celtic Tiger period
as loose credit fuelled a boom in consumer spending. Following the Tiger’s demise prime yields pushed out to a
peak of 8.5% in the Q110 – Q312 period but they have since compressed to the current level of 4.75% (as per
CBRE data).
JLL Retail Capital Values
1,400
Prime Retail Yield
9.0 600
1,300 8.0 500
7.0 400
1,200 300
6.0
200
1,100 5.0
100
%
4.0
1,000 0
3.0 -100
2.0 -200
900
1.0 -300
800 0.0 -400
Q193 Q196 Q199 Q102 Q105 Q108 Q111 Q114 Q117
700
Q411 Q412 Q413 Q414 Q415 Q416 Q417 Spread vs Irish 10 year (bps, RHS) Yield
Source: JLL Sources: CBRE, EIKON
But even after this tightening, as with the industrial segment we suspect that the path of least resistance for retail
yields remains to the downside, given that the current spread offered over the Irish benchmark 10 year bond
(383bps) stands well above the long-term (since the Millennium) average of 91bps.
9
Contact Details:
Philip O’Sullivan | philip.osullivan@investec.ie | +353 1 421 0496 Ronan Dunphy | ronan.dunphy@investec.ie | +353 1 421 0468
To view the full range of Investec Research & Insights go to www.investec.ie/researchDisclaimer Investec Bank plc (Irish Branch) (“Investec”) has issued and is responsible for production of this publication. Investec Bank plc (Irish Branch) is authorised by the Prudential Regulation Authority in the United Kingdom and is regulated by the Central Bank of Ireland for conduct of business rules. Investec Bank plc is a member of the London Stock Exchange and the Irish Stock Exchange. This publication should be regarded as being for information only and should not be considered as an offer or solicitation to sell, buy or subscribe to any financial instruments, securities or any derivative instrument, or any other rights pertaining thereto (together, “investments”). Investec does not express any opinion as to the present or future value or price of any investments referred to in this publication. This publication may not be reproduced without the consent of Investec. The information contained in this publication has been compiled from sources believed to be reliable, but, neither Investec, nor any of its directors, officers, or employees accepts liability for any loss arising from the use hereof or makes any representations as to its accuracy and completeness. The information contained in this publication is valid as at the date of this publication. This information is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the matters discussed herein. This publication does not constitute investment advice and has been prepared without regard to individual financial circumstances, objectives or particular needs of recipients. Readers should seek their own financial, tax, legal, regulatory and other advice regarding the appropriateness or otherwise of investing in any investments or pursuing any investment strategies. Investec operates exclusively on an execution only basis. An investment in any of the investments discussed in this publication may result in some or all of the money invested being lost. Past performance is not a reliable guide to future performance. To the extent that this publication is deemed to contain any forecasts as to the performance of any investments, the reader is warned that forecasts are not a reliable indicator of future performance. The value of any investments can fall as well as rise. Foreign currency denominated investments are subject to fluctuations in exchange rates that may have a positive or adverse effect on the value, price or income of such investments. Certain transactions, including those involving futures, options and other derivative instruments, can give rise to substantial risk and are not suitable for all investors. Investec (or its directors, officers or employees) may to the extent permitted by law, own or have a position in the investments (including derivative instruments or any other rights pertaining thereto) of any issuer or related company referred to herein, and may add to or dispose of any such position or may make a market or act as a principal in any transaction in such investments or financial transactions. Investec’s conflicts of interest policy is available at http://www.investec.ie/legal/uk/conflicts-of-interest.html Contact Details: Philip O’Sullivan | philip.osullivan@investec.ie | +353 1 421 0496 Ronan Dunphy | ronan.dunphy@investec.ie | +353 1 421 0468 To view the full range of Investec Research & Insights go to www.investec.ie/research
You can also read
