Inflation around the world accelerates again, UK hotel occupancy spikes in June as people come out to play again and Tralee social housing portfolio highlights the value of stable income producing real assets. All these stories and more are covered in this week’s insights update from BlackBee.
Another week, another rising inflation print! Last week’s economic data was again dominated by the narrative of rising inflation rates with consumer prices and factory prices around the world rising at their fastest pace in a number of years. US Headline May inflation came in at 5%, the highest since 2008 while Chinese producer prices topped that, rising by 9% – again a 13 year high. Ireland hasn’t been immune to this and our chart of the week shows Irish inflation turning sharply higher, hitting a two year high in May.
The continued acceleration in inflation rates again turned the focus on what the main central banks will do with monetary policy. We’ll hear from the US Fed this week although in our view a taper of its bond purchases is unlikely to happen before September. However, last week we heard from ECB President Christine Lagarde on the subject. In short her guidance was that the ECB would continue on its current monetary policy path, saying that it was “too early” to scale back its bond purchases.
On the domestic front the fallout of the potential corporation tax reform arising out last week’s G7 meeting was spelt out by Minister of Finance Paschal Donohue when he commented that Ireland could lose up to a fifth of its annual corporation tax take as a result of the change. We expect negotiations on possible tax changes to continue before the next stage of the talks at the G20 summit in Venice next month. At this juncture it is difficult to be definitive about the possible impact of corporation tax changes on future foreign direct investment into Ireland given a number of its other key advantages (a young population, well educated English speaking workforce and open access to the EU market) remain very much in place.
On the whole global equity markets enjoyed another positive week last week. They were helped very much on their way by a sharp fall in bond yields around the world thanks to a combination of the ECB’s comments (noted above) and bond investors’ growing belief that inflation’s resurgence could be a temporary phenomenon. The technology sector (amongst others whose fortunes have been tied to low interest rates) was one of the biggest winners as a result of the bond market moves, powering the S&P 500 Index of US stocks to a fresh all time high.
Based on last week’s action it seems that the bond market has made its mind up – this burst of inflation is temporary. We think it’s a little early to be completely sure of that call but it helped bonds of all types move higher last week with yields for government bonds, corporate bonds and emerging market bonds all moving lower. On the inflation debate bond investors seem to have taken a lot of solace from the fact that breakeven inflation rates (the inflation rate implied by the difference between nominal bond yields and inflation adjusted bond yields) seem to have levelled off over the past week or so. While this might be the case, the next monetary policy steps from the US Fed are key for the bond market. Any reduction to its bond buying program later on this year will make it difficult for government bonds to back up their recent gains.
Commodities moved higher again last week with broad gains seen across both energy and metals. In a fillip for those invested in both commodities and elsewhere, the International Energy Agency’s latest projections forecast that global oil demand will exceed pre pandemic levels by the end of 2022. If this transpires, it suggests that the world economy as a whole is likely to recover last year’s lost ground much faster than initially anticipated. From an energy market perspective, this is good news for oil investors but it also means global supply will have to ramp up over the next year to keep prices stable.
Tralee social housing portfolio approaching Dublin prime office yields!
n the face of it, social housing in Tralee and commercial offices in Dublin do not have too many initially obvious shared property characteristics. However, while tenant type and location differ, the yields on both might have more in common than first thought. We can see this in a 69-unit social housing portfolio offered to the market by Colliers last week at an net initial yield of 4.66%. According to the latest yields published by CBRE, this is close to current prime office yields in Dublin (4.25%) and tighter than those is secondary Dublin office markets (5.25%). The strong net yield on offer for the housing portfolio equates to a price tag of €10.75 million and is crucially supported by 20-year leases that were signed between July 2018 and September 2019. The figures support our view that real assets financed by very stable (in this case government backed) income streams represent some of the most appealing investments today.
Hospitality – Some hopeful signs for Ireland in June UK hotel data
Last week global hospitality specialist STR provided its latest update on the hotel sector which contained a glimpse of how trading could improve for Ireland’s hotels over the next few months based on their UK counterparts.
Pent up demand was clearly visible in the fact that occupancy for open UK hotels spiked to 65% at the start of June (from 30-40% in May) as restrictions were rolled back and leisure activity kicked back in while average room rates also showed significant improvement. Incredibly, Belfast hotel occupancy hit a whopping 93% helped by fewer restrictions around weddings and other gatherings. At this early stage of the recovery it is also clear that regional hotels are outperforming city ones with the lack of international travel hurting that latter’s performance.
Central bank illustrates the changing face of Irish Commercial Real Estate Market
The issue of international investment in Ireland’s real estate market has been a hot topic in recent weeks. Research published by the Central Bank last week however showed just how important this international investment has become to the smooth functioning of the commercial real estate (CRE) market. The research showed that a large share of CRE investment in Ireland now comes from international investors via investment funds while Irish investment funds also account for over 40% of the invested CRE market in Ireland. This is in sharp contrast to the position pre 2008 where the pillar banks were the main source of finance into the CRE market. Unfortunately, with the onset of the global financial crisis, this outsized reliance on the pillar banks for finance became an added source of stress on the CRE market when recession hit during the period. In our view it is beneficial to have a more diversified source of finance into the CRE market now although as noted by the Central Bank in its report, it is important to monitor the ongoing health of the CRE market from a wider financial stability perspective.