Investors spend a staggering €535m on Irish nursing homes in H1 2021, planning delays adding to the ‘perfect storm’ in Irish housing and equities push higher despite more evidence of accelerating inflation. All these stories and more are covered in this week’s insights update from BlackBee.
The main talking point among investors last week again revolved around where central bank monetary policy was headed to. In the US a subtle shift appears underway with more and more Federal Reserve (Fed) voters articulating a view that its current stance of purchasing $120Bn of government bonds per month could be eased. Both Mary Daly (San Francisco Fed President) and Randy Quarles (Fed Board Executive) made comments to this effect last week. We think a change is unlikely to happen before summer – but were the US economy to remain on its current trajectory over the next few months it is possible some change could be hinted at during the Fed’s Jackson Hole Symposium (in late August) in advance of the Fed’s September meeting.
Meanwhile, inflation data continue to give the Fed reason to discuss tapering its bond purchases. Our chart of the week this week shows how inflation is broadening out into food prices based on the data from the Food and Agriculture Organisation’s Food Price Index. Outside the US changes in monetary policy around the world are less likely in our view. In the Euro area for example there was push back last week on the notion of easing off the stimulus throttle with ECB Board member Fabio Panetta commenting that “a premature withdrawal of policy support would risk suffocating the recovery before it becomes self-sustained”.
This week is an important one in terms of data with the key event being the May US employment report (766,000 jobs are forecast to have been created in the month) – the report will be even more closely watched on Friday especially given the April report was much weaker than expected.
Equity markets settled into a more positive trading pattern last week with most market registering solid gains. Investors seemed to take a ‘half glass full’ view of the comments from the Fed (above) on possible shifts in monetary policy. In addition, equities shrugged off further evidence of inflation in the form of the core personal consumer expenditure index (an inflation indicator closely watched by the Fed) which rose by 3.1% in April – the highest since 1992. On the plus side Q1 earnings continued to help sentiment with profits at retailers like Gap and American Eagle beating expectations. Equity market bulls were also buoyed by reports of President Biden’s $6 Trillion (no that’s not a misprint!) spending budget targeting areas like infrastructure, education and climate change.
On the whole yields in the sovereign bond space drifted slightly lower last week. Euro area government bonds tended to outperform with yields helped lower by the ECB comments noted above. US yields were largely unchanged in spite of the latest inflation updates – the lack of a reaction to the inflation data suggests to us that for the time being bond investors are willing to believe that these accelerating rates of inflation are indeed ‘transitory’. The main credit sectors (investment grade corporate bonds, higher yielding and emerging market bonds) were the outperformers last week, likely taking their cue from the more positive tone in equity markets.
Last week was a strong one for commodities with oil leading the charge. Oil prices rebounded from weaker levels the previous week thanks to stronger than expected demand on the week which pushed oil stocks lower. Some reports suggesting that it might take Iranian output longer to hit oil markets also added to bullish sentiment as did a Goldman Sachs report reiterating a price target of $80 for Q4 2021. Copper was another commodity that made strong gains, adding to the big advance so far this year as demand accelerates thanks to the reopening of the global economy.
Healthcare – H1 2021 sees largest nursing home investment spend on record!
Last week CBRE reported that a staggering total of €535 million had been invested in Irish nursing homes so far this year – the strongest half year period on record, even surpassing the €320 million total for the whole of 2020! These numbers again clearly highlight that the nursing home care sector remains a very attractive sector for investment thanks to Ireland’s favourable demographically led demand, the sector’s lack of bed supply and its stable pricing environment via the ‘fair deal’ scheme.
European investors are far and away the dominant acquirers in the sector – a trend that’s been very visible over the past two years. Still a fragmented market with c. 32% of nursing beds owned by the ten largest operators, opportunities for consolidation exist. The high proportion of European investment from entities such as healthcare REITs Aedifica and Cofinimmo (both Belgian) or nursing home operator Orpea (founded in France) show the institutional appetite for portfolios of nursing home assets in Ireland
Real Estate – Planning complications add to housing’s ‘perfect storm’
A report by Deloitte on Real Estate Planning & Development has outlined several interesting but somewhat unsurprising revelations on the construction industry from Q1 2021. Firstly, the number of residential units submitted for planning permission fell by almost a third in the first quarter of the year. However, further down the development timeline the drop off intensifies with granted schemes down 26% and commencement notices lodged down 44%.
The primary factor for the decrease has no doubt been the construction sector shut down. However, it is not the only issue that is affecting developers’ ability to supply housing. The report found that there has been a tenfold increase in the number of residential units in Strategic Housing Developments (SHDs) in Dublin quashed or held up by judicial reviews. These planning delays are compounding the problems caused by construction sector shutdowns and rising raw material costs, creating an almost perfect storm in the housing market in Ireland.