Weekly Market Insight

Weekly Market Insight - 6th April 2021

06th April 2021

A strong Q1 for commercial property points to strengthening office demand, Irish consumer confidence on the up and asking prices for homes climb in response to stronger demand and supply shortages. All of these stories are covered in this week’s insights update from BlackBee.

Economy

Last week’s economic news reaffirmed the view that the world economic recovery is underway. The closely watched US manufacturing Purchasing Managers Index (PMI) showed that US manufacturing expanded at it fastest pace since 1983 in March. The data indicates strong growth in demand and consumption, helped by a number of factors; a brightening economic outlook as COVID restrictions have eased and the vaccine rollout has accelerated together with further fiscal stimulus, the details of which were also announced last week. The stronger economic tone was also echoed in March’s employment report with US employers adding the most jobs in seven months. The Eurozone Manufacturing PMI for March was also revised higher with output and new orders increasing at record rates while the UK PMI hit its highest level in a decade. Further supporting the view that the global economic recovery is underway, Asian exports in March surged.

President Biden announced his $2.25tn infrastructure plan last week. The spending which is set to be funded by higher corporate tax rates includes $621bn earmarked for infrastructure upgrades. The investment in infrastructure will help raise the long-term productive capacity of the economy while also creating more short term demand and jobs. In another boost for the economy, Biden said that up to 90% of adults will be eligible for a vaccine by the 19th April as the US expand the pace of its vaccination programme.

Equities

Some nervousness was visible early last week as investors weighed up whether a wave of forced sales by hedge funds managed by Archegos Capital Management could drag the equity market down. While the financial sector was initially weaker, equities regained their poise as the week progressed and as a whole pushed higher. The technology sector, the darling of investors over the past year, was a big winner gaining nearly 3% on the week. Elsewhere interest rate sensitive sectors and the energy sector also got a boost on foot of steadier bond yields and the strong US economic news noted earlier.

Bonds

Last week saw long dated US government bonds close out their worst quarter in decades as the stronger tone change to the economy combined with fresh concerns around the potential for rising inflation led to a sharp sell off. A minor pick up in US claims for unemployment assistance last week brought some temporary respite for government bonds on Thursday. However this was short lived thanks to Friday’s US employment report which pushed US ten year bond yields above 1.72%, its highest level since January 2020. With the stronger tone to US economic data last week, the high yield bond sector was unsurprisingly the main winner – again showing how the sector tends to be strongly correlated with the equity market.

Commodities

Sector News:

Residential/Social Housing – Supply of homes to buy falls 40% in one year!

The housing crisis in Ireland has been a major issue for some time now. It is no secret that the pandemic has exacerbated the problem with the construction sector being forced to close during 2020 due to public health restrictions. The implementation of longer than expected level 5 restrictions again in early 2021 has also compounded the problem. These longer than expected restrictions this year prompted the ESRI to downgrade its forecast for housing completions to 15,000 for 2021 (down 25% from 2020 levels) in its latest Quarterly Economic Commentary. Two other reports last week echoed a similar view. Linesight, a global construction consultancy, released a report forecasting only 16,000 housing completions in Ireland in 2021. Elsewhere AIB’s Housing Market Bulletin also flagged a more difficult supply backdrop for this year, noting that the 12-month cumulative total for commencement notices in January 2021 was 23% lower compared to twelve months previously.

The result of increasing demand and shortages in housing supply was painfully evident in last week’s Daft.ie Irish house price report. The report showed that from Q1 2020 to Q1 2021, house prices climbed by 7.6% and as of March 1st there were fewer than 12,000 homes available to buy representing a 40% fall on the stock available for sale a year ago. The average listed price of a home was €256,000 in Q1 2020. This climbed to €276,000 by Q1 2021.

Commercial Property – Q1 investment spend suggests investors still see a future for the office.

To our mind the evidence that there is life for the office market post pandemic is building. The Irish Times reported last week that office demand sentiment has improved since December and that active office demand is currently tracking at approximately 3.3 million square feet, approaching the levels of demand witnessed in January 2020 and well above the levels of 2.7-2.9 million square feet seen throughout last year. The improving demand sentiment is due to a number of factors including the vaccine rollout, work from home fatigue and the growth in office-based employees most noticeably in the tech sector – CSO figures show that employment in the tech sector grew by 9.3% (11,800 jobs added) during 2020. In another example of the growing tech presence, it was reported by the Sunday Times over the weekend that TikTok, the Chinese social media company, has chosen The Sorting Office in Dublin as their new office location. The Sorting Office spans 200,000 square feet over 7 floors and has the capacity to accommodate up to 2,000 workers. TikTok’s decision to rent the building in its entirety further indicates there is increased confidence returning to the Dublin office market as we enter Q2 2021.

Property consultants CBRE also released Q1 figures which seemed to validate a stronger outlook for office demand. Despite being in lockdown for the first quarter of 2021, more than €1.2bn of commercial property transactions took place – more than the combined investment spend for the total 2009-12 period. The spend was also higher than the long-term average of €800mn and on par with the bumper Q1 2020. Residential accounted for 59% of spend in the quarter while office investments accounted for 32%. Kyle Rothwell, head of capital markets at CBRE said that “Despite some uncertainty about the ‘future of the office’, which is unlikely to dissipate until such time as the majority of office workers return to their buildings later this year, the office sector remains the preferred investment choice for institutional investors in Europe”.

Hospitality – Consumer sentiment is improving, a crucial factor for hospitality. 

A key factor in the strength of the recovery for the hospitality sector will be consumer sentiment. The brighter the outlook among consumers, the more likely they are to spend – spending which ultimately we believe will flow into the hospitality sector. Following on from KBC’s more positive comments about consumer sentiment a couple of weeks ago, we saw more evidence of consumers feeling more positive last week via Bank of Ireland’s Economic Pulse which rose to its highest level in 13 months in March, helped by the rollout of COVID-19 vaccines and the promise of a stronger economy in the second half of the year.

Internationally we also saw more evidence of stronger travel patterns out of the US. US airport checkpoints saw 1.36m passengers pass through on the 12th March, marking the highest daily number of passengers since March 2020. Figures from the US Transportation Security Administration show that the rebound in air travel has continued with daily passenger numbers climbing above the 1.5m mark on several occasions (see our chart of the week). In a SEC filing on Monday, American Airlines said that they expect to reactivate most of its aircraft fleet in the second quarter to meet anticipated levels of demand suggesting that the strong rebound in air travel is set to continue, good news in particular for Irish hotels that are more exposed to the international leisure segment.

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