Deutsche Bank begins coverage of Green Reit with ‘buy’ rating

Dublin's office market can offer double-digit growth to shareholders in real estate investment trusts despite record low vacancy rates, Deutsche Bank has said.

The German bank initiated analyst coverage of Irish companies Green Reit and Hibernia Reit, giving Green Reit a ‘buy’ rating due to its “high earnings company annual growth rate ... a profitable development pipe and logistics optionality”.

Meanwhile, the bank gave Hibernia a ‘hold’ rating, saying that while income growth was attractive, that was off a lower base and the bank believes “it may underperform long-term with less capital recycling”.

Despite low vacancy rates, Deutsche judges that office-based employment will expand to about 20 per cent of Dublin’s workforce by 2024 as the city’s population rises from 40 per cent of the State to 50 per cent by 2026.

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"The city represents 50 per cent of Irish GDP and, coupled with Brexit lettings, these favourable demographics are providing a solid foundation for maintaining record rents and successful letting of development schemes," Deutsche analyst Rob Jones wrote.

Oversupply?

In its research note, the bank warned that late-cycle developers building in 2020-21 could drive oversupply in the market, which could in turn hit the “Reits’ capital values over the medium-term, even if they have been prudent themselves and ceased development”.

On Brexit, the analysts suggested that investor concern that Ireland might not necessarily be winning the race to attract relocations from London is not well-founded.

“We analysed the Brexit impact on the Irish office market, with lettings from the UK running at circa two times pre-vote levels, and conclude that while we see it as a net positive for Ireland, it is not a prerequisite for continued office market growth,” Mr Jones wrote.

Deutsche has given a target price of €1.85 to Green Reit, which is currently trading around €1.63, and a target price of €1.65 to Hibernia Reit, which is currently trading around €1.53.