Builders getting to grips with the new reality

Last week's falls come as investors turn increasingly bearish on the outlook for the Irish economy.

As the market woke up last Monday to Sinn Féin's stunning electoral success, many investors' first reaction was to dump shares of companies that might suffer if some of the party's policies were implemented.

Shares of Ires Reit, the residential property company and Ireland's largest residential landlord, were particularly badly hit, falling almost 10pc last Monday.

Reading what the Sinn Féin manifesto has to say on rents, it is hardly surprising Ires shareholders took fright. The document proposes a slew of landlord-unfriendly measures, including a three-year rent freeze on all tenancies, tying any reviews after the end of the rent freeze to the consumer price index and the creation of tenancies of unlimited duration.

Just for good measure, the Sinn Féin manifesto also called for an increase from 25pc to 33pc in the dividend withholding tax paid by all Reits and Irefs (Irish Real Estate Funds, the Reits' little brothers), the introduction of a 33pc capital gains tax on all property disposals by Reits and Irefs, and an increase in the stamp duty rate on all commercial property transactions from 7.5pc to 12.5pc.

Not surprisingly, the price of other property-related shares also took a knock with quoted house-builders Glenveagh and Cairn falling by 7pc and 3pc respectively. Shares in Hibernia Reit, which has a €1.4bn Dublin property portfolio, most of which is offices, were down more than 9pc on the election results.

However, the post-election sell-off wasn't confined to property-related stocks. All three quoted banks - AIB, Bank of Ireland and Permanent TSB - also felt the chill electoral wind last Monday, with shares in both of the big domestic banks down by more than 5pc last Monday while PTSB shares were down by almost 9pc at one stage.

Hotel operator Dalata, fuel retailer Applegreen and ferry company Irish Continental also saw their shares fall following the election results. Dalata shares were down 4pc, with both Applegreen and Irish Continental shares dipping by up to 5pc.

While Sinn Féin's unexpectedly strong showing in last weekend's General Election certainly hit Irish share prices, in most cases last Monday's weakness was merely the continuation of a pattern which goes back to at least the beginning of 2020.

The shares of the three quoted banks are well down since the start of 2020 with AIB down by almost a quarter, PTSB by a fifth and Bank of Ireland by "only" 15pc. Ires and Hibernia have also been much weaker since the start of the year, with Ires down 18pc since mid-December and Hibernia shares 11pc weaker over the same period.

It is a similar story with the other non-financial shares. Applegreen is down 9pc year-to-date, Dalata by 8pc and Irish Continental by 6pc. It has been a different story with Irish bonds which, despite a slight increase in yields this week, are still trading at far lower yields than at the start of the year.

What has been the main factor pushing shares with a significant exposure to the Irish economy lower? Is it Sinn Féin, Brexit or are investors growing wary of what they perceive to be an over-heating Irish economy?

"I would attribute some of the weakness to the recovery in share prices after the UK election in December," said Goodbody Stockbrokers chief economist Dermot O'Leary.

"There was a feeling that a hard Brexit had been avoided. However, the 'Boris bounce' faded quickly and by January there was again a fear that we could have a hard Brexit by the end of the year."

O'Leary traces the most recent share price weakness to the publication of an Ipsos MRBI opinion poll on February 4, the Tuesday before the election, showing Sinn Féin with 25pc support, Fianna Fáil with 23pc and Fine Gael with 20pc - which was within a fraction of 1pc of the actual outcome. Suddenly the prospect of Sinn Féin in government moved from the merely hypothetical to the very real.

While investors have reacted with shock to the Sinn Féin surge, the reaction from employers' body Ibec has been far more laid back. Ibec boss Danny McCoy was quoted as saying that he could "absolutely" see Ibec being able to work with Sinn Féin in government.

This is despite the Sinn Féin manifesto containing a number of proposals which could hurt all businesses, not just property companies and the banks.

These include an increase in the minimum wage from its current level of €10.10 an hour, already the second-highest in the European Union, to a "living wage" of €12.30, along with compulsory trade union recognition and a legal right of access for union officials to company premises.

"It [the increased Sinn Féin support] definitely changes politics, no matter what government we get," said Ibec director of policy Feargal O'Brien.

"The biggest issue we see with the Sinn Féin manifesto is the narrowing of the tax base [with workers to be exempted from USC on income up to €30,000]. There will be too much tax going on too few shoulders."

However, he cautions that, just became something is in a manifesto, there is no guarantee that it will ever happen.

"Across all of the parties' manifestos there were bits that were hostile to business. The important thing is what gets into the programme for government," he added.

Support for Sinn Féin was strongest among younger voters, with the exit poll showing that almost a third of those who cast a ballot aged between 18 and 34 voted for the party, more than the combined Fianna Fáil/Fine Gael vote among the same age group. This almost certainly indicates that voter dissatisfaction at high house prices and rents were the main driver of the increase in support for the party.

As well as controlling rents, the Sinn Féin manifesto also proposes a €6.5bn public housing programme, which would be largely paid for by Nama's projected €4bn profit, to deliver 100,000 homes on public land.

It also promises to get Home Building Finance Ireland, the government-owned company established in 2014 to provide finance to the housebuilding sector, to focus on delivering homes costing less than €250,000.

The manifesto also pledges to give the Central Bank the power to put a cap on mortgage interest rates - although as an independent body there is no way that a Sinn Féin government could force the Central Bank to actually exercise such a power.

While these proposals would, if implemented, be potentially good news for Cairn and Glenveagh, there is also a sting in the tail - as the manifesto also proposes to increase the vacant site levy from 7pc to 15pc, with a new Active Land Management Agency "penalising the hoarding of land, bringing more land into use and driving down land prices".

At the half-year stage, Cairn had enough land to build 15,400 new houses and apartments. It expects to sell just 1,100 homes this year. Glenveagh had a landbank sufficient to build 13,350 units on the same date and had signed up customers for 800 units from the beginning of 2019 to mid-August of that year.

While, on the face of it, this would seem to reinforce suspicions of land hoarding, the reality is considerably more nuanced. Both of the quoted house-builders hope to greatly increase their output in the coming years.

Cairn expects its landbank to be down to between four and six years by 2024, which implies annual output of about 2,000 units, while Glenveagh is projecting output of 2,500 units by 2023 or a landbank of about five years.

If these projections prove to be accurate, then both Cairn's and Glenveagh's landbanks will be bang in line with the five-year average for quoted UK house-builders within three or four years.

If Sinn Féin does enter government, the housing portfolio is almost certain to go to the party's housing spokesman Eoin Ó Broin. He can be relied on to use the leverage created by his new Active Land Management Agency to drive Cairn, Glenveagh and the house-builders to build homes as quickly and as cheaply as possible.

While much attention has been paid to what is in the Sinn Féin manifesto, almost certainly far more important is what is not in it.

Having long been opposed to the 12.5pc company tax rate, Sinn Féin has come to see the light and is now promising to maintain the 12.5pc rate with only a few minor tweaks, the main one being capping at 80pc capital allowances on intangible assets on-shored between 2015 by the multinationals.

Even this tweak comes with very respectable establishment credentials: it was first put forward by the chair of the Fiscal Advisory Council in a report commissioned by the Department of Finance, but wasn't acted on by the last government.

The truth is that Sinn Féin needs company tax revenues to pay for its ambitious social and housing programmes.

"None of the quality of life issues such as housing and health can be dealt with unless they are underpinned by a strong business sector. Nothing in the [Sinn Féin] manifesto would be considered extreme by European standards", says Ibec's O'Brien.

At Goodbody Stockbrokers O'Leary is slightly more cautious.

"There is concern about the election result and the policies it may bring about, particularly for the banks and property stocks," he said.

"There has been a huge amount of interest from international investors over the past few days. Overseas investors feel that they have no edge and are likely to stay away until there is greater clarity."