OREANDA-NEWS. High ratings on CMBS backed by Irish multi-family housing (MFH) assets will be difficult to achieve given the lack of investment track record and the limited historical data on the sector. In Fitch's view, bonds rated above 'Asf' need to survive stresses significantly above those experienced in the recent residential downturn.

Advance rates will be further constrained because recent rental growth is not sustainable unless the country's economic fortunes improve beyond our assumptions.

Demand for rented accommodation has surged in Dublin, where rents are already nearing their 2007 peak. Early investors into Ireland's recovery profited as yields fell 3% since 2012. But housing supply looks set to increase and the economic recovery to slow. Underlying deflation means nominal rents may fall over time.

MFH is not an established asset class in Ireland, which is traditionally a nation of homeowners with rented accommodation provided socially or by small-scale, domestic private investors. That may be changing as tighter mortgage finance narrows the route to owner occupation. International investors may look to invest in MFH as a bet on a structural change in the Irish housing market.

However, availability of long term data to support investment is limited, with little coverage of rental yields. The dataset available comes from multiple sources (eg the Private Residential Tenancies Board, daft.ie and the Central Statistics Office) with different reporting conventions as to property type and location.

For the recent downturn, Fitch estimated MFH yield performance by collating the various time series. Our findings indicate that at the market peak in 2007, Dublin residential properties yielded between 2% and 5%. As prices fell through to 2012, yields climbed to between 5% and 11%, with the highest yields in some outlying suburbs. The results show that not even Dublin MFH is a homogenous sector, with significant variation in volatility by post code.

Over the same time period, rents fell on average by 25%. Dublin has recovered strongly and Fitch expects rents in the commuter belt to continue to catch up as some suburban residents seek more affordable housing. But looking further ahead, Fitch expects Dublin housing to become more affordable in real terms, with downside risk to nominal rents given the likelihood of additional supply and the lack of inflation. In Dublin, yields actually widened in 4Q14 on expectations of new supply.

The movement in yields and rents associated with the last downturn would provide benchmarks for a 'Asf' rating analysis by Fitch. The outcomes of more severe rating stresses can be judged with less certainty on account of the limited track record of Irish MFH and related data.

Lessons can be learned from observing developments in the German MFH sector. Starting in 2006, several global opportunity funds acquired large housing portfolios as a bet on accelerating economic growth alongside a structural shift, in that instance towards owner-occupation. This shift did not materialise. What moderated the impact was the depth of domestic markets able to reabsorb these assets. Germany has a track record of institutional investment in MFH financed largely by domestic banks. There is not a comparable institutional investor base in Ireland.

Like Germany in 2006, the Irish economy is recovering and its housing market undergoing a change. Macroeconomic recovery is our base case, but the pace will slow (we forecast 2.9% real GDP growth this year and 2.4% next, down from 4.7% in 2014). Without growth in rents, with interest rates so low real estate value appreciation hinges on the global 'hunt for yield' intensifying. If this fails to play out, the thin local investor base and limited debt finance will exacerbate volatility in Irish MFH property values. The fact that local residential investors suffered losses in the last downturn may also limit the future exits for new or recent investors.