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Risks piling up for US multifamily Reits, says Fitch

The good times may be subsiding for US multifamily Reits, according to Fitch Ratings.

The sector has thrived over the last few years despite strong macro headwinds. Muted supply and superior access to capital have led to material improvements in both operating and credit profiles of multifamily Reits. However, longer term risks are increasing.

“The current euphoric multifamily environment will amplify the fickle psyche of investors,” says associate director Britton Costa.

Fitch estimates 80 per cent of the 2009-2011 growth in multifamily demand was derived from declining home ownership. As such, improvements in the single family market will negatively impact apartments.

Over time, “multifamily Reit demand and operating fundamentals will slow down as rents become less affordable and interest in home ownership rises,” says Costa.

Also clouding the future of the sector is the uncertainty surrounding the GSEs. Fannie Mae and Freddie Mac have increased their exposure to the multifamily sector by USD76bn over the last five years to offset a similar decline in mortgage availability from traditional lenders. However, there is limited political will to keep the GSEs under conservatorship indefinitely. What's more, none of the banks, life insurance companies or the CMBS market appear willing, nor have the capacity to entirely fill the void.

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