Equity Invested in DSTs Inches Forward
Investors continue to secure equity in Delaware Statutory Trust (DSTs) albeit at a slower pace than in recent years. The overall commercial real estate slowdown may affect the continued slowing of DST equity investment.
By Al DiNicola, AIF®, CEPA™
June 5, 2023
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD
Most DST offerings are used by investors when entering into a §1031 tax deferred exchange. Mountain Dell Consulting consolidates results from most of the DST sponsors on a weekly and monthly basis. Through May 2023 Mountain Dell Consulting reports DST equity investment was just over $2.1 Billion. If the same monthly pace continues, the 2023 end of year may reach over $5 Billion. The pace of equity investment may be directly tied to the commercial and investment real estate market and how many investor utilize §1031 exchanges into the DST space.
There is always a work of caution when comparing past year DST equity investment. Each year is a different financial climate. Prior to COVID there was equity investment but not in comparison to the most recent past years of 2021 and 2022. Like other industries understanding what a typical norm for equity investment in the DST space may be helpful. We are not making excuses but simply providing an observation. COVID may have been the springboard for many investors to decide to sell their investment properties (a few years earlier than anticipated) and move into a DST. Here is a five (5) year equity overview.
|2023 Estimated *||$5.2 Billion|
Demographics in Play
The underlying demographics have not changed regarding the investors seeking to sell their actively managed real estate and move into a passively managed property with passive income. What is evident is the effect of the rise in interest rates creating a compression of overall net operating income for a leveraged real estate investment. If there is additional money needed for debt service (created by the rise in interest rates) then investors will pause in acquiring the real estate of investors seeking to move into a DST. Cap rate analysis is a different number because cap rates are a function of NOI prior to debt service as a method to value the property. Investor holding assets will not easily reduce their asking or selling price as they are anxiously waiting for interest rates to stabilize.
Interest rates are affecting the DST market as well.
With the rise in interest rates sponsors are seeking all cash DST acquisitions or lower loan to value acquisition which ultimately requires additional equity. All cash DST work very well for some cash investors utilizing a §1031 exchange. Some all-cash investors will seek taking on the non-recourse debt that DST offers in order to increase the basis in the investment thus providing tax advantaged income. Investors who need debt are faced with fewer DST offering any debt over a conservative level of say 50%. This creates an issue with satisfying the 1031 exchange requirements of replacing. Debt. Several zero-coupon DST (offering high LTV and no annual income) are ideal for offsetting the debt requirements. Multifamily represents over 40% of the offerings and Industrial is at 20%. Other asset classes have limited offerings however, necessary retail continues to gain market share. Well positioned properties with good fundamentals continue to appeal to the investors in a position to convert their current actively managed properties into a passive investment property.
DSTs are not for all investors. The acquisition of a DST is for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email email@example.com.
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