We have been talking for some time now about too much money chasing too few assets and the corresponding bubblelicious nature of the stock, bond and real estate markets. To para phrase the great Sir Winston Churchill, Never in history has so much been printed by so few for so many.
Simply put, thanks to the Federal Reserve and European Central Bank, we are in a global monetary glut.
To put this in the proper perspective, this Niagara of money is so enormous and has sparked such feverish rallies in all asset prices, it has resulted in the creation of assets where none existed before.
According to the WSJ, “the financial system is having to invent new kinds of assets because not enough exist to absorb the deluge of central bank liquidity. More than 6,000 cryptocurrencies are now being traded, not to mention non-fungible tokens (NFT’s), which supposedly establish ownership of easily copied digital art works.” Digital and artwork seem like an oxymoron to me but that’s another discussion.
What this means to income property investors specifically is that those inclined to sell now are realizing prices they never imagined possible.
Sadly, all good things must come to an end. With inflation heating up, the all powerful central banks are reigning in their asset purchases (please read stimulus).
For those of you willing to take your head out of the asset price clouds, the two central banks are on record stating their intention to reduce combined net asset purchases of about $235 billion a month to zero in 12 months, a deceleration of about $20 billion a month.
The last time net asset prices were reduced in the U.S. it ignited the “Taper Tantrum” of 2013-14. When this occurred, the Fed was only decelerating at a pace of $8.5 billion a month, less than half what the two central banks propose now.
Therefore, whatever 2022 may look like from an asset price standpoint, we believe it will be very different than 2021. This should terrify investors. They will need all the downside protection they can get.
For commercial real estate investors, this is where DST properties may really shine. The fractional nature of DST ownership may allow you to diversify much better than you can otherwise do yourself.
When selling out at what we believe to be a market top, why risk overpaying for a single asset on the way back in? This should be of particular concern if the replacement property is of a lesser quality than what was just sold.
Using Delaware statutory trusts for replacement property purposes, helps investors break out of this downward spiral. With institutional quality replacement properties on offer, you are no longer limited to hum-drum local retail offerings and all their deferred maintenance. Qualitatively, this should be a step up not down.
Instead of putting all your eggs in one basket, this also allows you to diversify functionally in terms of property type and geographically. This comes as close to Modern Portfolio Theory (MPT) in real estate as you are likely to get.
MPT is an investing strategy common to the securities markets that seeks to use diversification to minimize risk while maximizing return. This is obviously more difficult to achieve with illiquid assets like DSTs. However, as mentioned earlier, the fractional nature of DST ownership can allow you to diversify to the extent that the individual risk of each property has less impact on overall portfolio risk.
Revisiting market historian Jeremy Grantham’s observations regarding “the last 12 months (being) a classic finale to an 11-year bull market,” our current situation is particularly fraught because “bonds, stocks and real estate are all inflated together.”
When all this does unwind, the demonstrable ineptness of our last four Fed bosses (Greenspan, Bernanke, Yellen & Powell) in dealing with asset bubbles of their own creation should give real pause.
We believe real property investors are best served looking to their own devices by seeking protection through the functional and geographic diversification on offer with DSTs.
