Why Ground Lease REITs are Building In Popularity

As more residential or commercial property owners in requirement of liquidity usage ground leases to open capital, investor could gain the benefits.
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Numerous openly traded realty trusts (REITs) have actually dealt with challenges in the past year, with returns largely routing stock market indexes. But REITs that are focused on ground leases - owning the land without owning the structures that rest on it - have been an exception.

Splitting the ownership of industrial land from the buildings that rest on it isn't an originality. In some ways, it's the exact same monetary structure that middle ages royalty utilized with its subjects. But the of ground leases and their growing popularity is reflective of other type of securitization throughout the economy - creating narrower and more focused return qualities to fit the needs of various classes of investors.

And with industrial office genuine estate, in specific, in a popular state of post-lockdown turmoil, the capability to create a de-risked real estate property has been warmly accepted by financiers.

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At present, Safehold (SAFE) is the sole publicly traded ground lease REIT pure play. It will likely be one of a number of on the marketplace in the coming years, triggering other more standard REITs to diversify their holdings with land leases.

We have actually currently seen this with a mega-deal involving Real estate Income and Wynn Resorts. In a deal valued at $1.7 billion, Wynn Resorts sealed a sale/leaseback plan with Real estate Income, a standard REIT, for its Encore Boston Harbor development, a hotel, casino and theater task 6 miles south of Boston.

Unlocking capital when in need of liquidity

Residential or commercial property owners are utilizing ground leases to unlock capital in locations where liquidity is doing not have. With regional banking tightening up lending - even with the specter of lower rates of interest - we are now seeing land lease questions shoot up. In my own land lease specialized practice, we are fielding more inquiries from owners and designers in all genuine estate sectors.

One requires to just look at numbers touted by Safehold. Tim Doherty, Safehold's head of financial investments, stated in a news release that the business has actually expanded land lease deals from 12 in 2017 to 130 in 2022, with the value of the portfolio at more than $6 billion. He attributed the growth to a new level of sophistication in the land lease market, adopting methods such as predictability of lease payments, a move that causes more efficient prices. Over the last three months of 2023, Safehold stock was up almost 40%.

Growing popularity of ground leases has not gone undetected. Three years back, Dallas-based Montgomery Street Partners began a $1 billion REIT targeted on financial investments in the country's leading 50 markets. High interest from institutional financiers prompted Montgomery Street to expand the swimming pool to $1.5 billion in 2022.

Murray McCabe, a managing partner of Montgomery Street Partners, stated in a press release, "The strong demand we have actually seen for GLR's (ground lease REIT) follow-on equity offering verifies our strategy and verifies that ground leases have actually progressed to end up being an appropriate and mainstream financing tool."

Clearly, ground lease mutual fund are one of the emerging patterns in real estate. Ares Management and property private equity company The Regis Group formed Haven Capital in 2020 to record growing land lease demand to, in their words, provide "a more efficient type of financing" that assists unlock property value.

These recent advancements, in addition to general funding trends within the realty market, establish a pattern that's hard to overlook: Land lease activity, which has actually grown to a more than $18 billion market in 2022, will only see more offers revealed over the next 10 years. By one price quote, the market might be near $2.5 trillion in the United States alone, supplying a significant runway for expansion.

How does a land lease work?

Long a staple of household workplaces trying to find a stable earnings and foreseeable stream from long-held uninhabited parcels in preferable places, the land lease has become commonly welcomed because the car presents a win-win circumstance for both the building owner and the landowner.

How does a land lease operate? Typically covering a term of 50 to 99 years with renewal alternatives, a land lease REIT or sponsor obtains the land from the building owner. This arrangement makes it possible for the developer to launch important capital, directing it towards locations with greater return potential. Simultaneously, the structure owner keeps complete control of the possession while divesting the land below it, which, though useful in the development procedure, offers little return to the overall project. The lease is customized to fit the project.

The Boston Harbor Development works as an illustration of the long-standing usage of land leases in the hospitality market. Additionally, this method has actually discovered appeal in retail, health and wellness facilities and fast-food outlets. Now, various markets are recognizing the worth of this idea. Ground rent payments consist of predetermined annual lease boosts.

" Proof of concept continues to spread," Safehold's Doherty stated.

As the advantages to a task's capital stack become readily obvious, ground leases will get broader approval and be routinely utilized as a crucial component in the real estate industry. Predictions recommend that ground leases will become mainstream within the next 5 to ten years, providing a spectrum of investment opportunities for astute players.

Related Content

Bright Spots Amid Commercial Realty Struggles.
REITs Unveiled: A Comprehensive Guide for Investors.
How to Find the Best REIT Stocks.
Publicly Traded REITs vs. Non-Traded REITs: What's the Difference?
Real Estate Investing: How You Can Profit Now.
This post was composed by and provides the views of our contributing consultant, not the Kiplinger editorial staff. You can examine adviser records with the SEC or with FINRA.

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Jim Small is the Founder/CEO of Sante Real Estate Investments, an impact-based property business. For over 10 years, he has partnered with ultra-high-net-worth individuals and household workplaces to obtain and handle countless multifamily properties throughout the U.S. and Europe, generating consistent returns and positive social impact.

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