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 might enjoy the rewards.

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Numerous openly traded real estate trusts (REITs) have dealt with obstacles in the previous year, with returns mostly trailing stock exchange indexes. But REITs that are concentrated on ground leases - owning the land without owning the structures that sit on it - have been an exception.

Splitting the ownership of business land from the buildings that rest on it isn't a brand-new concept. In some ways, it's the exact same monetary structure that middle ages royalty used with its topics. But the democratization of ground leases and their growing popularity is reflective of other sort of securitization throughout the economy - creating narrower and more focused return attributes to match the requirements of various classes of investors.

And with business office property, in particular, in a popular state of post-lockdown upheaval, the capability to develop a de-risked genuine estate property has been warmly accepted by investors.

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At present, Safehold (SAFE) is the sole publicly traded ground lease REIT pure play. It will likely be among numerous on the market in the coming years, prompting 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 transaction valued at $1.7 billion, Wynn Resorts sealed a sale/leaseback arrangement with Real estate Income, a standard REIT, for its Encore Boston Harbor development, a hotel, gambling establishment and theater task 6 miles south of Boston.

Unlocking capital when in requirement of liquidity

Residential or commercial property owners are utilizing ground leases to open capital in locations where liquidity is lacking. With regional banking tightening up financing - even with the specter of lower rates of interest - we are now seeing land lease queries shoot up. In my own land lease specialized practice, we are fielding more queries from owners and developers in all realty sectors.

One needs to just take a look at numbers touted by Safehold. Tim Doherty, Safehold's head of investments, said in a news release that the company has broadened land lease deals from 12 in 2017 to 130 in 2022, with the worth of the portfolio at more than $6 billion. He attributed the development to a new level of elegance in the land lease market, adopting strategies such as predictability of lease payments, a move that causes more effective pricing. Over the last three months of 2023, Safehold stock was up nearly 40%.

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

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

Clearly, ground lease investment funds are among the emerging trends in genuine estate. Ares Management and realty private equity firm The Regis Group formed Haven Capital in 2020 to capture growing land lease need to, in their words, supply "a more efficient kind of financing" that assists unlock asset value.

These current developments, together with total funding trends within the property market, establish a pattern that's hard to overlook: Land lease activity, which has grown to a more than $18 billion market in 2022, will just see more offers announced over the next 10 years. By one quote, the market might be near to $2.5 trillion in the United States alone, providing a considerable runway for expansion.

How does a land lease work?

Long a staple of household workplaces searching for a stable income and predictable stream from long-held uninhabited parcels in desirable areas, the land lease has ended up being commonly embraced because the vehicle presents a win-win scenario for both the building owner and the landowner.

How does a land lease run? Typically spanning 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 enables the developer to launch important capital, directing it towards areas with higher return capacity. Simultaneously, the building owner keeps complete control of the asset while divesting the land underneath it, which, though beneficial in the advancement process, supplies little return to the general job. The lease is tailored to fit the task.

The Boston Harbor Development works as an illustration of the enduring usage of land leases in the hospitality market. Additionally, this method has actually discovered popularity in retail, health and wellness centers and fast-food outlets. Now, numerous markets are recognizing the value of this concept. Ground lease payments include predetermined yearly lease boosts.

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

As the to a job's capital stack ended up being easily apparent, ground leases will gain broader acceptance and be frequently used as a crucial element in the real estate industry. Predictions suggest that ground leases will become mainstream within the next five to 10 years, providing a spectrum of financial investment chances for astute players.

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Real Estate Investing: How You Can Profit Now.
This short article was composed by and presents the views of our contributing advisor, 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 family workplaces to obtain and manage thousands of multifamily assets across the U.S. and Europe, generating consistent returns and favorable social effect.

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