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, real estate financiers could gain the rewards.

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Numerous publicly traded property trusts (REITs) have dealt with difficulties in the past year, with returns mainly trailing stock exchange indexes. But REITs that are focused on ground leases - owning the land without owning the buildings that sit on it - have been an exception.

Splitting the ownership of commercial land from the structures that sit on it isn't a new concept. In some methods, it's the same monetary structure that middle ages royalty used with its topics. But the democratization of ground leases and their growing appeal is reflective of other sort of securitization across the economy - developing narrower and more focused return characteristics to match the requirements of various classes of investors.

And with industrial workplace realty, in specific, in a popular state of post-lockdown upheaval, the ability to produce a de-risked property asset has actually been warmly welcomed by investors.

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At present, Safehold (SAFE) is the sole openly traded ground lease REIT pure play. It will likely be one of numerous on the market in the coming years, prompting other more conventional REITs to diversify their holdings with land leases.

We've 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 plan with Real estate Income, a traditional REIT, for its Encore Boston Harbor advancement, a hotel, casino and theater job six miles south of Boston.

Unlocking capital when in requirement of liquidity

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

One requires to only look at numbers promoted by Safehold. Tim Doherty, Safehold's head of investments, stated in a news release that the company has actually broadened land lease offers from 12 in 2017 to 130 in 2022, with the worth of the portfolio at more than $6 billion. He associated the growth to a new level of elegance in the land lease market, embracing methods such as predictability of lease payments, a relocation that leads to more effective pricing. Over the last three months of 2023, Safehold stock was up nearly 40%.

Growing popularity of ground leases has not gone unnoticed. 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 investors triggered 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 confirms our technique and verifies that ground leases have actually developed to end up being an appropriate and traditional funding tool."

Clearly, ground lease financial investment funds are among the emerging trends in property. Ares Management and property personal equity firm The Regis Group formed Haven Capital in 2020 to capture growing land lease need to, in their words, supply "a more effective type of financing" that helps unlock property worth.

These recent developments, in addition to total financing patterns within the realty industry, establish a pattern that's hard to disregard: Land lease activity, which has actually grown to a more than $18 billion market in 2022, will only see more offers announced over the next ten years. By one price quote, the marketplace could be near to $2.5 trillion in the United States alone, offering a significant runway for growth.

How does a land lease work?

Long a staple of household offices searching for a constant earnings and foreseeable stream from long-held vacant parcels in preferable areas, the land lease has ended up being commonly welcomed due to the fact that the lorry provides a win-win situation 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 choices, a land lease REIT or sponsor acquires the land from the building owner. This arrangement allows the developer to release crucial capital, directing it towards areas with higher return capacity. Simultaneously, the building owner retains full control of the property while divesting the land underneath it, which, though useful in the development procedure, provides little return to the overall project. The lease is customized to fit the project.

The Boston Harbor Development acts as an illustration of the enduring usage of land leases in the hospitality industry. Additionally, this method has discovered appeal in retail, health and wellness centers and fast-food outlets. Now, different industries are acknowledging the worth of this concept. Ground lease payments include fixed annual lease increases.

" Proof of idea continues to spread," Safehold's Doherty said.

As the advantages to a stack ended up being easily apparent, ground leases will get larger acceptance and be routinely used as an essential element in the realty industry. Predictions suggest that ground leases will end up being mainstream within the next 5 to 10 years, using a spectrum of financial investment opportunities for astute gamers.

Related Content

Bright Spots Amid Commercial Real Estate Struggles.
REITs Unveiled: A Comprehensive Guide for Investors.
How to Find the very 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 written by and presents the views of our contributing adviser, not the Kiplinger editorial personnel. You can inspect consultant 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 realty business. For over 10 years, he has partnered with ultra-high-net-worth people and family offices to acquire and handle thousands of multifamily assets across the U.S. and Europe, generating consistent returns and favorable social effect.

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