Why Ground Lease REITs are Building In Popularity

As more residential or commercial property owners in requirement of liquidity use ground rents to open capital, investor could gain the benefits.
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Numerous openly traded real estate trusts (REITs) have dealt with obstacles in the previous year, with returns mainly tracking 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 business land from the buildings that rest on it isn't a new concept. In some ways, it's the same financial structure that middle ages royalty utilized with its subjects. But the democratization of ground leases and their growing appeal is reflective of other sort of securitization across the economy - creating narrower and more focused return attributes to match the needs of various classes of investors.

And with business workplace real estate, in specific, in a prominent state of post-lockdown turmoil, the capability to produce a de-risked genuine estate property has actually been warmly embraced by financiers.

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

We've already seen this with a mega-deal including Real estate Income and Wynn Resorts. In a deal valued at $1.7 billion, Wynn Resorts sealed a sale/leaseback arrangement with Real estate Income, a traditional REIT, for its Encore Boston Harbor development, a hotel, casino and theater project 6 miles south of Boston.

Unlocking capital when in need of liquidity

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

One needs to only look at numbers promoted by Safehold. Tim Doherty, Safehold's head of financial investments, stated in a news release that the company has actually broadened land lease deals from 12 in 2017 to 130 in 2022, with the value of the portfolio at more than $6 billion. He associated the growth to a new level of elegance in the land lease market, adopting strategies such as predictability of lease payments, a move that leads to more efficient pricing. Over the last 3 months of 2023, Safehold stock was up nearly 40%.

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

Murray McCabe, a managing partner of Montgomery Street Partners, said in a news release, "The strong demand we've seen for GLR's (ground lease REIT) follow-on equity offering verifies our strategy and validates that ground leases have actually developed to end up being an appropriate and traditional financing 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 efficient form of funding" that helps unlock property worth.

These recent advancements, in addition to general financing patterns within the real estate market, develop 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 considerable runway for expansion.

How does a land lease work?

Long a staple of household offices searching for a stable income and foreseeable stream from long-held vacant parcels in desirable areas, the land lease has actually ended up being extensively welcomed since the lorry presents a win-win circumstance for both the structure owner and the landowner.

How does a land lease operate? Typically spanning a term of 50 to 99 years with renewal options, a land lease REIT or sponsor gets the land from the building owner. This plan makes it possible for the designer to launch vital capital, directing it towards locations with higher return capacity. Simultaneously, the building owner retains full control of the property while divesting the land below it, which, though useful in the advancement process, supplies little go back to the total task. The lease is customized to fit the job.

The Boston Harbor Development functions as an illustration of the enduring use of land leases in the hospitality market. Additionally, this technique has discovered appeal in retail, fitness and health centers and fast-food outlets. Now, different industries are acknowledging the worth of this idea. Ground lease payments include established annual lease boosts.

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

As the advantages to a project's capital stack ended up being easily obvious, ground leases will acquire broader acceptance and be frequently utilized as a crucial aspect in the real estate market. Predictions suggest that ground leases will become mainstream within the next five to ten years, using a spectrum of financial investment opportunities for astute gamers.

Related Content

Bright Spots Amid Commercial Property 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 short article was written by and provides the views of our contributing adviser, not the Kiplinger editorial staff. You can examine advisor 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 genuine estate business. For over ten years, he has partnered with ultra-high-net-worth people and family workplaces to obtain and manage countless multifamily assets across the U.S. and Europe, creating consistent returns and favorable social effect.

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