Why Ground Lease REITs are Building In Popularity

As more residential or commercial property owners in need of liquidity usage ground leases to unlock capital, investor might gain the benefits.

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Numerous publicly traded property trusts (REITs) have dealt with obstacles in the past year, with returns mostly trailing stock market indexes. But REITs that are concentrated 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 rest on it isn't a brand-new idea. In some methods, it's the very same monetary structure that middle ages royalty utilized with its topics. But the democratization of ground leases and their growing appeal is reflective of other kinds of securitization throughout the economy - producing narrower and more focused return qualities to fit the needs of various classes of financiers.

And with commercial workplace genuine estate, in particular, in a popular state of post-lockdown upheaval, the capability to create a de-risked realty asset has actually 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 among several on the marketplace in the coming years, prompting other more conventional 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 plan with Real estate Income, a standard REIT, for its Encore Boston Harbor development, a hotel, casino and theater project 6 miles south of Boston.

Unlocking capital when in requirement of liquidity

Residential or commercial property owners are using ground leases to unlock capital in locations where liquidity is doing not have. With local 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 specialty practice, we are fielding more questions from owners and designers in all real estate sectors.

One requires to only take a look at numbers touted by Safehold. Tim Doherty, Safehold's head of investments, said in a press release that the company has actually expanded land lease offers 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 brand-new level of elegance in the land lease market, embracing techniques such as predictability of lease payments, a relocation that results in more effective pricing. Over the last three months of 2023, Safehold stock was up nearly 40%.

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

Murray McCabe, a managing 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 method and validates that ground leases have actually developed to end up being an acceptable and traditional funding tool."

Clearly, ground lease investment funds are one of the emerging patterns in property. Ares Management and property private equity company The Regis Group formed Haven Capital in 2020 to capture growing land lease need to, in their words, provide "a more effective type of funding" that assists unlock asset worth.

These recent advancements, together with general financing trends within the property industry, develop a pattern that's difficult to ignore: Land lease activity, which has grown to a more than $18 billion market in 2022, will just see more deals announced over the next ten years. By one quote, the marketplace might be close 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 family workplaces trying to find a consistent income and predictable stream from long-held uninhabited parcels in desirable locations, the land lease has actually become widely embraced since the automobile provides a win-win circumstance for both the structure owner and the landowner.

How does a land lease operate? Typically spanning a regard to 50 to 99 years with renewal choices, a land lease REIT or sponsor acquires the land from the structure owner. This plan enables the designer to launch essential capital, directing it towards locations with higher return potential. Simultaneously, the structure owner maintains complete control of the asset while divesting the land below it, which, though helpful in the development procedure, offers little return to the general job. The lease is tailored to fit the job.

The Boston Harbor Development functions as an illustration of the enduring use of land leases in the hospitality industry. Additionally, this method has actually found appeal in retail, fitness facilities and fast-food outlets. Now, numerous industries are recognizing the worth of this idea. Ground rent payments include fixed annual lease increases.

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

As the benefits to a task's capital stack become readily evident, ground leases will acquire larger approval and be frequently used as a crucial element in the property industry. Predictions recommend that ground leases will become mainstream within the next 5 to 10 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 very best REIT Stocks.

Publicly Traded REITs vs. Non-Traded REITs: What's the Difference?

Real Estate Investing: How You Can Profit Now.

This article was written by and presents the views of our contributing advisor, not the Kiplinger editorial staff. You can examine 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 genuine estate company. For over ten years, he has partnered with ultra-high-net-worth people and family workplaces to obtain and manage thousands of multifamily possessions throughout the U.S. and Europe, creating constant returns and favorable social effect.

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