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Why Ground Lease REITs are Building In Popularity

As more residential or owners in requirement of liquidity usage ground leases to open capital, investor could gain the rewards.

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Numerous publicly traded genuine estate trusts (REITs) have dealt with challenges in the past year, with returns largely routing stock exchange indexes. But REITs that are focused 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 new idea. In some ways, it’s the exact same monetary structure that medieval 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 – creating narrower and more concentrated return qualities to match the needs of different classes of investors.

And with industrial office real estate, in particular, in a prominent state of post-lockdown upheaval, the capability to produce a de-risked realty property has actually 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 several on the marketplace in the coming years, triggering other more traditional 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 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, gambling establishment and theater job 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 areas where liquidity is lacking. With regional banking tightening up financing – even with the specter of lower interest rates – we are now seeing land lease inquiries soar. In my own land lease specialized practice, we are fielding more queries from owners and designers in all real estate sectors.

One requires 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 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 development to a brand-new level of sophistication in the land lease market, embracing methods such as predictability of lease payments, a move that causes more effective rates. Over the last three months of 2023, Safehold stock was up almost 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 investments in the country’s leading 50 markets. High interest from institutional financiers triggered Montgomery Street to expand the pool to $1.5 billion in 2022.

Murray McCabe, a managing partner of Montgomery Street Partners, stated in a press release, “The strong need we have actually seen for GLR’s (ground lease REIT) follow-on equity offering confirms our strategy and validates that ground leases have evolved to end up being an acceptable and traditional financing tool.”

Clearly, ground lease investment funds are among the emerging patterns in realty. Ares Management and property private equity firm The Regis Group formed Haven Capital in 2020 to record growing land lease need to, in their words, supply “a more effective form of financing” that assists unlock possession value.

These current developments, along with overall financing trends within the property 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 estimate, the market might be close to $2.5 trillion in the United States alone, providing a substantial runway for expansion.

How does a land lease work?

Long a staple of household offices searching for a stable earnings and foreseeable stream from long-held uninhabited parcels in preferable locations, the land lease has actually ended up being extensively welcomed because the vehicle presents a win-win scenario for both the building owner and the landowner.

How does a land lease run? Typically covering a regard to 50 to 99 years with renewal choices, a land lease REIT or sponsor gets the land from the building owner. This arrangement enables the developer to launch important capital, directing it toward locations with greater return potential. Simultaneously, the structure owner retains full control of the property while divesting the land beneath it, which, though useful in the advancement procedure, offers little return to the total task. The lease is tailored to fit the project.

The Boston Harbor Development serves as an illustration of the enduring usage of land leases in the hospitality market. Additionally, this method has actually discovered appeal in retail, fitness and health centers and fast-food outlets. Now, various industries are recognizing the worth of this principle. Ground rent payments include established annual lease increases.

” Proof of principle continues to spread,” Safehold’s Doherty stated.

As the advantages to a project’s capital stack become easily apparent, ground leases will gain larger acceptance and be regularly employed as an essential element in the genuine estate industry. Predictions recommend that ground leases will become mainstream within the next 5 to 10 years, using a spectrum of investment chances for astute gamers.

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

Real Estate Investing: How You Can Profit Now.

This short article was composed by and provides the views of our contributing adviser, not the Kiplinger editorial staff. You can inspect 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 company. For over 10 years, he has actually partnered with ultra-high-net-worth people and household offices to acquire and manage countless multifamily properties across the U.S. and Europe, creating consistent returns and positive social impact.

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