Why Ground Lease REITs are Building In Popularity

As more residential or commercial property owners in requirement of liquidity usage ground rents to open capital, real estate financiers might reap the benefits.

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Numerous openly traded realty trusts (REITs) have faced obstacles in the previous year, with returns largely trailing stock market indexes. But REITs that are focused on ground leases - owning the land without owning the buildings that sit on it - have actually been an exception.

Splitting the ownership of commercial land from the structures that sit on it isn't an originality. In some methods, it's the very 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 kinds of securitization across the economy - developing narrower and more concentrated return attributes to suit the requirements of different classes of financiers.

And with industrial workplace real estate, in specific, in a prominent state of post-lockdown upheaval, the ability to develop a de-risked genuine estate property has actually been warmly welcomed 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 marketplace 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 including 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 traditional REIT, for its Encore Boston Harbor development, a hotel, casino and theater job 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 areas where liquidity is lacking. With local banking tightening up financing - 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 inquiries from owners and developers in all property sectors.

One needs to just take a look at numbers touted by Safehold. Tim Doherty, Safehold's head of investments, said in a press release that the business 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 attributed the development to a new level of elegance in the land lease market, embracing techniques such as predictability of lease payments, a move that leads to more efficient rates. Over the last 3 months of 2023, Safehold stock was up almost 40%.

Growing appeal of ground leases has not gone undetected. Three years earlier, Dallas-based Montgomery Street Partners began a $1 billion REIT targeted on investments in the country's top 50 markets. High interest from institutional investors prompted Montgomery Street to broaden 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 evolved to become an acceptable and mainstream financing tool."

Clearly, ground lease mutual fund are among the emerging patterns in genuine estate. Ares Management and realty 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 financing" that helps unlock asset value.

These current developments, along with overall financing trends within the realty market, establish a pattern that's difficult to overlook: 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 10 years. By one estimate, the market might be near $2.5 trillion in the United States alone, supplying a substantial runway for growth.

How does a land lease work?

Long a staple of family offices trying to find a consistent earnings and foreseeable stream from long-held uninhabited parcels in preferable locations, the land lease has become commonly welcomed due to the fact that the car presents a win-win circumstance for both the building owner and the landowner.

How does a land lease operate? Typically spanning a regard to 50 to 99 years with renewal alternatives, a land lease REIT or sponsor gets the land from the structure owner. This arrangement allows the designer to launch crucial capital, directing it toward areas with higher return potential. Simultaneously, the building owner maintains full control of the possession while divesting the land underneath it, which, though useful in the advancement procedure, provides little return to the overall task. The lease is customized to fit the project.

The Boston Harbor Development acts as an illustration of the enduring use of land leases in the hospitality industry. Additionally, this technique has discovered appeal in retail, fitness facilities and fast-food outlets. Now, numerous markets are recognizing the worth of this idea. Ground rent payments consist of established annual lease increases.

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

As the advantages to a project's capital stack become readily obvious, ground leases will acquire broader approval and be regularly employed as a crucial element in the property market. Predictions suggest that ground leases will become mainstream within the next 5 to 10 years, offering a spectrum of financial investment chances for astute players.

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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 composed by and provides the views of our contributing advisor, not the Kiplinger editorial staff. You can check 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 property business. For over 10 years, he has partnered with ultra-high-net-worth individuals and family offices to get and manage countless multifamily assets across the U.S. and Europe, producing consistent returns and favorable social impact.

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