1 Why Ground Lease REITs are Building In Popularity

Chau Benedict edited this page 2025-06-17 14:36:48 +08:00

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• As more residential or commercial property owners in requirement of liquidity usage ground leases to unlock capital, genuine estate financiers could reap the benefits.-.-.-.-.

As more residential or commercial property owners in requirement of liquidity usage ground leases to unlock capital, genuine estate financiers could reap the benefits.

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  Numerous openly traded realty trusts (REITs) have faced obstacles in the previous year, with returns mostly tracking stock exchange indexes. But REITs that are concentrated 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 a new idea. In some ways, it's the same financial structure that middle ages royalty utilized with its topics. But the democratization of ground leases and their growing popularity is reflective of other sort of securitization throughout the economy - developing narrower and more focused return qualities to fit the requirements of various classes of investors.
  
  And with industrial workplace realty, in particular, in a popular state of post-lockdown turmoil, the ability to develop a de-risked genuine estate possession has actually been warmly embraced by investors.
  
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  At present, Safehold (SAFE) is the sole openly traded ground lease REIT pure play. It will likely be among several 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 transaction valued at $1.7 billion, Wynn Resorts sealed a sale/leaseback plan with Real estate Income, a conventional 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 regional banking tightening up financing - even with the specter of lower rate 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, stated in a press release that the company has expanded 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 development to a new level of sophistication in the land lease market, embracing strategies such as predictability of lease payments, a move that results in more efficient rates. 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 began a $1 billion REIT targeted on investments in the nation'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, stated in a press release, "The strong need we have actually seen for GLR's (ground lease REIT) follow-on equity offering verifies our strategy and confirms that ground leases have progressed to become an acceptable and traditional financing tool."
  
  Clearly, ground lease financial investment funds are among the emerging trends in realty. Ares Management and realty private equity company The Regis Group formed Haven Capital in 2020 to capture growing land lease demand to, in their words, provide "a more effective kind of funding" that helps unlock asset worth.
  
  These current advancements, together with total financing trends within the property industry, develop a pattern that's hard to neglect: 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 ten years. By one estimate, the marketplace might be near to $2.5 trillion in the United States alone, providing a substantial runway for growth.
  
  How does a land lease work?
  
  Long a staple of household offices trying to find a constant earnings and foreseeable stream from long-held uninhabited parcels in preferable locations, the land lease has ended up being commonly embraced due to the fact that the automobile presents a win-win situation 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 options, a land lease REIT or sponsor obtains the land from the structure owner. This arrangement makes it possible for the designer to launch essential capital, directing it towards locations with greater return capacity. Simultaneously, the building owner keeps complete control of the asset while the land underneath it, which, though helpful in the development procedure, offers little return to the total task. The lease is tailored to fit the task.
  
  The Boston Harbor Development acts as an illustration of the enduring use of land leases in the hospitality market. Additionally, this method has discovered appeal in retail, fitness and health facilities and fast-food outlets. Now, numerous markets are recognizing the value of this concept. Ground rent payments consist of fixed yearly lease boosts.
  
  " Proof of idea continues to spread out," Safehold's Doherty said.
  
  As the advantages to a task's capital stack become easily apparent, ground leases will get wider acceptance and be regularly utilized as an essential aspect in the genuine estate market. Predictions suggest that ground leases will end up being mainstream within the next five to ten years, providing a spectrum of investment opportunities for astute players.
  
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  Jim Small is the Founder/CEO of Sante Real Estate Investments, an impact-based realty company. For over ten years, he has partnered with ultra-high-net-worth people and family workplaces to acquire and manage countless multifamily assets throughout the U.S. and Europe, generating consistent returns and favorable social effect.
  
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