1 Why Ground Lease REITs are Building In Popularity

Clayton Petre edited this page 2025-06-22 15:04:44 +08:00

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• As more residential or commercial property owners in requirement of liquidity use ground rents to open capital, investor might reap the rewards.-.-.-.-.

As more residential or commercial property owners in requirement of liquidity use ground rents to open capital, investor might reap the rewards.

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  Numerous openly traded genuine estate trusts (REITs) have actually faced challenges in the previous year, with returns largely tracking stock market indexes. But REITs that are concentrated on ground leases - owning the land without owning the structures that sit on it - have actually 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 middle ages royalty used with its topics. But the democratization of ground leases and their growing popularity is reflective of other type of securitization across the economy - producing narrower and more concentrated return characteristics to suit the needs of different classes of investors.
  
  And with commercial workplace genuine estate, in particular, in a popular state of post-lockdown turmoil, the ability to produce a de-risked property asset has been warmly accepted by investors.
  
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  At present, Safehold (SAFE) is the sole openly traded ground lease REIT pure play. It will likely be one of 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 conventional REIT, for its Encore Boston Harbor development, a hotel, gambling establishment and theater project 6 miles south of Boston.
  
  Unlocking capital when in requirement of liquidity
  
  Residential or commercial property owners are utilizing ground leases to unlock capital in areas where liquidity is lacking. With regional banking tightening up lending - 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 property sectors.
  
  One needs to only look at numbers touted by Safehold. Tim Doherty, Safehold's head of financial investments, stated in a news release that the business has expanded land lease deals 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 sophistication in the land lease market, adopting techniques such as predictability of lease payments, a relocation 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 back, Dallas-based Montgomery Street Partners started a $1 billion REIT targeted on investments in the country's top 50 markets. High interest from institutional financiers prompted Montgomery Street to expand the pool to $1.5 billion in 2022.
  
  Murray McCabe, a handling 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 validates our strategy and confirms that ground leases have progressed to end up being an acceptable and mainstream funding tool."
  
  Clearly, ground lease financial investment funds are among the emerging trends 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 efficient type of funding" that assists unlock possession worth.
  
  These current advancements, in addition to overall financing patterns within the realty market, develop a pattern that's tough to disregard: Land lease activity, which has actually grown to a more than $18 billion market in 2022, will just see more deals announced over the next 10 years. By one estimate, the marketplace might be near $2.5 trillion in the United States alone, providing a significant runway for growth.
  
  How does a land lease work?
  
  Long a staple of family offices trying to find a consistent income and foreseeable stream from long-held vacant parcels in preferable places, the land lease has become widely accepted because the vehicle presents a win-win circumstance 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 acquires the land from the structure owner. This arrangement makes it possible for the designer to launch crucial capital, directing it toward locations with higher return capacity. Simultaneously, the structure owner keeps full control of the asset while divesting the land below it, which, though beneficial in the development process, provides little go back to the total project. The lease is tailored to fit the job.
  
  The Boston Harbor Development works as an illustration of the long-standing use of land leases in the hospitality market. Additionally, this method has actually discovered popularity in retail, health and fitness centers and fast-food outlets. Now, various markets are recognizing the value of this concept. Ground lease payments include predetermined annual lease increases.
  
  " Proof of principle continues to spread out," Safehold's Doherty stated.
  
  As the benefits to a task's capital stack become easily obvious, ground leases will gain larger approval and be routinely employed as a crucial element in the property industry. Predictions recommend that ground leases will end up being mainstream within the next five to ten years, providing a spectrum of investment chances for astute gamers.
  
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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 people and family offices to get and handle countless multifamily assets across the U.S. and Europe, generating consistent returns and favorable social impact.
  
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