1 Why Ground Lease REITs are Building In Popularity
julianebeaty63 edited this page 2025-06-20 17:55:59 +08:00


As more residential or commercial property owners in need of liquidity usage ground rents to unlock capital, real estate investors might enjoy the benefits.

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    Numerous publicly traded property trusts (REITs) have actually dealt with obstacles in the previous year, with returns mainly routing stock market indexes. But REITs that are concentrated on ground leases - owning the land without owning the buildings that rest on it - have been an exception.

    Splitting the ownership of industrial land from the buildings that rest on it isn't a new concept. In some ways, it's the very same monetary structure that medieval royalty utilized with its subjects. But the democratization of ground leases and their growing appeal is reflective of other type of securitization throughout the economy - developing narrower and more concentrated return characteristics to match the requirements of different classes of investors.

    And with commercial workplace property, in particular, in a popular state of post-lockdown turmoil, the capability to create a de-risked realty property has actually been warmly embraced by investors.

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    At present, Safehold (SAFE) is the sole publicly traded ground lease REIT pure play. It will likely be one of numerous on the marketplace in the coming years, prompting other more traditional 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 plan with Real estate Income, a standard REIT, for its Encore Boston Harbor development, a hotel, gambling establishment and theater project six miles south of Boston.

    Unlocking capital when in requirement of liquidity

    Residential or commercial property owners are utilizing ground leases to open capital in locations where liquidity is lacking. With local 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 realty sectors.

    One requires to just look at numbers promoted by Safehold. Tim Doherty, Safehold's head of financial investments, stated in a news release that the company 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 associated the development to a new level of elegance in the land lease market, embracing strategies such as predictability of lease payments, a relocation that leads to more effective pricing. Over the last 3 months of 2023, Safehold stock was up nearly 40%.

    Growing popularity of ground leases has not gone undetected. Three years ago, Dallas-based Montgomery Street Partners started a $1 billion REIT targeted on investments in the nation'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, said in a press release, "The strong need we've seen for GLR's (ground lease REIT) follow-on equity offering confirms our method and confirms that ground leases have evolved to become an acceptable and mainstream financing tool."

    Clearly, ground lease mutual fund are among the emerging patterns in property. Ares Management and real estate personal equity company The Regis Group formed Haven Capital in 2020 to record growing land lease demand to, in their words, offer "a more effective type of financing" that helps unlock asset worth.

    These current advancements, along with total financing patterns within the realty industry, develop 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 revealed over the next ten years. By one quote, the marketplace could be near $2.5 trillion in the United States alone, providing a considerable runway for expansion.

    How does a land lease work?

    Long a staple of household offices searching for a constant income and foreseeable stream from long-held uninhabited parcels in desirable locations, the land lease has become commonly embraced because the lorry presents a win-win scenario for both the structure owner and the landowner.

    How does a land lease operate? 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 plan makes it possible for the developer to launch important 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 useful in the development procedure, supplies little return to the total job. The lease is customized to fit the job.

    The Development works as an illustration of the enduring use of land leases in the hospitality industry. Additionally, this approach has actually discovered popularity in retail, fitness and health centers and fast-food outlets. Now, numerous industries are recognizing the value of this principle. Ground rent payments consist of established yearly lease increases.

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

    As the benefits to a job's capital stack become easily evident, ground leases will get broader approval and be regularly utilized as a crucial element in the real estate market. Predictions recommend that ground leases will end up being mainstream within the next five to ten years, using a spectrum of financial investment chances 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 actually partnered with ultra-high-net-worth people and family workplaces to get and manage thousands of multifamily possessions across the U.S. and Europe, producing consistent returns and favorable social effect.

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