1 Why Ground Lease REITs are Building In Popularity

Zane Haddon edited this page 2025-06-20 23:38:34 +08:00

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• As more residential or commercial property owners in requirement of liquidity use ground leases to unlock capital, real estate investors might enjoy the benefits.-.-.-.-.

As more residential or commercial property owners in requirement of liquidity use ground leases to unlock capital, real estate investors might enjoy the benefits.

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  Numerous openly traded real estate trusts (REITs) have actually faced difficulties in the previous year, with returns mainly trailing stock exchange 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 industrial land from the structures that sit on it isn't an originality. In some methods, it's the exact same financial structure that medieval royalty utilized with its topics. But the democratization of ground leases and their growing popularity is reflective of other kinds of securitization throughout the economy - producing narrower and more concentrated return attributes to suit 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 develop a de-risked property property has actually been warmly welcomed by financiers.
  
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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 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 arrangement with Real estate Income, a traditional REIT, for its Encore Boston Harbor advancement, 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 unlock capital in areas where liquidity is lacking. With local banking tightening up lending - even with the specter of lower rates of interest - we are now seeing land lease questions soar. In my own land lease specialty practice, we are fielding more inquiries from owners and developers in all genuine estate sectors.
  
  One needs to just take a look at numbers promoted by Safehold. Tim Doherty, Safehold's head of investments, said in a press release that the company has 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 sophistication in the land lease market, adopting methods such as predictability of lease payments, a relocation that causes more effective pricing. Over the last 3 months of 2023, Safehold stock was up almost 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 nation's leading 50 markets. High interest from institutional investors prompted Montgomery Street to expand the swimming pool to $1.5 billion in 2022.
  
  Murray McCabe, a managing partner of Montgomery Street Partners, said in a news release, "The strong demand we have actually seen for GLR's (ground lease REIT) follow-on equity offering confirms our method and confirms that ground leases have actually progressed to end up being an acceptable and traditional funding tool."
  
  Clearly, ground lease investment funds are one of the emerging patterns in property. Ares Management and property private equity company The Regis Group formed Haven Capital in 2020 to catch growing land lease demand to, in their words, offer "a more effective form of financing" that assists unlock asset worth.
  
  These current advancements, in addition to general funding patterns within the realty industry, develop a pattern that's tough to neglect: Land lease activity, which has grown to a more than $18 billion market in 2022, will just see more deals revealed over the next 10 years. By one quote, the market might be close to $2.5 trillion in the United States alone, supplying a considerable runway for growth.
  
  How does a land lease work?
  
  Long a staple of household workplaces looking for a steady income and foreseeable stream from long-held uninhabited parcels in desirable places, the land lease has ended up being widely embraced due to the fact that the vehicle presents a win-win scenario for both the building owner and the landowner.
  
  How does a land lease operate? Typically spanning a term of 50 to 99 years with renewal alternatives, a land lease REIT or sponsor gets the land from the building owner. This plan makes it possible for the designer to launch important capital, directing it toward locations with higher return potential. Simultaneously, the building owner maintains complete control of the possession while divesting the land below it, which, though useful in the development procedure, provides little return to the general task. The lease is customized to fit the task.
  
  The Boston Harbor Development works as an illustration of the long-standing usage of land leases in the hospitality market. Additionally, this technique has discovered appeal in retail, fitness facilities and fast-food outlets. Now, various industries are recognizing the worth of this idea. Ground rent payments include lease boosts.
  
  " Proof of concept continues to spread," Safehold's Doherty said.
  
  As the benefits to a project's capital stack become readily obvious, ground leases will acquire broader approval and be frequently employed as a crucial element in the property industry. Predictions suggest that ground leases will end up being mainstream within the next five to ten years, offering a spectrum of investment opportunities for astute gamers.
  
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  Jim Small is the Founder/CEO of Sante Real Estate Investments, an impact-based realty company. For over 10 years, he has partnered with ultra-high-net-worth people and household offices to obtain and handle countless multifamily possessions across the U.S. and Europe, creating consistent returns and positive social impact.
  
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