Why Ground Lease REITs are Building In Popularity

As more residential or commercial property owners in need of liquidity usage ground leases to open capital, investor might reap the rewards.

-. -. -.

-.

Newsletter sign up Newsletter. -

When you buy through links on our site, we might make an affiliate commission. Here's how it works.

Numerous openly traded realty trusts (REITs) have faced challenges in the previous year, with returns largely tracking stock exchange indexes. But REITs that are focused 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 structures that sit on it isn't a brand-new concept. In some methods, it's the same monetary structure that medieval royalty used with its topics. But the democratization of ground leases and their growing popularity is reflective of other sort of securitization throughout the economy - producing narrower and more concentrated return attributes to fit the needs of different classes of financiers.

And with industrial workplace realty, in specific, in a popular state of post-lockdown turmoil, the ability to produce a de-risked realty possession has actually been warmly embraced by financiers.

Register for Kiplinger's Personal Finance

Be a smarter, better educated financier.

Sign up for Kiplinger's Free E-Newsletters

Profit and prosper with the very best of professional guidance on investing, taxes, retirement, personal financing and more - straight to your e-mail.

Profit and succeed with the finest of specialist suggestions - straight to your email.

At present, Safehold (SAFE) is the sole publicly traded ground lease REIT pure play. It will likely be one of a number of 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 involving 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 conventional REIT, for its Encore Boston Harbor development, a hotel, gambling establishment and 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 locations where liquidity is doing not have. With regional banking tightening up lending - even with the specter of lower interest rates - we are now seeing land lease queries soar. In my own land lease specialty practice, we are fielding more inquiries from owners and developers in all property sectors.

One needs to just look at numbers promoted by Safehold. Tim Doherty, Safehold's head of financial investments, stated in a press release that the business has actually expanded 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 brand-new level of elegance in the land lease market, adopting strategies such as predictability of lease payments, a relocation that causes more effective prices. Over the last 3 months of 2023, Safehold stock was up nearly 40%.
apartmentguide.com
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 investors prompted Montgomery Street to broaden the swimming pool to $1.5 billion in 2022.

Murray McCabe, a managing partner of Montgomery Street Partners, stated in a press release, "The strong demand we have actually seen for GLR's (ground lease REIT) follow-on equity offering confirms our technique and validates that ground leases have progressed to become an acceptable and mainstream financing tool."

Clearly, ground lease mutual fund are one of the emerging trends in property. Ares Management and genuine estate personal equity company The Regis Group formed Haven Capital in 2020 to record growing land lease need to, in their words, supply "a more effective type of funding" that helps unlock asset value.

These current advancements, along with general financing trends within the property market, develop a pattern that's tough to overlook: Land lease activity, which has grown to a more than $18 billion market in 2022, will only see more offers announced over the next ten years. By one estimate, the market could be near to $2.5 trillion in the United States alone, providing a significant runway for growth.
websterapartments.org
How does a land lease work?

Long a staple of household offices looking for a consistent earnings and predictable stream from long-held vacant parcels in preferable places, the land lease has ended up being widely welcomed because the vehicle provides a win-win circumstance for both the building owner and the landowner.

How does a land lease run? Typically spanning a term of 50 to 99 years with renewal alternatives, a land lease REIT or sponsor acquires the land from the building owner. This arrangement makes it possible for the developer to release crucial capital, directing it towards locations with greater return potential. Simultaneously, the structure owner retains full control of the property while divesting the land below it, which, though helpful in the advancement procedure, supplies little go back to the total project. The lease is customized to fit the task.

The Boston Harbor Development functions as an illustration of the enduring use of land leases in the hospitality market. Additionally, this approach has discovered popularity in retail, health and wellness facilities and fast-food outlets. Now, numerous markets are acknowledging the worth of this idea. Ground lease payments include predetermined yearly lease increases.

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

As the benefits to a task's capital stack ended up being easily evident, ground leases will get broader acceptance and be frequently employed as a crucial component in the genuine estate market. Predictions suggest that ground leases will end up being mainstream within the next 5 to ten years, using a spectrum of investment opportunities for astute gamers.

Related Content

Bright Spots Amid Commercial Property Struggles.
REITs Unveiled: A Comprehensive Guide for Investors.
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 consultant, not the Kiplinger editorial personnel. You can inspect adviser records with the SEC or with FINRA.

Get Kiplinger Today newsletter - totally free

Profit and prosper with the best of Kiplinger's suggestions on investing, taxes, retirement, individual financing and a lot more. Delivered daily. Enter your e-mail in the box and click Sign Me Up.

Jim Small is the Founder/CEO of Sante Real Estate Investments, an impact-based realty business. For over 10 years, he has actually partnered with ultra-high-net-worth people and household offices to get and handle thousands of multifamily assets across the U.S. and Europe, generating consistent returns and positive social impact.

Four things you can do today to up your financial readiness SPONSORED Don't get caught financially flat-footed.

Millions To Lose Medical Insurance Unless Congress Acts The Kiplinger Tax Letter If existing guidelines for the health premium tax credit (PTC), a popular Obamacare subsidy, aren't extended, 3.7 million individuals could lose their medical insurance.

Keep an eye out for Annuity Surrender Charges: How to Avoid Them Pulling money out of an annuity early can be a pricey proposition. Here's how surrender charges work and one possible method around them - an annuity "ladder."

The Snake Bite Effect: How Fear Can Cost Investors Dearly Does market volatility make you seem like running scared? That could be a pricey mistake. Here's why ... and what to do instead.

I'm a Wealth Manager: This Is How to Reduce One of the Biggest Risks to Your Retirement If the stock market dips when you retire, your portfolio might not have time to recover. But having a structured earnings plan for your retirement years can help.

Ditch the Fear: A Guide to Embracing Retirement Preparedness Don't be frightened about running out of cash, be prepared. This financial expert explains how you can assist take control of 3 critical retirement danger elements with a little planning.

Jet Set on a Budget Plan: Expert Advice for Summer Travel These cost-saving methods, supplied by a financial advisor, are vital for enjoying summer season travel without financial stress or financial obligation.

Four Innovations That Reinvented Retirement as We Understand It and Why AI Is Next A financial expert checks out the innovations that have reshaped our lives for many years - and what the next transformation, AI, might indicate for your legacy.

What Will They Remember About You? It's Not Just About Your Money Once you retire is the prime-time show to guarantee you leave a meaningful tradition, personally and economically. This financial organizer recommends five actions to develop a bridge in between who you are and how you'll be remembered.

How One Widow Nearly Missed Out on $213,000 in Social Security Losing your partner typically suggests losing 30% to 50% of your household income. This financial consultant highlights that preparing ahead and comprehending the rules surrounding survivor benefits can help.