Why Ground Lease REITs are Building In Popularity

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

-.
-.
-.
-.
-
- Newsletter sign up Newsletter.
-

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

Numerous publicly traded real estate trusts (REITs) have dealt with challenges in the previous year, with returns mostly routing stock market indexes. But REITs that are concentrated on ground leases - owning the land without owning the buildings that sit on it - have been an exception.

Splitting the ownership of commercial land from the buildings that sit on it isn't an originality. In some ways, it's the exact same financial 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 across the economy - developing narrower and more concentrated return qualities to fit the needs of different classes of investors.

And with business office realty, in specific, in a popular state of post-lockdown upheaval, the ability to create a de-risked realty possession has actually been warmly accepted by investors.

Be a smarter, much better educated financier.

Profit and flourish with the best of expert advice on investing, taxes, retirement, personal financing and more - straight to your email.

Profit and succeed with the very best of professional guidance - straight to your email.

At present, Safehold (SAFE) is the sole openly traded ground lease REIT pure play. It will likely be among numerous on the market in the coming years, prompting other more conventional 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 traditional REIT, for its Encore Boston Harbor advancement, a hotel, gambling establishment 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 locations 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 shoot up. In my own land lease specialty practice, we are fielding more queries from owners and designers in all realty sectors.

One requires to just take a look at numbers touted by Safehold. Tim Doherty, Safehold's head of financial investments, stated in a news release that the business has broadened 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 growth to a new level of elegance in the land lease market, embracing methods such as predictability of lease payments, a relocation that leads to 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 ago, 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 handling 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 strategy and verifies that ground leases have evolved to end up being an acceptable and traditional financing tool."

Clearly, ground lease mutual fund 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, supply "a more effective form of funding" that assists unlock possession worth.

These recent developments, along with overall financing trends within the property industry, establish a pattern that's tough to neglect: Land lease activity, which has actually grown to a more than $18 billion market in 2022, will just see more deals revealed over the next ten years. By one estimate, the marketplace could be close to $2.5 trillion in the United States alone, supplying a significant runway for expansion.

How does a land lease work?

Long a staple of family workplaces looking for a stable income and predictable stream from long-held uninhabited parcels in preferable locations, the land lease has actually ended up being widely welcomed since the vehicle presents a win-win circumstance for both the structure owner and the landowner.

How does a land lease operate? Typically covering a term of 50 to 99 years with renewal alternatives, a land lease REIT or sponsor gets the land from the building owner. This arrangement makes it possible for the designer to release crucial capital, directing it toward locations with greater return potential. Simultaneously, the structure owner keeps full control of the asset while divesting the land underneath it, which, though useful in the development procedure, offers little return to the overall task. The lease is tailored to fit the job.

The Boston Harbor Development serves as an illustration of the enduring use of land leases in the hospitality market. Additionally, this approach has discovered appeal in retail, health and fitness facilities and fast-food outlets. Now, different markets are acknowledging the value of this principle. Ground rent payments include fixed yearly lease increases.

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

As the advantages to a job's capital stack ended up being easily evident, ground leases will acquire larger acceptance and be regularly employed as a key component in the real estate market. Predictions suggest that ground leases will become mainstream within the next 5 to ten years, using a spectrum of financial investment chances for astute players.

Related Content

Bright Spots Amid Commercial Realty 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 written by and provides the views of our contributing advisor, not the Kiplinger editorial personnel. You can check advisor records with the SEC or with FINRA.

Get Kiplinger Today newsletter - complimentary

Profit and prosper with the very best of Kiplinger's guidance on investing, taxes, retirement, individual finance and much more. Delivered daily. Enter your e-mail in package and click Sign Me Up.

Jim Small is the Founder/CEO of Sante Real Estate Investments, an impact-based property company. For over 10 years, he has actually partnered with ultra-high-net-worth people and household workplaces to get and manage countless multifamily possessions across the U.S. and Europe, creating consistent returns and positive social impact.

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

Millions To Lose Health Insurance Unless Congress Acts The Kiplinger Tax Letter If present rules for the health premium tax credit (PTC), a popular Obamacare subsidy, aren't extended, 3.7 million people might lose their medical insurance.

Watch Out for Annuity Surrender Charges: How to Avoid Them Pulling money out of an annuity early can be a costly proposal. Here's how surrender charges work and one prospective way around them - an annuity "ladder."

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

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

Ditch the Fear: A Guide to Embracing Retirement Preparedness Don't be frightened about lacking money, be prepared. This monetary professional explains how you can help take control of three critical retirement threat factors with a little planning.

Jet Set on a Budget: Expert Advice for Summer Travel These cost-saving strategies, provided by a financial consultant, are vital for enjoying summertime travel without monetary stress or financial obligation.

Four Innovations That Reinvented Retirement as We Understand It and Why AI Is Next A monetary expert explores the developments that have actually reshaped our lives for many years - and what the next revolution, AI, might suggest for your legacy.

What Will They Remember About You? It's Not Practically Your Money Once you retire is the prime-time television to ensure you leave a significant legacy, personally and economically. This monetary planner suggests 5 steps to build a bridge 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 implies losing 30% to 50% of your household earnings. This monetary consultant stresses that preparing ahead and comprehending the rules surrounding survivor advantages can help.