1 Why Ground Lease REITs are Building In Popularity

Elliot Getty edited this page 2025-06-20 05:16:42 +08:00

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• zhihu.comAs more residential or commercial property owners in need of liquidity use ground leases to open capital, genuine estate investors might enjoy the benefits.-.-.-.-.

zhihu.com
As more residential or commercial property owners in need of liquidity use ground leases to open capital, genuine estate investors might enjoy the benefits.

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  Numerous openly traded real estate trusts (REITs) have faced challenges in the past year, with returns mostly trailing stock market indexes. But REITs that are concentrated on ground leases - owning the land without owning the structures that sit on it - have been an exception.
  
  Splitting the ownership of industrial land from the structures that rest on it isn't an originality. In some ways, it's the exact same monetary structure that middle ages royalty used with its subjects. But the democratization of ground leases and their growing appeal is reflective of other kinds of securitization throughout the economy - producing narrower and more focused return qualities to suit the needs of different classes of financiers.
  
  And with industrial office genuine estate, in particular, in a prominent state of post-lockdown turmoil, the capability to develop a de-risked genuine estate asset has actually been warmly accepted by financiers.
  
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  At present, Safehold (SAFE) is the sole publicly 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 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 theater project 6 miles south of Boston.
  
  Unlocking capital when in need of liquidity
  
  Residential or commercial property owners are using ground leases to unlock capital in areas where liquidity is doing not have. With regional banking tightening up financing - even with the specter of lower rate of interest - we are now seeing land lease queries shoot up. In my own land lease specialty practice, we are fielding more inquiries from owners and developers in all realty sectors.
  
  One requires to only take a look at numbers promoted by Safehold. Tim Doherty, Safehold's head of financial investments, stated in a press release that the company 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 development to a brand-new level of elegance in the land lease market, adopting methods such as predictability of lease payments, a move that leads to more effective prices. 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 country's top 50 markets. High interest from institutional financiers prompted Montgomery Street to broaden 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 verifies our method and confirms that ground leases have actually developed to become an acceptable and traditional funding tool."
  
  Clearly, ground lease mutual fund are one of the emerging trends in property. Ares Management and realty private equity company The Regis Group formed Haven Capital in 2020 to catch growing land lease need to, in their words, supply "a more effective kind of funding" that assists unlock property value.
  
  These current advancements, together with general funding trends within the realty industry, develop a pattern that's tough to disregard: Land lease activity, which has 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 might be near to $2.5 trillion in the United States alone, supplying a considerable runway for expansion.
  
  How does a land lease work?
  
  Long a staple of family offices searching for a constant income and foreseeable stream from long-held uninhabited parcels in preferable areas, the land lease has ended up being extensively embraced because the lorry provides 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 choices, a land lease REIT or sponsor obtains the land from the building owner. This arrangement enables the developer to launch vital capital, directing it towards areas with higher return potential. Simultaneously, the structure owner maintains full control of the asset while divesting the land below it, which, though useful in the advancement procedure, offers little return to the total project. The lease is customized to fit the task.
  
  The Boston Harbor as an illustration of the long-standing usage of land leases in the hospitality industry. Additionally, this method has discovered appeal in retail, health and wellness centers and fast-food outlets. Now, various industries are recognizing the value of this idea. Ground rent payments include predetermined annual lease increases.
  
  " Proof of principle continues to spread out," Safehold's Doherty said.
  
  As the advantages to a task's capital stack become easily apparent, ground leases will gain larger acceptance and be frequently employed as a key aspect in the property industry. Predictions recommend that ground leases will become mainstream within the next 5 to 10 years, providing a spectrum of financial investment opportunities for astute gamers.
  
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  Jim Small is the Founder/CEO of Sante Real Estate Investments, an impact-based realty business. For over ten years, he has actually partnered with ultra-high-net-worth individuals and family offices to acquire and handle thousands of multifamily properties across the U.S. and Europe, generating constant returns and positive social impact.
  
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