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Why Ground Lease REITs are Building In Popularity
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As more residential or commercial property owners in need of liquidity use ground leases to open capital, genuine estate financiers could gain the rewards.
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Numerous openly traded realty trusts (REITs) have actually faced challenges in the previous year, with returns largely trailing stock exchange indexes. But REITs that are focused on ground leases - owning the land without owning the buildings 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 methods, it's the same monetary structure that middle ages royalty utilized with its topics. But the democratization of ground leases and their growing popularity is reflective of other sort of securitization across the economy - producing narrower and more concentrated return characteristics to fit the requirements of various classes of investors.
And with industrial workplace genuine estate, in specific, in a prominent state of post-lockdown upheaval, the capability to develop a de-risked property asset has actually been warmly embraced 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 a number of on the marketplace in the coming years, triggering other more standard 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 areas where liquidity is lacking. With regional banking tightening up lending - even with the specter of lower interest rates - we are now seeing land lease queries shoot up. In my own land lease specialized practice, we are fielding more questions from owners and developers in all genuine estate sectors.
One needs to just take a look at numbers touted by Safehold. Tim Doherty, Safehold's head of investments, said in a news release that the company has actually 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 brand-new level of elegance in the land lease market, adopting techniques such as predictability of lease payments, a move that results in more efficient pricing. Over the last 3 months of 2023, Safehold stock was up almost 40%.
Growing popularity of ground leases has not gone unnoticed. Three years ago, Dallas-based Montgomery Street Partners began 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 handling partner of Montgomery Street Partners, said in a news release, "The strong need we have actually seen for GLR's (ground lease REIT) follow-on equity offering confirms our strategy and verifies that ground leases have developed to become an appropriate and traditional funding tool."
Clearly, ground lease financial investment funds are one of the in realty. Ares Management and realty private equity firm The Regis Group formed Haven Capital in 2020 to capture growing land lease demand to, in their words, offer "a more efficient type of financing" that assists unlock asset worth.
These recent developments, in addition to general financing trends within the property market, establish a pattern that's hard to overlook: Land lease activity, which has actually grown to a more than $18 billion market in 2022, will just see more deals announced over the next 10 years. By one price quote, the marketplace could be near 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 household offices trying to find a consistent earnings and foreseeable stream from long-held uninhabited parcels in desirable locations, the land lease has ended up being extensively embraced because the automobile presents a win-win circumstance for both the building owner and the landowner.
How does a land lease run? Typically covering a regard to 50 to 99 years with renewal options, a land lease REIT or sponsor acquires the land from the building owner. This arrangement makes it possible for the developer to release essential capital, directing it toward locations with greater return capacity. Simultaneously, the structure owner retains full control of the asset while divesting the land below it, which, though beneficial in the advancement procedure, supplies little return to the general task. The lease is tailored to fit the project.
The Boston Harbor Development works as an illustration of the long-standing use of land leases in the hospitality industry. Additionally, this approach has discovered popularity in retail, health and fitness centers and fast-food outlets. Now, various markets are acknowledging the worth of this idea. Ground rent payments include established yearly lease increases.
" Proof of idea continues to spread," Safehold's Doherty said.
As the benefits to a project's capital stack become easily evident, ground leases will get larger approval and be regularly used as an essential component in the genuine estate industry. Predictions suggest that ground leases will become mainstream within the next 5 to 10 years, using a spectrum of investment opportunities for astute players.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can examine consultant records with the SEC or with FINRA.
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Jim Small is the Founder/CEO of Sante Real Estate Investments, an impact-based realty business. For over 10 years, he has partnered with ultra-high-net-worth people and family offices to acquire and manage thousands of multifamily possessions throughout the U.S. and Europe, producing constant returns and favorable social effect.
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