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Why Ground Lease REITs are Building In Popularity
savannahhandco edited this page 3 weeks ago
As more residential or commercial property owners in requirement of liquidity use ground leases to unlock capital, genuine estate financiers could reap the rewards.
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Numerous openly traded property trusts (REITs) have actually faced difficulties in the previous year, with returns mainly routing stock market indexes. But REITs that are focused on ground leases - owning the land without owning the buildings that rest on it - have actually been an exception.
Splitting the ownership of business land from the buildings that sit on it isn't an originality. In some methods, it's the very same monetary structure that middle ages royalty used with its subjects. But the democratization of ground leases and their growing popularity is reflective of other type of securitization across the economy - creating narrower and more concentrated return qualities to match the needs of various classes of financiers.
And with industrial office real estate, in particular, in a prominent state of post-lockdown upheaval, the ability to produce a de-risked realty asset has actually been warmly welcomed by investors.
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At present, Safehold (SAFE) is the sole openly traded ground lease REIT pure play. It will likely be among numerous 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 involving 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 advancement, a hotel, casino and theater task six miles south of Boston.
Unlocking capital when in need of liquidity
Residential or commercial property owners are using ground leases to unlock capital in locations where liquidity is doing not have. With local banking tightening up financing - even with the specter of lower rates of interest - we are now seeing land lease queries soar. In my own land lease specialty practice, we are fielding more queries from owners and developers in all realty sectors.
One needs to only take a look at numbers promoted by Safehold. Tim Doherty, Safehold's head of financial investments, stated in a news release that the business has 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 growth to a brand-new level of elegance in the land lease market, adopting techniques such as predictability of lease payments, a move that causes more efficient rates. Over the last 3 months of 2023, Safehold stock was up almost 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 nation's top 50 markets. High interest from institutional financiers triggered 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've seen for GLR's (ground lease REIT) follow-on equity offering validates our strategy and verifies that ground leases have progressed to end up being an appropriate and traditional financing tool."
Clearly, ground lease mutual fund are among the emerging patterns in property. Ares Management and genuine estate personal equity firm The Regis Group formed Haven Capital in 2020 to capture growing land lease demand to, in their words, provide "a more efficient kind of financing" that helps unlock property worth.
These recent developments, along with overall financing patterns within the property industry, develop a pattern that's difficult to overlook: Land lease activity, which has grown to a more than $18 billion market in 2022, will only see more offers revealed over the next ten years. By one quote, the market could be near to $2.5 trillion in the United States alone, providing a significant runway for expansion.
How does a land lease work?
Long a staple of family workplaces looking for a constant earnings and predictable stream from long-held uninhabited parcels in desirable places, the land lease has become commonly accepted because the vehicle presents a win-win circumstance for both the structure owner and the landowner.
How does a land lease operate? Typically covering a regard to 50 to 99 years with renewal choices, a land lease REIT or sponsor acquires the land from the structure owner. This plan enables the designer to release important capital, directing it toward areas with greater return capacity. Simultaneously, the structure owner maintains full control of the possession while divesting the land underneath it, which, though helpful in the advancement process, offers little return to the overall job. The lease is customized to fit the task.
The Boston Harbor Development acts as an illustration of the enduring use of land leases in the hospitality market. Additionally, this technique has actually found appeal in retail, health and wellness centers and fast-food outlets. Now, numerous industries are recognizing the worth of this idea. Ground lease payments consist of fixed yearly lease increases.
" Proof of concept continues to spread out," Safehold's Doherty said.
As the advantages to a task's capital stack ended up being readily apparent, ground leases will acquire larger acceptance and be routinely employed as a crucial element in the property industry. Predictions suggest that ground leases will become mainstream within the next five to ten years, offering a spectrum of financial investment chances for astute players.
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This short article was written by and presents the views of our contributing consultant, not the Kiplinger editorial staff. You can examine advisor 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 property business. For over 10 years, he has partnered with ultra-high-net-worth individuals and household offices to acquire and manage thousands of multifamily possessions throughout the U.S. and Europe, generating constant returns and positive social impact.
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