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Why Ground Lease REITs are Building In Popularity
ruebenmonti537 edited this page 2 months ago
As more residential or commercial property owners in requirement of liquidity use ground leases to unlock capital, investor could gain the benefits.
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traded property trusts (REITs) have actually faced obstacles 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 actually been an exception.
Splitting the ownership of commercial land from the structures that sit on it isn't a brand-new concept. In some ways, it's the same financial structure that medieval royalty used with its topics. But the democratization of ground leases and their growing appeal is reflective of other kinds of securitization throughout the economy - producing narrower and more concentrated return characteristics to suit the needs of various classes of investors.
And with industrial office realty, in specific, in a prominent state of post-lockdown upheaval, the capability to create a de-risked realty asset has been warmly embraced by investors.
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At present, Safehold (SAFE) is the sole openly traded ground lease REIT pure play. It will likely be one of numerous on the marketplace in the coming years, prompting 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 arrangement with Real estate Income, a traditional REIT, for its Encore Boston Harbor advancement, a hotel, gambling establishment and theater task six miles south of Boston.
Unlocking capital when in requirement of liquidity
Residential or commercial property owners are utilizing ground leases to unlock capital in areas where liquidity is lacking. With regional banking tightening up financing - even with the specter of lower rate of interest - we are now seeing land lease queries soar. In my own land lease specialty practice, we are fielding more questions from owners and designers in all genuine estate sectors.
One needs to just look at numbers touted by Safehold. Tim Doherty, Safehold's head of financial investments, said in a press release that the business has broadened land lease deals from 12 in 2017 to 130 in 2022, with the value of the portfolio at more than $6 billion. He attributed the growth to a brand-new level of sophistication in the land lease market, adopting techniques such as predictability of lease payments, a move that causes more efficient pricing. Over the last three months of 2023, Safehold stock was up almost 40%.
Growing popularity of ground leases has not gone unnoticed. Three years earlier, Dallas-based Montgomery Street Partners started a $1 billion REIT targeted on investments in the country's leading 50 markets. High interest from institutional investors prompted Montgomery Street to broaden the 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 verifies our method and confirms that ground leases have actually developed to become an appropriate and traditional financing tool."
Clearly, ground lease mutual fund are among the emerging trends in genuine estate. Ares Management and realty personal equity firm The Regis Group formed Haven Capital in 2020 to capture growing land lease demand to, in their words, supply "a more effective type of funding" that helps unlock possession worth.
These current advancements, in addition to overall financing patterns within the property market, establish a pattern that's tough to disregard: Land lease activity, which has actually 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 might be close to $2.5 trillion in the United States alone, offering a substantial runway for expansion.
How does a land lease work?
Long a staple of family offices looking for a consistent earnings and predictable stream from long-held uninhabited parcels in preferable areas, the land lease has actually become widely welcomed because the vehicle presents a win-win circumstance for both the structure owner and the landowner.
How does a land lease run? Typically covering a regard to 50 to 99 years with renewal choices, a land lease REIT or sponsor gets the land from the building owner. This arrangement makes it possible for the designer to release important capital, directing it towards locations with greater return capacity. Simultaneously, the building owner retains full control of the asset while divesting the land underneath it, which, though helpful in the development process, provides little go back to the general project. The lease is tailored to fit the job.
The Boston Harbor Development works as an illustration of the long-standing use of land leases in the hospitality market. Additionally, this technique has actually discovered popularity in retail, health and wellness facilities and fast-food outlets. Now, numerous industries are acknowledging the value of this idea. Ground rent payments include predetermined annual lease increases.
" Proof of concept continues to spread out," Safehold's Doherty said.
As the advantages to a task's capital stack become easily apparent, ground leases will gain wider approval and be regularly used as a crucial component in the property market. Predictions recommend that ground leases will become mainstream within the next 5 to 10 years, offering a spectrum of investment chances for astute players.
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Jim Small is the Founder/CEO of Sante Real Estate Investments, an impact-based real estate business. For over ten years, he has actually partnered with ultra-high-net-worth individuals and family workplaces to acquire and handle thousands of multifamily possessions throughout the U.S. and Europe, generating constant returns and positive social impact.
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