Why is land lease housing booming?

At first glance the land lease business model appears like a way to get cheap housing that is also a good investment. But regulatory quirks mean we all pay.

My new book, The Great Housing Hijack, will be released on 27th February 2024 (you can pre-order now). If you want to understand the economics of housing markets and why everyone claims to want affordable housing, but no one wants cheap housing, this book is for you.

---

One of the hottest plays in residential real estate investment is the land lease community. Currently, this model of ownership houses 130,000 Australians and there are many more projects in the pipeline.

So what’s it all about?

This article is my attempt to wrap my head around the business model and understand where the rabbit goes in this financial magician’s hat—because if it is a cheaper option for residents, then how is it also a better investment for landlords?

Who exactly is paying?

The land lease model is essentially that of a caravan park. In Queensland, the relevant legislation for these communities is the Manufactured Homes (Residential Parks) Act 2003, with each state having its own legislative framework. Some land lease communities are (or were) caravan parks. In the United States land leases are called “manufactured home estates”.

Many companies are active in this sector, such as Ingenia, GemLife, Hometown, Palm Lake, and Sea Change. Large institutional investors are also taking an interest.

Halcyon is a big player and was recently acquired by Stockland for $620 million. There now seems to be a huge financial appetite for investment in this model, just as there is for build-to-rent apartments.

Here’s how they describe the land lease model:

…you purchase your stand-alone home and sign a lease (Site Agreement) to pay rent (Site Fees) on the freehold land on which your home sits. The land remains the property of Stockland. Under the legislation (relevant to the state the home is located in), you hold your land lease in perpetuity, meaning it lasts the life of your ownership. The Site Agreement is your contractual right to occupy the land and also gives you non-exclusive use of the community’s common areas and communal facilities.

This site agreement style of lease comes with the obligation of an ongoing rent payment, which is often a different amount for singles and couples. Some are perpetual leases, but others expire after 50 or 99 years, and the site agreement can be traded like any other property right. There is usually no subletting allowed.

Because of this lease arrangement, rather than a property title, there is currently no way to borrow money to buy a home and lease bundle in land lease communities. So they are typically marketed towards retirees, with often minimum ages of 50 years and bans on children residing in the community.

They are essentially retirement villages. And I think that much of the analysis that follows applies to retirement villages in general.

Land lease communities seem to be delivering for many residents. They also seem to be delivering for investors.

If land lease projects make better returns for developers and landlords, how can they also be cheap for residents compared to buying or renting freehold property?

Regulatory quirks relied on for the business model

Here’s how Stockland explains its land lease business model.