What cap rates apply to income-generating ground leases in the current market?

Cap rates for income-generating ground leases in the current commercial real estate market, particularly in India’s Tier 1 and Tier 2 cities, reflect the low-risk, long-term, and stable cash flow profile of these assets. Since ground leases typically involve tenants who develop and operate their facilities on leased land, they offer predictable, inflation-protected income with minimal landlord obligations. This stability attracts both institutional and private investors, influencing the cap rate range.

1. Core Urban Markets (Tier 1 Cities)

• In prime areas of cities like Mumbai, Delhi NCR, Bengaluru, Hyderabad, and Chennai, cap rates for ground lease income streams typically range from 6.5% to 7.5%.
  
• These markets command lower cap rates due to:
  
  • Highland value appreciation
    
  • Strong tenant credit profiles (often corporates, healthcare, retail anchors)
    
  • Limited land availability and demand for long-term tenancy
    

2. Established Suburban and Tier 2 Markets

• In fast-developing corridors of cities like Pune, Ahmedabad, Coimbatore, Jaipur, and Kochi, cap rates range from 7.5% to 8.5%.
  
• Slightly higher yields are expected due to:
  
  • Perceived market volatility
    
  • Longer vacancy timelines in case of tenant exit
    
  • Slightly lower tenant creditworthiness compared to metro zones
    

3. Ground Lease Assets with Institutional or Credit Tenants

• When the tenant has an investment-grade credit rating, or is a publicly listed or multinational company, cap rates can compress further (by 50–100 basis points).
  
• Cap rates in such cases may range from 6.0% to 7.0%, depending on:
  
  • Length of lease (typically 30+ years)
    
  • Lock-in duration
    
  • Escalation structure (annual vs triennial)
    

4. Special-Use or Sector-Specific Ground Leases

• Logistics parks, hospitals, schools, and fuel stations leased under long-term ground lease agreements often fall in the 7.5% to 9.0% range.
  
• These may offer slightly higher yields due to:
  
  • Sector-specific operational risks
    
  • Limited secondary market for specialized uses
    
  • Less flexibility in land reuse without tenant departure
    

5. Cap Rate Adjustments Based on Escalation and Rent Review

• Assets with 5% annual escalation or 15% every 3 years often support lower cap rates due to stronger forward yield protection.
  
• Ground leases with market rent review mechanisms every 10–15 years also trade at compressed cap rates due to built-in inflation alignment.
  

In conclusion, income-generating ground leases typically trade at 6.5% to 8.5% cap rates, depending on location, tenant profile, lease structure, and resale liquidity. Lower cap rates indicate higher demand and lower risk, particularly for properties with stable, long-term tenants and transparent lease terms.