The Securities Exchange Board of India (Sebi) has recently announced amendments to the REIT Regulations 2014, outlining provisions for the formation of Small and Medium Real Estate Investment Trusts (SM REITs). This initiative seeks to regularize the fractional ownership in both commercial and residential properties under the detailed guidelines and provide effective regulatory framework for a large number of unregistered Fractional Ownership Platforms (FOPs). It is expected that FOPs once listed as SM REITs, will command significant traction in equity markets.
According to Rajeshwar Burla, Senior Vice-President & Group Head- Corporate Ratings, ICRA, “At a cap rate of 8-8.5%, SM REIT-ready office space provides monetization oppor- tunity of Rs. 67,000 – 71,000 crore across top seven cities. SM REITs will provide an opportunity for small Grade A and most of the Grade B office developers to monetize their investments and wider market acceptance of fractional ownership platforms (FOPs). However, the minimum unitholding requirement for SM REITs could act as a deterrent from a scalability perspective.”
ADVANTAGE FRACTIONAL OWNERSHIP PLATFORMS
A new investment model gaining popularity is the Fractional ownership platform that invests mainly in commercial rea estate to generate steady passive rental income for the long term along with capital appreciation. It facilitates the eventual ownership of a commercial property by small scale investors at the retail level. While, fractional ownership platforms as a model encompass residential, warehousing, agro-farms and retail assets as well, currently in India, commercial office spaces dominate FOPs.
Industry experts affirm that SEBI guidelines will induce confidence among the investors and will be beneficial in increasing retail participation, Also, FOPs that will enlist as SM REITs will gain easy access to funding. From an asset owner perspective, an eventual listing will lead to increase in fair value of as- sets, democratization of ownership and reduction in transaction costs during exit.
“SM REITs will not only foster retail investors’ interest in the real estate sector, but will ensure investment portfolio diversification in a regulated environment. Aspects like reduction in minimum invest- ment amount, mandatory manager holding period, and 95% presence of income generating assets will make SM REITs more endearing to the informed investor. Interestingly, the number of unitholders for the three office REITs in India have shown an annual growth of 60-80% since listing. On similar lines, SM REITs have a potential to witness an increase in ownership base by up to 20 times in the next 4-5 years.” said Badal Yagnik, Chief Executive Officer, Colliers India.
VALUE FOR REAL ESTATE STAKEHOLDERS
The revisions to SEBI (Real Estate Investment Trusts) Regulations, 2014, represent a bold regulatory shift, rendering SM REITs more accessible with a minimum asset value of Rs. 50 crores. This democratization of real estate will promote broader participation. SM REITs offer diversified portfolios, liquidity, professional management, and regulatory oversight, making them an enticing option for investors seeking stability and reduced risk compared to fractional ownership models.
As per Aryaman Vir, CEO of WiseX, “Over the last decade, the investment landscape in India has undergone a transformation in demographics, technological progress, and there has been growth in individual disposable incomes. Investors are now increasingly open to exploring new investment options for better returns. The recent SEBI guidelines on SM REITs enhances layers of liquidity and safety to investing in real estate, and also makes it highly accessible to investors. Despite an inclination towards equities & mutual funds, there is growing evidence of interest in investing in real-estate investments amongst investors as it is a stable asset class. We believe the recent SEBI approval on regularizing fractional ownership framework, along with reducing the minimum threshold of investment to INR 10 lakhs will further help in democratizing real estate—a traditional asset class—to more investors.”
Sudarshan Lodha, Co-founder & CEO, Strata said, “As the leading FOP in the nation, Strata embraces the regulator’s vision to streamline fractional ownership, elevating it to mainstream investment status. We are thrilled by the recent growth of this sector, and we believe that this regulatory push will enhance the credibility and investor confidence. Our focus this year is to integrate eligible assets into SM REITs, bolstering investor trust and developer relationships to fortify our supply pipeline.”
Umesh Sahay, Founder & CEO of EFC (I) Limited, expressed, “India’s economy is on a growth trajectory, and this is likely to spur investments across sectors including real estate – both commercial and residen- tial. With SEBI notifying amended regulations for SM REITs, investors can now own rent-yielding real es- tate assets by making a minimum investment of Rs 10 lakh. The move will help enhance transparency and boost participation of both do- mestic and foreign retail investors, thereby leading to better liquidity in the market. We remain confident of the growing demand, and this move to set up and manage the assets and investments of SM REIT will help further boost our core business of acquiring and managing commercial real estate and leasing it out as managed office spaces.”
Shiv Parekh, Founder and CEO, hBits commented, “SEBI’s confidence in REITs and the belief that fractional ownership of real estate will be the strength of India, is a big boost to the sector on the close heels of the notification establishing guidelines for the creation of SM REITs. It is a ‘mutual fund’ moment for the real estate sector, and in the true sense is democratization of access of retail investors into real estate. Until now, real estate has been a major part of the HNI’s portfolio, but the reduction in the minimum investment threshold to INR 10 lakhs makes it affordable for the larger population. India has over 800 million square feet of Grade A offices space, the demand for which is steadily growing. More than INR 4000 crores of A grade properties have undergone the FOP route and sold to investors over the last few years.”
Key Highlights
Fractional Ownership Platforms (FOPs) allow investors to participate in real estate ownership with fractional shares, minimum investment ranging from Rs. 10-25 lakh
SEBI will regulate FOPs) offering real estate as- sets through small and medium REITs (SM REIT). Registration of existing FOPs and new ones is mandatory under SEBI.
At present, it is estimated that the assets under management (AUMs) for various FOPs stand at Rs. 5,000 crore.
However, the minimum unitholding requirement for SM REITs could act as a deterrent from a scalability perspective.
Fractional ownership platforms such as Strata, hBits, WiseX, EFC (I) Ltd have started the process of registering under SM- REIT regulations.
Strata sale form of fractional ownership is mostly prevalent in office buildings. As of March 2024, office market in top six cities of the coun- try hold over 200 million sq. ft of Grade A strata sale stock, constituting 28% of total Grade A office stock.