Owning a Slice of Property With recent introduction of Small and Medium Real Estate Investment Trusts (SM REITs) by SEBI, investors can have fractional ownership of rent-yielding real estate assets at minimum investment of INR 10 lakh, along with transparency and safety

Real estate is a critical component of one's portfolio as it provides income, capital appreciation, inflation protection, and diversification. But investment in the same has often been regarded as capital intensive and requiring considerable market knowledge. Not every investor has the appetite or knowledge for such an investment. This resulted in the emergence of Fractional Ownership Platforms (FOPs) that allow retail investors to jointly own a piece of real estate asset at a fraction of the actual cost.

While this alternate asset class garnered a significant interest among investors, the absence of set regulations resulted in lack of transparency and questions whether such investments are safe. In order to regulate FOPs, SEBI recently notified amendments to the REIT regulations and introduced a framework for Small and Medium Real Estate Investment Trusts (SM REITs).

WHAT ARE SM REITS?

SM REITs are specialized real estate investment trusts that differ from conventional REITs. While the exisiting REITs primarily invest in large-scale commercial properties, such as office buildings and shopping malls with a cap of INR 500 crore, SM REITs concentrate on smaller and medium-sized properties with lower value. These are allowed to issue their units with asset value of at least INR 50 crore, and have at least 200 investors to start a fund. With a SM REITs, one can invest in real estate assets with a minimum amount of INR 10 lakh.

KEY REQUIREMENTS:

As per SEBI's notification companies offering SM REITs will have to maintain networth of INR 20 crore with half of it in the form of liquid cash. The company needs to have two years of experience in real estate fund management to float an SM REIT. Also, investment manager should ensure that 95% of the total net distributable cash flows of the Special Purpose Vehicle (SPV) are distributed to SM REITs and 100% of it shall be distributable to unit holders. The SEBI's directive is expected to boost fractional ownership in the country and is welcomed by platforms offering the same.

"This regulatory move indicates the regulator's trust in this novel investment avenue, reinforcing investor and stakeholder confidence in the fractional ownership model. Additionally, it has made real estate investment an affordable option, enabling investors to own top-notch assets confidently," says Shiv Parekh, Founder & CEO, hBits.

Agrees Sudarshan Lodha, Co-founder and CEO, Strata, "The reduction of the minimum investment ticket size to INR 10 lakhs ensures accessibility for a broader spectrum of investors, thereby democratizing real estate investment opportunities. Most importantly, we also expect that the supply side community comprising builders and developers will come forward and collaborate with fractional ownership players to put up their assets for SM REITs, as the demand for fractional ownership has been growing very rapidly."

Says Kunal Moktan, Co-Founder and CEO, Property Share, "The new SM REIT regulations will ensure a level playing field in terms of capitalization, minimum investment, fees, incentives, marketing, compliances, investor redressal mechanisms etc."

According to Bhavik Bhandari, CSMO, Ashwin Sheth Group, the development is anticipated to be a game changer for risk-taking retail investors and HNIs, enabling them to have exposure to real estate in a smart way, and providing another avenue to diversify their financial investments in the pursuit of better returns."

BENEFITS: Here are some key benefits of investing in SM REITs

LOWER TICKET SIZE: It adds a new asset class to the universe while at the same time securitising smaller real estate assets which are not large enough to be listed through REITs. "Investors get access to a high quality underlying asset at much lower ticket sizes with the added benefit of liquidity through a listed product," adds Moktan.

EASY EXITS: The SM REITs will be listed on the stock exchange, thereby ensuring that a ready secondary market is available for investors who would like to exit their holdings at any time. "Dematerialization of securities will improve liquidity options allowing for more flexible entry and exit strategies," says Aryaman Vir, CEO of WiseX.

PROFESSIONALLY MANAGED: SM REITs will be managed and run professionally by commercial real estate experts and people who have been in this industry and space. Moreover, investors can decide the different kinds of assets, be it office spaces, warehouses or data centers or look for geographical diversification.

REGULATORY TRANSPARENCY: SEBI's approval and regulatory oversight of SM REITs contribute to increased transparency and investor protection. The stringent reporting, audit of due diligence processes, investment rationale and disclosure practices mandated by SEBI ensure that investors have access to reliable information, fostering trust in the market.

FACTORS TO CONSIDER: Despite several benefits, an investor is advised to check the track record of the investment manager. "Investors need to look very carefully at the background of the investment manager - does the team come with experience of investing in real estate other than through the platform, how well is the manager capitalized (risk of bankruptcy), what is the history of corporate governance, who is on the advisory board, who are the independent directors, do they have a demonstrated history of returning capital to investors, does the founding team come with real estate investment experience etc," says Mokhtan.

Then there is market risk as the value of real estate assets and REIT units can fluctuate based on market conditions and economic factors. "Additionally, specific risks related to the underlying real estate assets, such as vacancies, lease expirations, and changes in rental rates, can impact the income potential of the investment," adds Lodha.

RIGHT ALLOCATION: While the minimum investment amount in SM REITs is INR 10 lakh, it is important to give a thorough look at one's existing investments before going for them. "Many people already own a good amount of real estate. Hence, REITs for them may not be a good option. It could be a good option for those who want diversification away from equity, debt, gold and are content with debt plus returns. Up to 10% in REITs may be suggested on a case by case basis," advises Suresh Sadagopan, MD & Principal Officer, Ladder7 Wealth Planners Pvt Ltd.