Fractional investment in real estate is set to become affordable and safer. The Securities and Exchange Board of India (SEBI) recently notified guidelines for the creation of Small and Medium Real Estate Investment Trusts or SM REITs.
In the last few days, there have been a lot of buzz in media around the formal notification of rules for setting up of SM REITs. The regulator’s move is being seen as a gamechanger for the real estate sector. Is it a gamechanger for investors too? Let’s find out.
But first, we need to understand what led to the introduction of SM REITs.
In the last few years, a number of private fractional real estate platforms like hBits, Strata, PropertyShare, Altgraf etc. have attracted crores of rupees from investors. Collectively, these platforms are believed to have attracted fractional investments in Grade A commercial properties worth over Rs 4000 crore.
Fractional investment platforms allow individuals to own a fraction of otherwise unaffordable large real estate assets. In this model, investors can co-own rent-yielding properties with other people. The co-owners then stand to benefit by earning a proportion of rent plus any appreciation in price of the property in future. However, there are some drawbacks of this model.
- First, fractional investment platforms are not regulated, making such investments highly risky.
- Second, the minimum ticket size is generally Rs 25 lakh, which makes fractional investment possible only for high-networth individuals (HNIs).
In the above backdrop, SEBI’s Small and Medium REIT notification is expected to make fractional investment more mainstream, affordable and safe. You may be wondering, how? Well, the answer to this is in details of the notification. Let’s look at some of the key features of SM REITs from the notification:
Key Features of Small and Medium REITs
- Minimum investment
An SM REIT can collect minimum Rs 50 crore by issuing units to a minimum of 200 investors for one scheme. The limit on the number of investors excludes investment manager of the SM REIT, its related parties and associates.
The minimum ticket size for investing in one scheme of SM REIT is Rs 10 lakh. That means, one unit of a SM REIT scheme will be available for Rs 10 lakh.
- Safety features
The investment manager must have a minimum net worth of Rs 20 crore, including minimum Rs 10 crore in liquid assets (cash, units of overnight or liquid mutual funds schemes, fixed deposits, government securities, treasury bills etc).
An scheme of SM REIT has to invest at least 95% of the value of its assets in completed and revenue generating properties. They cannot invest in under-construction or non-revenue generating real estate assets.
Up to 5% of the value of the scheme shall be invested in unencumbered liquid assets.
SM-REIT will be listed on stock exchanges.
An SM REIT cannot lend to any entity other than its own SPV and this SPV cannot lend to any entity.
Units of an SM REIT scheme will be available in Demat form .
- Scope of an SM REIT
SEBI has incorporated both commercial and residential properties within the new framework of SM REIT.
SM REITs can create separate schemes for owning real estate assets through Special Purpose Vehicles (SPVs) constituted as companies.
Investors will not have day-to-day control over management and operation of the assets (properties) managed by the SM REIT.
The properties in which SM REITs can invest include commercial assets, rental housing warehousing, hotels, holiday homes etc.
- Who can invest?
Investing in an SM REIT scheme will be allowed to Indians and foreign citizens (subject to RBI/Government guidelines)
Should you invest in SM REITs?
SM REIT schemes may benefit individuals, who think investing in real estate is the only real investment. With just Rs 10 lakh, investors may be able to invest in Grade A commercial assets in markets such as Mumbai’s Bandra Kurla Complex, Bengaluru’s Whitefield or Gurugram’s Golf Course Road. Even many luxury properties with rental income could be taken under an SM REIT scheme.
However, investors would have to be wary of low yield in real estate compared to other investment options. For instance, larger REIT schemes have delivered low returns in last few years (see here).
Ideally, taking advise from a SEBI-registered investment advisors would be the best way to decide whether to invest in an SM REIT scheme or not.
Note: The Small and Medium REIT guidelines have been introduced via Securities and Exchange Board of India (Real Estate Investment Trusts) (Amendment) Regulations, 2024 notified on March 8, 2024.
