Bengaluru/Mumbai: The Securities and Exchange Board of India (Sebi) has issued regulations to amend the REIT Regulations 2014, establishing guidelines for creation of Small and Medium Real Estate Investment Trusts, or SM REITs.
This move aims to regulate the fractional ownership industry and safeguard investor interests, incorporating both commercial and residential properties within the new framework.
Under this arrangement, an SM REIT is allowed to gather funds starting from ₹50 crore by issuing units to a minimum of 200 investors. These funds are to be used for acquiring and managing real estate assets, generating income for the investors.
The ownership of these assets will be structured through one or more schemes, each operating under special purpose vehicles (SPVs). An investment manager responsible for setting up an SM REIT is required to have a net worth of at least ₹20 crore, and a separate trustee will be appointed for oversight.
The new regulations will be called Sebi (REIT) (Amendment) Regulations 2024.
The process to list an SM REIT will mirror the initial public offering (IPO) by larger REITs, but with a significant distinction in asset completion requirements. For SM REIT schemes, at least 95% of the assets must be fully developed and generating revenue, compared to the 80% requirement for larger REITs.
An initial offering for an SM REIT will have a minimum subscription amount of ₹10 lakh per investor, contrasting with the current norm where fractional platforms often require an investment of about ₹25 lakh.
Moreover, the investment manager is mandated to retain a minimum of 5% of the total outstanding units in each scheme for a period of two years, starting from the fourth year post-listing, until the fifth year’s end. This is a reduction from the 15% that was proposed by the Sebi consultation paper.
However, SM REITs utilizing leverage must ensure a 15% co-investment by the manager, with leverage capped at 49% of the REIT’s assets.
“Any regulated product comes with significant benefits for investors – uniformity, investor protection, fairness, transparency and access to redressal mechanisms. We are excited to see the new SM REIT regulations being notified and look forward to working with the regulator in making institutional quality real estate accessible to retail investors under a fully regulated regime,” Kunal Moktan, co-founder and CEO, Property Share.
These amendments, approved by Sebi on 25 November 2023 following a consultation paper released in May of last year, aim to facilitate the growth of SM REITs.
Fractional ownership allows individual investors to co-own commercial or residential properties as an alternative investment route. Properties are acquired through SPVs or private limited companies, with investments typically directed towards pre-leased assets, ensuring monthly rental returns for investors.
As per industry estimates, fractional ownership platforms have over ₹4,000 crore in assets under management (AUM).
Sebi added that SM REIT schemes may raise funds from Indian and foreign investors by the issuance of units.
The investment manager is required to maintain a website detailing all SM REIT schemes, including information on real estate assets and properties, both proposed and acquired, under each scheme, enhancing transparency and investor access to information.
