The new regulations for medium and small REITs, especially the reduction of the minimum ticket size to Rs 10 lakh, by the Indian market regulator SEBI, is touted to be a game changer for the new-age fractional investment platforms in the country
Here’s a primer on how this much-needed transparency could benefit retail investors, as well as high net worth investors (HNIs), looking to add the highest-graded commercial real estate to their portfolios using the Real Estate Investment Trusts (REITs) route.
Where the fractional real estate industry stood before recent SEBI regulation
Buying a fraction of otherwise unaffordable large real estate assets is known as fractional investment. Through fractional investment, you co-own property with other people, which could be a rent-yielding office space or a building. What you earn is a proportion of the rent plus a potential upside appreciation in the price of the asset itself. Over the last few years, several new-age fractional investment companies such as hBits, Strata, PropertyShare, and Altgraf have listed a range of commercial properties on their IT-enabled platforms, which HNIs can invest in. Currently, these platforms are unregulated entities that are mainly web-based and operate by aggregating funds from investors to buy stakes in pre-leased commercial real estate, typically with a minimum ticket size of Rs 25 lakh. The lack of a standardised framework, or independent valuation and due diligence of assets owned made them a high-risk investment, and investor appetite was limited.
How the new SEBI guidelines will benefit savvy investors
Recently, the SEBI board notified regulations in REITs to create a system of regulation for Small and Medium REITs (SM REITs) with an asset value of at least Rs 50 crore vis-a-vis minimum asset value of Rs 500 crore for existing REITs. Small and medium REITs shall have the ability to create separate schemes for owning real estate through SPV (Special Purpose Vehicle), as per the latest SEBI regulations. These changes are important for formalising the sector, introducing investor faith and addressing the complexity of SPV security issues. These regulations will enable several of these prop-tech platforms to migrate to the SM REIT structure, if they meet the market regulators’ ‘fit and proper’ criteria. It will further increase investor participation in this asset class, which in turn boosts liquidity.
How these changes will help investors
- 1. Most of the fractional ownership platforms today have a minimum investment ticket size of Rs 25 lahk for an investor. SEBI guidelines for SM REITs have reduced the minimum ticket size to Rs 10 lakh. This is an excellent step because it opens the door to many more investors and enhances liquidity. In Rs 10 lakh, you can own some of the Grade A commercial assets in high-performing office markets such as Bandra Kurla Complex, Mumbai, Whitefield in Bengaluru, or Golf Course Road in Gurugram. The chairperson of SEBI has also mentioned in her speech after the board meeting, that once the investor comfort is built at an investment ticket of Rs 10 lakh, this amount can come down even further.
- 2. The minimum number of investors in an SM REIT has to be at least 200 in any scheme, all of whom should be unrelated to the investment managers, and no single investor can own more than 25% of any scheme. This truly democratises the SM REIT structure and ensures no one individual has a controlling stake in the scheme.
- 3. The SM REIT must also buy and own assets that are priced above Rs 25 crore and less than Rs 500 crore. Again, the minimum floor price ensures that the asset quality bought and owned by the SM REIT is of a certain quality.
- 4. The Small and Medium REIT is proposed to be structured very similarly to the current REITs, with one crucial difference. In SM REIT, there will be specific schemes with the trust, and each scheme will invest in a specific asset, and the investor can pick which asset he or she wishes to invest in.
- 5. Unlike the current REIT where all units allocated to investors have the same asset ownership, units will represent different assets in SM REITs. Listing of SM REITs will enable fair and transparent pricing for when you buy or sell the units, with enhanced liquidity and exit options.
- 6. The new rules will also ensure there are no fly-by-night operators in the fractional investment space. These new proposed regulations mandate that investment managers must have a personal net worth of a minimum Rs 20 crore out of which Rs 10 crore has to be a positive liquid net worth. They must also have two years of experience in fund management in real estate, and for new players with no prior real estate experience, it is mandated that two key management personnel must have at least five years of experience in real estate or real estate fund management.
- 7. The final safeguard for investors mandated in small and medium REITs is that 95% of the investor funds must be invested in completed rent-yielding assets.
We have witnessed a strong desire among the savvy retail investors and the HNI community to own high-quality income-generating commercial assets, which can offer attractive returns. We believe small and medium REITs could be the way forward for them to own multiple such assets, rather than concentrating a large pool of their funds in one large commercial asset. While the final structure of the regulation is awaited, the regulations and reduction in the minimum investment amount will establish standardised practices, protect investor interest, and democratise real estate, keeping the investors’ money safe and growing.
Additionally, fractional ownership is also emerging in the field of co-living and holiday homes in destinations like Goa, Coorg, etc and it’s only a matter of time that SEBI will issue guidelines to streamline investments in this segment as well.
(The author is CEO, India Sotheby’s International Realty.)
