The Securities and Exchange Board of India (Sebi) Friday notified the regulations to govern small and medium real estate investment trusts (SM-REITs) of income-generating and completed properties, which may include commercial assets, rental housing, warehousing, and hotels, among others.
The introduction of regulations is set to enhance investor trust, broadening the embrace of the growing asset category. This effort is expected to offer vital backing to real estate developers, creating an extra opportunity to capitalise on assets and inject essential liquidity into the industry.
While most of the regulations are in line with the draft guidelines that were issued in November, the capital market regulator has introduced a few additional measures related to leverage, minimum subscribers, and higher capital requirements for investment managers of SM-REITs.
“The new regulations are progressive and have the potential to change the income-yielding asset market in India. With the stringent governing standards, eligibility criteria and minimum capital requirement of Rs 20 crore for investment managers and 5% commitment in every SM-REIT, we hope that this alternate asset class will get a robust response from investors,” said Anuranjan Mohnot, MD, Lumos Alternate Investment Advisors.
The minimum subscription size for SM-REIT scheme units will be Rs 10 lakh and treated as one unit. The micro-REITs will be able to list with an asset value of at least Rs 50 crore and a maximum of Rs 500 crore. The SM-REITs will also be able to create separate schemes for owning real estate assets through special-purpose vehicles constituted as companies.
“These regulations safeguard the interests of investors and service providers alike. As a holiday home fractional ownership platform, the inclusion of the residential sector along with commercial in this regulation allows us to ensure that investors get easy exits and have complete transparency,” said Saurabh Vohara, founder & CEO, ALYF.
According to him, these regulations will help open a new asset class of holiday homes to a wider audience and change the way Indians own and earn from property investments.
As per the regulations, the minimum number of unit holders in the scheme of the SM-REIT other than the investment manager, its related parties and associates of the SM-REIT is expected to be not less than 200 investors.
“The fractional ownership ecosystem is gaining momentum over the years and over Rs 4,000 crore of grade A properties have been sold to investors through this route. The constant engagement between stakeholders and the regulator has yielded significant results, with the notification giving the right impetus to make fractional ownership a key choice for investors,” said Shiv Parekh, founder & CEO, hBits.
The regulations allow these micro-REITs to leverage up to 49% of the value of the scheme’s assets. It also mandates the investment managers to always hold a minimum of 5% of total outstanding units if the SM-REIT is not leveraged. In the case of a leveraged SM-REIT, the investment manager is required to hold 15% of the units.
“Any regulated product comes with significant benefits for investors – uniformity, investor protection, fairness, transparency, and access to redressal mechanisms. The industry is looking forward to working with the regulator in making institutional quality real estate accessible to retail investors under a fully regulated regime,” said Kunal Moktan, CEO & Co-founder, Property Share.
The scheme of SM-REIT is not allowed to lend to any entity other than its own special purpose vehicle, and this SPV is also not permitted to lend to any entity.
The regulation stipulates that funds should be raised only through the book-building process of a designated stock exchange and listing is mandatory. The funds can be raised from domestic or foreign investors.
