Investors can now have fractional ownership of rent-yielding real estate assets by making a minimum investment of Rs 10 lakh, with markets watchdog Sebi notifying the amended regulations for real estate investment trusts.
Amid rising demand for high-value realty assets, the Securities and Exchange Board of India (Sebi) has notified the framework for Small and Medium Real Estate Investment Trusts (SM REITs), and experts opined that the development will have a significant positive impact on the emerging fractional ownership sector in the country.
The watchdog notified the amended regulations for REITs on March 8, permitting fractional ownership of REITs and it will encompass commercial and residential properties.
In November last year, Sebi board cleared the amendments to REITs Regulations, 2014, in order to create a regulatory framework for the facilitation of 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.
As per the notification, the minimum price of each unit of the scheme of the SM REIT shall be Rs 10 lakh or such other amount as may be specified by Sebi from time to time.
“The size of the asset proposed to be acquired in a scheme of the SM REIT is at least rupees fifty crores and less than rupees five hundred crores…,” it added.
The framework for SM REITs provides for the structure, migration of existing structures meeting certain specified criteria, obligations of the investment manager, including net worth, experience, and minimum unit holding requirement, investment conditions, minimum subscription, distribution norms and valuation of assets.
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Shiv Parekh, Founder and CEO of fractional ownership platform hBits, said the notification reflects Sebi’s confidence in the potential of the fractional ownership model in democratising access of retail investors into real estate.
The reduction in the minimum investment threshold to Rs 10 lakh will attract a larger pool of retail investors, he added.
Shravan Gupta, Founder and CEO of YOURS, said the move is expected to have a significantly positive impact on the emerging fractional ownership sector in the country.
It is a platform for fractional ownership of luxury second homes.
Sudarshan Lodha, Co-Founder & CEO of Strata, said the migration of fractional ownership platforms is still an option.
About the notification, Aryaman Vir, CEO of WiseX, said it will pave the way for enhanced opportunities in the real estate investment Aankush Ahuja, CEO and Founder of FOIP, said the regulations of the fractional ownership industry under this framework will encompass both commercial and residential properties, thereby enhancing investor protection.
All these entities are Fractional Ownership Platforms (FOPs).
Typically, fractional investment of real estate through FOPs is an investing strategy in which the cost of acquisition of real estate is split among several investors, who invest in securities issued by a Special Purpose Vehicle (SPV) established by an FOP. Such SPVs purchase real estate assets.
FOPs allow investors to own a certain percentage or fractional share in the real estate asset through the securities issued by the SPVs.
“Being a pioneer of this fractional ownership model, hBits is also keen to be the first one to list our SM REITs thereby allowing our investors to make the most of this,” hBits’ Parekh said.
(This report has been published as part of an auto-generated syndicate wire feed. Apart from the headline, no editing has been done in the copy by ABP Live.)
In a move to regulate the fractional ownership industry, the Securities and Exchange Board of India (Sebi) has issued regulations to amend the REIT Regulations 2014, to establish guidelines for creation of Small and Medium Real Estate Investment Trusts (SM REITs), the notification said.
The new regulations will be called Sebi (REIT) (Amendment) Regulations 2024, it said.
“In regulation 2, in sub-regulation (1), clause (zm) shall be substituted with the following, namely -”(zm) REIT” or “Real Estate Investment Trust” means a person that pools rupees fifty crores or more for the purpose of issuing units to at least two hundred investors so as to acquire and manage real estate asset (s) or property (ies) , that would entitle such investors to receive the income generated therefore without filing them the day -to-day control over the management and operation of such real estate asset (s) or property (ies),” the notification said.
This means that under the arrangement, an SM REIT will be permitted to gather funds starting from ₹50 crore by issuing units to a minimum of 200 investors that will be utilized for acquiring and managing real estate assets or properties.
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The amendments were approved by SEBI on November 25 last year.
This is also expected to open the doors to fractional ownership of rent yielding real estate assets, including uber-luxury second homes across the country.
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A REIT is a company that owns, operates, or provides financing for income-generating real estate properties.
They currently need to have an asset base of ₹500 crore. These pool funds from investors, directing them toward various commercial real estate ventures. They are similar to shares and are listed on stock exchanges.
There are only three office REITs in India – Embassy Office Parks REIT, Mindspace Business Parks REIT, and Brookfield India Real Estate Trust.
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Commercial real estate (CRE) has long been an attractive investment avenue for those seeking to diversify their portfolios and capitalise on the stability and income potential of real property. Real Estate Investment Trusts (REITs) have been a game-changer in the global investment landscape, providing investors with a unique proposition to participate in the commercial real estate market. In a bid to catalyse the growth of the real estate sector in India, the Securities and Exchange Board of India (SEBI) has plans to introduce an innovative concept – the MSM REITs.
These MSM REITs, with a reduced minimum asset size of ₹25 crores, aim to foster a broader range of real estate investments while ensuring transparency, control, and credibility for investors. The minimum ticket size of Rs10 lakhs provides accessibility to retail investors while maintaining a certain level of sophistication.
This article explores the key features and advantages of MSM REITs, comparing them to traditional models and drawing parallels with global small-cap REITs.
Transparency, control and niche targeting
MSM REITs adopt a niche-targeted approach that allows investors to choose specific asset-focused schemes, offering transparency and control that goes beyond traditional blind pool investments. This provides investors with a clear understanding of the modalities and fundamentals of their investments ensuring a level of customisation and transparency that aligns with their evolving preferences.
Mandatory sponsor commitment and credibility
MSM REITs maintain the core structure of traditional REITs, comprising a Trustee, Sponsor/sponsor group, investment manager, and investors as primary stakeholders. Notably, in these MSM REITs, the Investment Manager and Sponsor can be the same entity. The proposed regulations ensure mandatory Sponsor commitment, fostering a ‘skin in the game’ mindset, and set minimum net worth requirements for the investment manager and sponsor, enhancing overall credibility.
Enhanced liquidity, easy transferability and low volatility
Listing units on stock exchanges introduce fair pricing, robust risk management, guaranteed settlement, high liquidity and easy transferability. Unlike the traditional models in the CRE investing space with long investment horizons, MSM REITs allow investors to exit at a time and price of their own choosing. Despite being a listed product, volatility remains low due to the backing of fairly stable assets.
Standardised regulations, risk mitigation and investor protection
The transition from the earlier models to a more structured approach in MSM REITs is a paradigm shift towards investor protection. Standardised regulations, Know Your Customer (KYC) norms, grievance redressal mechanisms, and the oversight of regulatory bodies collectively fortify investor confidence. The non-permissibility of investing in under-construction assets mitigates the risk of non-completion and disruption in returns. This prudent measure safeguards investors from uncertainties associated with projects still in progress, aligning with the aim of providing secure, stable and predictable returns.
In conclusion, incorporating MSM REITs into an investment portfolio offers investors a unique combination of stability, income generation, and growth potential. Drawing inspiration from global practices, the introduction of MSM REITs in India has the potential to mirror the success of small-cap REITs, single-asset REITs in other markets, such as the United States and the UK. This represents a progressive stride in the Indian real estate investment landscape.
By incorporating transparency, control, credibility, and investor protection, these REITs aim to stimulate further growth in the real estate sector and related segments of the economy. As India embraces this innovative approach, the MSM REITs have the potential to become a catalyst for a more inclusive and vibrant real estate investment ecosystem.
Abhishek Katiyar, VP of Strategic Initiatives at Property Share
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