The Securities and Exchange Board of India (SEBI) on March 8, 2024, expanded the definition of Real Estate Investment Trusts (REITs) to include Small and Medium Real Estate Investment Trusts (SM REITs). This amendment to the REIT regulations will broaden the scope of affordable and Sebi-regulated investment opportunities for retail investors in the real estate sector.
SM REIT
Under the new regulations, SM REITs are defined as trusts that pool at least Rs 50 crores and issue units to at least 200 investors for the acquisition and management of real estate assets or properties, so investors can receive income from these assets without direct control over their operations and management. The minimum investment for investors will be Rs 10 lakh. The investment manager who floats an SM REIT should have a net worth of not less than rupees 20 crore out of which Rs 10 crore should be liquid money.
Why SM REIT?
REITs, regulated by SEBI, function similarly to mutual funds, and also they are listed offering investors shares in real estate holdings with dividends based on earnings. They enable investors to acquire shares, offering dividends based on earnings from the entity's real estate holdings. But the minimum investment amount for erstwhile larger REITs was not affordable for retail investors. For those who couldn't afford REITs, fractional platforms were the only option to co-own commercial real estate with investments starting from Rs 15-25 lakh but they were not regulated by Sebi.
With SEBI now giving regulatory approval to SM REITs, such fractional platforms or new SM REITs can operate under SEBI oversight which will foster investor protection and their confidence. SM REIT shares will be traded on the stock exchange. Units of SM REIT schemes shall be mandatorily listed on the recognized stock exchanges having nationwide trading terminals, Sebi issued guidelines said.
For SM REITs, a minimum of 95 per cent of investments must be in revenue-generating assets, which may include commercial assets, rental housing, warehousing, and hotels, among others and not in any non-revenue generating asset. This reduced the risk for retail investors. This mandate differs from larger REITs, which only have to invest 80 per cent in revenue-generating assets and can hold the rest of the amount in under-construction assets.
Experts’ comment
Commenting on the development, Shiv Parekh, Founder and CEO, hBits said, “In just over 3.5 months since the regulator gave its initial approval for SM REITs, SEBI has notified its regulations on SM REITs, demonstrating Sebi's confidence that such fractional ownership will democratise access to real estate for retail investors. It is a watershed moment that will act as a catalyst in enhancing market efficiency increase awareness among potential investors about the benefits of this investment avenue and ensure widespread adoption. The reduction in the minimum investment threshold to Rs 10 lakh will attract a larger pool of retail investors. It will also bolster their confidence and promote democratization in the ecosystem.”
Shrinivas Rao, CEO- of Vestian said, “ The new framework encompassing both commercial and residential real estate will regulate fractional ownership and safeguard investor interests. Moreover, it is expected to boost the participation of domestic and foreign retail investors, and liquidity in the Indian real estate market as an initial offering for an SM REIT is mandated to have a minimum subscription amount of Rs 10 lakh per investor, contrasting with the earlier norm where fractional platforms often required an investment of about Rs 25 lakh.”
Piyush Gupta, Managing Director, Capital Markets & Investment Services, Colliers India, said, "With a minimum size of Rs. 50 cr. and minimum holding of 5% of the Investment Manager, this isn’t a significant entry barrier for newer Fund Managers however key checks and balances have been provided by SEBI.
