Investors May Soon Co-own Commercial Real Estate Via SMREIT; Know What Changed With New Sebi Regulation

Sebi allows Fractional Ownership Platforms to migrate to Small and Medium REITs, allowing more investor participation under its regulatory oversight
Investors May Soon Co-own Commercial Real Estate Via SMREIT; Know What Changed With New Sebi Regulation

Investors can soon start investing in commercial real estate via Small and Medium REITs (SM REITs) with a minimum investment limit of Rs 10 lakh. The Securities and Exchange Board of India (Sebi) introduced a framework for allowing SMREIT to manage real estate assets separately, differing from existing REITs that has Rs 500 crore minimum asset value. Sebi Chairperson Madhabi Puri Buch said Sebi seeks to expand the market for retail investors through SMREIT.

Says Shiv Parekh, Founder, hBits- Fractional ownership of commercial real estate platform, "The new legislation provides for converting special purpose vehicles (SPVs) into schemes under a trust structure, which may be more efficient regarding asset management, risk management, and strategic asset allocation." Parekh said the minimum investment limit in SMREIT may be Rs 10 lakh. To clarify the changes made by Sebi, understanding the distinction between Fractional Ownership Platforms and REITs is important.  

REITs vs Fractional Ownership Platforms

There are mainly two ways  to share property ownership, in commercial real estate. They were through  Fractional Ownership Platforms and REITs.  Fractional platforms allowed retail investors to co-own commercial real estate with investments starting from Rs 15-25 lakhs, yielding returns in the 8 to 12 percent range and an overall Internal Rate of Return (IRR) from 13 to 17 percent, as per experts. However, these platforms remain unregulated by Sebi.

On the other hand, Real Estate Investment Trusts (REITs), regulated by Sebi, operate similarly to mutual funds and they were listed. They enabled investors to acquire shares, offering dividends based on earnings from the entity's real estate holdings. REITs are traded as securities on the stock exchange.

Now What Changes?

 Sudarshan Lodha. Co-founder and CEO, Strata, a fractional ownership platform specialising  commercial real estate explains," Sebi has granted FOPs a choice whether to migrate to SM REITs."

"By ensuring a level playing field for FOPs alongside established REITs, this regulatory move will enhance credibility, and investor confidence," he added.

The main benefit of REIT over erstwhile fractional ownership platforms were REITs were listed. Now SMREITs are also expected to be listed, however Sebi has not issued the listing guidelines. "We expect specific guidelines from Sebi soon to facilitate a smooth transition for the sector," Lodha said.

 SM REITs shall have the ability to create separate scheme(s) for owning real estate assets through special purpose vehicle(s) constituted as companies, Sebi's release said.

Aryaman Vir, CEO of alternative investment platform, WiseX said, "Sebi's move of extending regulatory oversight will not only foster investor interest in the real estate space but also ensure investor protection, common disclosure practices, and a robust redressal mechanism.”

Vir, said, “The lowered minimum asset value of Rs 50 crore for Small and Medium REITs will open exciting opportunities for investors seeking more accessible entry points into real estate ownership. The ability for SM REITs to create separate schemes enhances flexibility and innovation in structuring real estate portfolios. The new regulations ensure only quality platforms operate with the highly ethical practices, adding a whole layer of trust, specially with the required necessary skin in the game by the FOPs."

Says Shiv Parekh, Founder, hBits- Fractional ownership of commercial real estate platform, "The new proposed regulations for SM REITs closely mirrors the structure of traditional REITs but with a significant addition. It will operate a unit trust scheme for each asset with corresponding units issued to investors. Such a reform makes room for tailor-made investment options where investors can pick the asset class based on their financial priorities. The proposal also seeks to reduce the minimum investment limit to 10 lakh rupees, which would lower the barriers to entry in REIT investments and make them more accessible to institutions and retail investors who couldn’t previously afford them."

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