Small and Medium Real Estate Investment Trusts or SM REITs are investment vehicles whereby investors pool money to invest in income-generating real estate properties – particularly, as the name suggests, small to medium-sized commercial and residential properties. Madhabi Puri Bach, the Chairperson of the Security Exchange Board of India (Sebi), at a recent Sebi-NISM research conference, said that investors should have a positive impression of assets such as real estate investment trusts (REITs), infrastructure investment trusts (InvITs), and municipal bonds, realizing their role for the nation’s development.
Hence, Sebi would focus on allowing wider ownership of smaller units within REITs and InvITs. Sebi’s take on small and medium enterprises has attracted many investors to explore new avenues for real estate investment. This is also because real estate is the favourite asset class for Indians.
Shobhit Agarwal, MD and CEO, Anarock Capital said, “For investors, SM REITs provide suitable diversification and accessibility with lower capital requirements, superior liquidity through stock exchange trading, and regular dividend income. These REITs are very apt additions to a diversified portfolio since they provide exposure to the real estate market with the added advantages of professional management and good liquidity.”
While traditional Reits invest mainly in commercial properties, SM Reits have the flexibility to invest both in residential and commercial real estate properties. As the number and value of properties that SM Reits invest in are much smaller than that of traditional REITs, there is space for more concentrated bets under SM Reits.
With the increasing popularity of fractional ownership (FOP), retail investors must run a few checks before investing in such models. As listed entities, REITs and SM-REITs will always ensure the protection of investor rights. However, unlisted platforms might lack a standard framework, independent valuation, and thorough due diligence. Hence, investing in REITs and SM REITs will bring added assurance of steady income generation.
“As fractional ownership of real estate is becoming popular, retail investors need to do certain due diligence before investing in such models. First, SM Reits is a listed entity, and hence it protects investor rights. However, investors need to be wary of unlisted platforms as they might lack a standard framework, independent valuation, and thorough due diligence,” Shrinivas Rao, CEO, Vestian, an international real estate property consultant said. Fractional ownership lets you co-own a high-value asset such as real estate with multiple investors. You buy a share (like a stock) and get a portion of the rent and potential property value increase.
Moreover, experts say, investors need to assess the valuation, potential rental earnings, yield, and capital appreciation of underlying assets. They must also pre-assess returns on eventual exit and liquidation as much as possible. According to the recent Sebi guidelines, SM Reits are required to ensure that 95 per cent of their assets must be operational and distribute a majority of their new operating income to shareholders in the form of dividends, thereby ensuring a stable income. “If you prefer to invest through FOPs, you must check whether the entire set of activities falls under the ambit of the real estate regulatory authority (RERA). When it comes to commercial real estate, investors can assess the tenant mix and check for lease tenure and expiries, for the property they wish to invest,” Rao added.
