Small and medium REITs increasingly attract FDI

Investments in the real estate sector, particularly through fractional ownership of real estate are becoming attractive investment opportunities for investors looking to diversify their portfolios.

Small and medium real estate investment trusts (SM REIT) that offer investment opportunities in fractional ownership of real estate have been permitted by the Securities and Exchange Board of India (SEBI) by way of the SEBI (REITS) Amendment Regulations, 2024, introduced in March of this year. While REITs are popular worldwide, they have yet to gain traction in India. The introduction of SM REITs is a shrewd move by the SEBI because it will promote foreign direct investment (FDI) in India because of their small ticket-size offerings. These see units priced as low as INR1 million (USD12,500), thus giving a wide range of worldwide retail investors increased access.

The first of the four entities required to run an SM REIT is the investment manager (IM). The IM is responsible for the registration, day-to-day management and operations of the SM REIT. Next is the trustee, who oversees the IM and the SM REIT to ensure compliance and reporting to the SEBI. A special purpose vehicle holds the assets acquired for a particular scheme of the SM REIT and transfers the revenue generated by the assets to the IM for distribution to the investors.

Finally, the investors are the unit holders in the investment schemes of the SM REIT. There are several features that make investment in SM REITs safe and provide good returns. Units are issued in dematerialised, or demat, form. Any number of units are held in the account of a depository participant, making transactions much easier. Units are listed on recognised stock exchanges that have nationwide trading terminals. Units are freely transferable and holders have voting rights.

Investment by SM REITs in under construction and non-revenue generating properties is prohibited. Depending on their importance, decisions are taken simply by two-thirds or three-quarters of the majority of unit holders. Some 10% of unit holders can ask for any matter to be taken up in a unit holders’ meeting. An investor has the flexibility to choose a particular scheme of the SM REIT.

The capital appreciation of the investment, in addition to the quarterly payouts from rental income provides a two-fold benefit to the unit holders. While the objective of the SM REIT is primarily to raise funds through issuing units to investors, it is permitted to leverage the assets it holds in accordance with the SEBI’s guidelines and regulations. Unit holders are charged 15% on short term capital gains and 10% on long-term capital gains after 36 months and where the gains exceed INR100,000.

Settlement of an investor’s grievances arising from their investments is ensured through the online SEBI Complaints Redress System, or Scores, and the various SEBI dispute resolution circulars and guidelines with which IMs must comply.

The segregation and ring-fencing of the assets, bank accounts, demat accounts and books of accounts of every scheme of the SM REIT are ensured by the IM and the trustee. The IM and the trustee must keep the title documents of the assets of the SM REIT’s scheme safely with a scheduled commercial bank. A 25% cap holding of the total outstanding units of any scheme by an individual and by persons acting in concert prevents undue influence in that scheme.

Each individual scheme of an SM REIT is required to own real estate assets valued at between INR500 million to INR5 billion and must have no fewer than 200 investors enrolled.

The demand for commercial real estate such as co-working office spaces, multi-storey residential complexes and other real estate assets has increased many-fold in recent years. It is therefore only a matter of time before SM REITs become a popular alternative investment to their traditional real estate counterparts. This is because of their significant advantages for investors.

Regulation of the fractional ownership of real estate assets is to be applauded because it will encourage FDI flows into the economy from retail investors worldwide. India’s fractional ownership market has an estimated value of USD500 million and is forecast to grow tenfold to reach USD5 billion by 2030 according to joint research by JLL and Property Share.

Rohit Jain is the managing partner and Rajiv Sharma is a partner at Singhania & Co.