SEBI introduces guidelines for small and medium REITs to regulate fractional ownership of real estate

The Securities and Exchange Board of India (SEBI) has revamped the REIT Regulations 2014, paving the way for the creation of Small and Medium Real Estate Investment Trusts (SM REITs). This move aims to regulate fractional ownership and protect investor interests, encompassing both commercial and residential properties.

Under the new framework, SM REITs can raise funds starting from ₹50 crore by issuing units to a minimum of 200 investors. The funds will be utilized for acquiring and managing real estate assets and generating income for investors. Ownership of these assets will be structured through schemes operating under special purpose vehicles (SPVs), with a net worth requirement of ₹20 crore for the investment manager.

The SEBI (REIT) (Amendment) Regulations, 2024 stipulate that an SM REIT's listing process will resemble an IPO, but with a key difference in asset completion requirements. At least 95% of the assets for SM REIT schemes must be fully developed and generating revenue, compared to the 80% requirement for larger REITs.

The minimum subscription amount for an SM REIT's initial offering is ₹10 lakh per investor, offering a more accessible entry point than the current norm. The investment manager is mandated to retain a minimum of 5% of outstanding units for two years post-listing, a reduction from the initially proposed 15%.

However, SM REITs utilizing leverage must ensure a 15% co-investment by the manager, with leverage capped at 49% of the REIT's assets.

These amendments, approved by SEBI on 25 November 2023, aim to foster the growth of SM REITs, providing a boost to fractional ownership in India. Fractional ownership platforms, estimated to manage over ₹4,000 crore in assets, allow individual investors to co-own properties as an alternative investment. Investments are typically directed towards pre-leased assets, ensuring monthly rental returns.

"We commend SEBI’s proactive stance on introducing regulations on follow-on offers by REITs and InvITs with an aim to enhance liquidity and investor participation in these sectors. The establishment of a clear framework in SM REITs by SEBI will pave a way for enhanced opportunities in real estate investment segment. The amendments are in alignment of our core values of empowering our investors with a plethora of secured investment avenues. This is a significant stride towards fostering innovation and excellence in the fractional ownership industry.", said Aryaman Vir, CEO of WiseX, a neo-realty investment platform.

SEBI highlighted that SM REIT schemes may raise funds from both Indian and foreign investors through the issuance of units. To enhance transparency, the investment manager is required to maintain a website detailing all SM REIT schemes, including information on real estate assets and properties, both proposed and acquired.

In another conversation with CNBC-TV8, Badal Yagnik, CEO of Colliers India, mentioned that there will be a significant influx of funds from Indian retail investors in this sector.