Sebi’s Regulation On SM REIT Will Boost Liquidity In Real Estate: Experts
As per the new regulations notified by the Securities and Exchange Board of India (Sebi), for small and medium real estate investment trusts, investment managers for these REITs must maintain a minimum net worth of Rs 20 crore, and the REITs are required to secure a minimum of Rs 50 crore from at least 200 unit holders.
“The recent decision by the Sebi is expected to have a significantly positive impact on the emerging fractional ownership sector in the country. This move comes at a time when the market and demand for fractional or co-ownership properties are rapidly growing. The amendments made to the Real Estate Investment Trust (REIT) Regulations in 2014 aim to establish clear guidelines for the formation of Small and Medium Real Estate Investment Trusts (SM REITs),” said Shravan Gupta, founder and chief executive officer (CEO) of YOURS a platform for fractional ownership of luxury second homes.
In May of last year, Sebi issued a consultation paper on small and medium REITs with the intention of bringing unregulated fractional ownership platforms under its regulatory umbrella. In November, it approved the launch of such REITs, but the detailed framework has only just been issued.
Under fractional ownership, several people pool funds to purchase and own mainly commercial rent-yielding properties in India. The size of the asset proposed to be acquired in a scheme would be in the range of Rs 50 to Rs 500 crore.
Gupta added that through these amendments, the regulatory body seeks to not only regulate and organise the fractional ownership segment but also enhance transparency in the sector. The introduction of specific regulations for SM REITs will provide a level of assurance to both investors and property owners, fostering trust and encouraging participation in these ventures, mentioned the founder of the fractional ownership platform.
For small and medium-sized real estate investment trusts (SM REITs), a minimum of 95 per cent of their investments must be in assets that generate revenue. They are not allowed to invest in real estate assets that are under construction or those that do not generate revenue.
“The notification on SM REITs was awaited for a long and shall provide a huge boost to providing liquidity to the granular holding of office-yielding assets. This opens a plethora of opportunities across size and scale of markets and products to retail and institutional investors to invest in office yielding real estate,” said Piyush Gupta, Managing Director, Capital Markets & Investment Services, Colliers India.
He further added that with a minimum size of Rs 50 crore and minimum holding of 5 per cent of investment managers, this isn’t a significant entry barrier for newer fund managers however key checks and balances have been provided by Sebi.
The recent regulation by Sebi has a significant difference from larger REITs, which must have at least 80 per cent of their assets generating rent, but are allowed to hold under-construction assets as well.
An initial offering for an SM REIT will have a minimum subscription amount of Rs 10 lakh per investor, contrasting with the current norm where fractional platforms often require an investment of about Rs 25 lakh.
“Recent regulation 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,” said Shrinivas Rao, chief executive officer (CEO), Vestian.
Rao further added, “SM REITs are now allowed to gather funds starting from Rs 50 crore by issuing units to a minimum of 200 investors instead of the earlier cap of Rs 500 crore. This may bring a large number of income-generating small and medium real estate assets under the purview of REITs.”
The minimum unit holding requirement at all times for the first three years after listing by the sponsor or investment manager is five per cent for an SM REIT that does not have any debt borrowings and 15 per cent for a REIT that has taken on leverage.
The minimum holding reduces telescopically with the number of years post-listing until it reduces to one per cent after the completion of the twentieth year from the listing date.
