Revolutionizing Asset Management: Pioneering the future with Small and Medium Real Estate Investment Trusts (SM REITs)

Mr. Kunal Moktan, Co-founder of Property Share, Bengaluru, is at the forefront of transforming real estate investment through the innovative use of Small and Medium Real Estate Investment Trusts (SM REITs), a new asset class recently notified by SEBI. An MBA graduate from IIM Ahmedabad, Kunal brings 17 years of experience in investment management, including 7+ years at the global real estate fund, The Blackstone Group where he was part of a 3-member team that started the firm’s India operations. Property Share boasts an investment portfolio of over ₹1,500 crores, with investments spanning 15+ properties. The platform serves over 250,000 users in more than 20 countries across five continents.

Can you tell us about Property Share and its role in the FOP and SM REIT ecosystem?

Hashim and I started Property Share in 2015 pioneering a revolutionary new concept of fractional ownership providing a technology platform with direct access to rent yielding real estate for sophisticated retail investors. In the years since, Property Share became not only the first but also the largest FOP platform in the country both in terms of properties funded and external capital raised. In June 2022, Property Share raised Rs. 347 crores in a Series B round from Westbridge Capital. In time, other FOPs mushroomed mirroring the model, process, structure and ticket size introduced by Property Share. In Mar, 2024 SEBI introduced the SM REIT regulations in order to bring the FOP business within the regulatory ambit through a listed and regulated trust vehicle in the same lines as mainboard REITs. This was a landmark decision by the regulator aimed at fostering the continued growth of FOP platforms while providing investors with the benefits of investing through a regulated framework.
In Aug’24, Property Share became the first fractional ownership platform (FOP) to receive the SM REIT license from SEBI.

Can you explain what Small and Medium Real Estate Investment Trusts (SM REITs) are?

SM REITs are a subclass within the REIT framework that provides access to individual investors to rent yielding real estate like office buildings, retail malls, hotels, hospitals etc. that are valued between Rs. 50 and 500 crores. Similar to REITs, SM REIT units will also be traded on the stock exchange and will be fully regulated by the Securities and Exchange Board of India (SEBI). With the introduction of SM REITs, the regulator has effectively introduced an entirely new asset class to the retail and institutional investor universe, continuing the march towards securitisation of real estate assets that started with REIT regulations in 2014. 

Why should an investor add SM REITs to their portfolio?

SM REITs have a focused single asset investment model that leads to c. 100 to 150 bps higher yield and better overall risk adjusted returns. In a way, it is like buying the assets that you like in the city and micro-market of your choosing but at much lower thresholds of Rs. 10 lakhs. Additionally, since the units are traded on the stock exchange, investors get liquidity on their units. The tax treatment for SM REITs is also more favourable than traditional investment products.

How do SM REITs make commercial real estate (CRE) investments more accessible to a broader range of investors?

Direct investing in Grade A rent yielding commercial real estate tenanted to blue chip companies can easily require capital in excess of Rs. 50 crores. Since 2015, Property Share, through its platform pioneered access to this asset with a lower minimum ticket size of Rs. 25 lakhs. With the new SM REIT regulations, SEBI has now reduced this to Rs. 10 lakhs thus making it even more accessible to a much larger demographic of retail investors. This threshold is likely to come down further as the market for SM REITs mature over time. 

How do SM REITs enhance aspects like professional management, credibility, transparency, and regulatory oversight in CRE investments?

An SM REIT’s structure has been envisaged by the regulator in a way that ensures assets are carefully selected and curated by an independent experienced investment manager and tailored to each individual investor’s requirements. The regulations have drawn on features of both Alternate Investment Funds and REITs. Similar to AIFs, investors entrust their capital to a professional and independent investment manager, the difference being that the final decision to invest rests with the investor and not the fund and compared to REITs, an SM REIT is unique in that the investment manager is mandated to invest 5% of its own capital into every investment, ensuring that there is significant alignment of interest. 

Additionally, regulations bring with it various advantages to the investor such as regulatory oversight, strict compliance overseen by a 6-member board with 3 mandatory independent directors, at least Rs. 20 crores of net worth for the investment manager, access to SEBI’s grievance redressal mechanisms, stringent KYC and PMLA requirements, strict marketing guidelines that avoid misselling of products and a regulated fee structure.

What should investors consider when selecting the best SM REIT for optimal returns?

The investment manager is the one driving investments in all SM REIT schemes. It is therefore very important for investors to analyse the people behind the manager, their backgrounds and investing experience, their previous track record and how well capitalised they are. Apart from the manager, the investor should also look at the asset itself including its location, rental yield, tenant profile, building quality, lease tenure etc.

How should SM REITs or commercial real estate investments be included in one's overall investment portfolio?

Investors should diversify their portfolio across products with differing risk and return characteristics. The safest and most liquid products usually come with the lowest returns and vice versa. The SM REIT is a unique hybrid product that sits between debt and equity asset classes that provide recurring returns through rent like debt whilst also providing capital appreciation on the underlying real estate akin to equity. Real estate, in general forms a large part of any Indian investor’s portfolio and SM REITs are one of the best products to play this asset class.