Sebi approves framework for small and medium REITs. What does it mean for fractional ownership?

You will soon be able to invest in commercial real estate property through a Real Estate Investment Trust (REIT) with an asset value of at least Rs 50 crore. This is because, with the aim to protect the interests of investors, the Securities and Exchange Board of India (Sebi) has decided on a framework for small and medium REITs in its board meeting held on Friday.

A REIT is a company that owns, operates, or provides financing for income-generating real estate properties. They currently need to have an asset base of Rs 500 crore. These entities pool funds from investors, directing them toward various commercial real estate ventures such as workspaces and malls. REITs operate similarly to shares, being listed on stock exchanges, enabling investors to buy or sell them at any time on the exchange. Currently, there are only 3 REITs funds in India – Embassy Office Parks REIT, Mindspace Business Parks REIT, and Brookfield India Real Estate Trust.

In the last 4-5 years, fractional ownership has gained traction in India, where investors pool their money to buy a property. Here, the cost of an asset is split between individual shareholders. However, earlier there were no guidelines in place from the regulator to oversee this space. “The guidelines proposed by Sebi are crucial for formalising the sector, instilling investor faith, and addressing the complexity of Special Purpose Vehicle (SPV) securities issuances. Particularly beneficial for retail investors unfamiliar with such structures, the regulation is anticipated to contribute to the growth and acceptance of this innovative form of property ownership, aligning with established practices in developed nations,” said Shravan Gupta, founder and CEO of YOURS, a platform for fractional ownership of luxury second homes.

Will small, medium REITs get listed? "We are still waiting for details. So far, there is no clarity on the listing of small and medium REITs. Sebi has allowed forming SPV, which certainly helps at the time of exiting the investment," added Gupta.

The Sebi circular that the Board, inter-alia, approved amendments to SEBI (Real Estate Investment Trusts) Regulations, 2014 to create a regulatory framework for the facilitation of SM REITs, with an asset value of at least Rs 50 crore vis-à-vis minimum asset value of Rs 500 crore for existing REITs. SM REITs shall have the ability to create separate scheme(s) for owning real estate assets through special purpose vehicle(s) constituted as companies.
 

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“The ability for SM REITs to create separate schemes enhances flexibility and innovation in structuring real estate portfolios. We look forward to the positive impact these regulatory changes will bring to the fractional ownership ecosystem, promoting more inclusivity and diversification in real estate investments,” said Aryaman Vir, CEO at WiseX.

Investing in the real estate sector through REITs offers an alternative to direct property ownership. It eliminates the need for substantial upfront investments, allowing individuals to start with a modest amount. In return, investors receive rental income from their contributions in the form of dividends and interest. 

“As the pioneers of fractional ownership model and neo-realty investments in India, we applaud Sebi's progressive move in regulating the fractional ownership framework with the amendments to the REIT Regulations. As an active contributor since the consultation phase in May 2023, we are delighted to see Sebi move ahead after extensive discussions with the key industry players and users. The regulatory approval addresses the evolving landscape of real estate investments. Sebi's acknowledgement of the growing trend of fractional ownership platforms and extending regulatory oversight is commendable. We believe that it will not only foster investor interest in the real estate space but also ensure investor protection, common disclosure practices, and a robust redressal mechanism,” said Vir.