Demystifying New REITS Regulations By SEBI For Fractional Investment In Real Estate
The Securities and Exchange Board of India (SEBI) recently introduced a game-changing framework for fractional investment in real estate through Small and Medium sized Real Estate Investment Trusts (SM REITs). This paves the way for greater accessibility and potentially unlocks a new avenue for wealth creation for retail investors.
SM REITs are a variation of the existing REIT structure targeted towards smaller, income-generating real estate assets. Unlike traditional REITs that invest in large commercial properties, SM REITs can focus on assets valued between Rs 50 crore and Rs 500 crore. This opens doors to a wider range of properties, including commercial office spaces, rental housing projects, warehousing facilities, and even hotels.
Highlights of the new SM REITS guidelines by SEBI
1. Minimum Investment
SEBI has cut the minimum investment for fractional ownership in prime commercial assets to Rs 10 lakh from Rs 25 lakh, aiming to broaden investor participation and boost liquidity. Further reductions may follow, according to SEBI’s chairperson, contingent upon investor confidence at this level.
2. Number Of Investors
In an SM REIT, a minimum of 200 unrelated investors is required for any scheme, with no single investor allowed to own more than 25% of the scheme. This setup democratises the SM REIT structure, preventing any individual from gaining a controlling stake in the scheme.
3. Asset Price
The SM REIT must also buy and own assets that are priced above Rs 50 crore and less than Rs 500 crore. Again, the minimum floor price ensures that the asset quality bought and owned by the SM REIT is of a certain quality.
4. REITS vs SM REITS
The Small and Medium REIT (SM REIT) is designed similarly to existing REITs but with a key distinction. In the SM REIT, there will be specific schemes within the trust, each dedicated to investing in a particular asset. Investors will have the flexibility to choose which asset they want to invest in within these schemes.
Unlike traditional REITs where all units represent the same asset ownership, units in SM REITs will represent different assets. This structure, along with the listing of SM REITs, ensures fair and transparent pricing for unit transactions, enhancing liquidity and providing improved exit options for investors.
5. Qualification Of Investment Manager
The new regulations aim to weed out unreliable operators in fractional investment by imposing strict criteria on investment managers. They must have a personal net worth of at least Rs 20 crore, with Rs 10 crore liquid, and two years of real estate fund management experience. New entrants without prior real estate experience must have two key personnel with at least five years of real estate or real estate fund management experience.
6. % Of Rent Yielding Assets
In small and medium REITs, a critical safeguard for investors is that 95% of the funds must be invested in completed rent-yielding assets.
Also Read: How to Start Fractional Investment in Real Estate
Benefits for Investors
The new SM REIT guidelines offer several advantages for retail investors:
1. Accessibility
The lower investment threshold allows individuals with smaller capital pools to participate in the real estate market, previously an exclusive domain of high-net-worth individuals (HNI).
2. Diversification
Investors can gain exposure to a diversified portfolio of income-generating properties, mitigating risks associated with single-property ownership.
3. Liquidity
Listing on stock exchanges enhances liquidity, allowing investors to easily buy and sell their units.
4. Professional Management
SEBI’s regulations ensure SM REITs are managed by experienced professionals, providing investors with peace of mind.
5. Potential for Stable Returns
Historically, REITs have offered investors a steady stream of income through rental distributions.
Also Read: Commercial vs Residential Fractional Investment
A Look Ahead for Fractional Investment in Real Estate
The introduction of SM REITs is a significant development for the Indian real estate market. It has the potential to unlock vast amounts of capital for smaller real estate projects while offering retail investors a new avenue for wealth creation. As the framework matures, we can expect to see the emergence of new SM REIT sponsors and a wider variety of investment options for discerning investors.
Important Note: While SM REITs offer exciting prospects, it’s crucial to conduct thorough research before investing. Understand the specific assets held by the SM REIT, the track record of the management team, and the associated risks involved. Consider consulting a financial advisor for personalised investment guidance. You can get in touch with SliceVista expert advisors to know more.
Also Read: How Does Fractional Investing Work in Real Estate?