SEBISEBI Introduces Small & Medium (SM) REITs: Revolutionizing Real Estate Investment With Enhanced Access And Transparency

INTRODUCTION

Real estate investment pertains to the acquisition of property with the intention of generating revenue, as opposed to its utilization as a personal residence. Conceptually, it encompasses any tangible assets such as land, building, and associated infrastructure. In Indian context, real estate has always been looked as a space for residential rather than commercial investment. Individuals have partaken in real estate investment through the direct acquisition of properties or the acquisition of equity shares in real estate companies. Nevertheless, these methodologies are associated with specific challenges and risks.

In 2014, Securities and Exchange Board of India (hereinafter referred as “SEBI”) introduced a new concept called as Real Estate Investment Trust (hereinafter referred as “REIT”) in India, with the aim of injecting vital capital into the real estate industry and channelling funds from individual/retail investors into the regulated financial framework.

REIT’s concept was introduced to offer retail/individual investors an opportunity to invest in real estate projects through pooling mechanism. REIT has a simple mechanism wherein the REIT buys a property, manages it and generates income from that property through renting or mortgaging and that same income is distributed among investors in the form of dividends.

There was no substantial development under REITs after 2014, however, in May 2023, SEBI released a consultation paper concerning Small and Medium Real Estate Investment Trust (hereinafter referred as “SM REIT”), intending to bring unregulated Fractional Ownership Platforms (hereinafter referred to as “FOPs”) to its regulatory oversight. In November 2023, SEBI granted approval for the introduction of these REITs; however, the comprehensive framework has been released on 08.03.2024.

GUIDELINES INTRODUCED BY SECURITIES AND EXCHANGE BOARD OF INDIA (REAL ESTATE INVESTMENT TRUSTS) (AMENDMENT) REGULATIONS, 2024

On 08.03.2024, SEBI published a notification bearing notification no. SEBI/LAD-NRO/GN/2024/166, wherein SEBI substituted clause (zm) in sub-regulation (1), in regulation 2, which states,

“(zm) “REIT” or “Real Estate Investment Trust” means a person that pools rupees fifty crores or more for  the  purpose  of  issuing  units  to  at  least  two  hundred  investors  so  as  to  acquire  and  manage  real estate  asset(s)  or  property(ies),  that  would  entitle  such  investors  to  receive  the  income  generated therefrom without giving them the day-to-day control over the management and operation of such real estate asset(s) or property(ies).”

With the introduction of SM REIT, SEBI has paved an affordable investment opportunity for individual/retail investors in real estate sector. Under this new framework, a SM REIT is authorized to collect capital starting from ₹50 crore (before 2024 amendment Capital Starting was from ₹500 crore) by distributing units to a minimum of 200 investors. These funds are utilized for the purpose of acquiring and managing real estate assets, aimed at generating returns for the investors. The ownership of said assets will be organized through one or multiple schemes, each running under Special Purpose Vehicles (hereinafter referred to as “SPVs”).

The process for listing an SM REIT will be similar to the Initial Public Offering (hereinafter referred to as “IPO”), but there’s a key difference in the requirements for completed assets. For SM REIT schemes, at least 95% of the assets must be fully developed and making money, while larger REITs only need 80%. In the context of an initial offering for an SM REIT, each investor will be required to subscribe for a minimum amount of ₹10 lakh, which is lower than the usual ₹25 lakh required by FOPs.

Additionally, the investment manager must hold onto at least 5% of the total units in each scheme for two years, starting from the fourth year after listing until the end of the fifth year. This is less than the originally proposed 15% by the SEBI consultation paper.  For SM REITs that use borrowing to finance their activities, the manager must put in 15% of the total amount borrowed, and borrowing cannot exceed 49% of the REIT’s assets.

SEBI has emphasized that SM REIT’s schemes are permitted to raise capital from both domestic and international investors by issuing units. In order to strengthen transparency, the investment manager is mandated to maintain a website delineating all SM REIT schemes, encompassing details pertaining to real estate assets and properties, both anticipated and procured.

Recognizing the presence of established FOPs in the market, SEBI has provided a six-month window for them to apply for registration as a SM REIT. This window presents them with an opportunity to transition to a regulated structure and potentially broaden their investor base. Importantly, the asset size and minimum investor criteria are relaxed for migrating FOPs.

A LOOK AHEAD: POTENTIAL AND GROWTH PROJECTIONS

The introduction of the SM REIT framework has elicited positive responses from industry stakeholders, who foresee substantial growth in the real estate FOP market. The following key takeaways encapsulate their perspectives:

1. Regulatory Framework Addresses Critical Aspects: Industry experts commend SEBI’s regulations for addressing crucial areas such as investor safeguards, defined holding periods, diversification mandates, and relatively accessible minimum investment thresholds.
2. Increased Liquidity for Developers: SM REITs offer developers a new avenue to monetize smaller completed projects, potentially expediting project cycles.
3. A Wider Investor Pool: The framework enables retail and institutional investors to participate in the office and commercial real estate market with a lower minimum investment compared to traditional REITs.
4. Opportunities for New Fund Managers: The minimum fund size and manageable minimum holding requirement for investment managers are perceived as conducive to new entrants.
5. Market Size and Growth Projections: A report by JLL India and PropShare estimates a tenfold increase in the market size, reaching $5 billion by 2030, attributable to increased transparency and investor protection due to regulations.

AMLEGALS REMARKS

SEBI has officially promulgated its regulations concerning SM REITs. This action underscores SEBI’s conviction that FOP models will normalise real estate access for retail /individual investors. This development represents a significant milestone expected to stimulate market efficacy. The new rules covering both commercial and residential real estate will control Co-ownership and protect the interests of investors.

It is also believed to increase the involvement of domestic and foreign individual investors, as well as the flow of money in the Indian real estate market. This will help boost the economy in the long run and also turn out to be a good investment area for a lot of medium and high networth individuals. Considering how India is pacing towards a 5 trillion dollar economy, real estate would always be a booming sector in its growth and REIT will only add to the pace of growth.

– Samarth Sheth (Intern)