About 40% of the total Grade A office stock in India’s top seven cities, valued at roughly $44 billion, is suitable for SM REITs. Markets such as Mumbai and Delhi NCR present the largest asset acquisition opportunities under the umbrella due to the abundance of small and mid-sized projects. Tech hubs like Bengaluru and Hyderabad also offer strong prospects, with well-leased, mid-sized assets emerging as attractive options for SM REIT investments, a report by JLL has said.
The industry is likely to face evolving compliance and regulatory oversight challenges as regulations mature and implementation progresses. Despite these teething issues, this market is poised to grow and potentially surpass $5 billion of Assets Under Management by 2030, it noted.
Why were SMREITs needed?
Traditionally, retail investors faced significant hurdles in investing in commercial real estate, high entry barriers, limited market knowledge, and a lack of expertise in evaluating assets, despite the sector offering higher rental yields and stability. Consequently, investments were largely confined to institutional investors, ultra-high-net-worth individuals, and pension or sovereign funds.
The introduction of Real Estate Investment Trusts (REITs) and, more recently, Fractional Ownership Platforms (FOPs) has transformed this landscape. These innovations have democratized access to real estate for retail investors, offering portfolio diversification and the opportunity to invest in asset classes that were previously out of reach.
What are Fractional Ownership Platforms (FOPs)?
Fractional ownership, as the name suggests, empowers investors to own a fraction or share of a property, effectively lowering the entry barrier and enabling a diverse range of investors to participate.
Fractional Ownership Platforms act as facilitators, streamlining the fractional ownership process. They provide a formal channel that enables retail investors to tap into primarily pre-leased commercial real estate, including office spaces, warehouses, or even shopping malls (with office spaces currently dominating the market), at a fraction of the total cost.
The cost of acquisition is split among several investors, who invest in securities issued by a Special Purpose Vehicle (SPV) established by the FOP. The investors earn returns in the form of rentals, as well as long-term value appreciation of the property, with distributions made after deducting management fees and other maintenance expenses.
To formalise this growing segment, the Securities and Exchange Board of India (SEBI) notified Small and Medium Real Estate Investment Trusts (SM REITs) through amendments to the existing REIT regulations. The notifications require FOPs who wish to operate such investment schemes to be registered as an SM REIT and be licensed under SEBI.
Under the SM REIT regulations, the FOPs will now have higher compliance requirements related to issue size, asset exposure, investment portfolio, number of subscribers, and minimum investment size. Also, such offerings now need to be listed on public exchanges and adhere to regular reporting and governance standards.
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