Business of SM-REITs: Democratizing Prime Real Estate!

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A retail investor drives past a stunning Grade A commercial/office property every day, marveling at its grandeur and wishing he could own a piece of such prime real estate. Owning such a high-value asset used to be an unattainable dream—until now. With SM-REITs, that can be a reality in a stress-free manner. Now, with just ?10 lakh, this investor can own a share in that very property when it’s listed under an SM-REIT/FOP.

This opportunity isn’t just transformative for individual investors—it’s a game-changer for platforms, fund managers, and the entire industry. SM-REITs open a vast market, turning each property into a tradable entity and attracting retail investors under a regulated framework. For platforms, this means significant growth potential, allowing them to manage multiple high-value properties with liquidity and stable returns. It’s not just about real estate; it’s about creating a scalable, billion-dollar market that redefines property ownership and investment in India.

So finally, after all the wait of the last few months, SEBI has granted the first license to Property Share Investment Trust, setting the stage for the inaugural IPO of a 250,000 sq ft fully leased commercial property in Bangalore under the newly introduced SM-REIT regulations. This development marks a significant milestone in the Indian real estate market, paving the way for many similar IPOs of standalone buildings or individual floors of a building. Each of these projects could effectively become a tradable entity, with its pricing and trading dynamics, turning each building into a distinct investment and liquidity vehicle.

In light of this milestone, I’m sharing some thoughts as both an observer of this space and a participant in this space, drawing on my experience as an investor in Fractional Ownership Platforms (FOPs) and direct fractional investments. Please note that these views are personal and based on my interactions with a few key players in the sector.

Based on my on-and-off interactions with pioneers in the Fractional Ownership Platforms (FOPs) like hBits, Strata, WiseX, Propshare, other co-working players, and upcoming funds of new-age investment managers, many are in various stages of structuring their platforms or preparing draft filings with SEBI for licences. Some are also exploring quickly migrating existing schemes into new SM-REITs. There will be multiple issues coming up over the next few years.

For those already familiar with fractional ownership, its benefits and challenges as an investment option are well-understood. This model, which allows multiple investors to co-own (either directly or through a company/LLP) high-value real estate assets, has democratized access to prime properties that were once the exclusive domain of large institutional investors or ultra HNIs. However, as with any investment model, it has evolved and faced its fair share of challenges, prompting the introduction of new regulatory frameworks to address some existing and foreseen issues.

The Evolution and Current State of Fractional Ownership

The fractional ownership market in India has seen significant growth, with over ?4,000 crore in assets under management as of 2023. According to a recent JLL – Property Share report, this market is expected to grow more than tenfold, surpassing $5 billion by 2030. Initially, this model gained traction in high-grade commercial office spaces due to its ability to offer stable, income-generating investments at a lower entry cost compared to outright property ownership.

Platforms like hBits, Strata, and Propshare have been instrumental in bridging the gap between traditional joint ownership and a more regulated structure with promises of better governance and management service. These platforms have simplified the investment process, offered professional management, and provided transparent access to property performance data. While the minimum investment on these platforms is typically ?25 lakh, they did set the stage for broader market participation and caught SEBI's attention, prompting the rules around SM REITs, a smaller version of REITs/InVITs.

Challenges in Traditional Fractional Ownership

Despite its advantages, traditional fractional ownership has faced challenges, particularly related to management and decision-making. Disputes among co-owners over property management, maintenance costs, and usage decisions have been common, often leading to costly and time-consuming conflicts. The need for unanimous agreement among co-owners can also delay important decisions, impacting the overall efficiency and appeal of the model. New-age FOPs have attempted to address many of these concerns, but investors are then exposed to potential exploitation by the entry of many such pooling platforms, not all of which may provide stable or credible management, leading to some mishaps impacting retail investors.

Introduction of SM REITs

To address these challenges and provide a stable regulatory environment to protect retail investors' interests, SEBI introduced Small and Medium Real Estate Investment Trusts (SM REITs). The regulations have been extensively discussed and written about. These new regulations aim to provide a more organized, transparent, and accessible version of fractional ownership. Here’s an overview of the SM REITs framework and its potential impact on the market:

1. Lower Entry Barrier: SM REITs allow investments into a single asset per scheme starting from ?50 crore, significantly lower than traditional REITs, making it more accessible for smaller investors and smaller properties.

2. Investment Requirements: SM REITs must invest at least 95% of their assets in fully developed, revenue-generating properties, compared to the 80% requirement for larger REITs. This focus on stable, income-generating assets reduces greenfield/brownfield risk for investors.

3. Broad Investor Base: SM REITs require a minimum of 200 investors, which helps spread risk and improve market liquidity. The minimum subscription amount is set at ?10 lakhs per investor, lower than the typical ?25 lakhs for traditional fractional ownership platforms.

4. Transparency and Governance: The regulations mandate comprehensive disclosure requirements, including maintaining a detailed website of all schemes, enhancing transparency and investor confidence. Investment managers are required to hold a minimum percentage of the units, ensuring alignment of interests with investors.

5. Liquidity and Convenience: SM REITs provide a way to monetize income-generating properties that previously lacked liquidity. The investment managers handle all compliance and tenant management, simplifying the investment process for individual investors.

Industry Perspectives on SM REITs

The introduction of SM REITs has generated largely positive reactions from retail investors’ perspectives. Feedback is also largely positive for the industry with some mixed reactions. Proponents argue that these regulations will enhance market efficiency, transparency, and investor protection, making real estate investments more accessible and attractive. They see SM REITs as a natural progression from traditional fractional ownership models, addressing many of the latter's inherent challenges. Existing players are targeting multiple REITs being listed in early 2025.

Critics comments on SM-REITs from a manager/REIT-business perspective are largely around stringent Requirements for Investment Managers (?20 crore net worth, with ?10 crore in liquid assets),? Co-Investment Obligations (up to 15%), Cap on REIT Size (?500 crore cap on each SM REIT limits scalability and profitability under one scheme), High Cost of Issuance: (3 to 5% of the issue size like an IPO, reducing overall yield), Separate SPV Requirement (Each property must be a separate Special Purpose Vehicle (SPV) and scheme unlike a pool of projects under larger REITs),? Liquidity Concerns (cap and separate SPV may lead to interest and trading concentrated in a few standout projects and less in others). While there are issues that I am sure SEBI is taking cognizance of, which may get addressed in due course, the concept of SM-REIT is forward-looking and timely and should evolve further with time and experience.

Real-Life Impact: Investing in Key Cities

Cities like Mumbai, Delhi NCR, and Bengaluru are hotspots for SM REIT investments. It is quoted by some IPCs that Mumbai alone has 50 million-plus square feet of SM REIT-eligible properties. Delhi NCR and Bengaluru follow with at least one-third of that size. These cities offer robust demand for rent-yielding assets and have professionally managed platforms that make SM REITs an enticing choice for retail investors, subject to profitably listing at similar yields as joint ownerships and FOPs.

Conclusion

Fractional ownership and the advent of SM REITs are revolutionizing India's real estate investment landscape. They lower entry barriers, provide a regulated and transparent investment environment, and offer attractive returns. Whether you’re a retail investor or an HNI, these models make high-quality real estate assets accessible and manageable. Now is the perfect time to explore fractional ownership and SM REITs as viable investment opportunities.?

For the platforms/managers, the business of managing these platforms isn’t just about real estate; it’s about building a new, accessible, and scalable market for real estate investment in India. It is about tapping into a billion-plus-dollar opportunity that can redefine how we think about property ownership and investment.

Wishing PropShare the very best for their ensuing maiden issue. Looking forward to being a unit holder soon.

Feel free to share your thoughts to aid further learning in this evolving market!