SEBI proposed a scheme for MSM REITS (Micro, Small & Medium REITS) -Bliss or Woe for Real Estate Sector?

Part-I

First, we must comprehend REITs.

Commercial property, such as shops and office space, is a less typical alternative for investing in real estate. However, huge ticket sizes of Rs. 1 crore or more are common in this sort of real estate investment, particularly in metro and Tier 1 cities. Add to that the problems of obtaining necessary approvals, obtaining long-term leases from viable tenants, and ensuring punctual receipt of rent, and it's easy to see why so few people select this investment option.

REITs, or real estate investment trusts, are corporations that own or finance income-generating real estate in a variety of property industries. To qualify as REITs, these real estate businesses must meet a variety of criteria. Most REITs are traded on major stock markets and provide a variety of incentives to investors. REITs, like mutual funds, provide an investment opportunity that allows ordinary Indians—not just Dalal Street, banks, and hedge funds—to benefit from valuable real estate, as well as the opportunity to access dividend-based income and total returns?and to help communities grow, thrive, and revitalise.

There are currently only 3 REITs available for investment in India – Embassy Office Parks REIT, Mindspace Business Parks REIT, and Brookfield India Real Estate Trust. And India's first retail REIT issue of Nexus Select Trust IPO just closed on 11th May.

What assets do REITs own?

REITs invest in a variety of real estate property types such as offices, apartment complexes, warehouses, retail centres, medical facilities, data centres, cell towers, infrastructure, and hotels. Most REITs specialise in one sort of property, but some have a diverse portfolio of properties.

When a Real Estate Company decides to establish a Real Estate Investment Trust, it becomes the REIT's Sponsor and appoints a Trustee. The Trustee is in charge of the Trust's real estate assets, which are no longer directly controlled by the Sponsor. A REIT can have direct control over its Real Estate Holdings or through the formation of a Special Purpose Vehicle (SPV). In the case of REITs, the SPV is a domestic corporation that holds the REIT's Real Estate Assets, and according to laws, the Trust must own 50% or more of the SPV.

The Trustee then hires a Manager to administer the Trust's Real Estate Assets and make investment decisions on its behalf. The REIT can be registered once the Manager has been appointed. Once registered, a REIT can raise funds by selling units on public stock exchanges or to private investors.

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How Do REITs Generate Returns for Investors?

The purpose of every investment is to create wealth for the investor and/or to produce consistent income. REITs give both of these advantages to unitholders. Investors can receive monthly dividends and/or interest payouts that provide consistent income, while the sale of REIT units on stock exchanges can bring capital gains.

• Dividend and Interest Payouts:?REITs pay out dividends and interest on their net rental income. This is the income received by a REIT from renting and leasing commercial real estate after deducting certain critical expenses connected to facility management and maintenance. Management fees, depreciation, maintenance charges, and other expenses are deducted from Gross Rental Income to calculate a REIT's Net Income. The current SEBI mandate requires REITs to pay out at least 90% of net rental income as dividends and interest to investors.
• ?Capital Gains:?Because REITs are listed and traded on stock exchanges, the price of individual units fluctuates based on their performance as well as market demand. Like equity stocks and mutual funds, successful performance by a REIT leads to an increase in the price of REIT units, which can then be sold at a profit and deliver Capital Gains to the owner. Next, let's take a closer look at the primary pros and drawbacks of investing in Real Estate Investment Trust units.

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There has been a proliferation of web-based platforms selling fractional ownership of real estate assets in the last 2-3 years. These platforms allow investors to invest in buildings and office spaces such as warehouses, shopping malls, and conference centres. These Fractional Ownership Platforms (FOPs) require a minimum investment of INR 10 lakhs to INR 25 lakhs. The underlying real estate assets offered by FOPs are analogous to the definition of real estate or property in the REIT Regulations.

The following are some of the prominent FOPs' self-revealed / self-declared details, including total assets under administration, as per their responses or as disclosed on their websites:

Platform Backed by No. of users Total Assets under

Management (in Crores)

Prop Share Commercial properties NA 960

Hbits Commercial properties 250 138

Strataprop Commercial Properties 1819 704

Asset Monk Commercial Properties NA 217

Myre Capital Commercial Properties NA 227

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??????Globally, such fractional ownership platforms have been in existence since 2015. Some of the platforms across the globe are as follows:

Name?of platform Country No. of users Total Assets Fundrise United States 3,87,000 $ 7 billion

Realty Mogul United States 2,74,000 $ 6 billion

Cadre United States 2,50,000 $ 5 billion

Stake UAE 1,50,000 $39 million

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??????Given the increasing value of investments in such FOPs, as well as the growing number of investors, it has become necessary to consider whether it is an appropriate time to require registration and regulate these FOPs to bring about, inter alia, regulatory oversight, common uniform standard disclosure practises, ensuring liquidity through the listing or similar such measure, investor redressal mechanism, and so on, to protect investors' interests.

As a result, there are ideas for regulating platforms that sell fractional ownership of real estate assets. Under the SEBI (Real Estate Investment Trusts) Regulations, 2014, such fractional ownership of real estate assets is planned to be presented as MSM REITs.

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