SEBI's Introduction of MSM REITs is a Groundbreaking Move for Indian Real Estate

Commercial real estate (CRE) is one of the most attractive asset classes for investors looking to diversify their investment portfolios and earn stable returns. Today, even investors with limited capital can invest in this asset class, which is growing at a CAGR of 21.10%, all thanks to Real Estate Investment Trusts (REITs). This transformative tool in the investment landscape has provided a unique opportunity for investors to invest in commercial real estate. SEBI recently introduced MSM REITs, which are regarded as a game-changing concept.

When and why did SEBI introduce this new category of REITs?

Fractional Ownership Platforms (FOPs) enable investors to own a fractional share of a real estate asset, rather than the entire property. The investor owns a specific percentage of assets through SPV-issued securities. In 2023, the Securities and Exchange Board of India (SEBI) approved amendments to the REIT regulations to regulate FOPs and protect investors' interests. As a result, a new category called Micro, Small, and Medium Real Estate Investment Trusts (MSM REITs) has been introduced. Now, the general public can invest in rent generating commercial real estate through this route. Small and large investors can make property-specific investments in MSM REITs, where they are aware of all the characteristics of the asset. MSM REIT is different from a regular REIT, just as investing in a REIT is akin to owning units of a MF scheme, while MSM REIT is akin to owning shares of a company.

Let's understand the structure of MSM REIT, which is similar to that of a traditional REIT:

• Trustee
• Sponsor/sponsor group
• Investment manager
• Investors as primary stakeholders

However, the sponsor and investment manager can be the same entity.

Here are some of the proposed guidelines for MSM REITs in accordance with REIT regulations:

• The sponsor, on behalf of the Trust, can submit a registration application to SEBI specifying it as an MSM REIT.
• The sponsor should have a minimum of 5 years of experience as a real estate developer or fund manager in the real estate industry.
• The sponsor should hold 15% of the total units of the MSM REIT for at least 3 years from the date of listing of such units.
• The net worth of the sponsor should be at least INR 20 crores.
• The investment manager's role is to manage the assets and investments of the MSM REIT and carry out all operational activities.
• The net worth of the investment manager should be at least INR 10 crores.
• The investment manager should be a company incorporated under the Companies Act, 2013.
• The investment manager should have at least 5 years of experience in fund management or advisory services in the real estate industry.

How can an investor find the appropriate MSM REIT for investment purposes?

There are several assets held by an MSM REIT, and to begin investing, investors must research and consider the following parameters:

• Asset quality
• Location
• Lease structure
• Demand/supply dynamics
• Management quality

What asset classes can be held by MSM REITs?

• Office
• Retail
• Warehousing
• Industrial
• Hospitality

What's the minimum asset size and ticket size?

The asset size is reduced to INR 25 crores, and the minimum ticket size is INR 10 lakh. This reduction aims to make investments more accessible to a wider range of investors, both small and large. It is expected that the ticket size restriction will be relaxed as time progresses.

What are investors promised?

As investors are aware of the specific assets in which they are investing, those investing in MSM REITs are provided with:

• Transparency
• Control
• Credibility
• High liquidity
• Guaranteed settlement
• Low volatility
• Robust risk management framework

What factors fortify investor confidence in MSM REITs?

• Standardised regulations
• Know Your Customer (KYC) norms
• Grievance redressal mechanisms
• Regulatory oversight

All in all, investors can incorporate MSM REITs into their investment portfolios, as they offer great growth potential. The introduction of MSM REITs by SEBI shows positive progress in the real estate investment sector in India, as they aim to stimulate further growth not only in the real estate sector but also in related segments of the Indian economy. As investors adopt this new method, it could help make the real estate market more inclusive and lively.