What does SEBI’s recent revision for investing in REITs mean for Commercial Real Estate?

In a recent turn of events, SEBI has amended the Real Estate Investment Trusts (REITs) Regulations, and the Infrastructure Investment Trusts (InvITs) Regulations, 2014. By reducing the minimum application value to INR 10,000 for REITs, they’ve taken a step in the right direction since it will help increase participation and liquidity for Commercial Real Estate.

Traditionally, Commercial Real Estate as an investment avenue was limited to only institutional and HNI investors as it was considered ‘risky’ due to the asymmetry and unorganized framework of the industry. With the introduction of regulations, RERA, and organized players in the industry, CRE has transformed to become a preferred asset class for many investors. With no REITs and CRE investment avenues, there was no way for retail investors to access or participate in CRE. This not only became a barrier for retail investors from accessing a lucrative asset class but also limited the growth and scope of the CRE market in India ?

The introduction of REITs welcomed by high participation from retail investors, HNIs (High Net-worth Individuals), and institutional investors is a positive sign for CRE and paves the way for significant growth in this sector. ?Furthermore, SEBI’s recent amendment implies increased confidence in the real estate market as an asset class. The minimum ticket size of INR 50,000 was earlier set in place with the objective to limit the investor base to only sophisticated investors. However, the new amendment to reduce the ticket size, highlights how SEBI is more comfortable with CRE and this asset class can be considered to be safe enough to be offered to retail investors at large. CRE’s performance, increased quality of assets, professionalism in the industry has led to this positive move, thus making it a safe avenue for retail investors.

While the concept of REITs and CRE are relatively new for investors, they are gaining popularity since they give retail investors access to Commercial Real Estate. According to an EY report, REITS and InvITs has raised a capital of over $9.7 billion in India. [1] During the last two years, all three REITs valued at INR 77,100 crore were listed. Till date, assets worth INR 2.1 trillion have been floated through InvITs and REITs with REITs accounting for 36% of the chunk[2]. Projections state that fractional ownership of real estate is expected to grow to $5 billion in India within three years, and therefore, now is the right time to make a move when it comes to CRE. Despite the pandemic, the subsequent lockdown, and the economic slowdown in 2020, the net absorption of Grade A office spaces was 25 million sq. ft. 2021 is expected to see this number rise to over 30 million sq. ft[3].

There are umpteen advantages of fractional investment for retail investors. First and foremost, you gain access to institutional grade opportunities with MNC tenants that are otherwise completely out of reach for retail investors. You can start investing on fractional ownership platforms with a lower ticket size and receive returns that are institutional grade. The biggest advantage, I believe, is that of a high-yield fixed income alternative that provides monthly cash-flow for investors. In today’s economy, the best of the debt products are giving only 7% or lower returns. Moreover, unlike other fixed income collateralized investment products, fractional ownership enables investors to earn an annual yield along with capital appreciation. The returns are like equity (17% - 25% IRR) whereas risk is like debt that is, collateralized.

In comparison to REITs, fractional ownership platforms are providing a significantly higher rental distribution with better distribution frequency and the returns are better by nearly 200-300 basis points. On the other hand, in REITs 20% of the total funds can be used for non-yielding (under construction/speculative) investments. Listed products such as REITs are highly susceptible to speculation. Unlike REITs, assets on fractional ownership platforms are not closely correlated with equity markets and hence help preserve capital in hard assets. To break it down simply, fractional ownership platforms are more like real estate private equity funds with increased liquidity, better transparency, and lower investment minimums.

In conclusion, the first 3 REITs have paved the way for real estate to compete as a wealth product with other asset classes. With the quality of assets and the overall stability of the underlying portfolio, retail investors have increasingly gravitated to these REITs to access fixed income as well as CRE. While REITs and fractional ownership platforms have disrupted the traditional access to CRE, both have their respective pros and cons and must be evaluated against your personal investment goals.

Fractional ownership platforms are a way for investors to access high-yield fixed income opportunities that are secured by an A-grade pre-leased commercial real estate asset. Each Grade A commercial property will have a Specific Purpose Vehicle that holds the property on behalf of its customers. Investors with a long-term perspective of 5-10 years can yield significant rental income as returns. Investors have multiple liquidity options including a tech-enabled actively managed secondary market that is designed to streamline and accelerate any secondary sales on the platform. Subsequently, investors can exit by selling their ownership to anyone directly or through complete asset sale wherein the entire property is sold and the money is given to all the investors. However, the latter is only possible when all those holding ownership of the property agree to the complete sale. Overall, fractional ownership is a step up for retail investors who can earn impactful monthly returns and have room for capital appreciation.

[1] Source: https://www.businesstoday.in/latest/corporate/story/reits-invits-gaining-traction-in-india-investment-trusts-raise-over-97-bn-in-capital-ey-302441-2021-07-26

[2] Source: https://www.livemint.com/news/india/assets-worth-over-rs-3-5-trn-may-get-monetised-via-invits-reits-in-next-one-year-icra-11623326200439.html

[3] Source: https://www.financialexpress.com/money/fractional-ownership-of-property-or-reit-what-is-right-for-you/2231449/

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