To regulate the fractional ownership industry and safeguard investor interests, market regulator Securities and Exchange Board of India (SEBI), has published a notification to amend the real estate investment trusts (REIT) regulations 2014. The establishing of guidelines for creating small and medium real estate investment trusts (SM REITs) incorporate commercial and residential properties within the new amendment. This move comes at a time when the market and demand for fractional or co-ownership properties are rapidly growing. The introduction of specific regulations for SM REITs is expected to provide a level of assurance to investors and property owners, fostering trust and encouraging participation in these ventures.
As per
the gazette notification, an SM REIT means an entity that collects Rs50 crore or more to issue units to at least 200 investors for acquiring and managing real estate assets or properties which would entitle the investors to receive income generated without day-to-day control of the management and operations of these assets. The minimum price of each unit of the scheme of the SM REIT will be Rs10 lakh.
The initial offering for an SM REIT is mandated to have a minimum subscription amount of Rs10 lakh per investor, contrasting with the earlier norm where fractional platforms often required an investment of about Rs25 lakh.
SM REITs are now allowed to gather funds starting from Rs50 crore by issuing units to a minimum of 200 investors instead of the earlier cap of Rs500 crore. This may bring a large number of income-generating small and medium real estate assets under the purview of REITs.
No unit-holder of the SM REIT scheme will enjoy superior voting or any other rights over another unit-holder in the same scheme and there are no multiple classes of units of the scheme of the SM REIT, SEBI says.
"An application for grant of certificate of registration as SM REIT must be made by the investment manager on behalf of the Trust. The investment manager has a net worth of not less than Rs20 crore. The investment manager should have at least two years' experience in the real estate industry or real estate fund management," the notification says.
The regulatory framework approved by SEBI provides for the structure of SM REITs, migration of existing structures meeting specific criteria, obligations of the investment manager including net worth, experience and minimum unitholding requirement, investment conditions, minimum subscription, distribution norms and valuation of assets.
SEBI says the investment manager, with a net worth of not less than Rs20 crore and at least two years’ experience in the real estate industry or fund management, must make an application for registration as an SM REIT. More than half of the directors of the investment manager should be independent directors who would not hold the position of directors of the manager or investment manager of any other REIT of SM REIT.
According to the market regulator, SM REITs should be able to create separate scheme or schemes for owning real estate assets through special purpose vehicles (SPVs) constituted as companies.
It says the SPV, a wholly owned subsidiary, can directly and solely own all assets bought or proposed to be bought by the SM REIT. "The scheme of the SM REIT should invest at least 95% of the value of the schemes' assets for each of its schemes in completed and revenue-generating properties and should not invest in under-construction or non-revenue generating real estate assets."
The SM REIT SPV should raise capital only from equity investment from the scheme and it may raise funds by borrowing from the scheme, SEBI says.
According to Piyush Gupta, managing director (MD) for capital markets & investment services at Colliers India, the notification on SM REITs was awaited for long and shall provide a huge boost to providing liquidity to granular holding of office yielding assets. "This opens plethora of opportunities across size and scale of markets and products to retail and institutional investors to invest in office yielding real estate. With minimum size of Rs50 crore and minimum holding of 5% of investment manager, this is not a significant entry barrier for newer fund managers, however key checks and balances have been provided by SEBI."
Last year in November, SEBI decided to amend the regulations or creation of new regulatory framework, for the facilitation of SM REITs with an asset value of at least Rs50 crore
vis-à-vis minimum asset value of Rs500 crore for existing REITs.
The SEBI notification framework for SM REITs is expected to contribute to the growth and acceptance of this innovative form of property ownership, aligning with established practices in developed nations.