Small & Medium REITs framework to boost property fractional market growth by 10 times to $5 bn, say industry players

The Small and Medium Real Estate Investment Trusts (SM REITs) framework brought by capital markets regulator Sebi will boost liquidity and aid growth in India’s real estate market, analysts said. 

The Securities and Exchange Board of India (Sebi), last week, notified the framework for SM REITs, wherein investors can now have fractional ownership of rent-yielding real estate assets by making a minimum investment of ₹10 lakh.

It amended the regulations for REITs, permitting fractional ownership of REITs which will encompass commercial and residential properties.

This will help the real estate fractional ownership market to grow by 10 times to $5 billion by 2030, according to a JLL India and PropShare report.

India’s real estate fractional ownership market is currently estimated at around $500 million and it is projected that the market is projected to grow 10 times in the next five years.

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“Albeit the regulatory compliance issues that the industry is expected to witness during the initial phase of implementation of the MSM REIT regulations, these are expected to pave the way for the market to grow and potentially surpass USD 5.0 billion of Asset Under Management (AUM) by 2030,” said the report.

Industry players believe that the Sebi regulations address key aspects to safeguard investor interests and to ensure organized growth of the market. 

The rules require the investment manager responsible for setting up an SM REIT to have a net worth of at least ₹20 crore and at least two years’ experience in the real estate industry or real estate fund management. Also, in a scheme of the SM REIT scheme which has opted not to undertake leverage, the investment manager shall always hold at least 5% of the total outstanding units during the first three years. The minimum holding increases to 15% in the case of leveraged schemes. 

Read here: Sebi notifies small and medium REITs

Moreover, at least 95% of the value of the schemes’ assets must be invested in completed and revenue generating properties and the remaining 5% can be invested in ‘unencumbered’ liquid assets. 

As per the regulation, the size of the asset to be acquired in a SM REIT scheme should be at least ₹50 crore and less than ₹500 crore with units to be issued to a minimum of 200 investors.

“With MSME REIT regulations, Sebi is now formally bringing this growing market into the regulatory ambit, which should lead to significant growth in this asset class while at the same time ensuring investors get the benefits that come with regulation - uniformity, fairness, transparency, and redressal mechanisms,” Kunal Moktan, CEO of PropShare, said.

JLL analysis shows that more than 328 million sq. ft of grade A office assets in the top seven cities of India, valued at approximately $48 billion are MSM REIT-worthy.

“As the regulatory framework falls into place and Fractional Ownership Platforms (FOPs) overcome initial implementation obstacles, we expect the MSME REIT market to experience an even more accelerated pace of growth,” said Dr. Samantak Das, Chief Economist and Head of Research and REIS, India, JLL.

The REIT market in India grew from ₹0.3 trillion to ₹1.3 trillion in Gross Asset Value (GAV) within a span of five years. 

Also Read: MSM REITs: How SEBI's game-changing move will transform India's real estate investment landscape

Piyush Gupta, Managing Director, Capital Markets & Investment Services, Colliers India said that 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 a plethora of opportunities across size and scale of Markets and Products to Retail and Institutional Investors to invest in Office yielding Real Estate. With a minimum size of ₹50 crore and minimum holding of 5% of Investment Manager, this isn’t a significant entry barrier for newer Fund Managers however key checks and balances have been provided by SEBI,” Gupta said.

Shrinivas Rao, CEO- Vestian expects the new guidelines to boost the participation of domestic and foreign retail investors, and liquidity in the Indian real estate market as an initial offering for an SM REIT is mandated to have a minimum subscription amount of INR 10 lakh per investor, contrasting with the earlier norm where fractional platforms often required an investment of about ₹25 lakh.

“SM REITs are now allowed to gather funds starting from ₹50 crore by issuing units to a minimum of 200 investors instead of the earlier cap of ₹500 crore. This may bring a large number of income-generating small and medium real estate assets under the purview of REITs,” he added.

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