Sebi’s micro-Reit proposals may let you own a slice of your office



Proposed MSM Reits will have minimum asset size of 25 crore, as against 500 crore ticket size of regular Reits.

The land bank is shrinking. And, so are opportunities for owning prime real estate. That’s why many Indian investors want to purchase a second house and even a third. And, there is good demand for commercial real estate as well—office buildings or malls. Wish you had invested in one such building in your neighbourhood. But that is prohibitive in terms of costs. That would not be possible without forking out several hundred crores of rupees. The answer to this has been Reits (Real estate investment trusts). However, there have only three listed Reits so far. There will be more soon, opening up opportunities for the ever-hungry investor.

A new discussion paper released by market regulator Sebi envisages the creation of ‘Medium, Small and Micro’, or MSM, Reits which will enable you to invest in such properties with a minimum investment amount of 10 lakh. This can be a game-changer for the sector. While the Reits listed thus far had a minimum asset size of 500 crore, the new MSM Reits will have a minimum ticket size of just 25 crore. It will allow unregulated players in fractional real estate to come under the Reit umbrella.

Fractional real estate is the idea that you can invest a small sum of money in real estate in exchange for a small share of the property. This is not possible while buying a property outright when costs typically go into crores of rupees. In fractional real estate, investors are given shares in special purpose vehicles (SPVs), which, in turn, own the property in question. Typically, these are private issues of shares and such SPVs can have a maximum of 200 investors.

Typically, fractional real estate platforms allot shares and compulsory convertible debentures in such SPVs. Investors get interest on their debentures and can get capital gains on their shares when the property is sold.

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The concerns

Currently, fractional real estate is not regulated. Startups in this sector have registered themselves as real estate agents under RERA but this does not provide adequate protection to investors. Investors own shares in the underlying SPVs, however they depend on the fractional real estate firm to actually manage the SPVs. In case the firm fails to do a good job, there is no backstop.

Things can get complicated when the 200 or so shareholders in an SPV pass away and numerous heirs come into the picture. There are no proper disclosure norms while raising money from investors or on ongoing disclosures like lease renewals. There are no standard investor grievance redressal systems and no KYC/AML rules on fractional real estate platforms.

Some platforms make investors execute a power of attorney (PoA) document in their favour and this can expose investors to legal risks. There are no standard valuation norms for the assets held. The platform can acquire the project for a price that is too high and investors may not understand this.

Further, there is no disclosure of conflicts of interest (if the platform and property seller for a fresh acquisition are connected, for example). There can also be instances of mis-selling, given the complex nature of this asset class.

What Sebi has proposed

According to the Sebi discussion paper, fractional real estate platforms will have to register with Sebi as MSM Reits. These will have to adopt a trust structure. The trust will own 100% stakes in SPVs (essentially companies). The SPVs, in turn, will own the property.

The trust will appoint an investment manager to supervise the REIT. The sponsor of the trust must have a net worth of 20 crore of which at least 10 crore should be liquid (in the form of cash, money market instruments, etc).

Sebi has proposed that the assets in this kind of micro Reits can range from 25 crore to 499 crore. In contrast, regular listed Reits need to have at least 500 crore in assets. Existing regular Reits have to distribute 90% of their cash flows to investors. For MSM Reits, the proposals say 100% of cash flows have to be distributed by the trust. This is net distributable cash flows and hence arrived at after deducting management, administrative expenses. etc.

“hBits is thrilled by Sebi’s proposal to regulate online platforms that offer fractional ownership of real estate assets. We believe that this step will be a game-changer for the commercial real estate investment industry, as it will provide increased transparency and capital protection for small investors and easier access to a new asset class for a wider range of investors. As a leading player in the fractional ownership space, we see this as the first step towards regulatory recognition of our industry. We believe that the fractional ownership industry has the potential to disrupt the way India invests, similar to how mutual funds did 15 years ago," said Shiv Parekh, founder, hBits, a fractional real estate platform.

Sudarshan Lodha, co-founder of Strata, said, “the Sebi proposals will enable investors to take exposure to specific real estate projects for a few lakhs of rupees. The REIT units will be listed on stock exchanges and held in your demat account. This is transformational for the previously unregulated fractional real estate space and a great boost for realty sector, overall. This is akin to Category I AIFs (alternative investment funds) in which the investment manager shows investors individual startups that they can invest in. Similarly, here, you can invest in an office complex in Bangalore rather than a collection of offices across India."

Interestingly, the Sebi proposals do not force MSM Reits to invest only in commercial real estate, as is required for regular REITs. This may open the door to investment in residential real estate in India.

Further, MSM Reits cannot take on any leverage. To be sure, regular REITs can take on leverage of up to 49% of their assets.

Aryaman Vir, chief executive officer of Aurum WiseX,a real-estate platform, said the new regulation is an opportunity to enhance the overall investor and stakeholder proposition but not allowing the players to take leverage is a limiting provision. “Real estate is an interesting asset class as one can take leverage against future cash flows. It is a very important aspect in real estate and should definitely be explored by the regulator in the future as it will significantly help investor returns."

Note that, leverage or debt can magnify returns, but it can also hurt returns if rental yields fall below the interest rate on the Reit’s debt.

Comparison to Reits

For the purpose of regulating and taxing the fractional real estate platforms, MSM Reits would be similar to regular Reits. Vir said, “while this structure is called a Reit, it’s been moulded to the requirements of regulating the FOP framework. One can say that it’s a subdivision of a REIT simply because it is a trust and the units will be listed. But in terms of the modalities that impact investors, it is different. Regular Reits come with a diversified portfolio, while MSM Reits offer individual real estate property. The former can invest in an under-construction property and the latter cannot. The minimum ticket size too differs ( 10 lakh for MSM Reits and 10,000 – 15,000 for regular Reits). The holding percentages of sponsors, too, are different."

Nevertheless, Sebi’s intention of extending the regulatory framework to the fractional real estate platforms is expected to address the concerns with such platforms regarding investor protection.


The Sebi discussion paper is silent on taxation. However, it is likely to be on par with regular Reits since Sebi has proposed the same trust structure. Dividends distributed by Reits are tax-free if the Reit has not adopted the concessional tax regime. Rent and interest distributed by the Reit are taxed at slab rate in the hands of the investor. Repayment of capital is complex— it is not taxed if such repayments have not exceeded the face value of the Reit unit cumulatively, but such payments must be reduced from the ‘cost of acquisition’ while calculating capital gains.

“The regulator is rightly bringing fractional ownership platforms (FOPs) under existing REIT regulations, and hence the same tax provisions applicable for the latter should be applicable for MSM REITs as well," opined Punit Shah, partner at Dhruva Advisors.

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