Sebi’s new norms make fractional realty investments more appealing

With a view to regulate the fractional ownership industry, the Securities and Exchange Board of India (Sebi) has recently issued regulations to amend the REIT Regulations 2014, to establish guidelines for creation of Small and Medium Real Estate Investment Trusts (SM REITs).

Talking to Bizz Buzz, Dr Prashant Das, Chair of Finance and Accounting area and Associate Professor, IIM (A), said, “Regulation of FOPs (Fractional Ownership Platforms) will widen investors' access to commercial real estate investment. The Sebi Chairperson's attention to real estate is a morale booster to the sector.”

The eligibility criteria for sponsors, the sponsors' skin in the game, restriction to completed assets, and a larger distribution requirement will reassure investors.

There are a few things that may warrant some reconsideration. For example, with the sponsor criteria taken care of, I feel that leverage requirements should be at par with REITs. I am somewhat concerned about the cost of compliance (listing, more frequent distribution, etc.): larger players have an economy of scale which smaller players may not. Also, I do not understand how SM REITs are feasible in the residential space, he said.

The recent decision by Sebi is expected to have a significantly positive impact on the emerging fractional ownership sector in the country. This move comes at a time when the market and demand for fractional or co-ownership properties are rapidly growing.

Aryaman Vir, CEO, WiseX, a real estate based alternate investments company, said, “We commend Sebi’s proactive stance on introducing regulations on follow-on offers by REITs and InvITs with an aim to enhance liquidity and investor participation in these sectors. The establishment of a clear framework in SM REITs by Sebi will pave a way for enhanced opportunities in real estate investment segment. As a pioneer in the fractional ownership landscape, WiseX is at forefront in upholding the highest standards of transparency and accountability.”

The amendments are in alignment of our core values of empowering our investors with a plethora of secured investment avenues. This is a significant stride towards fostering innovation and excellence in the fractional ownerships industry, he added.

Shravan Gupta, Founder and CEO, Yours, a platform for fractional ownership of luxury second homes, says, “The amendments made to the Real Estate Investment Trust (REIT) Regulations in 2014 aim to establish clear guidelines for the formation of SM REITs.”

Through these amendments, the regulatory body seeks to not only regulate and organise the fractional ownership segment but also enhance transparency in the sector. The introduction of specific regulations for SM REITs will provide a level of assurance to both investors and property owners, fostering trust and encouraging participation in these ventures.

Shrinivas Rao, Chief Executive Officer, Vestian, said, “Sebi’s notification to regulate SM REITs is a welcome move for the Indian real estate sector. This will regulate the fractional ownership industry and safeguard investor interests, incorporating both commercial and residential properties within the new framework.

Moreover, it is expected 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 Rs 10 lakh per investor, contrasting with the earlier norm where fractional platforms often required an investment of about Rs 25 lakh.

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

Piyush Gupta, Managing Director, Capital Markets & Investment Services, Colliers India, says, “The notification on SM REITs was awaited 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 Rs 50 crore and minimum holding of 5 per cent of Investment Manager, this isn’t a significant entry barrier for newer fund managers. However, key checks and balances have been provided by Sebi.