Investment in real estate is often capital intensive which requires considerable market knowledge. Not every investor has the appetite or knowledge for such investment. Furthermore, the past decade has shown considerable growth and returns in the commercial real estate market with people investing in real estate other than owning their home. This trend has given rise to Fractional Ownership Platforms (“FOPs”) which allow retail investor to own a piece of real estate assets.
Typically, FOPs incorporate a special purpose vehicle, the securities of which are then purchased by the investors. The investment can start with as low as INR 10 Lakhs. The real assets are subsequently purchased by the SPV, and the maintenance costs of these real assets are divided among the investors/shareholders in the SPVs, who also share in the returns of the assets. Thus, FOPs enable investors to own a specific percentage of real estate assets through the securities issued by the SPVs.
In light of the growing number of such platforms and with aim to protect the interest of investors, Securities Exchange Board of India (“SEBI”) recently approved the amendment to the SEBI (Real Estate Investment Trusts) Regulations, 2014 (“REIT Regulation”) at its board meeting dated November 25, 2023 to introduce a new category of Real Estate Investment Trusts (“REITs”) i.e. Small and Medium REITs (“SM REITs”).
The amendment is in the back drop of the consultation paper floated by SEBI in May 2023 proposing to regulate FOPs under REIT Regulation as a new category – Micro, Small and Medium Real Estate Investment Trusts (“MSM REITs”).
Some of the key regulatory framework proposed in the Consultation Paper is highlighted below:
- MSM REITs to be setup as a Trust under the provisions of the Indian Trust Act, 1882 with an ability to establish separate and distinct scheme/s for owning of real estate assets through wholly owned special purpose vehicles constituted as a company under the Companies Act, 2013.
- The sponsor should have at least 5 years experience in real estate industry as either a developer or a fund manager and would be required to hold minimum 15% of total units of the MSM REIT for each scheme for a period of 3 years from the date of listing of such units of such scheme.
- The sponsor and investment manager shall require to have net worth of at least INR 20 crores and INR 10 crores respectively.
- MSM REIT cannot raise debt and invest in under construction or non-rent generating real estate properties.
- The asset proposed to be acquired should be at least INR 25 crores and should not exceed INR 499 crores.
- The minimum subscription size to the units of a MSM REIT Scheme shall be INR 10 lakhs.
The new framework marks a significant step forwards formalizing the FOPs space by requiring them to register as SM REITs. However, we see this as a missed opportunity for SEBI to underscore the importance of asset tokenization with regard to the concept of fractional ownership. (Asset tokenization is a process of creating, reflecting and recording the ownership of underlying asset on any distributed leger technology i.e. blockchain)
While the amended regulation is yet to be published and notified with a detailed framework (on the structure of SM REITs, migration of existing structures meeting certain specified criteria, obligations of the investment manager including net worth, experience, and minimum unit holding requirement, investment conditions, minimum subscription, distribution norms, and valuation of assets), according to the press release, SM REITs shall have the ability to create separate schemes for owning real estate assets through special purpose vehicles constituted as companies with an asset value of INR 50 crores per scheme.