India’s forthcoming small and medium-sized real estate investment trusts are set to boost retail investment in real estate, but at the expense of the growing fractional ownership sector.

In November, the Security & Exchange Board of India announced that it had approved the regulatory framework for small and medium-sized REITs (SM REITs), which will allow REITs with a minimum asset value of INR500 million ($6 million) to be created.

The original REIT legislation from 2014 stipulated a minimum size of INR5 billion ($60 million) and the four REITs listed are much larger, with a combined market capitalisation of nearly $10 billion.

Megha Maan, Director, Research & Consulting at Savills India, says: “India’s REITs have been a great success but we still only have a small number of trusts targeting institutional investors. Smaller REITs will allow retail capital to flow into real estate in a regulated fashion.”

A consultation paper published last May revealed that SEBI sees smaller REITs as a way to bring emerging fractional real estate ownership platforms under its regulatory umbrella.

The past decade has seen a flurry of new fractional ownership platforms for real estate, both in India and worldwide. These platforms aggregate the funds of retail investors in order to buy properties which would be out of reach to an individual. SEBI said the Indian investors via such platforms typically invested around INR1 million ($12,000). Estimates of the size of the market vary, but it is believed to more than $5 billion of assets under management.

However, SEBI raised concerns about such platforms, due to their lack of regulation. Its concerns include investor protection, lack of transparency in valuations and management fees. The replacement of such platforms by REITs, “would not only help develop the real estate market but also provide investor protection measures and lead to an orderly development of this sector and the market”, the paper said.

SEBI proposes that any person or entity which facilitates or has facilitated fractional investment in real estate must register an SM REIT manager, fulfilling certain eligibility criteria. Those who do not fulfil the criteria will be required to wind up their operations.

Sponsors will be required to have skin in the game and hold at least 15% of an SM REIT’s units for at least three years. SM REITs will have to be listed and have at least 20 investors aside from the sponsor and related parties. SEBI proposes a minimum investment and unit size of INR1 million. SM REITs will also be subject to a similar regulatory and tax regime as their larger cousins.

“The rapid growth of fractional ownership platforms demonstrates the demand for real estate investment from retail investors in India and existing platforms will give the market a head start”, says Maan.

“However, some platforms will inevitably fail to meet the required standards and others will prefer to liquidate rather than take on the costs of managing listed entities,” she adds.

Further reading:
Savills India Research

Contact us:
Simon Smith