How small and medium REITs will impact fractional ownership in India?

The Securities Exchange Board of India (SEBI) has introduced amendments to the REIT Regulations 2014, which outlines provisions for the formation of Small and Medium Real Estate Investment Trusts (SM REITs). So, the environment of the Indian real estate has gone euphoric with the underlying promise to witness windfall into fractional ownership. It is perceived to be more lucrative than the existing REITs as the SM REITs encompasses both commercial and residential properties.

Safe investment

The SEBI guidelines make the fractional ownership falling under the SM REITs promising to turnaround the fortune. It was earlier seen like crowdfunding. Now it promises to make the investment safer as compared to the previous unregulated environment of investments into fractional ownership. Hence, fractional ownership would not be falling under the sandbox investment basket of the SEBI, which was more like fintech start-ups without the regulatory mechanism.

As per the new guidelines, SEBI has allowed the framework that can pool an amount of at least Rs 50 Cr but lesser than the existing REIT threshold of Rs 500 Cr for getting listed as a SM REIT. The number of investors should be at least 200. Not only the new fractional ownership platforms can apply to the SEBI, but also the existing ones before the SEBI for a migration plan. Though, the migration of existing fractional ownership assets has not been made mandatory.

There is no doubt that this, although experimental measure, is a step in the direction of regulating the fractional ownership platforms. Hence, the industry mood is quite upbeat.

Industry voices

Shiv Parekh, founder, and CEO, hBits, believes SEBI’s confidence in REITs and the belief that fractional ownership of real estate would be the strength of India, is a big boost for the sector on the close heels of the notification establishing guidelines for the creation of SM REITs. It is a ‘mutual fund’ moment for the real estate sector, and democratisation of access of retail investors into real estate in true sense, according to him.

“Until now, the real estate has been a major part of the HNI’s portfolio, but the reduction in the minimum investment threshold to Rs 10 Lakh makes it affordable for the larger population. We have seen a huge interest from investors in this alternative asset class and the formation of SM REITs as well as SEBI’s confidence will give further impetus to make fractional ownership the preferred choice of investors, ensuring widespread adoption,” added Parekh. 

Sudarshan Lodha, CEO, Strata, asserted that SEBI’s SM REITs amendments addressing key points that would strengthen investor confidence in fractional ownership. The formalisation of the space would accelerate the growth of fractional ownership in India at par with the developed economies. Additionally, with the minimum investment ticket size being reduced to Rs 10 lakh, this ecosystem is now open to a larger section of investors.

“To ensure investors participate in assets with tangible value and income potential, the guidelines mandate that assets eligible for listing must be complete and revenue-generating. The migration of fractional ownership platforms is still an option. Players can choose to migrate within six months and those migrated must also have a skin in the game of 5%, according to the guidelines. While clarity on adoption is evident, additional details on compliance and operational aspects are awaited,” added Lodha.

Meanwhile, there are developers in the boutique luxury segment, who are not willing to take a bet. They feel fractional ownership would not work in the holiday homes segment. Sarvesha SB, managing director, Bhadra Group, said the SM REIT would only work in the commercial and retail segments. According to him, the key differentiator between the REIT and SM REIT would be size and nature of investors, but not the segment.

“Holiday homes, luxury homes, and boutique hotels might be income generating assets but attract a different set of wealthy people. These are the choices of the privileged ones who want to avail it for self-use and not just look for time sharing kind of deals. Then there is also the added burden of maintenance cost and its associated challenges, like the investors’ individual tastes and choices. So, in my opinion it is just premature hype that fractional ownership will gain ground in luxury villas and holiday homes,” added Sarvesha.

Others suggested that these are initial stages of evolution for fractional ownership, and it would go through its own learning curve with trial and error. There are certain key differences between the existing REIT and the SM REIT; added with the fact that the SM REIT is at an experimental stage. The existing REITs have also gone through an evolutionary and learning phase with many amendments to make it full proof.

An investor must exercise ‘Caveat Emptor’ before making a commitment towards fractional ownership or its new version of SM REIT. Some of the important points are mentioned below.

• Fractional ownership attracts small retail investors, but their awareness is poor with product on offer.
• A new and evolving concept that is yet to taste the tangible returns.
• Regulatory framework established, but still risk outweighs rewards in the absence of standardisation of practices.
• Entry cost is way too high than REIT.
• Less liquid product than REIT.
• Exit not as easy as stocks or REIT; a new buyer needed to exit the current one.
• How to check mis-selling properties on higher valuation as there are multiple owners of the said property.
• Unlike REITs, maintenance cost will affect the investors’ ROI.
• About 8-8.5% projected returns ambitious; taxation clarity is also needed.
• History of success has only been seen in those countries where rental returns are higher than capital yields.
• Investors’ self-use of luxury holiday homes might be like timeshare where every participant desires in peak season.

Conclusion

Fractional ownership has gained ground in India due to novelty with the new investment basket and low base. It nevertheless has a long way to go before it becomes an investment portfolio of a vast majority of Indians. Any investment instrument attracts early birds due to high risk and high returns. In the case of SM REIT, risk is high, but returns are not even projected to be in double digits. Hence, it may take some time before a combination of factors like investor awareness, attractive returns, taxation clarity, etc., can collectively attract investors.

(The author is CEO at Track2Realty.)