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). With this the built 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 since the SM REITs encompasses both commercial and residential properties under the guidelines. A Track2Realty report.
There is no denying that the SEBI guidelines that makes the fractional ownership falling under the SM REITs promises to turnaround the fortunes of what till now was being seen more like crowdfunding. Now it promises to make the investment safer, compared to the earlier unregulated environment of investments into fractional ownership. Henceforth, fractional ownership would not be falling under the sandbox investment basket of SEBI, which was more like fintech start-ups without the regulatory mechanism.
As per the new guidelines, now SEBI has allowed the framework that can pool an amount that is at least INR 50 crore but lesser than the existing REIT threshold of INR 500 crore for getting listed as a SM REIT. The number of investors have to be at least 200 and not only the new fractional ownership platforms can apply with the SEBI, but also the existing ones can submit before the SEBI for a migration plan. Though migration of existing fractional ownership assets have not been made mandatory.
There is no doubt that this, though experimental measure at the moment, is a step in the direction of regulating the fractional ownership platforms. And hence, the industry narrative 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 will be the strength of India, is a big boost to the sector on the close heels of the notification establishing guidelines for the creation of SM REITs. According to him, it is a ‘mutual fund’ moment for the real estate sector, and in the true sense is democratization of access of retail investors into real estate.
“Until now, real estate has been a major part of the HNI’s portfolio, but the reduction in the minimum investment threshold to INR 10 lakhs 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,” says Parekh.
Sudarshan Lodha, CEO of Strata asserts that SEBI’s SM REITs Amendments address key points that would further strengthen investor confidence in fractional ownership. The formalization of the space will accelerate the growth of fractional ownership in India at par with the developed economies. Additionally, with the minimum investment ticket size being reduced to INR 10 lakhs, 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 completed 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,” says Lodha.
Upbeat voices apart, 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 of Bhadra Group believes SM REIT will only work in the commercial and retail spaces. 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 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 investor’s individual taste and choices with the given property. So, in my opinion it is just premature hype that fractional ownership will gain ground in luxury villas and holiday homes,” says Sarvesha.
Differences in the market perception apart, a balanced view suggests these are initial stages of evolution for fractional ownership, and it would go through its own learning curve with trial & 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 level and the existing REITs have also gone through an evolutionary & learning curve with many amendments to make it full proof.
An investor must exercise “Caveat Emptor” before making a commitment to fractional ownership or its new version of SM REIT. Some of the points to ponder are:
Fractional ownership attracts small retail investors but investor awareness is poor with the product on offer
A new & 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 higher 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 property on higher valuation since they are multiple owners of the said property
Unlike REITs, maintenance cost to affect the investor’s ROI
8-8.5% projected returns ambitious; taxation clarity is also needed
History of success has been only in those matured countries where rental returns are higher than capital yields
Investors’ self-use of luxury holiday homes might be like timeshare where every participants desires in peak season
Conclusion
Fractional ownership has gained ground in India due to novelty with the new investment basket and also lower base. It nevertheless has a long way to go before it becomes an investment portfolio of a vast majority of the Indians. Any investment instrument attracts early birds due to high risk but also high returns. In the case of SM REIT, risk is high but returns are not even projected to be in double digits. And hence, it may take some time before a combination of factors like investor awareness, attractive returns, taxation clarity etc can collectively attract the investors.
Ravi Sinha
CEO, Track2Realty
+91-9650634343
ravisinha@track2media.com
Ravi Sinha is a journalist with over two decades of cross-discipline media exposure. He is the CEO of real estate thinktank group Track2Realty. He has been writing extensively on the real estate sector for more than a decade now. Evaluation of real estate brand performance is his core domain expertise and he has immense insight into consumers’ psychograph. He has conceptualised Track2Realty BrandXReport as India’s 1st & only objective & non-paid brand rating journal that is industry-accepted benchmark of brand equity & ranking of the Indian real estate companies.
Track2Realty is an independent media group managed by a consortium of journalists. Starting as the first e-newspaper in the Indian real estate sector in 2011, the group has today evolved as a think-tank on the sector with specialized research reports and rating & ranking. We are editorially independent and free from commercial bias and/or influenced by investors or shareholders. Our editorial team has no clash of interest in practicing high quality journalism that is free, frank & fearless.
Subscribe our YouTube Channel @ https://bit.ly/2tDugGl
