The introduction of Real Estate Investment Trusts (REITs) regulations in 2014 and the subsequent listing of the first REIT in India in 2019 unlocked a new avenue for retail investors to benefit from institutional real estate investing. 

SEBI has upped the ante with their new framework for Small and Medium Enterprises REITs (SM REITs) which will further democratise access to real estate investing in India. While some investors were already diversifying their portfolio by investing in commercial properties through Fractional Ownership Platforms (FOP's), this new SM REIT regulation will give investors an additional regulatory oversight and the inherent benefits that come with regulations - redressal mechanisms and enhanced liquidity.

According to a joint-analysis by JLL and Property Share, the Indian fractional ownership market is currently estimated at around $500 million and is expected to grow 10 times in the next six years to surpass $5 billion of Asset Under Management (AUM) by 2030.

REITs (across asset sizes) are an established model for real estate investment globally. In the United States alone, publicly traded REITs manage a staggering USD 2.5 trillion in gross assets. India's REIT market is demonstrating similar promise, with a remarkable five-year growth trajectory – gross asset value has surged from around USD 3.6 billion to USD 15.6 billion currently.

Facilitating retail investment

SEBI's new regulatory framework for SM REITs has democratised access to high-quality real estate assets, traditionally the domain of institutional investors. By lowering the entry barrier and standardising investment requirements, retail investors now have the opportunity to diversify their portfolios with real estate assets previously beyond their reach. 

By establishing a minimum issue size of ₹50 crore and requiring units to be issued to at least 200 investors, SM REITs create an accessible entry point for retail investors seeking participation in India's dynamic real estate market. This lower investment threshold allows a broader range of individuals to benefit from the potential returns associated with this asset class. Investors can benefit from both a stable stream of rental income and also potential capital appreciation.

Benefits for investors

Access to grade a properties: SM REITs offer exposure to a curated selection of high-quality Grade A commercial properties, previously out of reach for many retail investors due to high capital requirements. This opens doors to potentially higher rental yields and capital appreciation.

Diversification opportunities: Each scheme of a SM REIT can house multiple assets (across Commercial, retail, residential etc) with an aggregate threshold of ₹500 Cr allowing investors to diversify their portfolios and mitigate risks associated with concentrating solely on single assets.

Increased liquidity and flexibility: Listing on stock exchanges facilitates efficient price discovery for SM REIT units. This translates to greater flexibility for investors to enter and exit the market as needed, aligning with their investment goals/horizon.

Enhanced transparency and investor protection: Regulatory oversight by SEBI ensures a level playing field with standardised minimum investments, periodic reporting and investor protection mechanisms. This fosters trust and transparency within the market, giving investors greater confidence.

Risks and considerations

In India, regular REITs work in a master trust model wherein the REIT Trust directly owns a stake in all the underlying SPV's which in turn own the rent-generating assets. Accordingly, there could be potential value accretion or dilution depending on the quality/ (or lack of quality) of the newer assets which are added by the Investment Manager of the REIT (subject to shareholder approvals) into the Master Trust.

While SM REITs will follow the similar ownership pattern of underlying assets, there will be a scheme level segregation (akin to Mutual Funds) with a capping of ₹500 Cr per scheme which will ensure that investors in a particular scheme have significantly better visibility on the assets comprising the scheme. Since SM REITs may invest in a limited number of properties, the performance of each scheme of a SM REIT will be heavily tied to those specific assets.

To mitigate this risk, thorough due diligence is crucial. Carefully examine the track record of the investment manager, their governance practices, and the underwriting standards used to select properties. By scrutinising these aspects, you can make informed investment decisions that balance potential rewards with calculated risks.

Way forward

The recent JLL-Property Share report identifies a significant opportunity within the Indian real estate sector, an estimated 328 million square feet of Grade A office space suitable for inclusion in Specialized Investment Trusts (SM REITs) schemes. This translates to an untapped investment potential of approximately USD 48 billion.

The emergence of SM REITs offers a compelling proposition to unlock value for all stakeholders. Fund managers can leverage these schemes to uncover undervalued assets within this vast pool of real estate, generating superior returns for their investors. Notably, SM REITs also provide developers/ asset owners with a much-needed path to liquidity, which can further invigorate the real estate sector by facilitating reinvestment and propelling continued growth.

SEBI's proactive approach in regulating SM REITs underscores the regulator's commitment to fostering a conducive environment for deepening the alternative investments space in India.