NEW DELHI: Recent regulations issued by the Securities and Exchange Board of India (SEBI) for small and medium real estate investment trusts (SM REITs) are likely to drive investor interest towards fractional ownership of real estate assets, according to Crisil Ratings.
By enabling strong investor protection, these regulations are expected to broaden investor base. Prudent management of operational risks remains key to popularising the vehicle, though.
So far, fractional ownership platforms (FOPs) did not follow uniform guidelines. The SEBI move is intended to address this by bringing existing FOPs under the regulatory ambit. Some of the key regulatory guardrails are mandatory investments in operational assets, restrictions on related party transactions, compulsory listing on the stock exchange and distribution of minimum 95% surplus from special purpose vehicles.
Mohit Makhija, senior director, CRISIL Ratings said, “The SM REIT regulations should inspire investor confidence by protecting them against two key risks. One, project completion and leasing risks would be mitigated as investments cannot be made in under-construction assets. Two, risk of diversion of funds will reduce due to ring-fencing of cash flows and mandatory distribution of funds on a quarterly basis. Further, the regulations should improve transparency and governance.”
Other regulations include the need for at least 200 retail investors which will provide liquidity. Minimum liquidity requirement at the investment manager (IM) level to provide a buffer against temporary mismatches. Further, experience linked eligibility criteria for the IM will foster strong governance.
Anand Kulkarni, director, CRISIL Ratings said, “The regulations are more stringent for SM REITs given the smaller ticket size of schemes, higher asset or geographical concentration risks, unlike traditional REITs that tap large-scale investments. Therefore, the IM’s skills in identifying the right properties and operating them professionally will remain critical for the success of SM REITs. Additionally, lean cost structures will be essential to protect investor returns.”
Investment in SM REITs is similar to the traditional form of ownership of real estate assets, with the difference being pooling investor money for fractional ownership under a trust structure. SM REITs will float different schemes under a trust, each of which will specify assets to be invested in. Investors can pick schemes that are better aligned with their philosophy of investing in a certain micro-market or asset type.
