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SEBI Greenlights the Framework for Small and Medium REITs

SEBI Greenlights the Framework for Small and Medium REITs

SEBI has approved new regulations for Small and Medium Real Estate Investment Trusts (SM REITs), aiming to expand real estate investment opportunities. These REITs can raise funds from Rs 50 crore by issuing units to a minimum of 200 investors. The framework requires assets to be managed through special purpose vehicles (SPV), overseen by qualified investment managers and trustees to ensure regulatory compliance.

A major change introduced by these amendments is the allowance for establishing Small and Medium REITs with a minimum asset value of Rs 25 crore, significantly lower than the previous requirements of Rs 500 crore for existing REITs. The amendments are anticipated to lower the investment thresholds and make REITs a more viable option for a broader range of investors.

Overview of the SEBI’s Framework for Small & Medium REITs

In the past two to three years, fractional ownership has gained significant popularity in India. This method allows multiple unrelated parties to share ownership of a high-value asset, mitigating the associated risks. Investors with limited funds who cannot purchase entire properties can invest in real estate through fractional ownership. However, the lack of proper regulations and governance has raised concerns about the safety of such investments.

The SEBI issued a consultation paper on May 12, 2023, titled “Regulatory Framework for Micro, Small & Medium REITS (MSM REITs)” to address these concerns. This paper proposed a regulatory framework for Small and Medium Real Estate Investment Trusts (SM REITs) to make real estate investment more accessible and bring a fractional ownership platform under the SEBI Regulation of REITs, 2014.

In a November 25, 2023, board meeting, SEBI approved amendments to the REIT Regulations, establishing a regulatory framework for SM REITs. These amendments were officially notified in the SEBI REITs Amendment Regulation. 2024.

The Securities and Exchange of India (SEBI) introduced amendments to the REITs Regulation in 2014, paving the way for establishing Micro, Small and Medium Real Estate Investment Trusts (MSM REITs). This initiative aims to regulate the fractional ownership industry, offering investors protection while encompassing commercial and residential properties within its framework.

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Amendment Introduced Under SEBI (REITs) Regulation 2024

The introduction of a new asset class has prompted a change in the REIT regulation’s definition of Real Estate Investment Trust (REITs). This amendment is effective under SEBI (REITs) Amendment Regulation, 2024, to streamline listing like IPOs but with enhanced asset completion requirements. REIT can go public through IPO Support. Below are the following amendments taken place in the amendment introduced under SEBI (REITs) Regulation, 2024:

  • The framework for SM REIT permits a reduced asset value of Rs 50 crore to encourage pooled investment in real estate assets or properties, thereby promoting REIT growth in India.
  • Also, the SM REITs must ensure that 95% of their assets are revenue-generated by initial public offerings requiring a minimum subscription of Rs 10 Lac to Rs 25 Lac.
  • The regulations also mandate transparency through detailed disclosure on a dedicated website, promoting accessibility and investors’ confidence in the regulated real estate investment framework.
  • SM REITs can mobilize funds starting from Rs 50 crore through unit issuances to a minimum of 200 investors, facilitating the acquisitions and management of real estate assets to generate income.
  • Each SM REIT scheme will operate through special purpose vehicles (SPVs) or Holding Companies (Holdcos), overseen by an investment manager with a requisite net worth of Rs 20 crore and a designated trustee ensuring regulatory compliance.
  • According to the amended regulation, SEBI has authorized the establishment of SM REITs with a minimum asset value of Rs 25 crores, significantly lower than the previous requirement of Rs 500 crores for traditional REITs.
  • Also, the amended regulation clarifies that any company that acquires and manages real estate assets or properties and offers or issues securities to investors will not be considered a REIT under the REIT regulations.

Difference b/w New Framework for a SM REITs & Existing REITs

According to REIT Regulations, existing REITs must have assets valued at a minimum of Rs 500 crore. The framework for SM REITs allows for a reduced asset value of Rs 50 crore to encourage pooled investment in real estate or properties, thereby promoting REIT growth in India.

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Additionally, the existing REIT structure involves a single pool of investors’ funds, meaning all new assets acquired by the REIT are added to this pool, giving all unitholders a beneficial interest in the entire pool of assets. In contrast, the SM REIT structure allows a single REIT to launch multiple schemes for real estate investment, like mutual funds. Thus, an SM REIT can hold different real estate assets under various schemes, with each scheme having its own set of unitholders.

Can a RE Developer Launch & Manage their own SM REIT?

According to REIT Regulations, any company, including a Real Estate (RE) developer, can act as the Investment Manager for SM REIT if it meets the eligibility conditions specified in regulation 26J(2)(d) under SEBI (Real Estate Investment Trusts) Amendment Regulations, 2024. However, suppose a developer is the Investment Manager for an SM REIT. In that case, it cannot transfer its assets to the SM REIT, as the framework prohibits related party transactions.

The SM REIT framework aims to involve professional investment managers to sponsor SM REOTs, overseeing the acquisition and management of third-party assets on behalf of unitholders through dedicated schemes prepared for this purpose.

Impact of SEBI’s Approval on the Fractional Ownership

Below is the Impact of SEBI’s approval on SM REITs on Fractional Ownership:

  1. Sebi’s regulatory changes are expected to formalize the fractional ownership sector, increase investors’ confidence, and simplify SPV securities issuances.
  2. These regulations will help retail investors understand and accept fractional ownership, aligning with practices in developed countries.
  3. It allows small and medium REITs to create separate schemes, fostering flexibility and innovation in structuring real estate portfolios.
  4. Investors can benefit from a wider range of investment options and strategies.
  5. REIT investments offer an alternative to direct property ownership. They require upfront capital and provide rental income as dividends and interest.
  6. SEBI’s regulations will increase investors’ interest in real estate by ensuring protection, common disclosure practices, and a robust redressal mechanism.
  7. A more conducive regulatory environment will lead to greater inclusivity and innovation in the real estate sector.
  8. SEBI’s proactive approach is shaping a more secure and regulated investment environment, enhancing the potential of India’s real estate market.
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Conclusion

SEBI’s approval of the framework for Small and Medium REITs marks a significant milestone in the evolution of real estate investment in India. By lowering the asset value thresholds and introducing structured regulatory oversight, SEBI is making real estate investment more accessible and appealing to a broader range of investors. This promotes the growth and diversification of REITs and enhances the investor’s protection and market transparency.

FAQ’s

  1. What does the SEBI framework for SM REITs entail?

    The SEBI SM REIT (Amendment) Regulations 2024 allows pooling funds between Rs 50 crore and less than Rs 500 crore gathered to issue units to a minimum of 200 investors.

  2. Which regulated the Small and Medium REITs?

    SEBI (REITs) (Amendments) Regulation, 2024 will regular SM REITs to follow an IPO with a notable distinction in asset completion criteria.

  3. What are REITs in SEBI?

    A Real Estate Investment Trust (REIT)is a trust registered with SEBI to conduct activities specified under the SEBI (Real Estate Investment Trusts) Regulation, 2014.

  4. What are SM REITs?

    SM REITs aim to democratize real estate investment by providing transparency, liquidity and diversification opportunities for retail investors.

  5. What are the top REIT stocks in India for long-term investment returns in 2024?

    The top REIT stocks in India for long-term investment returns in 2024 are:
    1.      Godrej Properties Limited
    2.      Prestige Estates Projects Limited
    3.      Sobha Limited
    4.      Phoenix Mills Limited
    5.      Brigade Enterprises Limited

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