March 11, 2024: In a move to regulate the fractional ownership industry, the Securities and Exchange Board of India (Sebi), on March 8, 2024, has issued regulations to amend the Reit Regulations 2014. These amendments establish guidelines for the creation of Small and Medium Real Estate Investment Trusts (SM REITs), to be known as the Sebi (REIT) (Amendment) Regulations 2024.

Under the new regulations, Sebi specifies that investment managers of such REITs can raise a minimum of Rs 50 crore from at least 200 unit holders. These funds are intended for acquiring and managing real estate assets, generating income for investors. The ownership of these assets will be structured through one or more schemes, each operating under special purpose vehicles (SPVs). Investment managers setting up an SM REIT must have a net worth of at least Rs 20 crore, and a separate trustee will be appointed for oversight.

The process to list an SM REIT will resemble the initial public offering (IPO) by larger REITs, but with a significant difference in asset completion requirements. For SM REITs, at least 95% of the investments should be in revenue-generating assets, and they cannot invest in under-construction or non-revenue-generating real estate assets. This differs significantly from larger REITs, for which the threshold is 80% in rent-generating assets, and they can hold under-construction assets as well.

An initial offering for an SM REIT will have a minimum subscription amount of Rs 10 lakh per investor, in contrast to the current norm, where fractional platforms often require an investment of about Rs 25 lakh. Additionally, the minimum unit holding requirement at all times for the first three years after listing by the sponsor or investment manager is 5% for an SM REIT that does not have any debt borrowings and 15% for a REIT that has taken on leverage. The minimum holding decreases over time until it reduces to 1% after the completion of the twentieth year from the date of listing.

Sebi added that SM REIT schemes may raise funds from Indian and foreign investors by issuing units. The investment manager must maintain a website detailing all SM REIT schemes, including information on real estate assets and properties, both proposed and acquired under each scheme, enhancing transparency and investor access to information.

Sebi issued a consultation paper on small and medium REITs in May 2023 with the aim of bringing unregulated fractional ownership platforms under its purview. In November 2023, it approved the launch of such REITs, but the detailed framework has only been issued now. Under fractional ownership, multiple individuals pool funds to purchase mainly commercial rent-yielding properties in India. The proposed asset size to be acquired in a scheme would range from Rs 50 crore to Rs 500 crore.