Small and Medium REITs: Here’s What Investors Need To Know

For most Indians, real estate is still a preferred asset class compared to other investment avenues. In this article, we shed light on the latest amendments put forth by SEBI regarding SM REITs. 

SEBI’s recent amendments regarding Small and Medium Real Estate Investment Trusts (SM REITs) have caught the attention of investors keen on exploring opportunities in real estate investments. In simple terms, SM REITs are a newer version of the traditional REITs currently prevalent in the market. 

What are REITs? 

REITs manage real estate portfolios, earning rental income distributed as dividends. This allows indirect real estate investment without property ownership hassles.

Amendments introduced under SM REITs 

SEBI has updated the REIT Regulations 2014 to introduce Small and Medium Real Estate Investment Trusts (SM REITs). The purpose is to regulate fractional ownership and safeguard investor interests across commercial and residential properties. 

• Fundraising and Investor Structure
  SM REITs can raise funds from Rs 50 crore onwards, with a minimum of 200 investors, investing in real estate assets for income generation.
• Ownership Structure and Net Worth Requirement
  Assets in SM REITs are organized through special purpose vehicles (SPVs), and the investment manager must have a net worth of Rs 20 crore.
• Listing Process and Asset Completion
  SM REITs follow an IPO-like process, with 95% of assets fully developed and revenue-generating, differing from larger REITs’ 80% requirement.
• Subscription Amount and Investment Manager’s Retention
  The minimum subscription is Rs 10 lakh per investor, and investment managers retain 5% of units for two years post-listing.
• Leverage and Co-Investment
  SM REITs can leverage up to 49% of assets, with a 15% co-investment requirement by the manager.

How do SM REITs work? 

Investing guru Warren Buffett once wisely remarked, “Never invest in a business you cannot understand.” This adage holds true not only for stock market investments but also for alternative asset classes like SM REITs.  

Operational Flow of SM REITs

1.      Registration: SM REITs register with SEBI.

2.      Pooling Resources: Investors contribute funds and receive units; SM REITs can leverage funds through debt.

3.      Transfer to SPV: Funds are transferred to SPVs, separate entities holding real estate assets.

4.      Property Acquisition: 95% of assets must be in completed and revenue-generating real estate.

5.      Revenue Generation: SPVs earn income through rentals or property sales.

6.      Income Distribution: SM REITs distribute 95% of cash flows to investors quarterly.

7.      Payout Mechanism: Unitholders receive 100% of net cash flow quarterly.

Disclosure Requirements
SM REITs must disclose asset values, anticipated lease rental income, NAV, and hold units aligning with unitholders’ interests.

How do these changes benefit retail investors?

SEBI’s recent guidelines for SM REITs will make real estate investments more accessible for retail investors. The lowering of minimum investment from Rs 25 lakh to Rs 10 lakh, opened doors for more investors and boosted liquidity. With just Rs 10 lakh, retail investors can now own shares in Grade A commercial properties in prime locations like Bandra Kurla Complex, Whitefield in Bengaluru or the Golf Course Road of Gurugram. The SEBI chairperson also hinted at further reductions in the future, making it even more accessible.

Conclusion 

As SM REITs prepare to enter the Indian investment landscape, investors must exercise caution. Presently, no SM REITs are listed on the exchange, signalling the novelty of this investment avenue. 

When SM REITs do debut, investors should approach them with care. Given their status as a budding investment class, a comprehensive understanding of their intricacies will only emerge with time. The ability to invest in lower-yielding residential properties and leverage up to 49% of the scheme’s value introduces inherent risk, necessitating alignment with one’s risk tolerance. Furthermore, the high minimum investment of Rs 10 lakh and initial subdued trading activity may impact liquidity. 

Mandatory disclosures will be invaluable tools for informed decision-making, including detailed offer documents outlining investment properties, projected yields with comparative analysis, and regular updates on Net Asset Value (NAV).