SM REITs Explained: A New Investment Opportunity for Indian Investors

SM REITs Explained: A New Investment Opportunity for Indian Investors

On August 9, 2024, Property Share grabbed attention by becoming India’s first company to secure the SM REIT license. This milestone has generated interest among investors seeking new opportunities to explore the real estate sector—a domain that has consistently been a favourite for Indians.

So, what exactly are SM REITs? Think of them as a modern twist on the traditional REIT (Real Estate Investment Trust). To break it down, a REIT is like a mutual fund but for real estate. It owns a bunch of properties, earns rental income, and then dishes out dividends to investors. Your investment can grow as the properties appreciate, all without you having to buy or manage anything yourself.

How SM REITs Are Different from Traditional REITs

SM REITs reshape the landscape by investing in both commercial and residential properties, offering more flexibility than traditional REITs, which usually stick to commercial real estate. The properties in SM REITs are typically smaller and less expensive, allowing for more focused investments. While traditional REITs might own massive office buildings or shopping malls, SM REITs might zero in on smaller residential projects or commercial spaces perfect for small and medium-sized enterprises (SMEs).

One key difference is that SM REITs are geared towards investors with a higher risk appetite. SEBI has set the minimum investment for SM REITs at Rs 10 lakh, compared to the Rs 10,000 to Rs 15,000 needed for traditional REITs. This higher entry point reflects the greater risk—and potentially greater reward—of these investments.

Investment Schemes and Fractional Ownership

SM REITs can split their portfolios into different schemes, each investing in various types of properties. So, one scheme could hold residential units, while another might focus on commercial spaces. Unlike traditional REITs, which offer the same value across all units, SM REITs can offer unique asset types within the same REIT.

SEBI’s regulations also touch on fractional ownership platforms, which have become popular in the real estate world. These platforms let you buy shares in a property, making it easier to invest in real estate. However, many platforms operate without much oversight, posing risks for investors. SEBI aims to formalise and regulate these setups by bringing fractional ownership under SM REIT regulations, boosting investor confidence. Fractional ownership platforms are expected to be listed within six months of the new rules.

How SM REITs Work

Here’s a quick rundown on how to invest in SM REITs:

• Registration: The SM REIT has to be registered with SEBI.
• Pooling Resources: Investors put their money into the SM REIT and get units in return. The REIT can also borrow up to 49% of the scheme’s value.
• Transfer to SPV: The pooled funds are moved to a Special Purpose Vehicle (SPV), a separate entity that holds the actual properties.
• Buying Properties: The SPV has to invest at least 95% of its assets in completed, revenue-generating real estate projects—no under-construction properties allowed.
• Rental Income: The SPV collects rent from the properties.
• Distributing Income: The SPV must send at least 95% of its cash flows back to the SM REIT.
• Pay-out Time: The SM REIT has to distribute 100% of the remaining net cash flow to unitholders every quarter.

Disclosures and Regulations

SM REITs need to manage assets ranging from Rs 50 crore to less than Rs 500 crore and must have at least 200 unitholders. They also need to be transparent about the properties they hold, expected lease rental income, and the net asset value (NAV) of the scheme. The NAV reflects the estimated market value of all assets held by the scheme.

Additionally, SM REITs are required to keep some skin in the game. They must hold onto 5% of the units for the first five years to align their interests with those of the unitholders. If debt is involved, this requirement bumps up to 15%. After the fifth year, the holding percentage starts to decrease, and by the twelfth year, the REIT only needs to hold 1% of the units.

Conclusion

SM REITs offer a fresh and exciting option for Indian investors looking to diversify their portfolios with real estate. With their unique structure and opportunities, they provide a new and flexible way to tap into the real estate market.