Construction Insights May 2024: India

SM REITs: An emerging investment avenue for real estate investors

India is seeing a new era for real estate investment with the introduction of regulatory provisions enabling change in the landscape of real estate. investment. 

The Securities and Exchange Board of India (“SEBI”), through its notification dated March 8, 2024, has ushered in a new era for real estate investment with the introduction of regulatory provisions tailored for Small and Medium Real Estate Investment Trusts (“SM REITs”). This comes by way of amending the SEBI (Real Estate Investment Trusts) Regulations, 2014 (“REIT Regulations”), through the SEBI (Real Estate Investment Trusts) (Amendment) Regulations, 2024 (“Amended REIT Regulations”), thereby refining the landscape of real estate investment and fostering growth in fractional ownership investment.

Under the Amended REIT Regulations, SEBI has paved the way for a broader spectrum of investors to engage in real estate investment while ensuring regulatory oversight. At the heart of this initiative is the recognition of the evolving fractional ownership platforms which, though prevalent, have often operated in a regulatory grey area. By formalizing these structures under the SM REITs framework, SEBI aims to bolster investor confidence and establish a robust regulatory framework.

SM REITs symbolize a contemporary evolution of conventional REITs, granting investors the autonomy to select their preferred scheme for investment. Notably, the minimum asset threshold has been significantly reduced from INR 5000 million to INR 500 million for SM REITs. It offers investors a structured pathway to participate in real estate ventures while mitigating the complexities associated with direct ownership and management.

The operational mechanism of SM REITs is outlined as under:

SM REITs must undergo registration with SEBI, ensuring compliance with regulatory standards. An application for registration of existing persons, entities or structures owning real estate asset(s) or property(ies) like SM REIT shall be made within 6 months from the date of notification of Amended REIT Regulations or within such period as may be specified by SEBI.
 
The scheme of the SM REIT may raise funds from any investor whether Indian or foreign by way of issuance of units. The SM REIT can also borrow money (debt) at the scheme level which shall not exceed 49% of the value of the scheme assets.
 
The minimum price of each unit of the scheme of the SM REIT shall be INR 1 million or such other amount as may be specified by SEBI from time to time.
 
The Special Purpose Vehicle (“SPV”) shall directly and solely own all assets that are acquired or proposed to be acquired by the scheme of the SM REIT, of which SPV is the wholly owned subsidiary.
 
The scheme of the SM REIT shall invest at least 95% of the value of the scheme’s assets for each of its schemes in completed and revenue-generating properties and shall not invest in under-construction or non-revenue generating real estate assets. 5% of the value of the schemes’ assets may be invested in unencumbered liquid assets. 
 
Concerning the distributions by the scheme of SM REITs and SPV: (a) at least 95% of the SPV's net distributable cash flows must be distributed to the SM REIT scheme, by the (Indian) Companies Act, 2013 and the amount retained by the SPV shall be utilized only in such manner as may be specified by SEBI from time to time; and (b) SM REITs are mandated to distribute 100% of the net cash flow to unitholders every quarter, ensuring timely returns on investment.
 
While SM REITs present a promising investment avenue, it is prudent for investors to exercise caution, given the novelty of this asset class. Nonetheless, this regulatory stride by SEBI heralds a new era of accessibility and transparency in real estate investment for investors.

For further information contact: Bomi Daruwala, Partner, Vaish Law - India

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