Long road ahead for SM-REITs to turn street-smart
Property Share Investment Trust recently filed the draft scheme document for PropShare Platina, to raise up to ₹353 crore becoming the first player to enter the SM REIT (Small and Medium REITs) space.
PropShare Platina manages 2.47 lakh sq ft office space in Prestige Tech Platina on Outer Ring Road, Bengaluru, which will be fully leased to a US-based tech company through a fresh 9-year lease with a 4.6 year weighted average lock-in and 15 per cent escalation in rents every three years, according to a businessline report. The scheme offers investors a projected FY26 distribution yield of 9 per cent.
The other one eyeing the SM REIT space after Securities and Exchange Board of India issued the notification is Rudrabhishek Enterprises Ltd. The new SM-REIT under the name ImpactR SM REIT, will have REPL as its investment manager.
SM-REIT norms
On March 8, SEBI announced that it will regulate fractional ownership platforms (FOPs) offering real estate assets through SM REITs. FOPs allow investors to participate in real estate ownership with fractional shares and minimum investment ranging from ₹10-25 lakh. Given the increasing value of investments with such FOPs and the growing number of investors, SEBI has introduced regulatory oversight in the form of SM REIT regulations.
Accordingly, for SM REIT, the asset size should be between ₹50 crore and ₹500 crore and the minimum number of unitholders in a scheme should not be less than 200 (other than Investment Manager, its related parties and associates of the SM REIT).
ICRA estimates SM REIT-ready office space at around 52-53 msf of the total office supply, indicating a healthy potential for SM REIT listings in the commercial office space.
At a cap rate of 8-8.5 per cent, SM REIT-ready office space provides monetisation opportunity of ₹67,000–71,000 crore across the top seven cities, it further said.
CBRE, a commercial real estate services and investment company, said: the potential market size for small and medium real estate investment trusts (SM REITs) in India is likely to be over $60 billion by 2026 with a potential market of over 300 million sq ft of completed commercial office space, with an additional 50 million sq ft expected to be completed by 2026.
Lot size
The minimum investment amount for SM REITs is ₹10 lakh. The lot size was kept deliberately high as SEBI said, SM REIT seeks to provide investors with higher risk-taking capabilities with an investment product aimed at curbing the proliferation of unregistered and unauthorised investment products.
When mainstream REITs were introduced in 2014, the lot size was ₹1 lakh that was reduced to ₹50,000 and further in 2021 to ₹10,000-15,000, once investors understood the risk element and functioning of REITs.
The two oldest REITs, Embassy (April 2019) and Mindspace (April 2020), have given a CAGR return of over 10 per cent in secondary market, excluding distributions.
Road ahead
Over 10 years, there have been only five REITs registered with SEBI – Embassy Office Parks REIT, Mindspace Business Parks REIT, Nexus Select Trust, Brookfield India Real Estate Trust and 360 One Real Estate Investment Trust. This indicates that the product is yet to reach masses.
Given the slow start in main REIT market, it is unlikely SM REIT will see huge ramp-up in the short term, at a time when investors want to become instant billionaires. To make the product popular, real estate companies should join hands with REITs to launch a campaign similar to “Mutual Funds Sahi Hai”. If these products succeed, this will help new types of real estate assets such as data centres attract retail investors.