SEBI pushes unregistered Fractional Ownership Platforms to embrace SM-REIT identity

FOPs to SM-REITs: The Securities and Exchange Board of India (SEBI) has introduced comprehensive guidelines tailored specifically for Small and Medium Real Estate Investment Trusts (SM-REITs). This move is poised to catalyse the transformation of numerous previously unregistered Fractional Ownership Platforms (FOPs) into SM-REITs. The anticipated outcome? A potential regularisation of real estate assets exceeding Rs 40 billion in the foreseeable future.

Fractional ownership, spanning across various real estate segments such as residential, warehousing, agro-farms, and retail assets, primarily operates through two modes: direct ownership by developers and through stock markets via REITs and SM-REITs. While direct ownership enables developers to engage with a broader base of asset buyers, FOPs and SM-REITs offer retail investors the opportunity for eventual ownership on a smaller scale. Notably, the current sphere of FOPs predominantly revolves around commercial office spaces.

FOPs: Retail power up

With the recent issuance of SEBI guidelines, the fractional ownership market is expected to witness a surge in regulatory compliance and an uptick in retail participation. FOPs are likely to opt for listing as SM-REITs, consequently gaining access to diversified funding sources. For asset owners, listing on SM-REITs promises increased asset valuation, democratisation of ownership, and reduced transaction costs during exit processes.

Badal Yagnik, Chief Executive Officer of Colliers India, remarked, "SM-REITs will not only stimulate retail investors’ interest in the real estate sector but also ensure investment portfolio diversification within a regulated framework." He stressed the attractiveness of SM-REITs to informed investors, citing key features such as reduced minimum investment thresholds, mandatory manager holding periods, and a substantial presence of income-generating assets.

The potential for SM-REITs to witness a significant increase in ownership base is underscored by the remarkable growth experienced by existing office REITs in India. Yagnik predicts a potential surge of up to 20 times in ownership base over the next 4-5 years. This, he believes, will firmly establish fractional ownership as a promising alternative investment avenue in the Indian real estate landscape.

In the commercial real estate (CRE) domain, the Strata sale model is expected to play an important role, with Grade A office stock projected to surpass 260 million sq ft by 2026, translating to a valuation of approximately Rs 4,500 billion.

Strata market trends

As of March 2024, Colliers reports that Mumbai leads in strata sold stock amongst major Indian cities, with a total of 60.3 million sq ft, boasting a strata penetration rate of 49 per cent. Following closely behind is Delhi NCR, with 55.6 million sq ft sold and a strata penetration rate of 41 per cent. Bengaluru secures the third position with 40.3 million sq ft sold, accompanied by a 19 per cent strata penetration rate. 

Hyderabad and Chennai trail behind with 22.4 million sq ft and 12.9 million sq ft sold, respectively, both with penetration rates of 21 per cent and 16 per cent. Pune records 10.6 million sq ft sold at a 15 per cent strata penetration rate. 

Overall, Pan India tallies up to 202.1 million sq ft sold, with a national strata penetration rate of 28 per cent. 

Despite the immense potential, only a fraction of office assets are currently accessible to retail investors through FOPs. However, as SM-REITs gain traction, the share of commercial assets accessible to retail investors is poised to escalate, particularly as the strata stock in the top six cities is forecasted to swell to 260-270 million sq ft in the next two years.