This article discusses the various modes of fractional investment in the real estate sector over the past few years. It provides a comparative analysis of the investment modes that have garnered attention lately. It also offers suggestions for the sustainable growth of the real estate market.

Overview of the Real Estate Sector

The real estate sector can be broadly classified into residential real estate and commercial real estate. Traditionally, individuals have owned residential properties, and large corporations have owned and operated commercial properties. Generally, individual retail investors found it viable to invest in the real estate sector by purchasing residential properties as commercial properties were predominantly owned and operated by developers. Individual investors willing to invest in commercial real estate properties mainly only do so by buying equity shares of listed real estate companies. However, lately, there has been an increased interest in investing in the real estate sector on a fractional basis, through different modes.

Modes of Investments in the Real Estate Sector

Presently, a retail investor in India can invest in the real estate sector through multiple modes. An investor can invest in units of real estate investment trusts (REITs), product offerings of fractional ownership platforms (FOPs), and, or purchase real estate tokens (RETs).

Real Estate Investment Trust

The Securities Exchange Board of India (SEBI) introduced the Real Estate Investment Trust (REIT) Regulations in 2014, which allowed individual investors monetary gains produced through ownership of commercial properties without the need to purchase any tangible assets.

A REIT is a trust that raises funds by issuing units to investors (called unit holders) and investing those funds primarily in assets in the real estate sector. The investment in such assets can be made directly or through a special purpose vehicle (SPV) or holding Company. A REIT must include a trustee, sponsor(s) (whose collective net worth must be INR 100 crores), and a manager (whose net worth/net-tangible assets must be worth at least INR 10 crores) and should be listed on a recognised stock exchange. The net asset value of any REIT must be at least INR 500 crores.

Fractional Ownership Platforms

FOPs are not defined under the law. FOPs offer fractional ownership of properties, usually commercial properties by way of a special purpose vehicle created for the object of acquiring the target property. The FOP calls upon investors to deposit a token amount as an expression of interest. Once the expression of interest is received, a special-purpose vehicle (SPV) is created and registered with the registrar of companies. The FOPs allow up to 200 investors via one SPV since a private limited company cannot have more than 200 members. The investors transfer the funds into an escrow account held by the SPV. Investors are made members of the SPV by way of private placement and tendering of equity shares and compulsorily convertible debentures. The SPV is then used for the acquisition of the target property.

Real Estate Tokens

RETs are unregulated in India, with the only exception being the issuance of RETs in a regulatory sandbox facilitated by the International Financial Services Centres Authority. RETs are blockchain-backed tokens that give the token-holder direct and proportional beneficial ownership of the property. The model is popular in foreign jurisdictions but in India, only RealX offers RETs. In this model, investors own a digital asset, i.e., the RET with easy transferability and greater consumer control. The target property is solely owned by a token trust and the investors have a beneficial co-ownership right in the

property. An RET can be used at any point by way of a distributed ledger technology operating as the registry of the RETs issued.

Differences in the Modes of Investments

As FOPs grew in number, the SEBI established the small and medium REITs (SM REITs) framework in March 2024 to allow FOPs to operate as SM REITs. The primary difference between FOPs in contrast to REITs is that while the target property is certain and known in the former, it is hard to track the end use of the sum invested in the latter.

Despite the popularity of FOPs, they continued to have intrinsic problems in the model like lack of factsheets and information memoranda in any standard formats prescribed by a regulator and asset value thresholds. To tackle these problems and with a view to democratise the real estate market, SEBI allowed FOPs to restructure their corporate structure and be governed by the framework on SM REITs. SM REITs have a reduced minimum asset value of INR 50 crores (in contrast to INR 500 crores in the case of REITs). Units of SM REITs are also required to be mandatorily listed on a recognised stock exchange and are completely regulated.

The SM REITs framework is an enabling addition to the REIT Regulations allowing FOPs to opt for the REIT route on a smaller scale. The migration of existing structures with fractional real estate assets, be it FOPs or RET-issuing platforms, into the SM REIT structure is not mandatory. Thus, because of no prohibition on operating outside the SM REIT framework and no bar on the SPV model, there is uncertainty about the number of FOPs that would take the SM REIT route.

In addition to the differences between FOPs and REITs discussed above, there are certain additional differences between the different modes of fractional ownership. Some of these are discussed below.

Requirement to list on stock exchange

While units issued by REITs are required to be listed on a recognized stock exchange by the SEBI, the shares offered by an FOP and RETs do not require mandatory listing on a recognised stock exchange. RETs operate on decentralised finance technology that allows purchase and sale of the RETs amongst peers on blockchain platforms, which are unregulated.

Minimum Asset Value

Despite being a lesser amount, the minimum asset value of INR 50 crores for SM REIT is a threshold that the FOPs and RET industry is not required to meet. This allows players to fractionalise small-scale projects to raise funds without restrictions.

Ownership of Assets

FOPs and RETs allow direct fractional ownership in the assets in contrast to the indirect ownership in owning units of REITs having investments in multiple assets. It means that while in REITs, the unitholder has a right over the distribution out of the income generated by the properties, the shareholder of a special purpose vehicle operated by an FOP, or the owner of an RET has an actual fractional right over the title of the property underlying the token.

Way Forward

The different modes of fractional investment in the real estate sector have opened numerous opportunities for individual investors willing to invest in commercial properties. However, to further strengthen the market and ensure sustainable growth, the SEBI may establish a regulatory framework similar to REITs for FOPs and RETs. However, the SEBI should ensure that the framework requires the market players to obtain mandatory recognition or registration with the SEBI.

It may also mandate detailed disclosures, regular audits, and transparent reporting to build investor confidence and ensure market stability. The SEBI can also organise educational campaigns and resources that can help investors make informed decisions and understand the risks and benefits associated with each investment mode.

Bharucha & Partners – Vivek Mishra and Vatsal Srivastava