Fractional ownership platforms have traditionally operated in a regulatory gray area, exposing retail investors—who often have limited financial knowledge and resources—to significant risks. To address this, the Securities and Exchange Board of India (SEBI) has introduced a new category of Real Estate Investment Trusts (REITs) known as Small and Medium REITs. These new regulations impose stricter conditions compared to regular REITs, aiming to safeguard the interests of retail investors.

Fractional ownership platforms (FOPs) have gained significant traction in recent years, with assets under management surpassing INR 4,000 crore. The rising popularity of fractional ownership platforms (FOPs) can be credited to the democratization of commercial real estate investment, which was previously accessible only to high-net-worth individuals and institutional investors. With significantly smaller ticket sizes—representing just a fraction of the asset’s actual cost—retail investors with limited financial resources can now participate and benefit from the yields of commercial real estate.

The regulatory framework for such platforms has remained ambiguous and insufficient. To bring FOPs under a structured regulatory regime and safeguard retail investors’ interests, the Securities and Exchange Board of India (SEBI) released a consultation paper on May 12, 2023, proposing a draft regulatory framework for FOPs (Consultation Paper).

Amendment

As a response to the Consultation Paper, on March 8, 2024, SEBI amended the SEBI (Real Estate Investment Trusts) Regulations, 2014, with two primary objectives: to introduce Small and Medium REITs (SM REITs), a new category of Real Estate Investment Trusts (REITs), and to encourage greater participation from retail investors in fractional ownership platforms (FOPs). However, there are key differences between the regulations governing SM REITs and those applicable to regular REITs, which are outlined below.

Investment Conditions

REITs must allocate at least 80% of their asset value to completed, revenue-generating properties. The remaining 20% can be invested in various asset classes, including under-construction properties, listed or unlisted debt of real estate companies, mortgage-backed securities, equity shares of companies with at least 75% of their income derived from real estate activities, government securities, money market instruments, and cash equivalents.

In contrast, SM REITs are required to allocate at least 95% of their asset value to completed, revenue-generating properties, ensuring a stable investment portfolio capable of delivering consistent income to investors. Notably, SM REITs are strictly prohibited from investing in under-construction properties or other non-revenue-generating real estate assets. However, they are allowed to invest up to 5% in liquid assets, which must remain unencumbered.

While REITs can initially raise funds only through a public issue, it may subsequently issue units through other methods, including a preferential allotment, qualified institutional placement, rights issue, bonus issue or an offer for sale, SM REITs, on the other hand, are limited to raising capital via public issue and may undertake leverage only if this option is clearly disclosed in their scheme offer document.

Sponsor Requirements

REIT sponsors, whether individually or collectively, must maintain a minimum net worth of INR 100 crore. Additionally, they are required to retain at least 15% of the REIT’s units for a minimum period of three years from the date of listing, ensuring their vested interest in the trust’s performance. SM REITs are not required to identify a separate sponsor. Instead, the investment manager is required, in the absence of a sponsor, to maintain a net worth of INR 20 crores among other requirements.

Investment Manager Requirements

The REIT’s investment manager must have a minimum net worth of ₹10 crore and at least five years of experience in fund or property management. Additionally, the manager must have at least two key personnel with a minimum of five years’ experience in the relevant field, ensuring a strong team to oversee operations.

In the case of SM REITs, the investment manager is required to maintain a higher net worth of ₹20 crore, to compensate for the absence of a separate sponsor. It also ensures that the manager is financially capable of making interest payments for failure to allot units and / or make distributions to unitholders within the prescribed timelines. Furthermore, the investment manager of an SM REIT is required to have a minimum of two years of experience or employ at least two professionals with a minimum of five years of experience in the real estate industry or real estate fund management.  In the absence of a sponsor, the investment manager must also hold 15% of the total units of the SM REIT for the initial three years. As is the case with regular REITs, the percentage of units required to be held by the investment manager reduces gradually from the date of listing of the units.

Governance

In both REITs and SM REITs, the investment manager is required to ensure that at least half of its board of directors consists of independent members. Additionally, trustees—who must be registered under SEBI (Debenture Trustees) Regulations—cannot be associates of either the sponsor or the manager. Furthermore, SM REITs are required to segregate and ring-fence their assets, bank accounts, investment accounts, and books of accounts for each scheme.

Structure

REITs have the flexibility to hold properties either directly or through Special Purpose Vehicles (SPVs) and/or a holding company. In contrast, SM REITs are only permitted to hold properties through wholly-owned SPVs that maintain direct ownership of commercial real estate assets ensuring greater simplicity and transparency in ownership and management.

Conclusion

The introduction of SM REITs is a strategic step toward strengthening the Indian real estate investment landscape. It promotes broader participation, drives market growth, and facilitates the development of a diverse range of real estate assets. By providing a well-regulated, accessible, and transparent investment platform, SM REITs are poised to play a pivotal role in the evolution and maturation of real estate investment in India—benefiting both the economy and individual investors alike. Additionally, the proposed reduction in the holding period for long-term capital gains calculation from 36 months to 12 months for listed REITs is a welcome initiative that could further attract retail investors seeking to diversify their portfolios.

Bharucha & Partners – Swathi Girimaji and Madhav Sirohi