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- Conventionally, the Indian real estate market has been the exclusive bastion of HNIs and large institutional investors. High capital requirements plus the relative illiquidity in direct property investment have often kept the average retail investor at bay.
- This is now changing rather fast with the advent of Small and Medium Real Estate Investment Trusts, more popularly known as SM REITs. Probably the most unique offering of SM REITs to investors is some sort of exposure mechanism to high-value assets, especially in CRE, without traditional barriers.
- This article examines some of the many ways in which SM REITs can increase access to high-value assets for retail investors and open up new value-creation avenues within a clearly regulated and structured investment environment.
What is an SM REIT?
The forthcoming SM REITs are the investment channels which will pool money from a few investors to invest in a diversified portfolio of real estate assets, particularly small-scale commercial properties. While major REITs have always had an interest in costly properties such as shopping malls, hotels, and office complexes, SM REITs will target small and medium-sized commercial properties. These may include shared office space, small offices, retail shops, warehouses, and any other form of commercial estate that is high in growth but at a much smaller scale.
High-Value Asset Exposure at Lower Entry Costs
Probably the biggest benefit to investing in SM REITs is the fact that it allows high-value asset exposure but at a relatively lower entry cost. Conventionally, investment in commercial real estate had at least a capital outlay of about INR 25 lakhs or more, where the same is brought to INR 10 lakhs by the SM REITs, thus allowing a greater range of investors into this market.
Data-Driven Returns
The possibility of assured returns is yet another reason why SM REITs are finding favour. In this regard, according to a recent report by Knight Frank India, commercial real estate in India has given on an average, a rental income of about 7-8% per annum over the last five years.
It also gave capital appreciation of around 5-7% annually on average, depending on the location and type of asset. The SM REITs are the vehicles to channel investments into revenue-generating properties, rendering income investors a mix of rental yields and capital appreciation-fitting solutions for those seeking return from risk-adjusted valuation.
A Regulated and Transparent Path to Invest
The Securities and Exchange Board of India lays down that the SEBI shall regulate the SM REIT so as to ensure proper regulation for investor protection and transparency. Thereby, all the SM REITs have to be listed in dematerialized form, which provides better price discovery and better liquidity to investors. Since the minimum 95% of assets have to be invested in income-generating property for regulatory purposes, the remaining 5% can be in liquid assets. This diminishes the risk of unoccupied spaces further and provides more predictable returns to investors.
Retail Investors’ Benefit
- Diversification: The diversification exposure that SM REITs provide is in one investment product alone, as the offerings consist of various important properties in different places and, in fact, of various kinds of properties. This spreads the risk, in effect, of relying on just one property or one location.
- Liquidity: Unlike direct real estate investment, SM REITs are liquid in that they get listed on and traded at stock exchanges. Investors can buy or sell the units of SM REITs like any other stocks, and this gives flexibility and control to them as far as their investment is concerned.
- Regular Income: With the main focus on income-yielding assets, the SM REITs make regular rental income distributions, which are normally quarterly in nature, thereby allowing this to be attractive for passive income investors.
- Risk Mitigation: The fact that the FOPs are invested with at least 5% in each property would mean they have “skin in the game.” This will align their interest with the retail investors and reduce the chances of mismanagement or conflict of interest.
Future Outlook for SM REITs in India
The pace of urbanisation, economic development, and increasing demand for office spaces, retail centres, and warehousing and logistic facilities have put the Indian commercial real estate market on an upward trend. Recent findings from Colliers India estimated that in the next few years, fractional ownership and SM REITs may unlock more than INR 4,000 crores in value. With regulatory support and a structured framework provided by SEBI, more investors will get attracted to this market to take forward the democratisation of high-value real estate assets.
Conclusion
SM REITs are a new paradigm in investment into real estate for Indians. In a way, SM REITs democratise access to high-value assets, allow retail investors to create wealth through real estate, and make them more accessible by reducing the entry barrier and offering a regulated and transparent avenue of investment.
As the sector continues to grow and evolve, the SM REITs will surely turn out to be very important in determining what shape the future of real estate investment would take in India: a new pathway toward financial independence for investors of all sizes.
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