How to Invest in SM Reits

REITs are soon becoming the most preferred investment avenues for the individuals who seek exposure to commercial real estate. However, with the introduction of Small and Medium REITs in India, the Indian investors will have even finer granularity as regards investment in this asset class. 

Unlike conventional REITs, which pool funds to invest in a diversified portfolio of properties, SM REITs enable investors to target specific income-generating real estate assets. It will be an attractive approach for investors searching for more direct control over their real estate investments, similar to controlling assets directly. 

Further down in this article, I have elaborated on how to invest in SM REITs focusing on regulations and guidelines prescribed by Securities and Exchange Board of India (SEBI).

Understanding REITs

REIT stands for Real Estate Investment Trusts. These are real estate companies that own or finance income-generating real estate in a variety of property sectors. Investors can indirectly invest in real estate through REITs without having to purchase or manage properties directly. They are extremely liquid compared with direct real estate investments, as they are listed on the major stock exchanges.

SM REITs focus on small and mid-cap real estate assets. They are mainly smaller properties or those in emerging locations with growth potential. Such investments in SM REITs are highly attractive owing to the resultant higher returns from the faster appreciation of properties or any higher yield relative to that of large-cap counterparts.

Indian REIT Market

REITs in India were first introduced in the year 2014, offering a legal platform for individuals to invest in real estate. SEBI regulation ensures investments that ensure increased transparency, liquidity, and, most importantly, the protection of investors.

Overview of SEBI to REITs

1. SEBI Role and Guidelines:

REITs are, in turn, regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Real Estate Investment Trusts) Regulations, 2014. Such regulations ensure that Indian REITs function in accordance with government guidelines that protect investors and maintain market integrity.

The consultation paper of the SEBI on SM REITs was issued in the year 2023. Later, it issued final regulations in March 2024, unlocking this access to markets of commercial real estate to greater investors. This level of targeted access to particular assets at ₹10 lakhs is significantly lower as compared to direct investments, which typically start from about ₹20-30 crore. Some key aspects of SEBI’s guidelines include:

• Registration and Compliance: All REITs have to be registered with SEBI before they are allowed to be listed on the stock exchanges. They have to make continuous disclosures, which include financial performance and asset valuations.
• Minimum Investment and Diversification: Another area is minimum investment and diversification. Here, SEBI states that a REIT must have at least 80% of its assets in completed properties and income-generating properties. This would ensure that income generation from the properties would be foremost before speculative developments.
• Dividend Distribution. SEBI regulations provide that REIT shall distribute at least 90% of the net distributable income. A high dividend distribution ratio is envisaged so that the diversification benefit goes to the investors through regular income from their investments.
• Investment Limits: Certain limits apply to investment in properties, related party transactions, and borrowing. For instance, a REIT may invest no more than 10% of its assets in one property, and it should ensure that no more than 49% of the value of its assets has been borrowed.

How to Invest in SM REITs

1. Research and Selection:

Make deeper research on the available SM REITs before investing. Consider looking through their portfolios, the qualities of their assets, historical performances, management teams, and the dividend yields of the REITs where you intend to invest. Various REITs target different things; some target office spaces, while others target retail or residential properties. Choose one that would suit your investment goals and risk level.

2. Understanding the Market:

Become aware of the current trends in the real estate market. Small and mid-cap properties are generally differentiated from large-cap investments in terms of potential risks and returns. Scan the trends in property values, rental income, and the overall economy that could impact these investments.

3. Opening a Demat Account:

To invest in REITs, one needs to have a demat account with a registered depository participant. The account will hold REIT shares electronically. Of course, it is worth remembering that your demat account would have to be linked to a brokerage firm’s trading account.

4. Choosing a Brokerage:

Choose a brokerage firm that allows access to REITs listed on stock exchanges. The firm should also provide decent trading platforms, extensive research tools, and customer support to clients. Most Indian brokerage firms now allow fully seamless access to REITs.

5. Making the Purchase:

Once you have shortlisted a REIT and opened your accounts, you will be able to buy shares via the stock exchange. Buy through your trading platform or with the help of your broker. Monitor your investment and see how your REIT is faring.

6. Ongoing Monitoring:

Invest in REITs on an ongoing basis. Keep track of the performance of the REIT, dividend payments, and all that occurs pertaining to the properties or management of the REIT. The review of your investment will inform you on holding, buying additional shares, or selling your shares.

Risks and Concerns

There are risks and issues inherent with SM REIT investment, amongst them being:

• Market Risk: The values of REITs do change with the overall economic conditions and real estate market trends.
• Liquidity Risk: Although REITs are generally more liquid than direct real estate investments, smaller and mid-cap REITs might have lower trading volumes that can be a liability in liquidity.
• Property-Specific Risks: The performance of SM REITs may highly depend on the success of their underlying properties. Location, occupancy rates by tenants, and property management play a role in returns.

Conclusion

Investment in SM REITs would add much to your investment portfolio in terms of bringing diversity and the opportunity to get rich returns. For Indian investors, regulation by SEBI is hence very important, as well as choosing the best available REITs after thorough research and study of markets. As you update your knowledge according to the guidelines set and are updated on market conditions, you can make mature decisions managing the risks involved in investing in small and mid-cap real estate assets.

Remember also that like all investments, it is also crucial to invest within one’s risk tolerance and financial goals. Consult a professional financial advisor if necessary to make sure that what you are putting your money into should help you achieve your long-term goals.

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