How Small And Medium REITs (SM REIT) Are Transforming The Indian REITs?

• REITs have changed how the real estate sector is invested globally because of the opportunity they give several investors to invest in the sector through publicly traded securities. While this concept is relatively new in India, REIT has caught on brilliantly since its inception. 
• An Indian REIT market is expected to develop and allow more sandboxes for small and medium REITs. The emergence of small and medium REITs as critical players in the segment is reshaping the landscape of Indian real estate.

Evolution of REITs in India

• The concept of REITs was first introduced in India through the issuance of regulations by the Securities and Exchange Board of India in 2014. These regulations aimed to bring in a regime that would make investment in real estate possible in a much more systematic manner of owning and managing income-generating real estate assets. Initial impetus toward REITs was provided, keeping in mind the need for liquidity in the real estate market and a mechanism for investment that would be more transparent.
• The first-ever Indian REIT was the Embassy Office Parks REIT, which opened in 2019. This was considered a breakthrough and shining star in the Indian real estate market as far as the viability of REITs in accordance with the consistency of returns for investors and with marinating the required capital inflow in the real estate market. 
• Afterward, a gradual proliferation of REITs regarding the number and type was observed in reflection of justified growing interest and confidence among the investors.
• In 2023 SEBI has updated compliance norms to align with international best practices, including IFRS (International Financial Reporting Standards) and global ESG reporting standards. This ensures that Indian REITs are on par with global counterparts and enhances their appeal to international investors.

 Types of REITs

Here, the REITs could be judged based on the type of investment they may have, and such is followed in India as well:

1. Equity REITs:

 Such REITs generally invest in properties that generate income. They derive their revenue from rent and appreciation of capital. Most of the REITs in India belong to this category as they invest in commercial properties that take office space or retail outlets.

2.  Mortgage REITs (mREITs) : 

These REITs invest in real estate debt in the form of mortgages and mortgage-backed securities. They collect income through interest on loans. Although not prominent in India, there is a possibility for their development once the market has matured.

3.  Hybrid REITs : 

They overlap and offer the benefits of equity and mortgage REITs since they both provide financing for properties and invest in them. The hybrid type of REIT offers diversification, and as of now, it is not very common in the Indian market.

 Indian REIT Landscape

The Indian REIT market has undergone significant evolution since the beginning. From the domination of large institutional players, the landscape is currently being juggled by a growing number of small and medium-sized REITs. The reasons behind this growth in importance can be outlined as follows:

1. Diversification and Accessibility :

 SM REITs allow smaller investors to participate in investments in quality real estate assets, which were hitherto accessible only to sizeable big players. SM REITs tap from a larger population of investors and allow participation in rewarding real estate segments.

2. Concentrate on Niche Segments :

 While large REITs usually target prime commercial real estate, smaller and medium-sized REITs may target niche markets or emerging locations. This can result in higher returns by capitalizing on areas that are either undervalued or rapidly developing.

3. Flexibility and Innovation :

 The small REITs are flexible and can be very innovative, sometimes beyond those of the larger REITs. They may venture into property types that are not typical or new management practices. This makes the real estate market dynamic.

4. Regulatory Support :

 SEBI has enabled regulations and reforms for the development of REITs in India. These encompass taxation concessions and easy compliance procedures. This is applicable to both large and small REITs. Such supportive measures have the characteristic of improving the competitiveness and operational efficiencies of SM REITs. SEBI’s regulatory framework has evolved to support the growth of SM REITs. Key recent guidelines from 2022-2023 include:

• Relaxation of Public Float Requirements: SEBI reduced the minimum public float requirement for REITs from 25% to 15%, with further reductions for large REITs. This change aims to enhance liquidity and attract more investments into REITs.
• Increased Borrowing Limits: The leverage cap for REITs was raised to 70% of total assets from the previous limit of 49%. This allows REITs, including SM REITs, to access more debt financing, enabling them to undertake larger investments and acquisitions.
• Enhanced Disclosure Requirements: SEBI mandated quarterly disclosures on financial and operational performance, including updates on rental income, occupancy rates, and asset valuations. This increased transparency is designed to provide investors with timely information and build trust in the market.
• Incentives for Affordable Housing: Special provisions and incentives for REITs investing in affordable housing projects were introduced. These include relaxed compliance requirements and favorable tax treatments, encouraging investment in this crucial sector.
• Reinvestment of Dividends: SEBI allowed REITs to offer a reinvestment option for dividends, enabling investors to reinvest payouts into additional units of the REIT. This feature supports compound growth and increases investor engagement.

 Impact on India’s Real Estate Sector

Arriving SM REITs are bringing some fundamental changes into the Indian Real Estate Industry in the following ways:

1. Increased Liquidity and Investment :

 SM REITs enhance liquidity in real estate by allowing investors to invest and withdraw from investments easily. As such, enhanced liquidity works as a stabilizing force for the market, resulting in more money coming into the market.

2. Increased Transparency and Corporate Governance :

 REITs, such as SM REITs, are bound by very tight regulatory standards and reporting requirements. This ensures increased transparency and good corporate governance in the real estate sector, enabling investors to have more confidence and reducing the possibility of scams or other forms of misappropriation.

3.  Urban Growth and Infrastructure Development :

 The two REITs under study often invest in new city centers and other infrastructure projects. Such investment will bring about beneficial development in these areas, helping in overall economic growth and developing urban infrastructure.

4.  Work Opportunities :

 Activities involving these SM REITs provide opportunities to create jobs due to property management, development, and maintenance. This would particularly create huge impacts if it were focused on smaller cities and towns where usually much attention might not be directed.

5. Market Dynamics :

 With the entry of SM REITs into the market, there increased competition and innovation, making larger REITs shape up and change their strategy to include new strategies in the process. This enhances efficiency and improves the quality of services in the real estate sector.

6.  Affordable Housing :

While not the focus, some SM REITs are starting to explore investments in affordable housing segments. If continued, this could help stem the shortages of homes while providing choices to low- and middle-income families.

 Conclusion

Small and medium-sized REITs have played a crucial role in transforming the shape of the sector. Other than construction, these SM REITs have further enhanced market liquidity, transparency, and urban development in real estate. In fact, with more of these coming in, it’s a clear guarantee for the further development and innovation of the industry, which will open new opportunities for investors and broader economic benefits across the country.

However, as the Indian property market moves on to evolve further, it can safely be said that SM REITs are likely to continue as an essential ingredient of this transformation.

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