Recent regulations issued by Securities and Exchange Board of India (SEBI) for small and medium real estate investment trusts (SM REITs) are expected to drive investor interest towards fractional ownership of real estate assets, as per a report by Crisil Ratings.
By enabling strong investor protection, the newly amended regulations are expected to broaden the investor base. Prudent management of operational risks remains key to popularising the vehicle, though, the rating agency report asserted.
Some of the key regulatory guardrails are mandatory investments in operational assets, restrictions on related party transactions, compulsory listing on the stock exchange, among others. | Pexels
Bringing Fractional Ownership Under Ambit
So far, fractional ownership platforms (FOPs) have not followed uniform guidelines. The SEBI's latest move is intended to address this by bringing existing fractional ownership platforms under the regulatory ambit.
Some of the key regulatory guardrails are mandatory investments in operational assets, restrictions on related party transactions, compulsory listing on the stock exchange, among others.
"The SM REIT regulations should inspire investor confidence by protecting them against two key risks," said Mohit Makhija, Senior Director, CRISIL Ratings.
Other SEBI regulations include the need for at least 200 retail investors, which will provide liquidity. | Representative Image/File
200 Retail Investors For Liquidity
One, project completion and leasing risks would be mitigated as investments cannot be made in under-construction assets. Two, the risk of diversion of funds is expected to be reduced due to the ring-fencing of cash flows and mandatory distribution of funds every quarter.
"Further, the regulations should improve transparency and governance," said Makhija.
Other SEBI regulations include the need for at least 200 retail investors, which will provide liquidity.
As per CRISIL Ratings' assessment, SM REITs target a distinct and differentiated market as compared to conventional REITs.
