How to safely invest in real estate via fractional ownership platforms The new regulations intended to make investment in real estate (usually a commercial building) safer and transparent for retail investors
The Securities and Exchange Board of India (Sebi) amended the Real Estate Investment Trusts Regulations, 2014, paving the way for the establishment of SM REIT or small and medium real estate investment trusts. These real estate investment trusts (REITs) allow individuals to invest in real estate properties via fractional ownership platforms.What is fractional ownership?
Fractional ownership refers to splitting the value of an asset among investors with each getting a share of the property or asset. In the US, fractional ownership is allowed in equity shares. However, in India, fractional ownership is available in real estate properties, usually commercial properties.Many Indians prefer to invest in real estate instead of financial assets such as equity shares, bonds or mutual funds. But investing in real estate properties requires huge financial resources and not everyone can do that. Fractional ownership allows an individual with limited resources to own a specified share of a particular commercial real estate via a platform that pools the large number of investors. The platform facilitating transactions of buying a fractional share in real estate is called a fractional ownership platform or FOP.
How new Sebi rules formalise the small FOPs and help small investors
Vimal Nadar, Senior Director & Head, Research, Colliers India, says, "The key objective of the recent SEBI notification of SM REITs is getting fractional ownership platforms into the regulatory framework. With SM REIT guidelines, REITs with investment amount below Rs 500 crore and minimum Rs 50 crore can be formed and listed. The majority of FOPs in India have smaller sized assets and were not operating in a regulated environment prior to this amendment. The new guidelines provide a platform for FOPs to exist through the formation of REITs and, more importantly, bring full transparency to investors in terms of disclosure and governance. Most of the details with respect to assets and investment shall be similar to those of larger REITs."Performance of listed REITs
Listing Date
1 year Return
3 years Return
Returns since listing
EMBASSY OFFICE PARKS REIT
1-Apr-19
12.0%
8.6%
10.2%
MINDSPACE BUSINESS PARKS REIT
7-Aug-20
7.0%
19.7%
14.3%
BROOKFIELD INDIA REAL ESTATE TRUST
16-Feb-21
-6.2%
0.1%
-5.6%
NEXUS SELECT TRUST
19-May-23
N.A.
N.A.
26.6%
Returns of respective REITs are a comparison against NSE closing price as on 14th May 2024.
Source: Colliers India
Also Read: How Sebi new rules make real estate FOPs safer for retail investors
What to check before investing in real estate via FOPs
The new guidelines are intended to make investment in real estate safer via FOPs. If you are investing in real estate via FOPs for the first time, it is important to know what you should check before making any investment.To put it in simple terms, when an individual invests in a mutual fund scheme, one checks the risk parameters of the scheme, investor's own risk profile, fund manager's performance and so on. Similarly, what should an individual check when he invests money in fractional ownership property.
Sudeep Chandran, Founder and COO of YOURS, a platform for fractional ownership of luxury second homes, says, "It's essential to recognise that the landscape and regulations surrounding fractional ownership are still evolving. Comparing this sector to the well-established mutual fund industry may not be entirely justified. Unlike mutual funds, where factsheets and key information memoranda are readily available, investors must conduct their due diligence more carefully in the case of fractional ownership which are not listed yet. Once the REITs are listed on stock exchanges, the transparency level will increase offering standardised information to the investors. However, one must carefully review the terms and agreements, and getting clarity on the implications of each clause, is essential. Seeking assistance from legal or subject matter experts is advisable."
It is crucial to have a clear understanding of the investment objectives, as well as the associated limitations, risks and returns of FOPs. "It's worth noting that various platforms offer fractional ownership with differing mechanisms, resulting in variations in risk, rights and returns. Some of the key considerations include minimum investments, property types, and the frequency of returns, whether monthly, quarterly, or only at the time of exit. Also, there are platforms that provide fractional ownership not solely for regular returns, but specifically for end-use purposes," Chandran explains.
Some of the parameters one should check before making real estate investments via FOPs are:
Minimum investment amount: Fractional ownership platforms have varying minimum investment amounts. It is important to check the amount when you start looking for platforms for investment purposes.Lock-in period: The investment in fractional ownership property can come with a lock-in period. This period can be different for different real estate properties and also for different FOPs. Asset details: The money invested by the individual will be ultimately used to buy real estate properties. It is important to know which type of real estate properties will be bought (residential or commercial) and the geographical location of the property, among other details. As per the Sebi regulations, the SM REIT must invest at least 95% of the value of the schemes' assets on each of its schemes in completed and revenue-generating properties and shall not invest in under-construction or non-revenue generating real estate assets. The balance 5% of the value of the schemes' assets may be invested in liquid assets, which are unencumbered.Tenant profile: The investment made in fractional real estate will not only generate capital appreciation over the long term but also offer periodic returns in the form of rental income. It is important to check the tenant profile to ensure that rental income is received on time. Kunal Arora, Partner, Lakshmikumaran & Sridharan Attorneys, says, "The investors should avail the benefit of the information being made available by the SM REITs and take an informed decision after considering all aspects, including details of the properties held by the SM-REIT, track record of the fund managers, marketability of the properties and other relevant information akin to any other investment scheme. It is pertinent to note that not all FOPs will take the SM REIT route for offering their products. There are other structures which are prevalent in the market and are likely to continue. In such cases, the investors may not have access to standardised information akin to a regulated structure and must dig deeper to understand and verify the critical aspects including title, marketability and risk-reward ratio of the property. Additionally, it is also important to have a clear understanding of the structure being adopted by the FOP to ascertain the investor's rights, risks involved, investor protection measures, tax implications, exit implications, etc."
This story originally appeared on: India Times - Author:Faqs of Insurances
