Market regulator Sebi's new guidelines for Small and Medium REITs (SM-REITs) could result in over Rs 4,000 crore (INR 40 billion) worth of existing assets currently managed by FOPs listing as SM-REITs in the next 2-3 years, according to property consulting firm Colliers. 

Sebi's guidelines are expected to bring a wave of regulation to the fractional ownership market for real estate. This will likely lead to many unregistered Fractional Ownership Platforms (FOPs) becoming listed SM REITs.

The guidelines  are expected to facilitate the listing of a significant number of previously unregistered fraction ownership platforma (FOPs) like Strata, hBits PropertyShare, Assetmonk, Alyf, YOURS and WiseX dealing in real estate assets. The move is aimed at promoting transparency and accountability in the real estate sector, and is likely to oost to the Indian REIT market.

Fractional Ownership

Real estate can be divided into portions for ownership by multiple investors. This is called fractional ownership.The concept allows multiple investors to co-own a single real estate property. This makes investing in expensive properties more accessible, especially for smaller investors.

There are two main ways to achieve fractional ownership:

Direct ownership: Developers sell portions of a property directly to buyers (strata sale model for commercial spaces).

Fractional ownership Platforms (FOPs): Online platforms allow investors to buy shares of a property.

City-wise strata sold stock and penetration as of March 2024

Fractional ownership in CRE: Strata sale Grade A office stock to cross 260 million sq ft by 2026, translating into a valuation of around Rs 4,500 billion: Strata sale form of fractional ownership is mostly prevalent in office buildings. As of March 2024, office market in top six cities of the country hold over 200 million sq. ft of Grade A strata sale stock, constituting 28% of total Grade A office stock. Mumbai followed by Delhi NCR are the leading cities in terms of quantum and strata penetration. 40-50% of their respective overall office stock is strata sold.

Of the 200 million sq ft of Grade A properties under the Strata sale model, it is estimated that only 10-20% office assets are currently being offered by FOPs that are accessible to the retail investor. A vast majority of commercial asset developers are yet to fully tap the potential investment coming in from small scale retail investor. Colliers predicts that strata stock in top six cities in India will swell to 260-270 million sq ft in next two years, with an estimated market value of around Rs 4,500 billion. 

In Delhi NCR, strata sale is the most popular form of fractional ownership of office assets wherein developers offer office floors or even entire buildings to multiple owners. With about 55 million sq ft of office strata sold stock, the region accounts for the second highest share across the top six cities. However, web-based FOP activity is quite low in the region and very few office buildings have been put up for retail investment by major FOP operators. However, with a regulatory framework in place, the region holds huge potential for offering fractional ownership of office assets through web-based FOPs/SM REIT and attract retail investments in the next few years.

SEBI's new guidelines for SM-REITs create a framework for smaller Real Estate Investment Trusts. This is expected to bring many unregistered FOPs under regulations by encouraging them to list as SM-REITs. This will potentially regularize over  Rs 40 billion worth of real estate assets currently managed by FOPs, estiamtes Colliers, a property consulting firm.

Colllier's also estimates that in the coming years, premium residential properties in the major offbeat destinations like Alibaug, Lonavala, Goa, Kodagu, Rishikesh and Shimla, is likely to see rising demand. Fractional ownership market is also likely to diversify in other alternative asset classes like industrial & warehousing, data centres, retail, student housing and healthcare in the years to come.

Benefits of regulation:

Increased Liquidity: Assets become more easily tradable, attracting a wider range of investors.

Transparency and Standardization: Clearer rules ensure fair practices and protect investors.

Increased Investor Participation: Lower investment minimums in SM-REITs compared to traditional REITs make it accessible to more people.

Benefits for Asset Owners:

Higher Asset Value: Increased demand for these regulated fractional ownership options can drive up property values.

Easier Exits: Listing as SM-REITs provides a clear path for selling their fractionalized assets.

Lower Transaction Costs: More streamlined processes can potentially reduce fees associated with selling fractions of a property.