Real estate has historically been the asset class that has created the highest wealth for investors around the world. Given high capital requirements and lack of liquidity, investing, especially in commercial real estate, was limited to institutional investors or individuals with significant financial resources.
However, through the recently notified SM REIT regulations, SEBI has effectively introduced an entirely new asset class to the retail and institutional investor universe, continuing the march towards securitisation of real estate assets that started with REIT regulations in 2014.
SM REITs provide a tremendous opportunity to monetise income generating assets that currently do not have access to liquidity and when paired with technology has the potential to completely transform the real estate investment landscape in the country.
To explore the power and potential of SM REITs, Moneycontrol’ s Mugdha Kalra hosted a webinar titled Decoding SM REITs: A New Way to Invest in Real Estate, featuring Kunal Moktan, Co-founder of Property Share. Property Share is the recipient of India’s 1st SM REIT license.
SM REITs: Democratising Commercial Real Estate Investment
Kunal Moktan began by recounting Property Share’s pioneering journey in India’s commercial real estate space. “We started Property Share in 2015 as a fractional ownership platform to give retail investors access to rent-yielding commercial properties,” he explained. Fractional ownership proved popular, but the absence of regulation limited its scalability. Recognising the demand for smaller, high-quality commercial real estate investments, SEBI introduced the SM REIT framework in March 2024.
Moktan emphasised the key differences between SM REITs and traditional REITs. “REITs are only allowed to invest in assets worth 500 crores and more, while SM REITs are focused on smaller assets. In a REIT, you’re buying a basket of securities, so you might own a piece of an office building in both Mumbai and Bangalore. But with an SM REIT, you can invest in a focused asset in the micro market of your choice. For example, if it’s a building in BKC, Mumbai, and you’re familiar with the location and tenant, you can choose to invest only in that asset.”
He also noted that SM REITs also offer higher rental yields compared to traditional REITs. “REITs can invest up to 20% in under-construction projects, which can give them an opportunity to grow the NOI. But during that time, you don’t get any returns on that 20%. SM REITs, on the other hand, cannot invest in under-construction projects; they only invest in rent-yielding assets, so the yield tends to be higher.”
Who Should Invest in SM REITs?
Moktan explained that SM REITs are ideal for working professionals and retirees seeking steady rental income and diversification. “It’s perfect for anyone looking to move beyond traditional investments like equities or mutual funds,” he said. With SEBI reducing the minimum investment threshold to ₹10 lakh, SM REITs have become more accessible, appealing to a wide range of investors.
“For retirees, it makes a lot of sense to get 8-9% returns on their capital from rents that are inflation-linked, with typically a 5% increase every year. It helps them plan their finances.” Moktan added. Moreover, SM REITs offer the chance to own premium commercial properties – office spaces leased by top-tier tenants, which have traditionally been out of reach of the retail investor.
Taxation and Regulatory Framework: A Boon for Investors
The government’s recent tax reforms have made REITs and SM REITs even more attractive. “Holding an SM REIT for more than a year now qualifies for long-term capital gains (LTCG) tax of 12.5%, aligning with the tax treatment for stocks,” Moktan explained. In addition, dividends from SM REITs are tax-free, and the taxation on interest income follows the investor’s personal tax bracket, making the structure highly tax efficient. “Overall, the net tax comes to around 5-10% of yield,” he noted.
How to Choose the Right SM REIT Scheme
Moktan advised investors to carefully evaluate three key factors when selecting an SM REIT:
- Location: Invest in properties located in prime markets with low vacancy rates.
- Manager Credentials: Ensure the investment manager has institutional investing experience and a proven track record. SEBI requires SM REIT managers to maintain a net worth of at least ₹20 crore, with ₹10 crore in liquid assets, ensuring financial stability.
- Tenant Profile and Lease Structure: Look for high-quality tenants with long-term leases to ensure stable cash Flows.
As Moktan noted, the beauty of SM REITs lies in their transparency. “We present the asset to you. You know exactly what you’re buying: location, tenant, and projected returns, which takes the guesswork out of real estate investing.”
For more insights on how SM REITs can add growth, income and stability to your portfolio, watch the full conversation here.
This is a partnered post.