The introduction of SM REITs has lowered the entry size for investors, reducing the minimum investment from INR 25 lakhs to INR 10 lakhs. This regulatory change has made fractional ownership more accessible to a wider pool of investors, democratizing access to high-yield commercial real estate opportunities that were previously limited to high-net-worth individuals.
“While traditional real estate investments have long been a staple for wealth accumulation, fractional ownership is still in its nascent stage in India. However, it is gaining traction, particularly in commercial real estate segments like office spaces and co-working environments,” says Sudarshan Lodha, Cofounder & CEO, Strata, in an e-mail interview with Zeebiz.com.
Edited excerpts:
• What key factors should investors consider when selecting a fractional ownership platform, and how can they mitigate the associated risks?
When choosing a fractional ownership platform (FOP) for real estate investment, it’s essential to evaluate key factors like past performance, current assets under management, successful exits, and the robustness of their due diligence process. The type and quality of assets offered also play a crucial role in assessing the platform’s credibility.
Like any investment, fractional ownership in commercial real estate carries risks. These include tenant vacancies, market volatility, and macroeconomic shifts that can affect property values and rental yields. It’s important for investors to weigh these risks carefully and select platforms with a strong track record in mitigating such challenges.
• With the rising popularity of fractional ownership in India, how have you seen this model evolve, particularly in the commercial real estate space?
With the rising popularity of fractional ownership in India, particularly in commercial real estate (CRE), the model has undergone significant evolution. One major shift has been the introduction of regulation by SEBI, which has brought greater transparency and accountability to the sector. Assets ranging from Rs 50 crore to Rs 500 crore now fall under the Small and Medium REITs (SM REITs) category, providing a more structured framework for fractional ownership platforms.
Additionally, the introduction of SM REITs has lowered the entry size for investors, reducing the minimum investment from INR 25 lakhs to INR 10 lakhs. This regulatory change has made fractional ownership more accessible to a wider pool of investors, democratizing access to high-yield commercial real estate opportunities that were previously limited to high-net-worth individuals. This has not only boosted investor confidence in the asset class but has also created a new niche in real estate investment, opening up lucrative opportunities for retail investors in a regulated environment.
• As new regulations come into play, could you explain what SM REITs are and how they differ from traditional REITs?
SM REITs, or Small and Medium Real Estate Investment Trusts, are a new category introduced as part of the regulatory framework governing fractional ownership in India. These REITs cover assets ranging from INR 50 crore to INR 500 crore, providing a structured approach for investments in smaller and mid-sized commercial real estate assets.
Unlike traditional REITs, which typically manage large-scale, high-value assets like major office complexes or shopping malls, SM REITs focus on smaller, more accessible properties. Another key difference between traditional REITs and Specialized/SM REITs lies in the level of control and risk management they offer investors. Traditional REITs function similarly to mutual funds, where investors pool their capital and the fund managers make decisions about which properties to invest in. As a result, investors have limited say over asset selection, and there’s a possibility of tenant vacancies affecting the return on investment.
In contrast, SM REITs, often structured through fractional ownership models, offer investors greater control over the specific assets they wish to invest in. Furthermore, tenant-related risks are significantly reduced in SM REITs, as properties are typically leased to tenants for pre-decided periods before the investment is made. This ensures a steady rental income without the risk of vacancies during the investment period, enhancing predictability and minimizing risks.
• How do REIT investments differ from the fractional ownership? Which segment of fractional ownership is being readily adopted by Indian investors? Moreover, do REIT, fractional ownership are as lucrative as the traditional real estate investment?
Real Estate Investment Trusts (REITs) and fractional ownership are both appealing avenues for real estate investment, yet they differ significantly. REITs operate as companies that manage income-producing properties, allowing investors to purchase shares in the trust. In contrast, fractional ownership provides individuals with direct ownership of a share in specific property, empowering them with a greater control on the choice of asset, clarity on the tenant occupancy, etc.
While traditional real estate investments have long been a staple for wealth accumulation, fractional ownership is still in its nascent stage in India. However, it is gaining traction, particularly in commercial real estate segments like office spaces and co-working environments. Investors are drawn to fractional ownership for its lower capital requirements, diversification potential, and the opportunity to directly engage with their investments. As the market continues to evolve, fractional ownership presents a popular alternative that complements traditional real estate and REITs, offering unique benefits for the modern investor.
• In what ways do you believe SM REITs can help investors build long-term wealth or generate passive income?
SM REITs provide a structured way for investors to build long-term wealth and generate passive income through commercial real estate. These REITs typically focus on mid-sized commercial properties, offering investors the benefit of steady rental income from pre-leased properties. With tenants already secured for fixed periods, SM REITs significantly reduce the risk of tenant vacancies, ensuring stable cash flow.
Another advantage is the potential for capital appreciation in commercial real estate, which can enhance wealth over time. SM REITs also operate under a regulated framework, which ensures transparency and offers investors more control over asset selection, unlike traditional REITs. This makes them a practical option for those looking for a low-maintenance, income-generating investment.