What are SM REIT? How is SEBI making it safer for investors?

What are micro REITs or SM small and medium REITs? How is SEBI making it safer for investors, and should you invest in it or not? SEBI recently introduced amendments to the regulations of 2014. In this, SEBI outlined provisions for the establishment of small and medium real estate investment trusts, also known as small and medium REITs or micro REITs. 

Earlier, fractional ownership or SM REITs were not regulated and were highly risky for investors looking to invest via this route. With this new move, SEBI aims to regulate fractional ownership of both commercial and residential properties. 

So, let's start this topic with the basics. What is an SM REIT? SM REITs or micro REITs are small and medium real estate investment trusts. These are a specialized form of real estate investment trusts that focus on small and medium-sized properties. 

Now, how are these different from other REITs? Conventional REITs mainly invest in large-scale commercial properties such as office buildings and shopping malls. SM REITs concentrate on smaller and medium-sized properties with lower value. When it comes to market capitalization and asset size, SM REITs have a smaller market cap and asset size compared to traditional REITs due to their focus on smaller properties.

If we talk about the portfolio composition, while traditional REITs may have a concentrated portfolio in specific sectors such as commercial real estate. SM REITs maintain diversified portfolios spreading risk across different property types within the real estate market.

Now, what are the key regulations that SEBI has set for SM REITs? The SEBI board notified regulations in REITs to create a system of regulation with an asset value of at least 50 crore rupees, vis-a-vis a minimum asset value of 500 crore rupees for existing REITs. 

The minimum ticket size for SM REITs will be 10 lakh rupees and will be treated as 1 unit. SM REITs can leverage up to 49% of these schemes' assets. The investment manager must hold a minimum of 5% of outstanding units if the REIT is unleveraged and 15% if leveraged.

The SM REIT scheme requires a minimum of 200 unit holders, excluding the investment manager, its related party, and associates. 95% of the investor funds must be invested in completed rent-yielding assets. Since the ticket size is lesser now, with rupees 10 lakh, you can actually own some of the Grade A commercial assets in high-performing office markets.

As per new rules, the investment managers must have a personal net worth of a minimum of 20 crore rupees, out of which 10 crore rupees has to be a positive liquid net worth. They must also have 2 years of experience in fund management in real estate. For new players, it is mandated that two key management personnel must have at least 5 years of experience in real estate or real estate fund management. 

Now, coming to the benefits of SM REITs. SM REITs offer retail investors the opportunity to diversify their portfolios, access high-value assets, receive regular income through dividends, and potentially benefit from capital appreciation. When we talk about risks, investors should consider risks such as market volatility and regulatory compliance burdens when investing in SM REITs.

Now, moving on to the impact of macroeconomic factors, economic factors such as interest rates, inflation, and market conditions significantly influence SM REITs. Rising interest rates can increase borrowing costs and impact profitability, whereas inflation affects operating expenses. However, real estate is often considered a hedge against inflation as property values and rental income tend to rise in line with inflation over the long term.

Favourable market conditions, including economic growth and consumer confidence, drive demand for real estate properties, ultimately benefiting SM REITs. Lastly, in global experience, smaller-scale REITs catering to niche markets exist worldwide. 

In the US, there are smaller ones that specialize in sectors such as healthcare or regional shopping centers. In Canada, Australia, and parts of Europe, smaller REITs provide exposure to specialized real estate segments. Smaller REITs are gaining traction and show that real estate investment opportunities are growing each day. Well, that is all in this article. We will come up more real esate update on our next article. Thank you for reading.