Strong regulatory oversight to protect investors despite inherent operational risk
Recent regulations issued by the Securities and Exchange Board of India (SEBI) for small and medium real estate investment trusts (SM REITs) are likely to drive investor interest towards fractional ownership of real estate assets. By enabling strong investor protection, these regulations are expected to broaden investor base. Prudent management of operational risks remains key to popularising the vehicle, though.
So far, fractional ownership platforms (FOPs) did not follow uniform guidelines. The SEBI move is intended to address this by bringing existing FOPs under the regulatory ambit. Some of the key regulatory guardrails are mandatory investments in operational assets, restrictions on related party transactions, compulsory listing on the stock exchange and distribution of minimum 95% surplus from special purpose vehicles.
Says Mohit Makhija, Senior Director, CRISIL Ratings, "The SM REIT regulations should inspire investor confidence by protecting them against two key risks. One, project completion and leasing risks would be mitigated as investments cannot be made in under-construction assets. Two, risk of diversion of funds will reduce due to ring-fencing of cash flows and mandatory distribution of funds on a quarterly basis. Further, the regulations should improve transparency and governance."
Other regulations include the need for at least 200 retail investors which will provide liquidity. Minimum liquidity requirement at the investment manager (IM) level to provide a buffer against temporary mismatches. Further, experience-linked eligibility criteria for the IM will foster strong governance.
Says Anand Kulkarni, Director, CRISIL Ratings, "The regulations are more stringent for SM REITs given the smaller ticket size of schemes, higher asset or geographical concentration risks, unlike traditional REITs that tap large-scale investments. Therefore, the IM's skills in identifying the right properties and operating them professionally will remain critical for the success of SM REITs. Additionally, lean cost structures will be essential to protect investor returns."
As per CRISIL Ratings' assessment, SM REITs target a distinct and differentiated market as compared to conventional REITs.
Schemes1 under SM REITs can target niche assets ranging from Rs 50 crore to Rs 500 crore which is an untapped opportunity as conventional REITs focus on large scale assets with consolidated asset value over Rs 500 crore. |
