Real estate investment trusts (REITs) have become a widely recognised financial instrument for investing in real estate assets, including commercial and residential properties, as well as infrastructure assets such as transmission lines, roads, power stations, telecommunications and warehouses.
In India, however, investment trusts are not limited to REITs; they are divided into three primary categories. These are infrastructure investment trusts (InvITs), which focus on infrastructure assets; traditional REITs, which focus on commercial real estate such as office buildings and shopping centres; and the newest type, small and medium (SM) REITs, which target niche markets such as warehouses and residential properties–areas not typically covered by InvITs and traditional REITs.
Currently, India’s REIT market is still in its early stages, with regulations first introduced in 2014 and the country’s inaugural REIT, Embassy Office Parks, launched in March 2019. Fast forward to today, India has over 30 listed InvITs, REITs and SM REITs, with total assets under management amounting to approximately Rs 6.5 trillion.
New market entrant
India’s REIT and InvIT markets have raised a total of Rs 1.4 trillion from April 2019 to September 2024. In line with this, the Securities and Exchange Board of India (SEBI) amended the REIT regulations in 2024 to establish a framework for SM REITs. This initiative is aimed at promoting wider participation in investment trusts through access to smaller assets while bringing fractional ownership platforms (FOPs) under the regulatory ambit.
Traditionally, Indian REITs were limited to investing in commercial real estate assets valued at over Rs 5 billion, such as malls and office buildings. However, the introduction of the SM REIT structure allows for the inclusion of assets valued between Rs 0.5 billion and
Rs 5 billion, thereby tapping into previously overlooked opportunities.
Operating under a scheme-based model, each SM REIT is launched through an initial public offering (IPO) to raise funds for targeted investments in specific property types or locations, providing investors with focused and niche exposure. Through these measures, SEBI aims to democratise real estate investment, enabling retail investors to access Grade A real estate–an arena typically dominated by large institutions such as Brookfield and Blackstone or high-net-worth individuals due to high capital requirements.
Experience so far
InvITs have proven to be a fairly successful asset class, especially in sectors such as roads and power. On the other hand, despite growth over the years, REITs are yet to deliver impressive returns. These returns come from two sources: distribution yield and asset price appreciation. Historically, overall returns have averaged around 7-9 per cent, comprising a 5-6 per cent distribution yield and a 2-3 per cent asset price appreciation.
However, this 7-9 per cent average return, coupled with the additional risks associated with real estate, has not generated much enthusiasm among investors. Real estate assets come with several inherent risks, including vacancy rates, operational and maintenance challenges, and broader macroeconomic factors, such as the impact of the pandemic. Additionally, complex taxation on the asset class is also a discouraging factor.
The latest addition, SM REITs, has sparked confidence among investors. According to media sources, since SM REIT investment managers are required to be unrelated to developers, assets acquired from developers are generally purchased at fair market prices, allowing for additional returns through appreciation in the market price of assets.
SEBI regulations aiding growth
SEBI has actively advocated for investor interests since the inception of SM REITs. To promote investor protection, the regulator has established key regulations that require investment managers to hold a minimum of 5 per cent of the total outstanding units in unleveraged SM REIT schemes and 15 per cent in leveraged schemes. This ensures managers maintain a significant stake and share in the associated risks, strengthening investor safeguards. Additionally, at least 95 per cent of the asset value must be invested in revenue-generating properties, which helps ensure stable cash flows for investors.
Recently, SEBI introduced a consultation paper aimed at simplifying regulations for SM REITs to promote ease of business and enhance transparency for investor protection.
SEBI has also proposed standardising disclosures in scheme offer documents by splitting them into two parts: key information of the trust (KIT), which provides an overview of the SM REIT, investment manager, trustee and a high-level view of the company; and key information of the scheme (KIS), detailing each individual scheme and its specific assets.
After the first scheme’s disclosure of both KIT and KIS, only the KIS would need to be submitted for subsequent schemes for SEBI’s review. The KIT must be updated every six months or as necessary and filed with the regulator. This proposal would enable investors to make direct, apple-to-apple comparisons among different REITs.
The regulator conveyed through the paper that REITs, SM REITs and InvITs must obtain a credit rating if their borrowings exceed specified limits. SEBI has proposed that these ratings should apply to the trust as a whole, providing a reflection of the trust’s financial health and ability to meet debt obligations. This change will simplify regulations and offer a clearer, more comprehensive view of the trust’s financial stability, allowing investors to assess the overall risk of the trust’s borrowing capacity rather than focusing on individual loan terms.
In its latest consultation paper, it has proposed regulatory changes that would allow assets in the “infrastructure” category to be considered real estate assets if they are intended to generate stable rental income through leasing. The regulator has also suggested that infrastructure assets such as warehouses, hotels, hospitals and data centres should be eligible for inclusion in REITs as long as they generate rental income and have long-term leases.
Currently, REITs are limited to commercial real estate, but SEBI’s proposal aims to broaden the scope to include these income-generating infrastructure assets.
Recent developments
Gradually, FOPs are transitioning to the SM REIT framework, with new SM REITs filing for regulatory registration. Property Share became the first FOP to receive the SM REIT licence from SEBI. Recently, Property Share submitted draft papers for its first scheme, the PropShare Platina IPO, valued at Rs 3.53 billion.
The second SM REIT to be licensed by SEBI was ImpactR SM REIT. ImpactR aims to diversify beyond traditional residential and commercial properties, introducing asset classes such as warehousing, hospitals, hotels and industrial spaces, with its first IPO set to launch soon.
Emberstone SM REIT has also received SEBI approval to register as an SM REIT. Other fractional ownership platforms, including hBits and Strata are at various registration stages and will broaden investment options for investors. Many of these platforms plan to expand into infrastructure sectors such as warehousing and data centres, offering more avenues for investors to park funds for consistent returns.
Future opportunities and outlook
Similar to InvITs and REITs, SM REITs hold strong potential to carve out a significant share in investors’ portfolios, driving the monetisation of existing physical assets across real estate, warehouses and utilities. According to a media report, the potential market for SM REITs in India spans over 300 million square feet of commercial office space, with an additional 50 million square feet expected to be added by 2026, leading to an estimated market size of Rs 60 billion. This figure does not factor in the growing interest in warehousing, data centres and utilities, which present ample opportunities for diversification.
With SEBI’s recent consultation paper, SM REITs and REITs are set to attract investors by offering access to varied asset classes. In this evolving landscape, SM REITs and REITs are paving the way for a more inclusive and diversified investment market, where retail and institutional investors can participate in India’s expanding real estate and infrastructure sectors for consistent, long-term returns.
