FOPs slow to migrate under Sebi's new SM REIT norms; few registered

Industry players say lacuna in the newly-introduced platform behind low registrations

Only a handful of fractional ownership platforms (FOPs) have migrated to the new Securities and Exchange Board of India (Sebi) norms for Small and Medium Real Estate Investment Trusts (SM-Reits).

According to the data on market regulator’s website, only one FOP, Property Share Investments, had secured a license, while five more applications were pending, including those from hBits and WiseX as of August 31.

The deadline for migration from FOP to the newly introduced SM-Reit framework — cleared by the Sebi board in November 2023 and notified in March – ended on September 8.

Industry players say the low uptake is due to the lack of key relaxations, such as allowing related party transactions and reducing minimum unit sizes.

The new framework is aimed at bringing the FOP and other real estate platforms under the regulatory ambit. 

Fractional ownership platforms offer co-ownership of a real estate asset, mostly earning through rentals.

"The low FOP application turnout under the SM-Reit regime may be attributed to lack of certain key relaxations they have been pushing for -- allowing related party transactions, relaxing mandatory listing requirements, reducing the minimum unit size for asset migration (as inter-se sale/purchase by existing investors or the trust mechanism outlined under Sebi FAQs could face backlash from the current investor base), permitting the use of distributors or internal client books for fresh issuance considering reluctance of incumbent merchant bankers, and accepting partial revenue-generating assets, at least as a one-time measure,” said Sanchit Kapoor, partner, IC Universal Legal.

Some players suggested that as the new norms do not allow under-construction projects or undeveloped projects as SM-Reits, they have not applied for the registration yet.

Sources suggest that there may not be any extension in the timeline.

Fresh applications may be accepted only from new players while those which already have an existing business in the same segment might have to “discard their current models” and apply afresh, said a source familiar with the developments.

The market regulator introduced the new norms to provide investor protection and reduce risks in the segment.  

With the new norms kicking in, residential and commercial properties with a minimum value of Rs 50 crore can be included in SM-Reits. 

Until now, only large-scale commercial properties could be part of Reits. The new structure also brings skin in the game for sponsors and rules on leverage.

According to a report by the property consultancy firm CBRE, the market size of SM-Reits in India is expected to exceed $60 billion by 2026.