Fractional ownership platforms for real estate seek lower holding threshold

Also seek exposure to under-construction projects; Sebi to formalise framework soon

Fractional ownership platforms (FOPs) for real estate are seeking a lower shareholding threshold for sponsors, as well as grandfathering of ongoing investments and permission to continue investing in under-construction projects.

This demand arises following a consultation paper floated by the Securities and Exchange Board of India (Sebi) in May. Sebi is expected to formalise a framework soon to regulate the mushrooming of web-based FOP platforms.

The fractional ownership model enables investors to own a small percentage or fraction of real estate assets, such as buildings, office spaces, warehouses, shopping centres, and conference centres.

Although the industry welcomes the move towards regulation, there is opposition to the proposed 15 per cent minimum sponsor shareholding mandated by the capital markets regulator.

“The 15 per cent investment requirement by the sponsor is not suitable for technology-enabled asset-light fractional platforms. While it is appropriate for traditional real estate investment trusts’ (REITs’) eligibility, as they are created by developers seeking exits, asset-light platforms lack the capital for such investments in each asset,” says Shiv Parekh, founder, hBits.

Sudarshan Lodha, co-founder of Strata, adds, “The norms are welcomed as they will make the segment more transparent, controlled, and listed. However, reconsideration of the 15 per cent mandatory sponsor holding would be greatly appreciated due to the high threshold.”

Sources indicate that the regulator is considering industry demands to reduce the requirement to 5 per cent, provided these platforms demonstrate sufficient “skin in the game”.

Currently, the fractional ownership segment operates without regulation, and the facilitating platforms have no exposure to real estate projects. These FOPs charge investors a management fee.

In its paper, Sebi has also proposed a minimum networth of Rs. 20 crore, a cap on the total expense ratio, the restructuring of the current special purpose vehicle (SPV) model to that of a REIT, and standards for valuation, liquidation, and exits.

The regulator stated that migrating the SPV structures to a REIT structure might result in treating such investments as “business trusts”, offering tax benefits not available to SPVs and investors. However, platforms are seeking grandfathering of ongoing investments from this restructuring to avoid impacting returns.

“Sebi has suggested migration of the current investments from the SPV to the proposed micro, small, and medium (MSM) REIT. There will be new costs on such a migration which were not foreseen by investors and thus their returns will be affected. The norm should only be for new investments while those ongoing should be allowed in the present form for the due course,” adds Parekh.

Regarding investments, the industry has requested that MSM REITs be allowed to invest in debt and under-construction assets, as traditional REITs are permitted. The proposed Sebi paper suggests banning MSM REITs from investing in under-construction or non-rent generating properties, while traditional REITs can invest up to 20 per cent of value in under-development projects.

Larger FOPs generally have a minimum ticket size ranging from Rs. 25 lakh to Rs. 40 lakh and attract long-term investors. However, Sebi is discussing reducing the minimum entry value to Rs. 10 lakh. While the industry is divided on the minimum investment, there is a consensus that a more transparent regulatory framework will help expand the market.

“Currently, investors cannot leverage or pledge their FOP investments as they aren’t securitised. We are in talks with four/five banks willing to offer loans against these investments. Furthermore, we expect interest from overseas investors once this segment transitions into a REIT,” notes Lodha.

Under Consideration

 15% sponsor holding not suitable for asset-light fractional ownership platforms, say players

 Sebi proposal bans investment in under-construction properties, FOPs seek relaxation

 Some players have requested to allow current SPV model for ongoing investments

 Regulatory ambit to boost investor confidence, encourage overseas investors

 Securitisation to facilitate pledging of investments in MSM REITs

 Regulator considering bringing minimum investment value to Rs 10 lakh