The new SM REIT regulations bring the added advantages of investor protection and increased liquidity

The Indian real estate sector is undergoing a transformative shift, driven by proactive regulatory initiatives. Landmark reforms such as the RERA Act (2016) to enhance developer accountability, the introduction of GST for tax standardisation, and the implementation of REIT regulations (2014) to create a new investment avenue have collectively bolstered accessibility, transparency, and market stability for investors.

The introduction of Real Estate Investment Trusts (REITs) regulations in 2014, followed by India’s first REIT listing in 2019, opened up institutional-grade real estate investments to retail investors. Taking this momentum further, SEBI (Securities and Exchange Board of India) has now introduced a framework for Small and Medium REITs (SM REITs), aiming to further democratise real estate investment in the country. While some investors have previously explored fractional ownership of commercial properties through dedicated platforms, the new SM REIT regulations bring the added advantages of regulatory oversight, investor protection, and increased liquidity.

As per the recent report by Colliers, institutional investments in Indian real estate reached a five-year high of $6.5 billion in 2024, marking a 22% YoY growth from $5.4 billion in 2023. The industrial and warehousing segment emerged as the top contributor to Indian realty investments, attracting $2.5 billion — a staggering 190% increase compared to 2023.

Globally, REITs are an established and successful investment model. In the United States alone, publicly traded REITs manage an astonishing $2.5 trillion in gross assets. India’s REIT market is following a similar upward trajectory, having expanded significantly over the past five years, with its gross asset value increasing from approximately $3.6 billion to $15.6 billion today.

SEBI’s new regulatory framework for SM REITs has lowered entry barriers, allowing retail investors access to premium real estate assets that were previously dominated by institutional players. By setting a minimum issue size of ₹50 crore and requiring at least 200 investors per scheme, the framework ensures broader participation in the real estate sector. This initiative enables a more diverse range of investors to enjoy both stable rental income and potential capital appreciation.

Advantages for investors

Access to Grade A properties: SM REITs offer exposure to high-quality commercial real estate, an asset class traditionally requiring significant capital. This allows investors to benefit from higher rental yields and long-term capital gains.

Portfolio diversification: Each SM REIT scheme can encompass multiple asset classes (commercial, retail, residential, etc.) with an aggregate threshold of ₹500 crore, mitigating the risks associated with single-asset concentration.

Liquidity and market flexibility: Being listed on stock exchanges ensures efficient price discovery, making it easier for investors to enter or exit their positions in alignment with their investment strategies.

Transparency and investor protection: SEBI’s oversight mandates standardised investments, periodic reporting, and enhanced investor protection measures, fostering trust and confidence in the market.

Risks and considerations

India’s traditional REITs operate under a master trust model, where the REIT trust holds direct stakes in underlying Special Purpose Vehicles (SPVs) that own rent-generating properties. The addition of new assets by the investment manager — subject to shareholder approval — can either enhance or dilute value.

While SM REITs will follow a similar structure, they introduce scheme-level segregation akin to mutual funds, capping each scheme at ₹500 crore. This ensures that investors have greater visibility into the specific assets within their chosen scheme. However, given that SM REITs might hold fewer properties, their performance will be closely tied to the success of individual assets.

To mitigate these risks, investors must conduct thorough due diligence, examining the track record of investment managers, their governance standards, and property selection criteria. A well-researched approach can help balance potential risks and rewards effectively.

The writer is vice-president – Investments, Alt Capital.