In a development aimed at regulating Fractional Ownership Platforms (FOPs) and ensuring investor protection in the real estate sector, the Securities and Exchange Board of India (SEBI) issued the Securities and Exchange Board of India (Real Estate Investment Trusts) (Amendment) Regulations, 2024, on March 08, 2024 (the Regulations).
FOPs facilitate fractional investment or ownership in real estate, dividing the acquisition cost among multiple investors who invest in securities issued by a Special Purpose Vehicle (SPV) established by the FOP. These SPVs acquire real estate assets, with investors/shareholders collectively bearing costs and sharing benefits, subject to management and maintenance fees levied by the FOP or its associates.
Key highlights of the Regulations include:
■ Amending the definition of REIT and new category of SM REITs
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- The definition of a Real Estate Investment Trust (REIT) has been amended with a more substantive definition which accounts for the conditions applicable to a REIT (REIT would also mean a small and medium real estate investment trusts (SM REIT), a new category introduced pursuant to these amendments).
- No offer of units can be undertaken by an SM REIT unless: (i) the size of the asset proposed to be acquired in a scheme of the SM REIT is at least INR 50 crores; and (ii) the minimum number of unitholders of a scheme of the SM REIT other than the investment manager, its related parties and associates of the SM REIT are not less than 200 investors.
■ Establishment and registration
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- A SM REIT is to be set up as a trust under the Indian Trusts Act, 1882.
- The Regulations permit existing persons, entities, or structures to submit registration applications for migration into a SM REIT within 6 months (from March 8, 2024). Following grant of registration to migrate, the actual migration must be completed within 6 months from receipt of the certificate of registration.
■ Fundraising and listing
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- SM REITs are permitted to launch schemes and each scheme shall be identified by a separate name (shall not be misleading/portray any guaranteed returns to the investors).
- SM REITs must raise funds through an initial offer of scheme units which are mandatorily required to be listed on recognized stock exchanges. Such scheme units must be issued only in dematerialized form.
■ Subscription amount and trading lot
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- Subscription amount is set at INR 10 lakhs with the issue price of each unit fixed at the same amount to maintain a trading lot of INR 10 lakhs.
■ Distribution of net cash flows
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- Investment managers must ensure distribution of not less than 95% of net distributable cash flows from SPVs to SM REIT schemes and 100% of such flows from SM REIT schemes to unit holders.
■ Sponsor/Investment Manager requirements
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- Only one entity shall serve as both sponsor and investment manager with a minimum net worth requirement of INR 20 crores.
- The investment manager/sponsor must possess at least two years’ experience in real estate industry and/or fund management or employ two key managerial personnel with five years’ experience each.
■ Undertaking leverage for funding
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- The total borrowings and deferred payments, net of cash and cash equivalents at the scheme level, must not surpass 49% of the scheme assets’ value.
- If the total borrowings and deferred payments, net of cash and cash equivalents at the scheme level exceed 25% of the scheme assets’ value, further borrowings necessitate obtaining a credit rating and the approval of unit holders.
■ Investment conditions
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- Schemes of SM REITs shall not be permitted to invest in under-construction or non-revenue generating real estate assets.
- SPVs shall directly and solely own all assets that are acquired or proposed to be acquired by a scheme and shall not be permitted to lend to any entity.
■ Asset valuation
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- Mandatory comprehensive annual valuation of scheme assets is required to be undertaken by a valuer with reports submitted to the investment manager within two months from the end of the financial year.