The introduction of regulations is set to enhance investor trust, broadening the embrace of the growing asset category. This effort is expected to offer vital backing to real estate developers, creating an extra opportunity to capitalize on assets and inject essential liquidity into the industry.
While most of the regulations are in line with the draft guidelines that were issued in November, the capital market regulator has introduced a few additional measures related to leverage, minimum subscribers, and higher capital requirement for investment managers of SM-REITs.
“The new regulations are progressive and have the potential to change the income yielding assets market in India. With the stringent governing standards, eligibility criteria and minimum capital requirement of Rs 20 crore for investment manager and 5% commitment in every SM REIT, we hope that this alternate asset class will get robust response from investors,” said Anuranjan Mohnot, MD, Lumos Alternate Investment Advisors.
The minimum subscription size for MSM REIT scheme units will be Rs 10 lakh and treated as one unit. The micro-REITs will be able to list with an asset value of at least Rs 50 crore and maximum of Rs 500 crore. The SM REITs will also be able to create separate schemes for owning realty assets through special purpose vehicles constituted as companies.
“These regulations safeguard the interests of investors and service providers alike. As a holiday home fractional ownership platform, the inclusion of the residential sector along with commercial in this regulation allows us to ensure that investors get easy exits and have complete transparency,” said Saurabh Vohara, founder & CEO, ALYF.According to him, these regulations will help open a new asset class of holiday homes to a wider audience and change the way Indians own and earn from property investments.As per the regulations, the minimum number of unitholders of the scheme of the SM REIT other than the investment manager, its related parties and associates of the SM REIT are expected to be not less than 200 investors.
The regulations allow these micro-REITs to leverage with a cap of up to 49% of the value of the scheme’s assets. It also mandates the investment managers to always hold a minimum 5% of total outstanding units if the SM REIT is not leveraged. In case of leveraged SM REIT, the investment manager is required to hold 15% of units.
The scheme of SM REIT is not allowed to lend to any entity other than its own special purpose vehicle and this SPV is also not permitted to lend to any entity.
The regulation stipulates that funds should be raised only through a book building process of designated stock exchange and listing is mandatory. The funds can be raised from domestic or foreign investors.