This explainer series on SM REITs is brought to you by Property Share, where we break down everything you need to know about SM REITs—making real estate investment simple and accessible. Explore the various sections to learn about the fundamentals of SM REITs, their unique benefits and potential risks, how they are different from regular REITs, how to invest and how to evaluate them, along with their taxation norms.
This explainer series is also available in the form of a video.
Real estate is a common asset class for investment, but the operational hassles of property management and the high capital requirement makes it difficult. In such cases, Small and Medium Real Estate Investment Trusts (SM REITs) could present a viable investment alternative.
SM REITs allow you to own a share of income-generating properties without the high capital needed for buying real estate. Investors can enter real estate investments with a lower ticket size of just ₹10 lakh.
What are the advantages of SM REITs?
Investors can earn passive income through regular rental income along with capital appreciation on the property value, ensuring steady returns with lower volatility. Unlike physical properties, SM REITs are traded on the stock exchange, providing enhanced liquidity & accessibility to buy or sell your shares anytime. Regulated by SEBI, SM REITs follow strict compliance, including timely reporting, grievance mechanisms, and transparency measures.
Unlike traditional REITs, where investors put money into a blind pool of assets, SM REITs allow you to choose specific asset-focused schemes based on your goals, hence providing customisation & control. SM REITs also provide a great option for portfolio diversification, where investors can diversify across various types of real estate assets through different schemes, reducing the risk of depending on a single property type.
A minimum of 95% of an SM REIT’s assets must be fully developed and revenue-generating, mitigating the risks from construction delays and vacancies. Additionally, they must be managed by experienced professionals with a net worth of at least ₹20 crore, ensuring high-quality asset management. Investment managers must hold at least 5% of the total outstanding units, ensuring they have skin-in-the-game and align with investor interests.
Risks of Investing in SM REITs
Despite the many advantages of investing in SM REITs, there are some risks as well which the investors should keep in mind.
Tenancy Risk
Since SM REITs own fewer properties, they often rely on a small number of tenants, increasing the risk if a major tenant leaves.To reduce risk, investors should diversify across multiple schemes in different locations.
Liquidity Risk
While listed on stock exchanges, SM REITs may have lower liquidity than traditional REITs due to higher ticket size. Investors should have a 3 to 5 year horizon before investing to reap the benefits fully.
Interest Rate Risk
Rising interest rates can make REITs less attractive, as investors may shift to other fixed-income investments like fixed deposits or government bonds. However, rental yields from SM REITs remain stable since they are based on fixed contractual agreements with tenants.
Conclusion
SM REITs offer a great way to earn passive income and invest in real estate with lower capital. Investing in SM REIT schemes that align with your investment goals and risk profile can help balance the risks & rewards, opening up new investment opportunities in commercial real estate.