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.
SM REITs, or Small and Medium Real Estate Investment Trusts, are regulated by SEBI and provide an opportunity to invest in real estate without directly owning properties. SM REITs allow investors to focus on specific income-generating properties with a tailored approach that offers investors greater customisation and control over their real estate investments.
While SM REITs open up new investment opportunities in commercial real estate, thorough due diligence & careful evaluation is crucial before adding them into the portfolio
Investors need to carefully examine the following 2 key areas - investment manager (IM) and the underlying asset.
Investment Manager:
Investment Manager plays a crucial role in ensuring the success of an SM REIT. Investors need to evaluate the IM’s historical track record in managing real estate assets along with the returns delivered. Additionally, a well-managed SM REIT follows industry best practices. Strong governance practices by theIM should be preferred, to ensure transparency and investor protection. One should also evaluate their underwriting standards. A good IM follows strict underwriting criteria when selecting properties, ensuring only high-quality assets enter the portfolio. Lastly, the IM’s asset management capabilities should be assessed. A skilled Investment Manager enhances property value, ensures high occupancy rates, and maintains strong relationships with Grade A tenants.
Underlying Asset:
The asset itself is the core revenue driver of any SM REIT. Here are the key factors to evaluate in the underlying asset.
Location
Investors should choose assets in prime locations within major cities, with good connectivity and infrastructure. The location should have high occupancy rates, indicating strong demand among prospective tenants.
Demand-supply dynamics
If new properties exceed demand, vacancy rates rise, and rental prices go down. This shift gives tenants the bargaining power to renegotiate lower rents.
Asset Quality
The best quality tenants occupy the best quality properties. One should look for Grade A buildings with premium amenities, IGBC or LEED certification, and strong developers.
Valuation and Rental yield
Investors should evaluate the property’s capital appreciation potential and projected rental yield. A good SM REIT offers consistent income and long-term value growth.
Lease Structure
When evaluating the lease structure, investors should look for properties with longer lease tenures of three to five years and a sufficiently long tenant lock-in period. This reduces rental default risk and ensures stable income. If tenants handle their own fit-outs, they’re less likely to vacate, reducing tenant turnover.
Tenant quality
Grade A tenants, such as Fortune 1000 companies and top Indian firms, are more financially stable and likely to make timely rent payments.
Type of property
SM REITs invest in various property types, including office spaces, retail malls, and hospitality assets. Each type has different economic drivers. For example, offices depend on business growth, while retail properties thrive in high foot-traffic locations. Investors should choose assets that align with market trends and their investment strategy.
Conclusion
SM REITs offer a compelling opportunity for investors seeking to invest in rent generating commercial assets, particularly for those who want to choose the assets and micro-markets they invest in.
By carefully evaluating the Investment Manager, Asset Quality, Lease Structure, and Tenant Profile, you can select SM REITs that align with your investment goals & risk profile.