How to evaluate the right SM REIT to invest in? | Property Share

Real estate investment trusts (REITs) have become a popular investment option for individuals seeking exposure to the commercial real estate market. But with the introduction of Small and Medium REITS (SM REITs) in India, investors now have a more granular approach to investing in this asset class. Unlike traditional REITs that pool funds to invest in a diversified portfolio of properties, SM REITs allow investors to target specific income-generating real estate assets. This granular approach can be appealing to investors seeking greater control over their real estate investments, similar to owning assets directly.

The Rise of SM REITs in India

The Securities and Exchange Board of India (SEBI) introduced a consultation paper for SM REITs in 2023, which was followed by issuance of the final regulations in March 2024, opening doors for a wider range of investors to participate in the commercial real estate market. This targeted access to specific assets comes at a much lower minimum investment amount (10 lakhs) as compared to direct investments (which typically start from around 20-30 crores), making it more accessible to potential investors.

Last week, Property Share (www.propertyshare.in) became the first fractional ownership platform (FOP) to receive the Small and Medium Real Estate Investment Trust (SM REIT) license from SEBI under the name of Property Share Investment Trust (PSIT). Property
Share will become the investment manager to PSIT.

Factors to Consider When Evaluating SM REITs

While SM REITs open up new investment opportunities, it is important for investors to exercise diligence about the underlying asset before incorporating them into one’s investment portfolio. Some of the key parameters are shared below:

• Location: It is arguably the most important factor in any real estate investment. Prime locations in major cities with good connectivity and infrastructure are generally preferred for commercial assets. Moreover, the location should have high occupancy rates, which indicates strong demand among prospective tenants, in case a tenant vacates its premises.
• Demand/supply dynamics: It is important to understand the expected demand and upcoming supply in the location. When compared to the demand, if a micro-market sees a much larger upcoming supply, it pushes the vacancy higher, which puts a significantly downward pressure on the rentals as it gives the bargaining power to the tenants to renegotiate the rents. This data is published regularly by research teams of large IPCs (International Property Consultants) like JLL, CBRE and Knight Frank which can serve as a guide to investors.
• Asset Quality: The asset quality is extremely important since best quality tenants typically occupy the best quality assets. Grade A properties have impressive double/triple heighted lobbies, quality amenities, LEED or IGBC certification and are built by Grade A developers. In addition, an investor should physically visit the asset if possible in order to ascertain both the quality of the asset as well as the location.
• Tenant Quality: Grade A tenants, like Fortune 1000 or Indian top 100 companies, are always preferred as they make significant investments on their office space (including fit-outs, customised layouts etc), which enhance stickiness. Also, multinational tenants ensure that rental payouts are made on time and are hence, quite reliable.
• Lease structure: In a typical commercial lease, the tenant has lock-in for only a small duration of the lease (3-5 years), while the landlord is ‘locked-in’ for the entire lease period (5-9 years). During the lock-in period, the party which is ‘locked-in’ can’t terminate the contract. Investors should look for SM REITs in which the remaining lock-in period is at least 2-3 years or where the residual lease tenure is medium to long term (5-9 years).
• Property Type: SM REITs can invest in various property types like office, retail, hospitality etc. Investors should understand the economic drivers behind each of the asset classes. E.g. While the outsourcing boom has been one of the key drivers for the office demand in India over the past decade or so, malls and high street retail is primarily driven by the growth in domestic consumption.
• Management Expertise: A strong and experienced management team is essential for the success of any SM REIT. Investors should research the team's pedigree and the historical track record of investing and exiting assets. A robust team with demonstrated capability in investments and asset management augurs well for the success of the SM REIT.

SM REITs offer a compelling opportunity for investors seeking to invest in rent generating commercial assets, particularly for those investors who want to choose the assets and micro-markets they invest in. By carefully evaluating the factors mentioned above, investors can select SM REITs that align with their investment goals and risk profile.

This article was also published on Moneycontrol.com on 13^Th August, 2024 (https://www.moneycontrol.com/news/brand-connect/how-to-evaluate-the-right-sm-reit-to-invest-in-12794162.html)