SM REITs: A new way to invest in real estate

SM REIT stands for Small and Medium Real Estate Investment Trusts and they are a subclass within the REIT framework that provides access to individual investors to rent yielding real estate like office buildings, retail malls, hotels, hospitals etc. that are valued between Rs. 50 and 500 crores. Similar to REITs, SM REIT units are also traded on the stock exchange and are fully regulated by the Securities and Exchange Board of India (SEBI).

In March, 2024 SEBI in consultation with players in the market, introduced the SM REIT regulations in order to bring the FOP business within the regulatory ambit through a listed and regulated trust vehicle in the same lines as mainboard REITs. This was a landmark decision by the regulator aimed at fostering the continued growth of FOP platforms while providing investors with the benefits of investing through a regulated framework.

The first SM REIT is likely to be available to the public to subscribe in Q4 2024.

The minimum investment shall be in units of Rs 10 lakh and additional investments would be in multiples of Rs 10 lakhs.

REITs are globally considered to be a safe and transparent way to invest in income generating real estate and SM REITs have a focused single asset investment model that leads to c. 100 to 150 bps higher yield than traditional REITs and better overall risk adjusted returns. In a way, it is like buying the assets that you like in the city and micromarket of your choosing but at much lower thresholds. Since the units are traded on the stock exchange, investors get easy liquidity on their units. The tax treatment for SM REITs is also much more favourable than traditional investment products like fixed deposits.

Capital gains are taxed at 12.5% if held for more than 12 months and at 20% if held for less than 12 months.

An SM REIT will come out with an initial public offering for every new scheme and the process of investing is therefore the same as investing in an IPO. You can subscribe to the listing directly via your demat account and can also purchase units of previously listed SM REIT schemes from the stock exchange.

SM REITs provide two kinds of income - rental income as dividends and capital gain at the time of sale of the asset.

The investment manager selects, acquires, manages and sells the assets for all schemes.

The investment manager usually charges a scheme management fee and a property management fee which varies from one manager to the other. The details of the fee are provided in the offer document and on the website of the investment manager.

An investor can get his/her capital back by either selling his units on the stock market or waiting for the asset to be sold, which is usually between 3-6 years.

There are two risks to investing in an SM REIT - vacancy risk and exit risk. Vacancy risk is the risk that the tenant in the asset will vacate the property prior to the culmination of the tenancy in the future at which point the asset will need to be re-leased, which may lead to a temporary loss of income. Exit risk is the risk that that asset may take a longer period to sell than expected, especially in cyclical market conditions.

The investment manager entity is the one driving investments in all SM REIT schemes. It is therefore very important to analyse the people behind the manager, their backgrounds and investing experience, their previous track record and how well capitalised they are.