Fractional-realty industry welcomes Sebi oversight, but wants a "killer" provision to go

A consultation paper by SEBI said the capital market regulator is looking to bring these platforms under Real Estate Investment Trust (REIT) regulations as Micro, Small and Medium (MSM) REITs.

Much-awaited reform 

“Sebi’s move to regulate the platforms is definitely a welcome move. Ever since we started, this is what we have been waiting for,” said Sudarshan Lodha, co-founder of Strata, one of the larger FOPs operating in India. It has Assets Under Management (AUM) of Rs 704 crore gleaned from1,819 investors, according to Sebi’s consultation paper.

Strata had constant interactions with the market regulator, to give inputs towards oversight of the industry.

“Without this (the regulation), there can be hundreds of companies who can come in because there was no entry barrier. It was just about putting up a website and running a business… if one of these does something bad, then the trust in the entire industry is compromised,” said Lodha.

Shiv Parekh, founder of hBITs, said: “This will help players like us who have already been following these transparency norms.”

“With more trust created (from being regulated) more investors and large distributors, like banks, will come into the industry,” he added.  That’s why Parekh believes that the best suggestions in the consulting paper relate to disclosure norms.

Currently, 70 percent of hBits’ investors are in the 30-50 age group, most of them mid- to senior-level execs, he said. Thirty percent are Non-Resident Indians (NRIs) and 70 percent are based in India.

hBits has managed Rs 140 crore in assets, and with the closing of their next round, that number will go up to Rs 190 crore. It manages 10 commercial properties.

With a more robust regulatory mechanism, Strata’s Lodha believes that retail participation in such real-estate assets will go up. According to him, currently retail participation in the Rs 60,000-crore REIT market is only between 10-15 percent or around Rs 6,000 crore.

“But India buys close to Rs 3 lakh crore of real estate every year… so clearly they (REITs) haven’t caught on the way it should,” he said.

The existing REIT structure limited the number of properties that investors could consider--the minimum asset size is Rs 500 crore. Under the proposed regulation for Micro, Small and Medium (MSM) REITs, the size of the asset to be acquired has to be only above Rs 25 crore and should not exceed Rs 499 crore.

Lodha also pointed out that there will be more flexibility for investors to pick and choose properties they want to invest in. According to the consultation paper, an MSM REIT can set up separate schemes for owning different properties through wholly owned SPVs.

Problem areas 

One of clauses that the industry wants reconsidered is the requirement that the sponsor hold a minimum of 15 percent of an MSM REIT’s units for three years from the date of listing.

“Honestly, that is an industry-killer provision,” said Strata’s Lodha, adding that he was hoping for the regulator to reconsider it.

Lodha reasoned that the provision in current structure for larger REITs made sense because they are largely developers looking to exit their realty by selling it forward to the SPV, and making a margin of 30-40 percent in that sale.

But FOPs function more like a broker or an asset manager, buying assets on investors’ behalf and managing them. They don’t function like a fund manager who makes the decisions on buying and selling assets, but as an asset manager who buys and sells as the investors tell them to do.

“With this (15 percent) provision, the market will become an institutional play again with platforms like ours unable to sustain,” Lodha said.

For investment managers to have skin in the game, the net worth criteria given in the consulting paper could be raised from the present Rs 10 crore held in unencumbered liquid assets. Lodha said the net worth could be raised to Rs 50 crore with Rs 20 crore in liquid assets.

hBits’ Parekh too believe that the 15-percent holding should be reconsidered. “There will be fewer units for the investors and this will reduce market participation,” he said.

Also read: Sebi proposes special rights to certain unitholders of REITs and InvITs

Another provision Lodha would like the market regulator to reconsider is the prohibition on investing in under-construction or non-rent generating properties.

He believes that this takes away the opportunity in built-to-suit properties, which are under construction but a tenant has been identified for it. “That allows investors to come in early (into the project, at a lower price),” said Lodha.

To ensure that more mature investors participate in the industry, he suggested that the minimum subscription size be raised from Rs 10 lakh suggested in the consulting paper to Rs 25 lakh and then this can be reduced to Rs 10 lakh as the industry matures.

hBits’ minimum investment threshold is already Rs 25 lakh and 80 percent of its investors have put in this amount.

When the market grows, participants may come up against another hurdle, according to Aditya Sankar, founding partner of Centricity WealthTech.

Shankar said that the number of properties that may be appealing, because of proper documentation or because of builder credentials, has to go up. Currently, such properties are limited and have every platform chasing them.

“Almost all (of the FOPs) are trying to get the same kind of property in the same locality. Unless the pie (of attractive real-estate) grows, the market (for this asset class) will not grow,” he said.