Fractional ownership and investment platform Alt (formerly Property Share) plans to get small and medium real estate investment trusts (SM REITs) worth around Rs 20,000 crore over the next few years, its co-founder Kunal Moktan said in a recent interaction with Moneycontrol. Alt has floated both of India's first two SM REITs, Propshare Platina and Propshare Titania, located in Bengaluru and Mumbai respectively.
The two schemes are together worth around Rs 750 crore. According to Securities and Exchange Board of India (SEBI) regulations, the value of a single asset being monetised under a SM REIT scheme cannot exceed Rs 500 crore, with a minimum investment of Rs 10 lakh.
"There is a very high demand for direct real estate investing into a high yield product because in an SM REIT, yield is 9% versus a REIT which is 5.5% today... That is something that has worked for investors. And I feel like if there is enough supply, you can definitely do more of these schemes. Our own plan is to get to about Rs 20,000 crores of SM REITs in the next three to four years, which is 40 odd properties," Moktan said, during the interaction.
He added that the firm, backed by private equity players Westbridge Capital and Lightspeed Venture Partners, has started talks for the launch of the third SM REIT scheme. Moktan said that while the company is evaluating retail assets as an investment opportunity in the future, the third scheme is also expected to be an office SM REIT, similar to its first two schemes.
SM REITs, which evolved from fractional ownership of income-earning real estate, has long been termed to be the next big thing in commercial real estate, and an effective way to monetise small real estate holdings, including strata-owned assets owned by individual landlords.
However, despite SEBI handing out six perpetual SM REIT licences, only Alt (Property Share) has been able to bring SM REITs to the market. One firm, Strata (now Everstrat), also surrendered its licence earlier this year, after it ran into regulatory issues surrounding a property it funded in Tamil Nadu.
According to a report by property consultants CBRE, despite the slow adoption of SM REITs, the segment remains attractive for investors. Around 500 million sq ft of space across asset classes such as offices, retail, and warehouses, can be monetised through SM REITs, the CBRE report showed, with asset values touching around $75 billion.
Moktan, one of the founders of private equity giant Blackstone's real estate funds in India, said that the relative sluggishness in new SM REITs coming to the market is more to do with the stricter governance standards, compared to fractionally owned platforms, which were often marred by mis-selling.
"The sector is regulated. There was a lot of mis-selling happening in the earlier fractional ownership platform, which is totally unregulated. And a lot of capital is being raised to deploy with a lot of of irresponsible disclosures and corporate governance issues and returns which were not really vetted by an auditor," he said.
Moktan added, "Once the sector got regulated, all of these practices became regulated in the same manner as REITs. So you have to now have an independent board. You have to have like full-fledged corporate governance policies in your trust. You need to audit every figure coming out of your draft red herring prospectus. So it's not easy to mis-sell these assets".
The lack of capitalisation in the fractional ownership space was also a major factor that turned investors off towards the sector, as returns were frequently delayed due to insolvent and errant landlords. Moktan said that new-age SM REITs are trying to assuage such concerns by tying up with major investors to buy assets, and are also deploying their own capital in each SM REIT scheme. In its two schemes, Moktan said that Alt has deployed around Rs 42 crore in capital.
Moktan, contrary to market concerns about a relative lack of supply in Grade-A office supply, said that enough supply is coming into the market, even as developers remain on the conservative side towards the announcement of new office assets.
"I feel like there is enough supply that is coming in the market. You don't want too much supply because then rents can start getting affected. And in India, developers are a little conservative when it comes to commercial office supply because compared to residential, which you can launch and start monetising immediately by selling units. You have to first buy the land, get a construction loan, construct for three years, then you have to wait for a year to lease it and on the fourth year onwards is when you start getting some cash flow," he said.
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