SEBI norms for fractional ownership platforms: Future prospects of existing investors, qualifying norms for players major worries

India real estate update: According to industry estimates, these players of fractional ownership properties have raised around Rs 3,500 crore majorly from retail investors in the last two to three years.

With the Securities and Exchange Board of India (SEBI) expected to bring fractional real estate ownership platforms under its jurisdiction, questions have emerged on how many of the existing platforms will qualify under the market regulator's ‘fit and proper criteria’ and where it will leave the existing investors in these assets, experts said.

Currently, these platforms are unregulated entities that are mainly web-based and operate by aggregating funds from investors to buy stakes in pre-leased commercial real estate, typically with a minimum ticket size of Rs 25 lakh. There are few examples of residential or holiday homes concept in fractional ownership model.

While holding these assets, investors receive a fixed payout from the rental income of the properties, which are also expected to witness price appreciation with time, allowing investors to exit at a higher value in the future.

Taking cognizance of the growing popularity of these platforms, last week, the market regulator approved amendments to the SEBI (Real Estate Investment Trusts) Regulations 2014 to create a new regulatory framework for small and medium Real Estate Investment Trusts (REITs), which will hold real assets under the fractional ownership model.

Also read: Small and medium REITs: Sebi launches new framework for fractional ownership of real-estate

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Mehul R Thakkar

Special Correspondent|Moneycontrol

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Greater regulation

Experts, however, said that while it's a welcome move and will in all likelihood add further retail investor participation in this asset class and, in turn, boost liquidity, questions remain on the final shape and form of the regulatory framework and its potential impact on existing platforms. According to industry estimates, these players have raised around Rs 3,500 crore from retail investors in the last two to three years.

"Many questions remain unanswered. For example, the type of investment allowed (rent-generating / non-rent-generating / under construction asset), nature and extent of applicability of the Real Estate Regulation Act (RERA). This besides exemptions and exclusions on provisions of the Companies Act, allowing of foreign investments, existing platforms not fitting into the framework, investor rights, tax framework, possibility of trading, etc," said Vinit Gada, Chartered Accountant and Partner at Swapnesh & Vinit.

As per the proposed norms, these REITs can have an asset value of at least Rs 50 crore, compared to the current minimum asset value of Rs 500 crore for existing REITs. In a way, SEBI has proposed extending the framework of SEBI (REIT) Regulations to bring these platforms under its regulatory ambit to develop this market and protect investors.

Experts say that the extent of protection for retail or small investors will be known once the final regulatory framework is released. According to market sources, the final paper on regulating fractional ownership property is expected to be out in the next few days.

"There will not be a surprise if the framework benefits small and medium developers, investors, and projects. But more clarity is awaited," Gada added.

Emerging asset class

“According to industry estimates, total investments majorly by retail investors in this space stand at around Rs 3,500 crore. This indicates a growing interest in this sector," Aryaman Vir, Chief Executive Officer (CEO), WiseX, told Moneycontrol.

"We anticipate that the introduction of this regulation and reduction in the minimum investment amount will establish standardised practices, ensure checks and balances, protect investor interest, and encourage the democratisation of real estate. This regulatory environment is expected to expand the potential of the overall industry by improving the availability of capital," Vir added.

According to fractional ownership property (FOP) players, the regulatory framework of SEBI will formalise the FOP space, enabling it to become the single avenue for small and medium investors looking to safeguard their incomes.

Also read: MC Explainer: Should you invest in property via the fractional ownership model?

"The move by SEBI holds the potential to create a dual positive impact: formalising fractional ownership as an investment class, thereby attracting a segment of portfolios towards a larger market, and fostering the supply of hospitality assets to meet the escalating demand in the travel and hospitality sectors. The ultimate aim of the FOP space is to become another investment option, such as mutual funds, insurance, etc, in every portfolio," said Saurabh Vohara, founder and CEO, ALYF, an FOP player.