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Demystifying SM REITs (Small and Medium Real Estate Investment Trusts)

13 Mar 2024 - Tushar
Reading time about 5 minutes

The Indian real estate market is vast and lucrative, but traditionally, direct investment has been limited to high-net-worth individuals due to the high capital required. However, a revolutionary change is here.

Demystifying SM REITs

Small and Medium Real Estate Investment Trusts (SM REITs)

Introduced by SEBI in March 2024, SM REITs are poised to democratize real estate investment, making it accessible to a broader range of investors like you. This article will guide you through the world of SM REITs, explaining how they can transform your asset allocation and financial planning strategies.

What are SM REITs and How Do They Work?

Imagine co-owning income-generating commercial or residential properties with hundreds of investors. That’s the essence of SM REITs. These trusts pool funds (between Rs. 50 crore and Rs. 500 crore) from a minimum of 200 investors. The collected funds are then used to acquire pre-leased, revenue-generating real estate assets. Investors in turn receive a portion of the rental income produced by these properties.

Think of SM REITs as bridges connecting investors to the real estate market. You gain exposure to high-value properties without the hassle of direct ownership (think managing tenants, repairs, and property taxes). Plus, the minimum investment amount of ₹10 lakh per investor is lower than current norms where fractional ownership platforms require ₹25 lakh, making it an attractive option for individual investors looking to diversify their portfolios.

Fractional real estate platforms in India

There are multiple fractional ownership platforms (FOP) came up in recent periods in India such as Strata, hBits, Asset Monk, AurumWiseX (earlier know as myRE Capital). These are tech enabled platforms and offer seamless online investments to investors. The minimum investment on these platforms typically range from ₹25 Lakh to ₹45 Lakhs and offer rental yields of 8-10% and a targeted IRR of 13-16% on the investment.

Strata is backed by Kotak Investment Advisors, Gruhas Proptech, Elevation (SAIF Partners), Mayfield India, Sabre Investments, and Gemba Capital. It primarily focuses on Grade-A commercial real estate. It claims more than 40,000 registered investors on its platform with a total of ₹920 Crore assets under management.

hBits started in 2019 by Shiv Parekh and is a part of RAYCON group. It claims more than 90,000 plus registered investors on its platform with a total of ₹310 Crore assets under management.

Asset Monk also founded in 2019 with headquarter in Hyderabad. It claims it has investors from 16+ geographies throughtout the world on its platform with a total of ₹350 Crore assets under management.

AurumWiseX which got formed after acquisition of 2.5 year old MYRE Capital by Aurum PropTech. Aurum PropTech is a listed company with BSE Limited and NSE Limited. It claims more than 60,000 plus registered investors on its platform with a total of ₹400 Crore assets under management.

With the formal notification of SM REIT these FOPs will be able to offer various assets to the retail investors.

How SM REITs Bolster Your Asset Allocation and Financial Planning?

1. Diversification is Key: A well-balanced portfolio spreads risk across different asset classes. Traditionally, real estate has been out of reach for many retail investors. SM REITs bridge this gap, allowing you to include income-generating real estate in your portfolio alongside stocks, bonds, and other investments. This diversification helps mitigate risk and potentially improve your overall return on investment.

2. Passive Income Stream: SM REITs are designed to distribute a significant portion (around 90%) of their rental income to investors. This translates to a regular stream of passive income, which can be a valuable tool for financial planning. You can use this income to supplement your current income, invest further, or build your retirement nest egg.

3. Liquidity and Flexibility: Unlike direct real estate ownership, SM REITs offer greater liquidity. Since the units are traded on stock exchanges, you can easily buy and sell them, providing flexibility in managing your portfolio. While the existing Fractional ownership assets may not get listed immediately, this offers great option for investors to invest in to these opportunities.

4. Professional Management: SM REITs are managed by experienced professionals who handle property selection, tenant management, and overall operations. This frees you from the complexities of direct real estate ownership, allowing you to focus on your core financial goals.

Investing in SM REITs: A Few Cautions

While SM REITs offer exciting possibilities, it’s crucial to approach them with a balanced perspective. Here are some things to keep in mind:

  • Market Fluctuations: Like any investment, SM REITs are subject to market fluctuations. Rental income and property values may fluctuate, impacting your returns.

  • New Regulatory Framework: SM REITs are a new investment vehicle. While SEBI regulations are in place, there’s a limited track record to assess long-term performance.

  • Dependence on Underlying Assets: The success of SM REITs hinges on the performance of the underlying real estate assets. Careful due diligence on the properties held by the SM REIT is essential.

Conclusion

SM REITs hold immense potential to transform the Indian real estate investment landscape. By offering diversification, passive income, liquidity, and professional management, they can be a valuable addition to your asset allocation and financial planning strategies. However, a cautious and informed approach is key. Consult a qualified financial advisor to understand SM REITs in the context of your overall financial goals and risk tolerance.

Ready to explore the possibilities of SM REITs?

Do your research, consult a financial advisor, and unlock the power of real estate within your investment portfolio.