India’s first small and medium REIT faces resistance from existing REITs

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India’s first small and medium REIT faces resistance from existing REITs

PropShares, a fractional real estate platform, recently became the first player to receive an SM (small and medium) Reit license from SEBI. SM Reits are real estate investment trusts with an asset base of over 10 billion m… 50 crores and more Rs 500 crore

However, existing investors of PropShares rejected the migration to SM REIT status. Mails sent by the platform indicate that the ‘no’ vote may have been due to high upfront costs, including 6-6.5% stamp duty.

According to PropShares, the high cost is a result of SEBI regulations that do not allow co-ownership of the property by SM REIT. The REIT must own 100% of the property and co-ownership is with PropShares’ existing entities


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“As per question #8 in the FAQs shared by Sebi, as per Reit regulations, the SPV must directly and fully own all the assets that are acquired or proposed to be acquired by the scheme of SM Reit of which the SPV is a wholly-owned subsidiary. Hence, multiple SPVs cannot jointly own the same asset,” said Hashim Khan, co-founder of PropShares. However, some experts opined otherwise.

Opinion of experts

“I don’t know if enough efforts were made to convince investors,” said an industry expert who asked not to be named.

Ajay Roti, founder, Tax Compass, said, “If the migration is structured correctly, I don’t think the cost should be that high. An ordinary share swap from an SPV to units of an SM REIT/scheme does not attract stamp duty or income tax implications. You can also cut costs by choosing a competitively priced merchant banker, as there is no need to find new investors to migrate the assets. Ultimately, it is all about intent – ​​a platform that is serious about the migration will make it happen.”

PropShares has assets under management or AUM of around Rs 1,300 crore. A portion of this AUM is managed through Alternative Investment Funds or AIFs.

Other major players in the sector include Strata and Hbits. Strata has applied for the SM Reit licence, while Hbits is also planning to apply for the same.

All applicants must submit a migration plan to SEBI for existing investors on the platform. Players who fall outside the rules risk enforcement action for running an unlicensed exchange or collecting funds in violation of collective investment scheme or CIS rules.

Another reason for the industry’s hesitation is Sebi’s rule that SM REITs can only invest in ready and revenue-generating properties. This reduces the risk exposure and, therefore, the returns that the platform can target.

Mainstream Reits also have the same requirement and typically have a yield of 6-7%. However, some players have found alternative solutions. For example, Strata Bank plans to invest in such projects through loans or bonds.

The platform will enter into ‘forward-purchase’ agreements to transfer the projects to SM REIT upon completion. For this, it has partnered with banks like Kotak Mahindra and UB (a fixed-income platform).

Unlike mainstream Reits, which can only hold commercial properties, SM Reits can hold any type of property except vacant land, opening the way for residential projects as well.

Also read: Large-caps and Reits: A makeover at India’s biggest investment adviser

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“India’s First SME REIT Faces Resistance from Existing Players”
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PropShares, a fractional real estate platform, has made history by becoming the first player to receive an SM (small and medium) Reit license from SEBI. SM Reits are real estate investment trusts with an asset base of over 10 billion rupees and more than 500 crore rupees.

However, existing investors of PropShares rejected the migration to SM REIT status. According to emails sent by the platform, the “no” vote may have been due to high upfront costs, including 6-6.5% stamp duty.

PropShares claims that the high cost is a result of SEBI regulations that do not allow co-ownership of the property by SM REIT. The REIT must own 100% of the property, and co-ownership is with PropShares’ existing entities.

View full image

“As per question #8 in the FAQs shared by Sebi, as per Reit regulations, the SPV must directly and fully own all the assets that are acquired or proposed to be acquired by the scheme of SM Reit of which the SPV is a wholly-owned subsidiary. Hence, multiple SPVs cannot jointly own the same asset,” said Hashim Khan, co-founder of PropShares.

Opinion of experts

“I don’t know if enough efforts were made to convince investors,” said an industry expert who asked not to be named.

Ajay Roti, founder, Tax Compass, said, “If the migration is structured correctly, I don’t think the cost should be that high. An ordinary share swap from an SPV to units of an SM REIT/scheme does not attract stamp duty or income tax implications. You can also cut costs by choosing a competitively priced merchant banker, as there is no need to find new investors to migrate the assets. Ultimately, it is all about intent – ​​a platform that is serious about the migration will make it happen.”

PropShares has assets under management or AUM of around 1,300 crore rupees. A portion of this AUM is managed through Alternative Investment Funds or AIFs.

Other major players in the sector include Strata and Hbits. Strata has applied for the SM Reit licence, while Hbits is also planning to apply for the same.

All applicants must submit a migration plan to SEBI for existing investors on the platform. Players who fall outside the rules risk enforcement action for running an unlicensed exchange or collecting funds in violation of collective investment scheme or CIS rules.

Another reason for the industry’s hesitation is Sebi’s rule that SM REITs can only invest in ready and revenue-generating properties. This reduces the risk exposure and, therefore, the returns that the platform can target.

Mainstream Reits also have the same requirement and typically have a yield of 6-7%. However, some players have found alternative solutions. For example, Strata Bank plans to invest in such projects through loans or bonds.

The platform will enter into ‘forward-purchase’ agreements to transfer the projects to SM REIT upon completion. For this, it has partnered with banks like Kotak Mahindra and UB (a fixed-income platform).

Unlike mainstream Reits, which can only hold commercial properties, SM Reits can hold any type of property except vacant land, opening the way for residential projects as well.

Also read: Large-caps and Reits: A makeover at India’s biggest investment adviser

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