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The Indian fractional ownership market is currently estimated at around $500 million and is expected to grow 10 times in the next five years to surpass $5 billion of Asset Under Management (AUM) by 2030, according to an analysis by JLL and Propshare.
The analysis examined Grade A office assets across the top seven (Mumbai, Delhi NCR, Kolkata, Chennai, Bengaluru, Pune, and Hyderabad) markets of India shedding light on the potential size and expected growth trajectory of the market.
Traditionally, real estate investment has required a substantial amount of capital. Given high capital requirements and lack of liquidity, investing, especially in commercial real estate, was limited to institutional investors or individuals with significant financial resources. However, the emergence of REITs and Fractional Ownership Platforms (FOPs) have transformed the real estate investment landscape.
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What is fractional ownership?
Fractional ownership, as the name suggests, empowers investors to own a fraction or share of a property, effectively lowering the entry barrier and enabling a diverse range of investors to participate.
Fractional Ownership Platforms act as facilitators, streamlining the fractional ownership process. They provide a formal channel that enables retail investors to tap into primarily pre-leased commercial real estate including office spaces, warehouses, or even shopping malls (with office spaces currently dominating the market), at a fraction of the total cost.
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The cost of acquisition is split among several investors, who invest in securities issued by a Special Purpose Vehicle (SPV) established by the FOP. The investors earn returns in the form of rentals as well as long-term value appreciation of the property, with distributions made post deduction of management fees and other maintenance expenses.
To formalize the nascent fractional ownership space, the Securities and Exchange Board of India (SEBI) has the Small and Medium Real Estate Investment Trusts (SM REITs). Amendments to the REIT Regulations 2014 enable the formation of SM REITs, addressing concerns regarding regulatory oversight in FOPs.
“The current fractional ownership market is estimated at around $500 million based on the value of assets under management. However, our analysis reveals significant prospects for growth. More than 328 million sq. ft of grade A office assets in the top seven cities of India, valued at around $ 48 billion are MSM REIT-worthy. The REIT market in India grew from around ₹0.3 trillion to around ₹1.3 trillion in Gross Asset Value (GAV) within a span of five years,” said Samantak Das, Chief Economist and Head of Research and REIS, India, JLL.
As the regulatory framework falls into place and FOPs overcome initial implementation obstacles, we expect the MSME REIT market to experience an even more accelerated pace of growth, he said.
Key aspects of the SM REITs regulations
The regulations address key aspects to safeguard investor interests, and to ensure organized growth of the market. First, it requires the investment manager responsible for setting up an SM REIT to have a net worth of at least ₹20 crore and at least two years’ experience in the real estate industry or real estate fund management.
Also, in a scheme of the SM REIT scheme which has opted not to undertake leverage, the investment manager shall always hold at least 5% of the total outstanding units during the first three years. The minimum holding increases to 15% in the case of leveraged schemes.
Second, SM REIT schemes are not allowed to invest in under-construction or non-revenue generating real estate assets. At least 95% of the value of the schemes’ assets must be invested in completed and revenue generating properties and the remaining 5% can be invested in ‘unencumbered’ liquid assets.
Third, the size of the asset to be acquired in a SM REIT scheme should be at least ₹50 crore and less than ₹500 crore with units to be issued to a minimum of 200 investors.
The SM REIT regulations lower entry barriers and have the potential to bring many income-generating small and medium real estate assets under the purview of REITs, providing a new funding avenue for them to raise capital. Additionally, it is expected to act as a catalyst in enhancing transparency and market efficiency, thereby boosting the participation of domestic as well as foreign retail investors and increasing liquidity in the Indian real estate market.
“With MSME REIT regulations, SEBI is now formally bringing this growing market into the regulatory ambit, which should lead to significant growth in this asset class while at the same time ensuring investors get the benefits that come with regulation – uniformity, fairness, transparency, and redressal mechanisms,” said Kunal Moktan, CEO, PropShare.
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