Small and Medium Real Estate Investment Trusts: An Overview

Introduction

A Real Estate Investment Trust (“REIT”) is an investment vehicle that owns, operates, or finances income-generating real estate assets, which involves pooling of capital from multiple investors to invest in a diversified portfolio of real estate assets. [1] These assets range from traditional properties like office buildings, apartment complexes, and shopping malls to specialized assets such as data centres, cell towers, infrastructure, etc. The income derived from these assets is then distributed to shareholders as dividends.

REITs in India

In India, REITs are governed by the Securities Exchange Board of India ("SEBI”) under the SEBI (Real Estate Investment Trusts) Regulations, 2014 (“REIT Regulations”) as amended from time to time, read with SEBI circulars. REIT regulations define REIT as a person [2] “that pools rupees fifty crores or more for the purpose of issuing units [3] to at least two hundred investors so as to acquire and manage real estate asset(s) or property(ies) that would entitle such investors to receive the income generated therefrom without giving them the day - to - day control over the management and operation of such real estate asset(s) or property(ies)”. [4]

SM REITs in India

REITs in India are classified as (i) Small and Medium REITs (“SM REITs") or (ii) REITs (“Conventional REITs”). SM REITs pool investors’ money to acquire and manage investments in small to medium-sized real estate assets [5][6] , i.e., assets falling within the range of INR 50 crores to INR 500 crores, whereas Conventional REIT pools investors’ money to acquire and manage investments on large-scale real estate assets above the range of INR 500 crores.

SM REITs involve each of the following distinct and independent roles:

(i) An investment manager (a) sets up an SM REIT, (b) manages its assets and investments, and (c) oversees its operational activities;

(ii) A trustee holds the assets in SM REIT for unit holders, ensuring regulatory compliance;

(iii) A special purpose vehicle (“SPV”) to hold the assets of the SM REIT is to be established; [7]

(iv) The unit holders in the SM REIT, which can include Indian and foreign investors. [8] A single unit holder can hold not more than 25% of the total units issued by the SM REIT scheme; [9]

(v) The SM REIT must ensure that all parties involved are fit and proper persons, as per the criteria set out under the REIT Regulations.

Requirements for the formation of REIT in India

The investment manager must register the SM REIT with SEBI. It must be structured as a trust through a duly stamped and registered trust deed. Upon obtaining a certificate of registration from SEBI, the SM REIT can operate legally in India. However, under the REIT Regulations there is a requirement to make an initial offer of a scheme within 3 years from the date of registration, failing which the SM REIT will have to surrender its certificate of registration.

Key features of SM REIT

The key features of SM REIT inter alia include:

(i) It must have a minimum of 200 unitholders;

(ii) 95% of the scheme’s assets must be invested in completed, revenue-generating properties, with the remainder in unencumbered liquid assets;

(iii) The total borrowing shall not exceed 49% of the value of the scheme assets;

(iv) Minimum price of each unit of the scheme shall be ten lakhs; and

(v) 100% of the net distributable cash flows of the scheme must be distributed to the unit holders.

Conclusion

Owing to the structure of SM REITs, which inherently focuses on smaller-scale projects, ample investment opportunities are created in a wider range of real estate assets. As the SM REIT market is gaining prominence, it has the potential to significantly contribute to the growth and development of the Indian real estate sector, making it a whole new investment asset class for investors interested in the real estate sector.

References

[1] Real Estate Investment Trusts: Understanding Definition and Basics, Enrichest, https://enrichest.com/en/blog/real-estate-investment-trusts-understanding-definition-and- basics (last visited February 28, 2025).

[2] Section 3 (42) of the General Clauses Act 1847 defines a person to include any company, association, or body of individuals, whether incorporated or not.

[3] Unit means beneficial interest of a REIT as per Regulation 2(1)(zx), SEBI (Real Estate Investment Trusts) Regulations, 2014.

[4] Regulation 2(1)(zm), SEBI (Real Estate Investment Trusts) Regulations, 2014.

[5] Regulation 26(H)(c), SEBI (Real Estate Investment Trusts) Regulations, 2014.

[6] Regulation 26(P)(2), SEBI (Real Estate Investment Trusts) Regulations, 2014.

[7] Regulation 26(H)(f), SEBI (Real Estate Investment Trusts) Regulations, 2014.

[8] Regulation 26(U)(1), SEBI (Real Estate Investment Trusts) Regulations, 2014.

[9] Regulation 26(ZD)(5), SEBI (Real Estate Investment Trusts) Regulations, 2014.