Real Estate Investment Trusts (REITs) and Small REITs (Sm REITs) in India

2/6/202513 min read

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Real Estate Investment Trusts (REITs) have emerged as a popular investment vehicle in India, offering individuals a way to invest in large-scale, income-producing real estate assets without the burdens of direct property ownership. The Securities and Exchange Board of India (SEBI) has been instrumental in fostering the growth of REITs in India1. In recent years, SEBI has introduced new regulations and policies to further develop the REIT market, including the introduction of Small REITs (Sm REITs) to cater to smaller investors and properties. This article provides a comprehensive overview of REITs and Sm REITs in India, covering their features, benefits, risks, SEBI's involvement, recent news and updates, and the concept of fractional ownership.

News and Updates on REITs and Sm REITs

Strata Secures SEBI License for Sm REIT: Strata, a commercial real estate investment platform, has received the official license from SEBI for its Sm REIT, named Strata SM REIT. The company aims to launch up to six Sm REIT schemes in FY26, with the goal of eventually launching one scheme every month2.
SEBI to Introduce Self-Regulatory Body for Sm REITs: SEBI is reportedly planning to introduce a dedicated self-regulatory organization (SRO) as the apex body for Sm REITs. This move is driven by the regulator's belief that Sm REITs require separate regulation due to their distinct characteristics compared to traditional REITs3.
PropShare Platina - First Sm REIT IPO: Property Share's inaugural Sm REIT IPO scheme, PropShare Platina, aims to raise INR 353 crore with a unit price band of INR 10-INR 10.5 lakh. The response to this IPO will be a key indicator of the future of Sm REITs in India3.
REPL Receives SEBI's Approval for Sm REIT: REPL (Rudrabhishek Enterprises Limited) has received SEBI's approval for its Sm REIT, further expanding the options available to investors in this emerging asset class1.
EFC REIT Obtains SEBI Registration for SM-REIT Public Issue: EFC (I) Ltd's arm, EFC REIT Pvt Ltd, has obtained SEBI registration for the launch of a Small & Medium Real Estate Investment Trust (SM-REIT) public issue, adding to the growing number of players in the Sm REIT market4.

What are REITs?

A REIT is a company that owns and operates income-producing real estate. REITs pool capital from numerous investors to invest in a diversified portfolio of properties, such as office buildings, shopping malls, hotels, and hospitals. By investing in REITs, individuals can gain exposure to the real estate market without the need to buy, manage, or finance properties themselves5. REITs are similar to mutual funds in that they allow investors to pool their money and invest in a diversified portfolio of assets. However, instead of investing in stocks or bonds, REITs invest in real estate7.

Types of REITs

There are several types of REITs, including:

Equity REITs: These REITs own and operate income-producing real estate, such as office buildings and shopping malls. Their primary source of income is rent7.
Mortgage REITs (mREITs): These REITs provide financing to real estate owners or invest in mortgage-backed securities. Their income comes from the interest earned on these loans7.
Hybrid REITs: These REITs combine the features of equity and mortgage REITs, investing in both properties and mortgages7.

How REITs Work

REITs operate by pooling money from multiple investors to acquire and manage a portfolio of real estate properties. These properties generate revenue through rental income, and any appreciation in property values adds to the trust's overall return. Investors in REITs receive a share of the income generated from these properties in the form of dividends7. In the case of Sm REITs, the funds are transferred to Special Purpose Vehicles (SPVs), which are separate entities that hold the real estate assets11.

Benefits of Investing in REITs

REITs offer several advantages to investors, including:

Real Estate Exposure: REITs provide a way to invest in real estate without the hassle of direct property ownership6.
Regular Income Streams: REITs are required to distribute a significant portion of their income as dividends, providing investors with a steady stream of passive income6.
Diversification: REITs typically invest in a diversified portfolio of properties, reducing investment risk6.
Liquidity: REITs are traded on stock exchanges, making them relatively easy to buy and sell7.
Transparency: REITs are subject to SEBI regulations, ensuring transparency and investor protection7.
Payout Mechanism: Unitholders in Sm REITs receive 100% of the net cash flow generated by the scheme on a quarterly basis11.
Tax Benefits of REITs: REITs in India benefit from pass-through taxation, meaning that income generated by the REIT is only taxed at the investor level, not at the REIT level. This helps avoid double taxation. Additionally, dividends distributed by REITs are exempt from tax in the hands of the investor, provided the SPVs under the REIT structure have already paid the applicable corporate tax12.
REITs in Retirement Portfolios: REITs can play a valuable role in retirement portfolios by providing a steady stream of income and diversification benefits. They offer exposure to a diverse mix of properties and can act as a hedge against inflation9.

Risks of Investing in REITs

Like any investment, REITs come with certain risks, such as:

Market Risk: REIT prices can fluctuate based on market conditions and changes in interest rates. For example, if interest rates rise, the value of REITs may decline as investors seek higher returns elsewhere6.
Tax Implications: While REITs offer certain tax benefits, the tax treatment of REIT dividends and capital gains can be complex and may vary depending on individual circumstances. It's essential for investors to understand the tax implications before investing in REITs6.
Management Risk: The performance of a REIT depends on the quality of its management team. Poor management decisions can negatively impact the REIT's returns and overall performance.

What are Small REITs (Sm REITs)?

Sm REITs are a new category of REITs introduced by SEBI in 2024 to cater to smaller investors and properties10. They are designed for investors looking to participate in the growth of small to medium-sized real estate ventures, which offer a higher growth potential than larger, more established REITs10. Sm REITs allow smaller investors to diversify their portfolios with a relatively lower capital requirement, exposing them to a promising, high-growth real estate sector10. By reducing the minimum investment amount and providing a structured investment model, Sm REITs are democratizing real estate investment in India2.

Key Features of Sm REITs

Smaller Asset Size: Sm REITs have a minimum asset size of ₹50 crore and a maximum of ₹500 crore per scheme, compared to the ₹500 crore minimum for traditional REITs. This allows for investment in a wider range of properties, including smaller commercial and residential assets2.
Lower Investment Threshold: The minimum investment in Sm REITs is ₹10 lakh per investor, making them more accessible to retail investors who may not have the capital to invest in traditional REITs11.
Focus on Completed Properties: Sm REITs are required to invest 95% of their assets in completed and revenue-generating properties, ensuring that investors receive a steady stream of income from their investments11.
Higher Distribution Requirement: Sm REITs must distribute 100% of their net distributable cash flows to investors quarterly, providing a more frequent income stream compared to traditional REITs10.
Focused Single-Asset Investment Strategy: Sm REITs often adopt a focused single-asset investment strategy, allowing investors to choose specific cities and micro-markets that align with their investment goals15.
Investor Structure: Sm REITs require a minimum of 200 investors per scheme, ensuring a broader investor base and greater diversification11.
Subscription Amount: The minimum subscription amount per investor in Sm REITs is ₹10 lakh, with additional investments in multiples of ₹10 lakh11.
Leverage and Co-investment: Sm REITs can leverage up to 49% of their assets, and the investment manager is required to co-invest at least 15% of the scheme's value11.

SEBI's Role in the REIT Market

SEBI plays a crucial role in regulating and developing the REIT market in India. Its involvement includes:

Registration and Regulation: SEBI is responsible for registering and regulating REITs and Sm REITs, ensuring they comply with regulations and guidelines. This includes setting standards for asset size, investment strategy, and investor protection2.
Investor Protection: SEBI's regulations aim to protect the interests of investors by ensuring transparency, accountability, and fair practices in the REIT market. This includes requiring regular financial reporting, adherence to corporate governance standards, and providing avenues for investor grievances2.
Market Development: SEBI actively promotes the development of the REIT market in India by introducing new policies and regulations to facilitate growth and attract investment. This includes initiatives to simplify regulations, reduce compliance burdens, and encourage greater participation in the sector18.
Monitoring and Supervision: SEBI monitors the activities of REITs and Sm REITs to ensure compliance with regulations and to address any concerns or issues that may arise. This includes overseeing fundraising activities, asset management practices, and investor relations3.
Net Worth Requirement: SEBI mandates that investment managers of Sm REITs must have a net worth of at least ₹20 crore, ensuring that they have the financial capacity and stability to manage investor funds responsibly11.
Listing Process: Sm REITs follow an IPO-like listing process, with units being listed on recognized stock exchanges with nationwide trading terminals. This provides liquidity and transparency for investors11.
Lock-in Period: SEBI has proposed extending the lock-in period for sponsor units in REITs and InvITs to ensure continued commitment and alignment of interests with unitholders20.
Nomination and Remuneration Committee (NRC): The composition and functioning of the NRC for REITs and InvITs have been aligned with listed companies, promoting better corporate governance and transparency21.

New Policies Related to REITs and Sm REITs

SEBI has been actively involved in developing the REIT market in India. Some of the key policies and regulations related to REITs and Sm REITs include:

Introduction of Sm REITs: The introduction of Sm REITs in 2024 was a significant step towards making real estate investment more accessible to retail investors. This move has opened up new avenues for investment in smaller commercial and residential properties, broadening the scope of the REIT market2.
Regulation of Fractional Ownership: SEBI's regulations for Sm REITs also brought fractional ownership platforms under a structured investment model, enhancing transparency and investor protection. This has provided a regulatory framework for fractional ownership, ensuring greater accountability and compliance2.
Lowering of Minimum Investment: SEBI reduced the minimum investment threshold for Sm REITs to ₹10 lakh, making it easier for smaller investors to participate. This has significantly lowered the barrier to entry for retail investors, allowing them to access a wider range of real estate investment opportunities11.
Standardization of Disclosures: SEBI has proposed standardizing disclosures in scheme offer documents for Sm REITs to promote transparency and ease of doing business. This will make it easier for investors to compare different Sm REIT schemes and make informed investment decisions4.
Simplified Public Issue Processes: SEBI has proposed simplifying public issue processes for Sm REITs to encourage greater participation in the sector. This will streamline the listing process and reduce the regulatory burden for Sm REITs, making it easier for them to raise capital4.
Interest Rate Derivatives: SEBI has proposed allowing REITs and InvITs to use interest rate derivatives for hedging purposes. This will help them mitigate interest rate risk and stabilize cash flows, providing greater certainty for investors20.
Liquid Fund Investments: SEBI has proposed allowing REITs, InvITs, and SM REITs to invest up to 20% of their corpus in liquid funds. This will provide them with greater flexibility in managing liquidity and reduce the impact of short-term market fluctuations20.
Common Infrastructure: SEBI's proposals extend to defining common infrastructure to include facilities like power plants and water treatment systems that serve multiple REIT assets. This will enhance operational efficiency and reduce costs for REITs20.
Quarterly Results: InvITs will be required to disclose their quarterly results, ensuring greater transparency and accountability for investors20.

Restricted Return InvITs

SEBI has proposed a regulatory framework for "restricted return InvITs" to provide infrastructure investors with predictable returns by setting limits on both upside gains and downside protection. This framework is designed to offer stability and attract investors who prefer a more structured investment approach20.

Fractional Ownership in REITs and Sm REITs

Fractional ownership allows multiple investors to jointly own a property, with each owner holding a share or fraction of the property. This concept allows investors to pool their resources and collectively invest in real estate assets that may otherwise be financially out of reach on an individual basis22. Fractional ownership can be facilitated through Special Purpose Vehicles (SPVs), which hold the property on behalf of the investors24.

Fractional ownership in REITs and Sm REITs offers several benefits, including:

Lower Barrier to Entry: Fractional ownership allows investors to access high-value real estate assets with a smaller investment amount. This makes it easier for individuals to diversify their portfolios and gain exposure to the real estate market22.
Diversification: Investors can diversify their real estate portfolios by investing in multiple properties through fractional ownership. This reduces their exposure to any single property or market22.
Reduced Management Burden: REITs and Sm REITs typically handle property management tasks, relieving investors of the responsibilities associated with maintaining and managing properties. This allows investors to enjoy passive income without the hassle of direct property ownership22.
Technological Innovation: Technology is playing an increasingly important role in enhancing fractional ownership platforms (FOPs). Online platforms and digital tools are making it easier for investors to access information, track their investments, and manage their fractional ownership holdings25.
Fractional Ownership and COVID-19: The COVID-19 pandemic has had a mixed impact on rental yields in the context of fractional ownership. While some sectors, such as office space, have experienced challenges, others, such as warehousing and logistics, have seen increased demand23.

Benefits for Developers

Sm REITs can benefit real estate developers by providing a new avenue for monetizing assets. By listing their properties through Sm REITs, developers can unlock capital and reinvest it in new projects, contributing to the growth of the real estate sector25.

Taxation of REITs

REITs in India are subject to a specific tax regime under Chapter XII-FA of the Income-tax Act, 1961. This regime includes provisions for pass-through taxation, dividend tax exemptions, and capital gains tax12.

Long-term capital gains (LTCG) on REIT units are taxed at 12.5% after one year of holding15.
Short-term capital gains (STCG) are taxed at 15% for assets held for less than a year12.

Challenges for REITs in India

Despite their growing popularity, REITs face several challenges in India:

Complex Taxation Rules: The tax treatment of REIT income and capital gains can be complex and may vary depending on individual circumstances. This can be a deterrent for some investors12.
High Effective Tax Rates: Investors in higher tax brackets may experience significant tax burdens on their REIT investments12.
Limited Tax Incentives: Unlike mutual funds, REITs do not qualify for tax-saving benefits under Section 80C of the Income Tax Act12.

Anticipated Trends in REITs

The REIT market in India is expected to continue evolving, with several anticipated trends:

Simplification of Tax Rules: There is a growing demand for clearer and simpler taxation rules for REITs, which could encourage greater investor participation12.
Diversification of REIT Sectors: REITs are expected to expand into new sectors, such as warehousing, data centers, and healthcare facilities, providing investors with more diverse investment opportunities12.
Alignment with Global Standards: Aligning Indian REIT regulations with international standards could attract more foreign investment and further develop the REIT market12.

Strategies for REIT Investment

To optimize your REIT investments, consider the following strategies:

Understand Tax Rules: Carefully evaluate the tax implications of REIT investments and how they impact your net returns and overall portfolio12.
Diversify Investments: Spread your investments across different types of REITs—commercial, retail, and industrial—to achieve a balanced risk profile12.
Stay Updated: Keep yourself informed about changes in tax laws and SEBI regulations to ensure compliance and maximize the benefits of your REIT investments12.

Costs Associated with SM REITs

Setting up and operating an SM REIT involves various costs, including registration fees to SEBI, costs for appointing independent directors, legal and professional fees, and ongoing operating expenses. These costs should be carefully considered by investors before investing in an SM REIT23.

Conclusion

REITs and Sm REITs offer a unique investment opportunity for individuals looking to gain exposure to the real estate market in India. With SEBI's active involvement in regulating and developing the REIT market, investors can benefit from increased transparency, liquidity, and accessibility. The introduction of Sm REITs and the regulation of fractional ownership have further democratized real estate investment, making it easier for smaller investors to participate in this growing sector. As the REIT market continues to evolve, it is expected to play an increasingly important role in India's real estate landscape and contribute to the overall growth of the economy. By providing a platform for investment in income-producing real estate assets, REITs and Sm REITs can channel funds into the real estate sector, supporting infrastructure development and economic growth. While REITs and Sm REITs offer attractive benefits, investors should carefully consider the associated risks and conduct thorough due diligence before investing.

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