Expanding Horizon of SM REITs

In the wake of growing interest in SM REITs and their enlarging landscape, this alternate asset class of real estate is expected to play a key role in shaping the future of India’s commercial real estate.

According to a recent CBRE report – ‘Navigating the SM REIT Landscape – A Look at Regulations and Implications’, the potential Small and Medium Real Estate Investment Trusts (SM REITs) market size in India is expected to exceed USD 60 bn by 2026. As per CBRE estimates, the potential market for SM REITs in India is over 300 million sq. ft. of completed commercial office space, with an additional 50 mn. sq. ft. expected to be completed by 2026. The total completed office stock in India currently stands at over 800 mn. sq. ft., out of which REIT-listed office inventory is recorded at over 88 mn. sq. ft.

Furthermore, according to the report, Mumbai recorded the highest potential SM REIT-ready completed office stock of 75 mn. sq. ft. as of June’24, with around 10+ mn. sq. ft. of upcoming supply by 2026.  Delhi-NCR recorded a completed SM REIT-ready potential stock of 70+ mn. sq. ft., followed by Bengaluru with 50+ mn. sq. ft. and Hyderabad with 30+ mn. sq. ft.. It is estimated that cumulatively, Delhi-NCR, Bengaluru and Hyderabad could add an additional supply of potential SM REIT-worthy stock of 36 mn. sq. ft. by 2026. Other cities such as Pune, Kolkata, and Chennai recorded 25+ mn sq. ft. of completed supply as of June’24. It is estimated that Pune, Kolkata and Chennai would cumulatively record additional supply of potential SM REIT-worthy stock of 14 mn. sq. ft. over the next two years.

 Potential Scope of SM REITs in India

The introduction of the SM REITs framework represents a significant step forward for India’s fractional ownership landscape. This framework is expected to institutionalise the real estate market by fostering greater transparency and attracting a new set of investors seeking portfolio diversification through real estate exposure. The SM REIT regulations aim to enhance investor confidence through measures such as prohibiting investments in under-construction properties to eliminate project completion risks and mandatory quarterly distribution of net cash flow to unitholders to negate any potential fund diversion.

Building upon the success of traditional REITs and InvITs, which, according to the Reserve Bank of India, have cumulatively accumulated INR 1.3 trillion in asset value in the past four years, SM REITs hold immense promise. They offer the potential to unlock price discovery and exit opportunities for investors in smaller, high-occupancy assets. By pooling such assets, SM REITs can drive improved property upkeep, ESG compliance through potential retrofitting, and an enhanced tenant profile. This could ultimately contribute to a more organised and efficient real estate ecosystem with a stronger asset profile.

Moreover, the Union Budget, 2024-25’s decision to reduce the holding period for determining long-term capital gains on listed business trusts — REITs and InvITs — from 36 to 12 months aligns these instruments with listed equity shares. This tax parity is expected to bolster the appeal of SM REITs as an investment vehicle. Securities and Exchange Board of India (SEBI) this year established a regulatory framework for small and medium real estate investment trusts (SM REITs) through amendments to the SEBI (Real Estate Investment Trusts) Regulations, 2014. This follows the May 2023 consultation paper on Micro, Small, and Medium REITs (MSM REITs).

The new SM REIT regulations provide a clear framework for Fractional Ownership Platforms (FOPs), which are investment vehicles pooling funds to invest in securities issued by special purpose vehicles (SPVs) that acquire real estate assets on a fractional or undivided ownership basis. Primarily targeting pre-leased, income-generating commercial properties, these platforms appeal to high-net-worth individuals (HNIs), non-resident Indians (NRIs), and overseas citizens of India (OCIs). Managed by individual entities, FOPs have been classified by SEBI as a form of collective pooled scheme, necessitating the implementation of the SM REIT regulations to ensure investor protection and market integrity.

According to Anshuman Magazine, Chairman & CEO, India, Southeast Asia , Middle East & Africa , CBRE, by enhancing transparency and offering robust investor protections, SM REITs are set to redefine portfolio diversification. This framework will not only mitigate risks associated with under-construction projects but will also ensure steady returns through mandatory quarterly distributions, making real estate a more accessible and secure investment option for a broader range of investors.

Rami Kaushal , Managing Director, Consulting & valuation Services , India, Middle East & Africa , CBRE, adds that the alignment of SM REITs with recent tax reforms under the Union Budget 2024-25 is a game-changer for the investment landscape. Reducing the holding period for long-term capital gains will make SM REITs more attractive and accessible, driving increased participation and further institutionalizing the market.  

The above analysis pertains to mid-sized (0.1 – 1 million sq. ft.), investment-grade office developments in India’s top 7 cities as of Q2 2024 and excludes institutional projects. Additionally, due to significant variations in development quality, city / micro-market dynamics, the indicated values may differ from actual values.