Sebi moots regulatory framework for fractional ownership platforms offering real estate

Capital markets watchdog Sebi has floated a consultation paper for regulating all web-based platforms offering fractional ownership of real estate assets to protect small investors. Such fractional ownership of real estate assets is proposed to be brought as Micro, Small and Medium REITs under Sebi's Real Estate Investment Trusts rules.

The proposed regulatory framework would help develop the real estate market, provide investor protection measures and lead to an orderly development of this sector and the market, Sebi said in its consultation paper.

Typically, fractional investment of real estate through fractional ownership platforms (FOPs) is an investing strategy in which the cost of acquisition of real estate is split among several investors, who invest in securities issued by a special purpose vehicle (SPV) established by an FOP. Such SPVs purchase real estate assets. FOPs allow investors to own a certain percentage or fractional share in the real estate asset through the securities issued by the SPVs.

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Some FOPs are operated by real estate agents or brokers (before the property is purchased) and as property managers thereafter. Sebi noted that there has been a mushrooming of web-based platforms offering fractional ownership of real estate assets in the past 2-3 years. These platforms provide investors with an option to invest in buildings and office spaces, including warehouses, shopping centres, conference centres etc. The minimum investment on these FOPs ranges from Rs 10 lakh to Rs 25 lakh. "While an investor decides to invest in such real estate, the lack of standard, uniform selling practices and lack of independent valuation, or diligence of information or materials provided to potential investors could result in investors falling prey to misspelling," Sebi noted.

Accordingly, Sebi has proposed to bring FOPs under regulatory ambit by introducing a chapter under REIT Regulations and labelling these as MSM REITs. MSM REIT should have parties like a trustee, sponsor and investment manager with each such person being a separate and distinct entity. The sponsor and investment manager should have a net worth of at least Rs 20 crore and Rs 10 crore, respectively.

The underlying real estate assets offered on FOPs are similar to the real estate or property defined under the REIT Regulation, Sebi said in its consultation paper on Friday. It has been proposed that any person or entity (including FOPs) which facilitate or has facilitated fractional investment in real estate by any structure whatsoever would be required to register with Sebi for operating as MSM REIT.

MSM REIT should be set up as a trust with the ability to establish separate and distinct scheme/s for owning real estate assets through wholly-owned special purpose vehicles constituted as a company. Globally, such fractional ownership platforms have been in existence since 2015. The Securities and Exchange Board of India (Sebi) has sought comments on these proposals by May 27.

Aryaman Vir, Chief Executive Officer at a real-estate platform Aurum WiseX, believes that the new regulation is an opportunity to enhance the overall investor and stakeholder proposition. But he opines that not allowing the players to take leverage is a limiting provision. "Real estate is an interesting asset class as one can take leverage on it against future cash flows. It is a very important aspect in real estate and should be explored by the regulator in the future as it will significantly help investor returns," he added.