SM REITs can help investors bet on high-value assets

The Securities and Exchange Board of India (Sebi) recently introduced amendments to the REIT Regulations of 2014, outlining provisions for the establishment of small and medium real-estate investment trusts, known as SM REITs or micro REITs. The move aims to regulate fractional ownership of both commercial and residential properties as well as protect investor interests. But what are SM REITs and how do they differ from conventional REITs?
ET finds out more:

What are SM REITs?
SM REITs are specialised real estate investment trusts that differ from conventional REITs in their scale and focus. While traditional REITs primarily invest in large-scale commercial properties, such as office buildings and shopping malls, SM REITs concentrate on smaller and medium-sized properties with lower value. This distinction is reflected in their market capitalisation, asset size and portfolio composition. Despite smaller scale, SM REITs maintain diversified portfolios, spreading risk across different property types within the real estate market.


What key regulations has Sebi set for SM REITs?
The minimum subscription size for SM REIT scheme units will be ?10 lakh and treated as one unit. The micro REITs will be able to list with an asset value of at least Rs 50 crore and a maximum of Rs 500 crore. SM REITs can leverage up to 49% of the scheme's assets. The investment manager must hold a minimum of 5% of outstanding units if the REIT is unleveraged and 15% if leveraged. The SM REIT scheme requires a minimum of 200 unit holders, excluding the investment manager, its related parties and associates.

What benefits does it offer to retail investors? What are the risks?
SM REITs offer retail investors an opportunity to diversify their portfolios. Besides, they provide access to relatively high-value assets, reduced management burden, regular income through dividends, access to niche markets and potential capital appreciation. However, risks such as market volatility and burden of regulatory compliance also need to be considered while making an investment.

How do macroeconomic factors impact SM REITs?
Economic factors such as interest rates, inflation and market conditions significantly influence SM REITs. Rising interest rates can increase borrowing costs, impacting profitability, while inflation affects operating expenses. However, real estate is often considered a hedge against inflation, as property values and rental income tend to rise in line with inflation over the long term. Factors like economic growth, employment levels and consumer confidence influence demand for properties. Strong economic growth and favourable market conditions can lead to higher occupancy rates, rental income and property values for SM REITs. Favourable market conditions, including economic growth and consumer confidence, drive demand for real estate properties, benefiting SM REITs.

What has been the global experience of SM REITs?
Smaller-scale REITs catering to niche markets exist worldwide. In the US, alongside large REITs with vast commercial portfolios, smaller ones specialise in sectors like healthcare or regional shopping centres. Similarly, in Canada, Australia and parts of Europe, smaller REITs provide exposure to specialised real estate segments. As emerging markets evolve, smaller REITs are gaining traction, reflecting growing real estate investment opportunities. Overall, the global experience for SM REITs reflects a diverse landscape with opportunities and challenges shaped by local market conditions, regulatory frameworks and investor preferences.