Propshare, a fractional real estate platform, recently became the first player to obtain a SM (small and medium) REIT license from Sebi. SM REITs are real estate investment trusts with an asset base between ₹50 crores and ₹500 crores.
However, Propshare’s existing investors rejected the migration to SM Reit status. High upfront costs, including a 6-6.5% stamp duty, may have led to the vote against, as indicated by an email sent by the platform.
According to Propshare, the high costs are a result of Sebi rules that do not allow co-ownership of the property by an SM Reit. The Reit must own 100% of the property and Propshare’s existing entities have co-ownership.
“As per question no. 8 of the FAQs shared by Sebi, REIT regulations require that the SPV should be the direct and exclusive owner of all the assets being acquired or proposed to be acquired through the scheme of SM Reit, of which the SPV is the wholly-owned subsidiary. Therefore, multiple SPVs cannot jointly own a single property,” Propshare co-founder Hashim Khan said. However, some experts were of the opposite view.
The experts speak
“I’m not sure enough effort has been made to convince investors,” said one industry expert who asked not to be named.
“If the migration is structured appropriately, I don’t see why the costs need to be so high. A simple swap of shares from an SPV to units of the SM Reit/scheme carries no stamp duty or income tax implications. Costs can also be reduced by opting for a competitively priced commercial bank as there is no need to find new investors to migrate assets. Ultimately, it is a matter of intent – a platform that is serious about migration will make this happen,” said Ajay Rotti, Founder, Tax Compass.
Propshare has assets under management or AUM of approximately ₹1,300 crore. Part of these assets under management are managed through alternative investment funds or AIFs.
Other major players in this space include Strata and Hbits. While Strata has applied for an SM REIT license, Hbits plans to apply for another one.
All applicants are required to submit a migration plan to Sebi for existing investors on the platform. Players who fail to comply with regulations risk being penalised for operating unlicensed exchanges or raising money in contravention of the Collective Investment Scheme or CIS norms.
Another source of uncertainty in the sector is the Sebi regulations which state that SM Reits can only invest in completed and income-generating properties. This reduces the degree of risk and, therefore, the profitability that a platform can hope to achieve.
Traditional real estate investment trusts also have the same requirement and typically have yields of 6-7%. However, some participants have found alternative solutions. For example, Strata plans to invest in such projects through bank loans or bonds.
The platform will enter into “forward purchase” agreements to transfer projects to SM Reit upon completion. To do so, it has partnered with banks such as Kotak Mahindra and Yubi (a fixed-income platform).
Unlike traditional REITs, which can only hold commercial properties, SM REITs can hold any type of property except vacant land, thus opening the door to residential projects as well.
Read also: Large caps and REITs: The changes at India’s largest investment advisor
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