Fractional ownership platforms (FOPs) have made real estate more accessible by allowing investors to buy a share in high-value properties with relatively modest sums. This model has been especially popular among retail and HNI investors who want exposure to commercial real estate without the need for massive capital. However, the growth of these platforms was largely unregulated, raising concerns around transparency, liquidity, and investor protection.
To address these issues, the Securities and Exchange Board of India (SEBI) introduced a regulatory framework for fractional ownership under the umbrella of Small and Medium Real Estate Investment Trusts (SM REITs). This framework seeks to make fractional ownership safer, more transparent, and better governed.
Why Does SEBI Regulate Fractional Ownership Platforms?
Unregulated platforms often used Power of Attorney (POA) structures, giving investors limited control and very few exit opportunities. Property valuations lacked uniformity, and investors were exposed to risks such as opaque fee structures and reliance on the platform to liquidate holdings.
By regulating these platforms under the SM REIT framework, SEBI aims to bring them within the formal securities market, similar to listed REITs. This ensures that investor interests are protected through stronger governance, exchange listing, and mandatory disclosures.
What Are SM REITs and How Do They Differ from Traditional REITs?
Traditional REITs in India require a minimum asset base of ₹500 crore and a minimum offer size of ₹250 crore, making them accessible only to large investors. In contrast, SM REITs reduce these barriers:
- Asset size per scheme: ₹25 crore to ₹499 crore
- Minimum total AUM: starts from ₹50 crore
- Must pool funds from at least 200 investors
These changes democratize access, letting more retail and HNI investors participate in income-generating real estate investments
Key Regulatory Requirements for SM REITs
SEBI’s framework for SM REITs introduces clear rules across structure, governance, valuation, and investor rights.
Structure and Governance
SM REITs must be set up as trusts under the Indian Trusts Act and can only invest through Special Purpose Vehicles (SPVs). Each trust requires an independent trustee and an investment manager. The investment manager must have at least two years of relevant experience or employ key personnel with five years of expertise. Sponsors are required to hold a minimum of 15 percent of units for three years after listing to show skin in the game.
Financial Requirements
Sponsors must have a net worth of at least ₹20 crore, including ₹10 crore in liquid net worth. The investment manager must maintain a minimum net worth of ₹10 crore. These thresholds are designed to ensure that only credible and well-capitalized entities manage investor funds.
Valuation and Transparency
Independent valuations, including physical inspections, must be conducted twice a year. Net asset values (NAV) must be disclosed regularly to keep investors updated on the performance of underlying assets.
Liquidity and Exit
Units of SM REITs must be listed on recognized stock exchanges and held in dematerialized form. This provides investors with a regulated and accessible exit route, unlike traditional fractional ownership where liquidity was uncertain.
Restrictions for Investor Protection
SM REITs are only permitted to invest in completed, income-generating assets. They cannot use leverage, which protects investors from the risks of debt. Related-party transactions are prohibited except for trustee and investment manager fees, further reducing conflicts of interest.
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How Do These Changes Benefit Investors?
The new framework brings multiple advantages for investors. Transparency improves with mandatory disclosures and regular valuations. Liquidity is enhanced since units are tradable on stock exchanges. Investor protection is strengthened by preventing leverage, requiring experienced managers, and mandating sponsor participation.
For example, the Indian fractional real estate market is estimated to be around ₹4,000 crore in size, with the potential to reach ₹8,500 crore in the coming years. Regulation ensures that this growth happens in a structured and credible way, benefiting both platforms and investors.
A Word of Caution
While SEBI’s framework is robust, investors must still exercise caution. A recent case involving Strata, a fractional ownership platform that surrendered its SM REIT registration amid disputes, highlights that regulation does not remove all risks. Investors should perform due diligence, review sponsor and manager backgrounds, and ensure that assets meet the criteria of being income-generating and debt-free.
Conclusion
SEBI’s regulation of fractional ownership platforms through SM REITs is a landmark step in formalizing this fast-growing investment space. It bridges the gap between traditional partnerships and listed REITs, offering a safer, more transparent way for retail and HNI investors to participate in real estate.
For investors, the key takeaways are simple. Prefer regulated SM REITs over unregulated models. Verify the credentials and financial strength of sponsors and managers. Pay attention to NAV disclosures and valuations. And most importantly, stay updated on SEBI advisories and compliance requirements.
With these safeguards in place, SM REITs can provide a powerful opportunity to diversify portfolios, generate rental income, and invest in institutional-grade real estate with confidence.