With the introduction of SM REITs, the scale of entry for investors has been reduced and the minimum investment amount has been reduced from Rs 2.5 million to Rs 10 million. This regulatory change has made fractional ownership available to a wider range of investors, democratizing access to high-yield commercial real estate opportunities that were previously limited to the wealthy.
“While traditional real estate investing has long been essential for wealth accumulation, fractional ownership is still in its infancy in India. However, it is gaining traction, especially in commercial real estate areas such as office spaces and co-working environments. “We’re collecting them,” he says. Sudarshan Lodha, co-founder and CEO of Strata, spoke to Zeebiz.com in an email interview.
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• What are the key factors for investors to consider when choosing a fractional ownership platform, and how can the associated risks be mitigated?
When choosing a fractional ownership platform (FOP) for real estate investing, it is essential to evaluate key factors such as past performance, current assets under management, successful exits, and robustness of the due diligence process. The type and quality of assets provided also plays an important role in assessing the reliability of a platform.
Like any investment, fractional ownership of commercial real estate involves risks. These include tenant availability, market volatility, and macroeconomic changes that can impact property values and rental yields. It is important for investors to carefully weigh these risks and choose a platform with a strong track record in mitigating such challenges.
• With fractional ownership growing in popularity in India, how have you seen this model evolve, especially in the commercial real estate space?
With the growing popularity of fractional ownership in India, especially in commercial real estate (CRE), this model has evolved significantly. One of the major changes was the introduction of regulations by SEBI, which increased transparency and accountability in the sector. Assets between Rs 50 million and Rs 50 billion now fall under the Small and Medium REIT (SM REIT) category, providing a more structured framework for fractional ownership platforms.
Furthermore, the introduction of SM REITs has reduced the scale of entry for investors, reducing the minimum investment amount from Rs 2.5 million to Rs 10 million. This regulatory change has made fractional ownership available to a wider range of investors, democratizing access to high-yield commercial real estate opportunities that were previously limited to the wealthy. This has not only increased investor confidence in this asset class, but also created a new niche in real estate investing, opening up lucrative opportunities for retail investors in a regulated environment.
• With new regulations in place, could you please explain what SM REITs are and how they differ from traditional REITs?
SM REIT (Small and Medium Real Estate Investment Trust) is a new category introduced as part of the regulatory framework governing fractional ownership in India. These REITs cover assets ranging from Rs 50 million to Rs 50 billion and offer a structured approach to investing in small and medium-sized commercial real estate assets.
Unlike traditional REITs, which typically manage large, high-value assets such as large office complexes or shopping malls, SM REITs focus on smaller, more accessible properties. Another important difference between traditional REITs and specialized/SM REITs is the level of control and risk management provided to investors. Traditional REITs work similarly to mutual funds, with investors pooling their money and a fund manager deciding which properties to invest in. As a result, investors have limited say in asset selection and tenant vacancies can impact investment returns. .
In contrast, SM REITs are often structured with a fractional ownership model, giving investors more control over the specific assets they wish to invest in. Additionally, SM REITs typically pre-lease real estate to tenants, which significantly reduces tenant-related risks. A fixed period of time before an investment is made. This ensures stable rental income without vacancy risk during the investment period, increasing predictability and minimizing risk.
• How is REIT investing different from fractional ownership? Which segments of fractional ownership are readily adopted by Indian investors? Moreover, are REITs and fractional ownership as lucrative as traditional real estate investments?
Real estate investment trusts (REITs) and fractional ownership are both attractive vehicles for investing in real estate, but they are very different. A REIT operates as an income real estate management company and allows investors to purchase shares within the trust. In contrast, fractional ownership provides individuals with direct ownership of shares in a particular property, giving them more control over asset selection, clarity over tenant occupancy, and more.
While traditional real estate investing has long been essential for wealth accumulation, fractional ownership is still in its infancy in India. But it’s especially gaining traction in the commercial real estate sector, including office spaces and co-working environments. Investors are attracted to fractional ownership because of lower capital requirements, potential for diversification, and the opportunity to be directly involved in the investment. As the market continues to evolve, fractional ownership has become a popular alternative to traditional real estate and REITs, offering unique benefits to modern investors.
• How do you think SM REITs can help investors build long-term wealth and generate passive income?
SM REIT provides a systematic way for investors to build long-term wealth and generate passive income through commercial real estate. These REITs typically focus on mid-sized commercial properties and offer investors the benefit of stable rental income from pre-leased properties. SM REIT secures tenants for a certain period of time in advance, which greatly reduces tenant vacancy risk and ensures stable cash flow.
Another benefit is that commercial real estate can increase in value, potentially increasing your wealth over time. SM REITs also operate under a regulated framework, which ensures transparency and gives investors more control over asset selection, unlike traditional REITs. This makes it a practical option for those looking for a low-maintenance, income-producing investment.
