SEBI’s proposal for regulating fractional real estate ownership platforms

Market regulator SEBI has proposed a framework for regulating platforms offering fractional ownership of real estate assets. 

In the past two-three years, there has been a mushrooming of web-based platforms offering fractional ownership of real estate assets. These platforms, such as Asset Monk, Prop Share and Hbits, provide investors an option to invest in buildings and office spaces including warehouses, shopping centres, conference centres, etc. The minimum investment on these fractional ownership platforms (FOPs) range from ₹10 lakhs to ₹25 lakhs

• Slate: All you wanted to know about fractional ownership 

“Given the increasing value of investments with such FOPs, as well as rising number of investors it has become necessary to consider whether it is an appropriate juncture to require registration and regulate these FOPs in order to bring about, inter-alia, regulatory oversight, common uniform standard disclosure practices, ensuring liquidity by way of listing or similar such measure, investor redressal mechanism, etc. to safeguard the interest of investors,” SEBI said in a consultation paper.

How FOPs work

Fractional investment or ownership of real estate through 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 the FOP. Such SPV purchases the real estate asset.

The costs of upkeep and acquisition are divided among the investors/shareholders in SPVs, who also share the benefits and returns of the assets subject to management and maintenance fees levied by the FOP or its associates or specified third parties. Thus, FOPs allow investors to own a certain percentage / fractional share in the real estate asset through the securities issued by the SPVs.

• Read: Into the world of fractional investing

SEBI said that the varying nature of structures adopted by the FOPs raises concerns regarding due investor protection, lack of uniformity in disclosure standards, lack of transparency in valuation, management fees, maintenance costs, redress of investor issues and grievances, participation in upside from potential sale of the real estate without concomitant contribution to acquisition price, etc.

“Moreover, a lack of transparency or lack of a market in effecting sale of the unlisted securities of the SPVs or of the underlying real estate when investor needs liquidity could lead to investor grievance. Therefore, there arises an imperative need that the FOPs as providers of such products, platforms and services operate in a transparent and regulated environment that balances the needs of all stakeholders,” SEBI said

Extending REIT regulations

The market regulator has proposed to extend the regulatory framework of REIT regulations to fractional ownership platforms as that would address the above-mentioned concerns to a large extent, and also provide an impetus for the growth of this market.

The migration of the current SPVs or other structures established by FOPs to the REIT structure, may also result in treatment of such investment by investors as investment in business trusts as defined under the Income-tax Act, which provides certain tax benefits for SEBI registered REITs that are otherwise not available to the SPV or the investors or both,” it added.

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