SEBI’s proposal to make it mandatory for micro, medium and small (MSM) REITs to hold a minimum of 15 per cent of the total units of the MSME REIT for each scheme for at least three years from the date of listing is being seen as a deal breaker by fractional ownership platforms, as that could mean players putting money on the table up front.

“Where do I get that money?” asked Sudarshan Lodha, co-founder, and CEO of Strata Property Management, one of the largest players in the segment with assets in the region of ₹1,000 crore. He said that the proposal would virtually put them out of business.

Fractional ownership platforms route their investors’ money, to buy assets, through special-purpose vehicles which issue securities to them. Their balance sheet sizes are in the range of ₹10 crore to ₹30 crore or even lower for some of the smaller players, making it economically unviable to lock up big amounts of money for a long period.

Lodha said that the regulator was treating them as a regular REIT, where the developer is the sponsor and as such has large funds at its disposal. “This means that I should start developing my own assets and down-selling them to the market,” he said. He added that fractional ownership platforms are facilitators or market-makers and while the proposed REIT regulations put them in the same category as investment managers.

Shiv Parekh, Founder of hBits, said that this was not a feasible proposition. “We are technology platforms, and it becomes unfair to lock up that amount of capital.”

Lodha pointed out that the proposal defeated the purpose of the fractional ownership platforms and it diluted the essence of the platform itself. “The essence of being a technology platform has completely gone away,” he said.

Points of disagreement

Last month, SEBI brought out a consultation paper with proposals on bringing fractional ownership platforms under the real estate investment trust framework and labelling them as MSM or micro, small, and medium REITs. The last date for comments and suggestions to SEBI’s consultation paper on treating factional ownership platforms as REITs is well past and the sector is waiting in trepidation for the final recommendations from the regulator.

While most of the industry players are more or less agreeable to being brought under the ambit of the REIT regulations - with some modifications and differences - there are several sticking points that have the potential to threaten their existence in a worst-case scenario.

Another point of disagreement is on the MSM REIT schemes not being able to raise debt funding. This restricts the SPV’s ability to access capital. Incidentally, even in the case of regular REITs, it is only recently that the regulator allowed them to raise funds through the issue of commercial papers.

A third point is that while existing REITs can own about 20 per cent of under-construction assets, MSM REITs can hold only rent-yielding assets. Lodha said that built-to-suit assets should be allowed because of the commitment assurance of rents from such facilities and that they are already under RERA regulations.

Aryaman Vir, CEO of Aurum WiseX said that he expected the regulator to view their suggestions and comments on the paper positively and the final recommendations would be more favorable.

He also pointed out that the proposals had the effect of opening up the segment to family offices and institutional investors while they could also approach big financial firms to distribute their products. “Platforms like us get the opportunity to go mainstream.”