Sebi underscores the “mushrooming number of web-based platforms” offering fractional ownership in real estate in its consultation paper. This model allows investors to own a fraction or share in buildings/office spaces, including warehouses, shopping centres etc. The minimum investment range is Rs 10-25 lakh, with the cost of acquiring the property split among multiple investors. These buyers invest in securities issued by a special purpose vehicles (SPVs) set up by the fractional ownership platform or FOP. In turn, these SPVs purchase real estate assets. Property Share and Strata are among the major players, with assets of over Rs 900 crore and Rs 700 crore respectively, as per Sebi data. Major foreign players are Fundrise, Realty Mogul and Cadre (all US-based).
What the regulator has proposed
Sebi has proposed that the FOPs be regulated by introducing a chapter under the REIT regulations and labelling them as MSM REITs. Current norms state that MSM REITs should have trustees, sponsors and investment managers — each a separate and distinct entity. Further, the sponsor and investment manager should have minimum net worth of Rs 20 crore and Rs 10 crore respectively.
FOPs should also migrate all transaction structures to that of MSM REITs, and all existing SPVs/ structures, who have carried out such investments must be wound up before registration as MSM REIT.
“Under REITs, there is a mechanism prescribing the REIT to hold 50% of the equity in the holding company or SPVs. Further, REITs are mandated to invest 80% of the funds in completed or revenue-generating properties. Such regulations are not applicable to FOPs. Guidelines to regulate the collection/investment received against the assets are needed to ensure the same is used towards completion of property,” says Manmeet Kaur, principal associate, Karanjawala & Co. It is proposed that the MSM REIT scheme has full control and hold 100% equity share capital in all SPVs. The SPVs shall be required to have full control and hold 100% ownership in all the underlying properties.
Who are the investors
Experts say non-institutional investors who can invest in small ticket sizes and view it as a long-term opportunity are typical customers. These may include retail investors.
“Those who can invest Rs 10-25 lakh, but may not have the right guidance regarding the market and the mechanics involved in managing a property, are the kind of investors that invest via these platforms. They view this sector as a lucrative investment,” says Harish Kumar, partner, Luthra and Luthra Law Offices India. According to him, the emergence of this model has led to larger public money being involved, with investors ranging from larger to the smaller categories. It has, therefore, become naturally vital for Sebi to regulate such flow of money safeguard interests.
What is worrying Sebi
In the paper, the regulator has highlighted that the lack of standard and uniform selling practices, and the lack of independent valuation/diligence of information or material provided to potential investors, could result in them falling prey to mis-selling.
It has pointed out that while many of the FOPs are registered as real estate agents or brokers, governed by the Real Estate Regulatory Authority (Rera), it is unclear whether all follow the norms in practice, and if all provisions are applicable to online platforms. “Given that the total asset size ranges from Rs 300-900 crore, and that there is extremely limited regulatory oversight in this sector, regulating such FOPs will provide a degree of protection and confidence to non-institutional investors, as well as help avert financial frauds and duping of investors,” says Vedika Shah, senior associate, Pioneer Legal.