Propshare, a fractional real estate platform, recently became the first player to secure an SM (small and medium) Reit licence from Sebi. SM Reits are real estate investment trusts with an asset base between ₹50 crore and ₹500 crore.
However, Propshare’s existing investors rejected the migration to SM Reit status. High upfront costs, including a 6-6.5% stamp duty, may have led to the ‘no’ vote, as indicated by a mail sent out by the platform.
According to Propshare, the high costs are a result of Sebi rules that do not allow co-ownership of property by an SM Reit. The Reit must be a 100% owner of the property and Propshare’s existing entities have co-ownership
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“According to question #8 in the FAQs shared by Sebi, Reit regulations require that the SPV shall directly and solely own all assets that are acquired or proposed to be acquired by the scheme of the SM Reit, of which SPV is the wholly owned subsidiary. Hence, multiple SPVs cannot jointly own a single property,” said Propshare co-founder Hashim Khan. However, some experts took a contrary view.
Experts speak
“I’m not sure if sufficient effort was made to convince investors,” said an industry expert who declined to be named.
“If migration is properly structured, I don’t see why the costs have to be so high. A simple share swap from one SPV to units of the SM Reit/scheme does not attract stamp duty or income tax implications. You can also cut down on costs by going for a competitively priced merchant banker, since there’s no need to find fresh investors for migrating assets. Ultimately, it is about intent – a platform that is serious about migration will make it happen,” said Ajay Rotti, founder, Tax Compass.
Propshare has assets under management or AUM of about ₹1,300 crore. Some of this AUM is managed via alternative investment funds or AIFs.
Other major players in this space include Strata and Hbits. While Strata has applied for an SM Reit licence, Hbits plans to apply for one.
All applicants must submit a migration plan to Sebi for existing investors on the platform. Players who stay outside the regulations risk enforcement action for operating unlicensed exchanges or collecting money in contravention of the Collective Investment Scheme or CIS rules.
Another source of industry hesitation is Sebi rules that SM Reits can only invest in completed and revenue generating properties. This reduces the extent of risk and, hence, the return that a platform can aim for.
Mainstream Reits also have the same requirement and generally have yields of 6-7%. However, some players have found workarounds. For instance, Strata plans to invest in such projects through bank loans or bonds.
The platform will enter into ‘forward-purchase’ agreements to move the projects into the SM Reit upon completion. For this, it has partnered with banks like Kotak Mahindra and Yubi (a fixed-income platform).
Unlike mainstream Reits, which can only hold commercial properties, SM Reits can hold any type of property, except vacant land, thereby opening the door to residential projects as well.
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