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REITs made commercial real estate accessible to Indian retail investors in 2019. In 2024, SEBI introduced SM REITs with a lower ticket size of Rs 10 lakhs for targeted investments.
Small & Medium REITs (SM REITs): The Next Big Thing in Real Estate Investing
Commercial real estate as an asset class was out of reach for retail investors for the longest time. This changed with the introduction of REITs in India in 2019 and it has quickly become a popular investment option for people looking to diversify their portfolios.
With the introduction of Small and Medium REITs (SM REITs) in 2024, investors now have a more targeted and asset-focused way to invest in this asset class.
SM REITs allow investors to focus on specific income-generating properties unlike traditional REITs, which pool funds to invest in a diverse portfolio of real estate. This more tailored approach offers investors greater customisation and control over their real estate investments without the hassle of directly owning a property.
The Securities and Exchange Board of India (SEBI) laid the groundwork for SM REITs with a consultation paper released in 2023, followed by the final regulations in March 2024. These regulations have widened the access to commercial real estate investments with a significantly lower ticket size of ₹10 lakhs – far more affordable than direct commercial real estate investments, which typically start upwards of ₹20–30 crores.
While SM REITs offer a new avenue for investment, there are some key factors which the investors can consider before adding them to their portfolio.
Quality And Location Of The Asset
Location is often the most critical aspect of any real estate investment. Prime commercial assets in well-connected, infrastructure-rich areas of major cities tend to perform better. High occupancy rates in these areas signal strong demand, ensuring that vacancies are quickly filled if a tenant leaves.
Understanding the supply and demand balance in the target location is essential. If the supply of commercial spaces outpaces demand in a particular micro-market, vacancy rates can increase, putting downward pressure on rental rates. Reports from leading international property consultants (IPCs) like JLL, CBRE, and Knight Frank provide valuable insights into these trends.
High-quality assets tend to attract high-quality tenants. Grade A properties—those with premium design, high-end amenities, LEED or IGBC certifications, and developed by top-tier builders—are more likely to retain tenants. Whenever possible, investors should visit the asset in person to assess both the property and its location.
SM REITs can target different property types, including office spaces, retail outlets, and hospitality assets. Understanding the economic factors driving each asset class is essential. For instance, India’s office space demand has been fueled by the outsourcing sector, while retail demand stems from domestic consumption growth.
Tenant profile
Grade A tenants, such as Fortune 1000 companies and leading Indian firms, are desirable since they typically make substantial investments in their office spaces, including customized layouts and fit-outs. Multinational tenants are also preferred for their financial stability and reliable rental payments.
Commercial leases typically feature a lock-in period for tenants (usually 3–5 years), whereas landlords are locked in for the full lease duration (typically 5–9 years). Investors should prioritize SM REITs with a remaining lock-in period of at least 2–3 years or those with a medium-to-long-term residual lease tenure.
Investment Manager
An experienced and capable management team is critical to the success of an SM REIT. Investors should research the team’s track record in managing, acquiring, and exiting real estate investments. A seasoned team increases the likelihood of delivering strong returns and effective asset management.
How To Invest In An SM REIT?
New SM REIT schemes are listed on the stock exchanges through an Initial Public Offering (IPO). Investors can subscribe to units of these schemes during the IPO process, similar to equity IPOs. Applications will be enabled via the ASBA mechanism and investors can apply via any of the following ways:
• Apply online through the Internet Banking facilities of all the SCSBs (Self-Certified Syndicate Banks)
• Apply online via your ASBA enabled brokerage accounts (e.g. ICICI Direct)
• Submit physical bid cum application form at your ASBA bank/branch where you would have your bank account
• Download the e-form from BSE and submit at your ASBA bank/branch
For schemes that are already listed, investors can trade them on the stock exchange through their demat accounts.
Conclusion
Institutional investors have been big investors in REIT products and have also demonstrated significant interest by participating in SM REIT listings. With its inherent nature, SM REIT is an investment product that is well positioned in every investor’s portfolio due to its superior risk-return dynamics.
By thoroughly evaluating the factors such as location, asset quality, lease structure, and management strength, investors can align their SM REIT choices with their financial goals and risk appetite, ensuring a well-balanced and strategic real estate investment.
It is authored by Ganesh Arunachalam, Vice President – Investments, Property Share
The views expressed in this article are those of the author and do not represent the stand of this publication.