The real estate industry has undergone remarkable changes over the last few decades. From individual high-rise towers to expansive townships and integrated complexes, the sector has matured significantly. In the past two to three years, however, a new phenomenon has captured investor interest — web-based platforms offering fractional ownership of real estate assets.
These platforms, often referred to as Fractional Ownership Platforms (FOPs), allow investors to take part in properties such as warehouses, office buildings, shopping malls, and even conference centers. While such models have gained popularity in developed markets like the United States and the United Arab Emirates, they have also started to take root in India.
As investor participation and investment values on these platforms increased, the absence of regulation raised concerns. Questions of valuation standards, disclosure practices, investor grievance redressal, and compliance frameworks began surfacing. Recognizing these gaps, regulators decided to step in.
To bring order, transparency, and protection for participants, the Securities and Exchange Board of India (SEBI) has put forward a consultation paper. This paper seeks feedback on a structured regulatory regime for fractional ownership, specifically through the creation of Micro, Small & Medium Real Estate Investment Trusts (MSM REITs).
Fractional ownership – An overview
Traditionally, real estate investments were considered the domain of the wealthy or higher middle-class groups. The reason was simple: such investments were capital-intensive, often demanding crores of rupees upfront. Beyond the financial barrier, investors also had to deal with complexities like property management, tenant acquisition, legal due diligence, and valuation issues.
Fractional ownership has emerged as a solution to these challenges. By pooling resources through an FOP, investors can collectively purchase a high-value property. For instance, a property worth INR 2 crores can be acquired by ten investors, each contributing INR 20 lakhs. This reduces the entry barrier while ensuring exposure to quality real estate.
The mechanism typically involves three parties:
- A Special Purpose Vehicle (SPV) that directly owns the asset.
- The Fractional Ownership Platform (FOP) facilitating the investment.
- The individual investors pooling their contributions.
The process generally unfolds as follows:
- The FOP identifies the property.
- It then lists the property on its platform, seeking expressions of interest with token commitments ranging from INR 10,000 to INR 100,000.
- Once commitments reach 100%, investors receive a placement memorandum to subscribe to securities issued by the SPV.
- Funds are transferred to an escrow account, and securities are subsequently allotted.
While effective in concept, these activities currently function without regulatory oversight. There is ambiguity over whether FOPs should be registered under the Real Estate (Regulation and Development) Act, 2016 (RERA). However, since RERA’s scope primarily covers developers and real estate agents, it does not adequately address the unique risks faced by fractional investors.
On the other hand, SEBI’s Real Estate Investment Trust (REIT) Regulations, 2014 already offer a tested framework. These regulations cover investor returns, valuation processes, eligibility norms, and disclosure standards. Consequently, SEBI is considering extending this REIT framework to fractional ownership by creating a new category: MSM REITs. Transitioning existing SPVs or FOP structures into MSM REITs could also enable investors to access tax benefits currently available to Business Trusts under the Income Tax Act.
Investor concerns in current practice
SEBI’s consultation paper highlights several issues that investors face under the present unregulated FOP model. These include:
- Valuation concerns – lack of standardized and independent valuation of assets.
- Inadequate disclosures – limited information is shared at the time of investment solicitation.
- Property title diligence – ambiguity in documentation of property titles.
- Lease and tenancy terms – lack of transparency on agreements with tenants.
- Ongoing disclosures – irregular reporting on lease receipts, property taxes, utilities, or renewal statuses.
- Exit difficulties – investors often depend entirely on FOPs for guidance during exits.
- AML/KYC compliance gaps – absence of alignment with Prevention of Money Laundering Act requirements.
- Investor grievance redressal – lack of independent or uniform mechanisms to resolve disputes.
These issues, left unchecked, increase risks for small investors and dent confidence in fractional ownership structures.
Proposed scope of regulation
To safeguard investor interests, SEBI has proposed a detailed framework under the umbrella of MSM REITs. The consultation paper lays down several critical aspects:
1. Compulsory Registration
All entities facilitating fractional ownership must register with SEBI as an MSM REIT. Existing structures must migrate, failing which they must wind down operations and provide investors with an exit option.
2. Structure of MSM REIT
- MSM REITs will be established as Trusts under the Indian Trusts Act, 1882.
- Each trust may operate distinct schemes through wholly-owned SPVs under the Companies Act, 2013.
- REITs must hold 100% equity ownership in SPVs, and SPVs must fully own the underlying properties.
- Key parties — Trustee, Sponsor, and Investment Manager — must all be distinct entities.
3. Operational & Regulatory Aspects
- Only “fit and proper” persons as per SEBI guidelines may act as parties to MSM REITs.
- Units of MSM REIT schemes must be mandatorily listed on stock exchanges and held in demat form.
- Existing FOPs must transfer SPV ownership to MSM REIT schemes, with investors receiving equivalent REIT units.
- Transactions with related parties will be restricted, and strict disclosure requirements will be enforced.
4. Fund Raising Restrictions
- MSM REITs can raise capital from both resident and foreign investors.
- Borrowing will not be permitted.
- Minimum participation of 20 unrelated investors is required.
- Subscription size per investor: at least INR 10 lakhs.
- No single investor (other than sponsor or related parties) can hold more than 25% of units.
- The asset size for each scheme should range between INR 25 crores and INR 499 crores.
5. End Use Requirements
- At least 95% of assets under management (AUM) must remain invested in completed, rent-generating properties.
- The balance may be parked in safe, liquid instruments like government securities or treasury bills.
6. Distribution of Cash Flow
- At least 95% of SPV-level distributable cash flows must be passed to the REIT scheme.
- 100% of distributable cash flows from the MSM REIT must be distributed to unitholders.
- SEBI will cap the expense ratio for MSM REITs.
7. Valuation of Assets
- Valuation must be conducted by a registered valuer.
- Full property inspections and NAV declarations must occur quarterly.
- For purchase or sale of assets, if prices deviate by more than 2% from valuation, approval from 75% of unitholders will be mandatory.
8. Rights of Investors
Investors will enjoy significant rights, including the ability to:
- Remove the investment manager, auditor, or valuer.
- Seek winding up of schemes.
- Approve changes in sponsor, investment strategy, or key appointments.
- Participate in annual meetings where financial statements, valuation reports, and auditor fees will be discussed.
Way forward
The introduction of MSM REITs is poised to transform the landscape of fractional ownership in India. By removing entry barriers and creating opportunities for diversified investment, the model has the potential to attract a wider base of investors. Transparent disclosure norms and standardized valuations are expected to boost trust and confidence in this emerging segment.
That said, the new framework will also impose higher compliance costs on existing FOPs and SPVs. Entities will need to engage independent trustees, sponsors, and managers, which could increase operational expenses. Moreover, the consultation paper leaves open questions on taxation, though it is likely that existing REIT tax provisions will apply to MSM REITs as well.
Final Thoughts
The move to regulate fractional ownership through MSM REITs marks a significant shift in India’s real estate investment ecosystem. For small investors, this change promises greater transparency, stronger safeguards, and more predictable returns. For platforms and funds, it signals a transition towards a more accountable and professional marketplace.
While compliance demands may feel heavy at first, the long-term benefits of investor confidence and a regulated environment outweigh the costs. Much will depend on how SEBI fine-tunes the framework and addresses gaps such as taxation. But one thing is clear — fractional ownership in India is no longer a fringe concept; it is moving into the mainstream, backed by regulation and oversight.
