On 8th March 2024, SEBI officially notified the SM REIT (Small and Medium Real Estate Investment Trusts) Regulations to bring completed, income-generating real estate assets — including rental housing, warehouses, and commercial buildings — under a structured investment trust model. While the final regulations align broadly with the earlier draft, there are key clarifications around investor limits, registration procedures, lock-in norms, investment structures, and fund-raising requirements. These regulations open up access to a wider class of investors and asset owners while boosting transparency and governance in the sector.
Background
SEBI introduced the SM REIT Regulations with the aim of expanding REIT accessibility beyond large commercial spaces. The final rules are mostly aligned with the 2023 draft consultation paper but come with some critical updates:
- A revised minimum number of investors (200 or more)
- Defined capital requirements for investment managers
- Additional compliance and registration processes
The framework took effect from 8th March 2024, and is expected to provide developers and investors a formal channel to pool funds for income-generating real estate assets.
Key Amendments and Implications
1. Definition of REIT
SEBI defines a REIT as an entity pooling ₹50 crores or more from at least 200 investors to acquire and manage income-generating real estate — without offering day-to-day control to investors.
- The term “REIT” now includes “SM REIT” under its scope.
- No separate legal definition has been assigned to SM REITs; they are considered a subset of REITs.
- Any structure with fewer than 200 investors does not fall under these regulations.
2. Non-Qualifying Entity
Entities directly issuing securities like CCDs without forming a REIT or SM REIT are not governed under the new regulations. However:
- They remain subject to the Companies Act, 2013, especially the private placement limit of 200 investors.
3. Registration and Application Fees
Investment managers must:
- File Form A on behalf of the SM REIT
- Pay:
- ₹1 lakh on application
- ₹10 lakhs within 15 days of SEBI’s response
- The higher of ₹5 lakhs or 0.1% of scheme size on filing the draft scheme
If no offer is made within 3 years of registration, SEBI may revoke registration unless extended for 1 more year.
4. Migration of Existing Structures
Existing entities migrating to SM REITs must:
- File a migration plan with SEBI within 6 months from regulation date
- Complete migration within 6 months of registration
Note: SM REIT units are listed and must be held in demat form, which means all investors must open demat accounts.
5. Appointment of Investment Manager
Investment managers must:
- Be a company incorporated in India
- Have net worth of ₹20 crores, including ₹10 crores in liquid assets
- Have 2+ years of experience in real estate or employ 2 KMPs with 5+ years experience each
- Ensure half of directors are independent
- Not be an associate of the trustee
Additional duties include website maintenance and adherence to lock-in requirements (see Annexure 1 in the PDF).
6. Investment Conditions
- SPVs must solely own the assets
- 95% of the scheme’s AUM must be in completed, rent-generating properties
- Remaining 5% can be in liquid assets like T-bills or mutual funds
- Lending is restricted to the SPV only
Investments in under-construction or non-revenue-generating assets are not permitted.
7. Fund Raising Requirements
- Minimum subscription/unit size: ₹10 lakhs
- Scheme asset size: ₹50 crores to ₹500 crores
- SM REITs can leverage up to 49% of scheme asset value through debt
- All capital must be raised via unit issuance under specific schemes
8. Offer Related Requirements
- 25% of units must be offered/allotted to public
- Investment manager must hold a minimum locked-in stake:
- 5% (non-leveraged)
- 15% (leveraged) — for the first 3 years
- No guaranteed returns allowed
- Lease rental details must be disclosed in offer documents
- Advertisements must follow strict content guidelines (no models/celebrities/fictional characters)
9. Distribution of Cash Flow
- SPVs must distribute 95% of their net distributable cash flow to the scheme quarterly
- SM REIT must distribute 100% to unit holders
- Declaration should happen within 15 working days of the quarter end, and payment within 7 days post-declaration
10. Rights and Meetings of Unit Holders
- Mandatory annual meeting within 120 days of year-end
- Special resolution required if purchase/sale exceeds ±5% of valuer-assessed property value
- Ordinary resolution required for:
- Transactions >10% of asset size
- Borrowings >25% of scheme asset
- Other material matters
11. Related Party Transactions
- Strictly prohibited under SM REIT, including facility and property management agreements with group entities
This is a major departure from standard industry practice and designed to ensure transparency and avoid conflict of interest.
Overall Remarks
These regulations introduce a well-structured route for small and medium developers to access formal capital markets. Key highlights include:
- No restriction on the type of real estate — residential, clubhouses, holiday homes are eligible
- Same tax implications as REITs for unitholders and Trusts
- Enhanced liquidity and transparency by listing units on recognized stock exchanges
- Clear distinction from Collective Investment Schemes or Deposit schemes, bringing regulatory confidence to both investors and developers
SEBI’s move is poised to revolutionize access to real estate investments, create a new investible asset class, and bring much-needed discipline to the way alternative real estate funding is approached in India.
