Sebi proposes norms to regulate fractional ownership platforms offering real estate assets

NEW DELHI:Financial markets regulator Securities and Exchange Board of India (Sebi) has floated a consultation paper to regulate online fractional ownership platforms (FOPs) offering fractional ownership of real estate assets to protect small investors. The proposed framework would help develop the real estate market, provide investor protection measures and lead to orderly development of the sector and the market, the consultation paper released on Friday said. Fractional ownership of real estate assets should be grouped in the form of micro, small and medium real estate investment trusts (REITs) as per Sebi’s Real Estate Investment Trust Rules.

Fractional investing in real estate through FOPs is an investment strategy in which the cost of acquiring a property is split among multiple investors, who invest in securities issued by a special purpose vehicle (SPV) established by a FOP. These SPVs purchase real estate assets. Some FOPs are operated by real estate agents or brokers (prior to the purchase of the property) and as property managers thereafter.

“When an investor decides to invest in such real estate, lack of standard and uniform sales practices and lack of independent evaluation or due diligence of information or documents provided to potential investors could lead investors to fall prey to spelling mistakes,” Sebi said.

The regulator has proposed to bring FOPs under the regulatory scope by introducing a chapter in the REIT regulations and labelling them as MSM REITs.

MSM REIT must have parties such as a trustee, a sponsor and an investment manager, each of which is a separate and distinct entity. The sponsor and the investment manager must have a net worth of at least Rs. 20 crore and Rs. 10 crore, respectively.

Sebi said that in the last 2-3 years, online platforms offering fractional ownership of real estate assets have mushroomed. These platforms provide investors with an opportunity to invest in buildings and office spaces, including warehouses, malls, conference centres, etc.

The minimum investment on these FOPs ranges from Rs10 lakh to Rs25 lakh.

The underlying real estate assets offered on FOPs are similar to real estate or properties defined under the REIT Regulations, Sebi said in its consultation paper. It has been proposed that any person or entity (including FOPs) who facilitates or has facilitated fractional investment in real estate through any structure would be required to register with Sebi to operate as an MSM REIT. MSM REIT should be constituted as a trust with the ability to establish separate and distinct schemes for holding real estate assets through wholly owned and incorporated special purpose vehicles.

Sebi has sought comments on the proposals by May 27.

(With contributions from agencies)