Fractional ownership, SM REITs and the future of Indian real estate: Six questions everyone is asking

In this 'Leading Questions' piece, Uday Singh Ahlawat and Shruti Choudhary answer some of the most pressing questions being asked by investors, developers, family offices and proptech founders about fractional ownership and SM REITs in India. With SEBI's introduction of a dedicated regulatory framework and growing institutional interest in alternative real estate assets, the sector is entering a period of significant transformation. This piece explores the legal, regulatory and commercial implications of that shift, and what it means for the future of real estate investing in India.

Question: What is the real story behind fractional ownership?

Answer: Fractional ownership of real estate assets majorly democratize real estate investments to a range of income groups. High quality real estate has been accessible only to institutional investors, high net worth individuals (HNIs), family offices etc. due to the substantial capital required for direct and full ownership. Fractional ownership/SM REITs allow multiple investors from different income range, thereby making real estate investment less exclusive and enabling such investors to benefit from the rental yield, capital appreciation without having to purchase the entire asset.

While most platforms currently do not use blockchain technology, it is an inevitable evolution of fractional ownership.

Question: Has SEBI legitimized fractional ownership, or changed it fundamentally?

Answer: Fractional ownership is a relatively new concept in India wherein the potential investors are allowed to invest in bite sized portions of an immoveable property. The investors are not expected to pay for the entire underlying asset but proportionate only to the portion they want to invest in.

The introduction of Small and Medium REIT framework through the SEBI (Real Estate Investment Trusts) (Amendment) Regulations, 2024 by SEBI has legitimized and institutionalized fractional ownership without fundamentally changing the concept. The SM REIT Framework provides a regulated route for certain real-estate fractional ownership platforms, subject to registration, scheme-level requirements, listing, governance, valuation, distribution and disclosure obligations. The registration of a platform offering fractional ownership becomes mandatory if such platforms meet the requirements mentioned in the SM REIT Framework.

Question: Is fractional ownership becoming more of a capital markets product rather than a real estate product?

Answer: Increasingly, yes. With the introduction of fractional ownership, investors are beginning to evaluate real estate through the same lens as financial products by comparing yields and being able to diversify their investment portfolios. We may go as far as to say that in many ways it represents a stock market-like ecosystem for real estate investors. Currently, most fractional ownership platforms do not rely on blockchain to fractionalize the underlying assets. However, if such platforms were to adopt blockchain eventually, it would intensify the gradual financialisation of real estate by making it easier to compare yields, quicker transferability and enable greater liquidity. Such an evolution would mark a significant shift in the perception of real estate, whereby it would be increasingly perceived as a financial product rather than a tangible asset.

Question: Are fractional ownership/SM REITs a threat to traditional developers, or an opportunity? Incidentally, will such platforms replace private real estate syndication and family office investing?

Answer: It in fact serves as an opportunity for traditional developers rather than being a threat. It allows developers to get a broader base of investors apart from HNIs, institutional investors and family offices, as multiple investors would be allowed to make proportionate investments in the underlying assets through smaller ticket sizes. Such broad investor base would in fact help the developers in monetizing the underlying asset.

Similarly, it is unlikely that family offices, private syndications will be replaced altogether. It may dilute such investments, but complete replacement is unlikely as family offices and private syndications offer a more disciplined and controlled approach towards real estate investment.Fractional ownership/SM REITs may be viewed as a complimentary investment opportunity rather than a threat or a replacement for existing investors.

Question: What role does Real Estate (Regulation and Development) Act, 2016 (“RERA”) play for regulating such platforms, if at all?

Answer: RERA does not specifically address the regulation of fractional ownership/SM REIT platforms, however, it defines “real estate agent” under section 2(zm) of RERA. That said, while these platforms are generally structured in a way where the investors acquire interest in a particularSPV which owns the underlying asset and not directly in the underlying property, the platform’s role may involve identifying properties, coordinating with developers/sellers, facilitating acquisition of the property by the SPV, and making such opportunities available to investors. Given the broad scope of the definition of “real estate agent” under RERA, fractional ownership/SM REIT platforms may be viewed as facilitating the sale or purchase of the underlying property.

Question: Can Non-Resident Indians (NRIs) invest in fractional ownership/SM REITs?

Answer: Yes, NRIs can invest in fractional real estate opportunities in India, provided the investment is made through a permitted route under the Foreign Exchange Management Act, 1999 and the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, as applicable. The investment should be routed through permitted banking channels. The investment may be made through a Non-Resident External (NRE), Non-Resident Ordinary (NRO) or Foreign Currency Non-Resident (FCNR) account, with income and sale proceeds credited or remitted in accordance with the rules applicable to the banking channel used. There is no minimum or maximum investment amount for private fractional real estate platforms; the ticket size will depend on the platform structure and investment documents. If the product is structured as an SM REIT, the minimum unit price is INR 10 lakh.

Uday Singh Ahlawat is the Managing Partner and Shruti Choudhary is a Senior Associate at Ahlawat & Associates.