Rs 70,000 Crore Office Space Monetization via SM-REIT

New Delhi, May 2 (PTI) Rating agency ICRA has estimated that around 530 lakh square feet of office spaces are eligible for small and medium REITs (SM-REIT) listing, creating a monetisation opportunity of Rs 67,000-71,000 crore.

In November last year, the Sebi board cleared the amendments to the REITs Regulations, 2014, in order to create a regulatory framework for the facilitation of SM REITs, with an asset value of at least Rs 50 crore vis-a-vis minimum asset value of Rs 500 crore for existing REITs.

As per the notification, the minimum price of each unit of the scheme of SM-REIT shall be Rs 10 lakh or such other amount as may be specified by Sebi from time to time. The size of the asset proposed to be acquired in a scheme of the SM-REIT is at least Rs 50 crore and less than Rs 500 crore.

"Small and Medium REITs will provide an opportunity for small Grade A and most of the Grade B office developers to monetise their investments. Also, Fractional Ownership Platforms (FOPs) are expected to be formalised, leading to wider market acceptance," said Rajeshwar Burla, Senior Vice-President & Group Head - Corporate Ratings, ICRA.

However, he said the minimum unitholding requirement for SM REITs could act as a deterrent from a scalability perspective.

As of December 2023, ICRA said the total Grade A office supply stood at 980 million square feet and Grade B office at 115 million square feet across the top seven cities.

"ICRA estimates SM REIT-ready office at around 52-53 million square feet (3 per cent of Grade A supply and 20 per cent of grade B supply) of the total office supply, indicating a healthy potential for SM REIT listings in the commercial office space. At a cap rate of 8-8.5 per cent, SM REIT-ready office space provides monetisation opportunity of Rs. 67,000 - 71,000 crore across the top seven cities," the statement said.

ICRA noted that registration of existing FOPs and new ones is mandatory under SEBI.

"FOPs allow investors to participate in real estate ownership with fractional shares and minimum investment ranging from Rs. 10-25 lakh. Given the increasing value of investments with such FOPs and the growing number of investors, SEBI has introduced regulatory oversight in the form of SM REIT regulations," it said.

According to SEBI, the framework for SM REITs provides for the structure, migration of existing structures meeting certain specified criteria, obligations of the investment manager, including net worth, experience, and minimum unit holding requirement, investment conditions, minimum subscription, distribution norms and valuation of assets.