Fractional Ownership & SM-REITs: Democratizing Access to Premium Real Estate — Opportunities & Regulatory Risks
For decades, the Indian real estate narrative was split into two disparate worlds. On one side stood the institutional giants—pension funds and sovereign wealth funds—quietly amassing Grade A commercial assets with stable, inflation-indexed yields. On the other hand, retail investors are largely confined to the volatile residential market or high-barrier physical commercial assets requiring multi-crore outlays. While residential property remains a sentimental favourite, the yield gap—typically 2–3% for housing versus 8–11% for commercial—has become impossible to ignore.
As we enter 2026, this structural divide is collapsing. The emergence of Fractional Ownership Platforms (FOPs) and the formalisation of Small and Medium REITs (SM-REITs) are rewriting the rules of ownership. What was once a "club deal" for the ultra-wealthy is now an exchange-traded financial product. However, for both the developer looking to monetise and the investor seeking yield, this transition from a private arrangement to a regulated market brings as much complexity as it does opportunity.
1. What Is Fractional Ownership in Indian Real Estate?
Fractional ownership is the process of pooling funds from multiple investors to co-own a high-value real estate asset. In the Indian context, this has primarily targeted Grade A office spaces, industrial warehouses, and premium retail hubs. Instead of a single entity buying a ₹100 crore floor in a Bengaluru tech park, 100 investors might contribute ₹10 lakh each.
Historically, these structures operated through a Special Purpose Vehicle (SPV), typically incorporated as a Private Limited Company. Investors held equity or Compulsorily Convertible Debentures (CCDs) in the SPV, which in turn, held title to the property. According to JLL India, the fractional ownership market in India has rapidly scaled to an AUM of approximately USD 500 million, with expectations to hit USD 5 billion by 2030.
The appeal is simple: it offers the passive income of a landlord without the operational headaches of property management, tenant acquisition, or maintenance. For the first-time commercial investor, it provides a "foot in the door" into an asset class previously gated by capital requirements.
2. SM-REITs Explained: SEBI’s Institutional Answer
While private fractional platforms pioneered the concept, they operated in a regulatory grey area for years. Recognising the systemic risk of unregulated pooling, the Securities and Exchange Board of India (SEBI) introduced the SM-REIT framework through the 2024 Amendment to the REIT Regulations.
An SM-REIT is a regulated trust that can launch various "schemes," each owning specific real estate assets via an SPV. Unlike traditional REITs, which require a minimum asset size of ₹500 crore, SM-REITs are designed for the "middle market," targeting assets valued between ₹50 crore and ₹500 crore.
SEBI’s intent is twofold: to provide a pathway for existing fractional platforms to migrate into a regulated environment and to ensure that the "democratisation" of real estate does not lead to a "fragmentation" of investor protection. As of late 2025 and early 2026, the market potential for SM-REITs is estimated to exceed USD 75 billion, covering over 500 million sq. ft. of REIT-able stock.
3. Structural Comparison: Ownership vs. Unit Holding
Understanding the difference between the legacy FOP model and the new SM-REIT model is critical for any market participant.
The most significant shift is the mandatory listing. By requiring SM-REIT units to be traded on stock exchanges, SEBI has solved the primary pain point of fractional ownership: the exit. In a legacy SPV, an investor wanting to sell often had to wait for the platform to find a new buyer. In an SM-REIT, liquidity is provided by the public market, though "depth" of liquidity remains a concern for smaller schemes.
4. Investor Opportunity: Access, Yield, and Portfolio Strategy
The allure of SM-REITs lies in the yield-to-risk ratio. According to Knight Frank’s 2025 India Real Estate Report, Grade A commercial office spaces in top-tier cities like Delhi-NCR, Bengaluru, and Pune have seen rental growth of 3% to 8% YoY.
Yield Expectations
Investors can typically expect:
Rental Yields: 8% to 11% (Pre-tax) distributed as dividends or interest.
Target IRR: 13% to 17% over a 5–7 year horizon, factoring in capital appreciation.
The "95% Rule"
A critical safety net in the SM-REIT framework is the mandate that at least 95% of the scheme’s assets must be invested in completed, revenue-generating properties. This differentiates SM-REITs from many "real estate funds" that take on development risk. For the investor, this means your money is not building a skyscraper; it is buying one that is already occupied by a tenant like a global bank or a tech giant.
Portfolio Diversification
In 2026, the strategy is shifting from "one-off" buys to diversified portfolios. Instead of owning one ₹1 crore residential unit, an investor can split that capital across five different SM-REIT schemes—one in warehousing, one in a life-sciences park, and three in IT SEZs—effectively hedging against sector-specific downturns.
5. Developer Perspective: Capital Access Without Compromising Control
For developers, SM-REITs are a vital tool for Asset Monetisation and Capital Recycling.
Monetising the "Mid-Sized" Asset
Many developers possess high-quality assets in the ₹100–300 crore range. These are often "stranded" because they are too small for a traditional REIT listing (which requires ₹500 crore+) and too large for most individual buyers. SM-REITs allow developers to offload these assets to the public market, unlocking equity that can be deployed into higher-margin new developments.
Retaining the "O&M" Revenue
Crucially, while the ownership moves to the trust, the developer can often retain the Property Management or Facility Management contracts. This enables a transition from a capital-intensive business model to a service-oriented, fee-based model. This shift is highly reflected in valuation multiples in financial markets.
The Governance Burden
However, the developer's role as an "Investment Manager" (IM) is now a high-stakes compliance function. Under the SEBI 2024 norms, the IM must maintain a net worth of ₹20 crore and have at least two years of experience in real estate management. Furthermore, the IM must hold a "skin in the game" of 5% to 15% of the units for up to 20 years. This ensures developers cannot simply "pump and dump" low-quality assets onto the retail public.
6. Regulatory & Operational Risks: No More Fluff
While the narrative of "democratisation" is powerful, the ground reality in India is fraught with operational risks that require deep due diligence.
Title Custody and Ownership Risk
In India, real estate titles are presumptive, not conclusive. Even within a SEBI-regulated SM-REIT, the underlying SPV must have an impeccable title. If a legacy dispute arises ten years down the line, the unitholders bear the brunt. Investors must look for schemes that provide a "Title Insurance" or have undergone rigorous third-party legal audits.
Exit Liquidity Constraints
The liquidity of SM-REIT units, despite being listed on the NSE or BSE, is constrained by the significant minimum investment requirement of ₹10 lakh. This high barrier to entry limits the pool of potential buyers compared to regular equity shares. Consequently, during periods of market downturn, investors might struggle to find active buyers for their "listed" units, potentially necessitating a sale at a substantial discount to the Net Asset Value (NAV).
Valuation Opacity
While SEBI mandates annual independent valuations, the appraisal of commercial real estate is sensitive to "Cap Rate" assumptions. A slight change in interest rates (as seen in the RBI’s 2025 repo rate adjustments) can significantly swing the NAV. There is a persistent risk that the marketing "headline yield" is inflated by aggressive valuation models that don't account for future capital expenditure (Capex) or tenant churn.
Sponsor/IM Failure
If the developer/Investment Manager faces financial distress or a loss of reputation in their main business, it can impact the "brand" of the SM-REIT. Unlike a traditional REIT which has multi-asset scale, an SM-REIT scheme is often a single-asset play. If that asset fails or the IM neglects maintenance, the investor has no "buffer" to protect their capital.
7. The 2026 Outlook: What to Watch
The most pivotal update for 2026 is the SEBI Circular reclassifying REITs as "equity-related instruments" effective January 1, 2026. This allows Mutual Funds and Specialized Investment Funds to include REITs/SM-REITs in their equity portfolios. According to Law. asia, this move is expected to trigger a massive influx of institutional capital into the sector, significantly improving secondary market liquidity.
Furthermore, we are seeing a "Migration Wave." Existing fractional platforms that fail to meet SEBI's ₹20 crore net worth or operational criteria by mid-2026 will likely be forced into consolidation or liquidation. For investors, this is a period of "flight to quality"—moving capital from unregulated platforms to those with strong developer pedigree and regulatory compliance.
8. Conclusion: Democratisation Needs Discipline
The rise of fractional ownership and SM-REITs is undoubtedly a net positive for the Indian real estate ecosystem. It provides developers with a structured exit and offers investors a chance to participate in India’s commercial growth story. By 2030, the "retail landlord" will likely be a unitholder in an SM-REIT rather than an owner of a physical shop.
However, the "democratisation" of access must be matched by a "democratisation" of information. High yields often come with high concentration risks. The future of this sector depends on the Investment Manager’s integrity and the investor’s discipline. For a developer, the goal is no longer just to "sell square feet"; it is to manage a financial instrument. For the investor, the goal is not to "own a brick," but to understand a balance sheet.
As the market matures, the distinction between a "real estate project" and a "yield product" will define the winners of India’s new property cycle.
