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Fractional Ownership Platforms (FOPs) operating in the real estate sector are urging for revised regulatory requirements to stimulate sponsor involvement, ensure ongoing investments, and permit participation in projects under construction. This call to action follows the release of a consultation paper by the Securities and Exchange Board of India (Sebi) in May, which is on the verge of shaping a comprehensive framework to oversee the surge of online FOP platforms.
The essence of fractional ownership lies in enabling investors to hold a small fraction of tangible real estate assets such as commercial spaces, office buildings, warehouses, conference centres, and retail complexes. While the industry appreciates the move towards regulation, there's a resistance to the proposed 15% minimum sponsor shareholding rule set by the capital markets regulator.
Founders argue that requirement for sponsors to hold a 15% stake might not be conducive to technology-driven, asset-light fractional platforms. While it suits traditional Real Estate Investment Trusts (REITs) meant for developers seeking exits, platforms with leaner capital will find it challenging for each asset. Insiders suggest that Sebi is contemplating the industry's plea to lower the requirement to 5%, subject to these platforms demonstrating significant commitment.
Currently, the fractional ownership sector operates without regulatory oversight, and the facilitating platforms don't have exposure to real estate projects. These FOPs levy a management fee on investors.
Sebi's proposal encompasses various facets, including a minimum net worth of Rs. 20 crore, capping total expense ratios, and transitioning from the current Special Purpose Vehicle (SPV) structure to a REIT model. The regulator argues that the shift to REITs might offer tax advantages to investors that aren't feasible through SPVs. However, platforms are advocating for ongoing investments to remain shielded from these structural adjustments to prevent adverse effects on returns.
In terms of investments, industry participants are pushing for Micro, Small, and Medium (MSM) REITs to be allowed to invest in debt and projects under development, similar to conventional REITs. In contrast, the proposed Sebi paper suggests restricting MSM REITs from investing in properties under construction or those not generating rental income, even though conventional REITs can allocate up to 20% of their value to such ventures.
While larger FOPs currently stipulate minimum investments ranging from Rs. 25 lakh to Rs. 40 lakh, Sebi is considering a reduction to Rs. 10 lakh. While opinions vary on this minimum investment alteration, there's agreement that a more transparent regulatory framework will invigorate market expansion.
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