How Property Share is giving investors a piece of the action in real estate

Property Share is the investment manager for Property Share Investment Trust, India’s first registered small and medium real estate investment trust (SM Reit). The public offer aimed to raise ₹353 crore to acquire six floors of a building in ‘Prestige Tech Platina’, an office park in Bengaluru, from US-headquartered tech firm 24(7).ai, and then lease it back to the company for a rental yield of 9%.

SM Reits are similar to Reits, and likewise, are governed by the Securities and Exchange Board of India (Sebi). But rather than invest in a basket of properties like regular Reits, they generally bet on specific and completed income-yielding properties, as PropShare Platina did, and launch individual schemes—much like individual mutual fund schemes—to raise capital. And unlike Reits, where the value of the properties proposed has to be at least ₹500 crore, the threshold for an SM Reit scheme is ₹50 crore, with the ceiling at ₹500 crore.

Industry experts believe that SM Reits can reshape India’s commercial real estate landscape by investing in ready properties, and organizing an office market that is fragmented. According to a recent report by workplace solutions firm Vestian, more than half of India’s Grade-A office space is Reit-worthy. And as per property advisory CBRE India’s estimates, the country’s potential SM Reit market value is likely to exceed $60 billion by 2026.

But SM Reits have been a long time coming. India’s real estate sector has suffered from a paucity of avenues for participation because poor transparency, shady stakeholders and stratospheric prices have barricaded the sector from retail investors.

As per property advisory CBRE India’s estimates, the country’s potential SM Reit market value is likely to exceed $60 billion by 2026

While equities offer a convenient way to benefit from the real estate boom, they do not offer the option of steady rental income, which is one of the key advantages of commercial property as an asset class. Reits addressed that gap and now SM Reits are promising to do the same, at least for people with plenty of money to spare—the minimum investment is ₹10 lakh. But they have come into existence only because of what preceded them: fractional ownership, a concept introduced in India by Property Share.

Fractional ownership

Gupta’s decision to invest in the PropShare Platina IPO was not taken on the spur of the moment. Four years ago, he had invested in a Property Share listing in Bengaluru. He had done so through the fractional ownership model, where a pool of individual investors can co-own commercial real estate, such as an office, retail space or a warehouse, through an alternative investment route.

A fractional ownership platform raises investor money to purchase a specific property through a special purpose vehicle (SPV) or private limited company. The assets are usually leased, so investors get a monthly rental.

There was a universe of assets valued below ₹500 crore being bought and sold to investors under this model, without any regulatory purview. Property Share was one of the earliest and largest companies in this market. Strata, hBits, Aurum WiseX and Assetmonk followed in its wake. Many others, including some small and fly-by-night players, also got into the business.

As the number of fractional ownership platforms grew, particularly after the pandemic, the number of retail investors putting money into them—like Gupta—also multiplied, drawing the attention of the Securities and Exchange Board of India (Sebi). So, in March, to protect investors’ interests and make fractional ownership a viable financial product, Sebi issued regulations for small and medium real estate investment trusts or SM Reits.

Among other things, the regulator requires the investment manager of an SM Reit to have a minimum net worth of ₹20 crore. It has to have a six-member board, including three independent members. And each scheme has to have a minimum of 200 investors as unitholders. In addition, investment managers need to hold 5% of the units, which they cannot liquidate for the first few years.

Closing one door as it opened another,Sebi also stated earlier this year that fractional real estate platforms will not be able to launch any new schemes for investors until they get themselves registered as SM Reits.

“Real estate is one of the largest asset allocations as far as retail investors go, which is why Sebi is looking to formalize this sector via SM Reits. They may be an institutional play, but they are a lot more relevant for retail investors who want individual asset exposure,” said Vinay K., tax partner at consultancy firm EY India.

Mixed response

PropShare Platina is the first SM Reit scheme to launch since the regulator’s green light. The offer was fully subscribed and then a little. It received bids for 4,002 units against the offered 3,353 units, at a price band of ₹10,00,000-10,50,000, according to data on stock exchanges. While the non-institutional investor portion was subscribed 4.37 times, the response from institutional investors was muted, with barely any subscribers (0.13 times). It was not a runaway success, but it marked a new beginning.

“The first IPO has made a decent debut and people have invested in the trust. This has inspired more confidence in this asset class for retail investors, and other players, who have been waiting for this to happen,” said Vedika Shah, senior associate at law firm Pioneer Legal.

For Property Share, this is just the beginning. “The IPO was a landmark event because globally, there is no SM Reit concept,” said Kunal Moktan, its co-founder and chief executive officer. “So, we are happy to be the first to bring it to investors, and with the response it received.”

Even the company’s rivals are pleased. “The first SM Reit IPO has succeeded. We are super-positive because this will really open the floodgates for the sector. SM Reits will lead to the financialization of assets, where investors can exit at the exchange level,” said Strata founder and CEO Sudarshan Lodha.

Institutional investors, however, will need some convincing going by their tepid response to the PropShare Platina offer. Industry experts believe that once more such schemes launch, their participation will also pick up.

As things stand, however, only the very rich can afford to subscribe to SM Reits. While some believe this is because the regulator wants only serious investors putting money into SM Reits, others see the threshold being lowered. “While the minimum ticket size of ₹10 lakh for SM Reits makes the product suitable only for HNIs at the moment, we think the regulations will gradually align more towards common investors, as happened with Reits,” said a Mumbai-based money manager, requesting anonymity.

Birth of an idea

The broad idea of creating a business model through which individual investors couldaccess commercial real estate was born in a cramped dorm at IIM-Ahmedabad, where Property Share co-founders Moktan and Hashim Khan were batchmates.

Moktan joined global asset manager Blackstone Real Estate’s founding team in India, which was setting up shop here. Khan moved to the Middle East and joined conglomerate Alshaya.

After Moktan left Blackstone in 2014, Khan and he reconnected, and decided to start Property Share. This is when fractional ownership started in earnest. Co-ownership of real estate has existed in India for years but in an unorganized fashion. For instance, office spaces in Mumbai’s business district, Nariman Point, would be sold to multiple individual investors.

Since there was no precedent of an organized platform doing it, the duo had to build it from scratch before launching it in 2015. Buying premium office space was expensive, so they started by listing small residential properties—8-10 investors pooled in money and bought units for around ₹60 lakh. The minimum investment was ₹5 lakh. Property Share would then let out the units and earn rental income, which was distributed among the investors.

“There was no investment opportunity for the average Indian investor who wanted to invest in rent-yielding commercial real estate. But it was difficult to build a user base in the early days. We had friends and family who invested in the first few schemes,” said Moktan.

Soon, the company realized that residential properties weren’t the sweet spot—individual investors can buy housing units anyway. So, as Property Share’s user base grew and the platform gained traction, it switched to office space.

There was no opportunity for the average investor wanting to invest in rent-yielding commercial real estate.
—Kunal Moktan

In terms of rental yields, too, office space was more lucrative. Rental yield is the yearly rental income as a percentage of a property’s value.Residential rental yields are low, ranging between 2-3%. In contrast, fractionally owned commercial assets offer a much higher yield of 7-9%, compared to 5-5.5% in traditional Reits. One of the main reasons for this is that fractional platforms, which will now operate under SM Reits, invest only in rent generating properties. Up to 20% of general Reit portfolios, on the other hand, can be held through under-construction properties as well as land.

Turning point

In its first commercial office asset listing, Property Share had bought space at Umiya Business Bay, an office park in Bengaluru’s Outer Ring Road, for ₹2 crore. Investors loved the high 8-9% rental yield and grabbed the opportunity. Property Share eventually exited the investment, and investors got an internal rate of return (IRR) of around 18% on it.

That first office property listing, followed by a Pre-Series A funding infusion of $700,000 by Singapore’s BEENEXT and Pravega Ventures in 2017, proved to be the turning point. “We came in early on, and saw a very interesting marketplace investment opportunity that they had created. It provided end-users a chance to own a piece of real estate as well as accompanying liquidity (in the form of rental income). Now, with SM Reits, that liquidity is available and can be traded on the exchanges,” said Dirk van Quaquebeke, managing partner at BEENEXT.

Globally, companies such as US-based Roofstock have executed fractional real estate successfully.

“What I really like is that the team knows how to underwrite risk.That’s the foundation of their business and the credo they lived by. Because, if you misuse the trust of the people who trust you with their money, and do not fulfil fiduciary responsibilities, that’s a problem,” said van Quaquebeke.

The capital-raise gave PropShare the resources to focus on larger office properties and attracted a more diverse group of investors through digital marketing. “It was a pivotal moment for us that helped us to scale. It also validated our vision,” said co-founder Khan, who is also the company’s chief technology officer.

Subsequently, the founders raised Series A funding of $4 million in a round led by Lightspeed Venture Partners. In June 2022, WestBridge Capital invested $47 million.

From creating the structure of buying different assets through special purpose vehicles to the ₹25 lakh minimum investment per scheme, Property Share laid the foundation that was followed by other platforms.

It was a pivotal moment for us that helped us to scale. It also validated our vision.
—Hashim Khan

Amid all this, however, the company faced one big challenge.“Convincing people (retail investors) to invest is the biggest challenge. You have to have a really good product. Since it was a new investment route, gaining the credibility to raise capital took some time,” Moktan said.

More IPOs coming

After the PropShare Platina SM Reit IPO this month, the company plans to launch multiple such IPOs in the coming months. It will also look beyond the office sector into retail and warehousing assets across Bengaluru, Mumbai, Hyderabad, Pune and the National Capital Region.

Property Share is working on 8-12 assets that will be launched as different schemes through IPOs. From around ₹1,800 crore of assets under management (AUM), it plans to grow to ₹5,000 crore in 2-3 years.

“We will scale up our SM Reit portfolio and want to be a market leader in this space. But we operate as an alternative investment platform, so besides SM Reits, we will also explore and expand other businesses as well,” said Moktan.

In 2022, for instance, the company entered the UK market and bought three warehouses there, which it manages for investors, who include Indians as well as non-resident Indians (it exited one of the warehouse investments subsequently).

Going forward, industry experts believe SM Reits could prompt a wave of consolidation, leading to 3-4 strong players, which is similar to what happened in the traditional Reit space. Currently, India has three listed office Reits and one retail Reit.

Aside from Property Share, only two other companies currently have an SM Reit licence: managed office space provider EFC (I) Ltd’s Emberstone SM REIT and Rudrabhishek Enterprises Ltd’s (REPL) ImpactR SM REIT. Three fractional ownership platforms, Strata Property Management, hBits Proptech and Aurum WiseX, have applied for a licence and expect to get one soon.

Going forward, industry experts believe SM Reits could prompt a wave of consolidation, leading to 3-4 strong players, which is similar to what happened in the traditional Reit space.

“We believe SM Reits have a lot of potential and offer an opportunity to manage good quality assets and raise funds. And returns can be multiplied for stakeholders. We plan to launch an IPO in the next few months,” said Pradeep Misra, chairman and managing director, REPL.

As more SM Reits get listed, more individual investors will come in. “Will we see many more players entering this space? The market will tell. But will we see many more SM Reit IPOs? Yes,” said EY India’s Vinay.

Sandeep Gupta may well be one of the investors eagerly waiting for those IPOs. He was one of the 419 investors who participated in the PropShare Platina public offer, submitting two applications—one for himself and one for his mother. While his mother’s application was accepted and one unit was allotted to her, his own application was rejected.

With inputs from Abhishek Mukherjee.