Fractional real estate lets investors buy small “slices” of high-quality property—typically offices, warehousing or retail—through SPVs or the new SEBI-regulated Small & Medium REIT (SM REIT) route. Minimum tickets can be as low as ₹10 lakh (SM REIT) and ₹10k–₹15k (listed REITs). Returns come from rent distributions and price appreciation—but watch liquidity, fees, tenant risk, and taxation. (Business Standard, Securities and Exchange Board of India, BDO India)
What is fractional real estate?
Fractional real estate means multiple investors pool money to own a share of a single, income-generating asset (e.g., Grade-A office floor, warehouse). Historically, platforms used SPVs/LLPs to hold the asset; since March 8, 2024, SEBI created SM REITs, a regulated “mini-REIT” structure designed to bring these deals under the REIT umbrella. (Securities and Exchange Board of India)
Why it matters now
- Lower entry barriers vs direct property purchase.
- SEBI oversight improves disclosures, listing and investor protections (SM REITs).
- Depth and transparency in REIT/InvIT frameworks keep improving (2025 updates). (The Times of India)
The regulatory framework (what changed)
SM REITs (2024): SEBI amended REIT Regulations to permit Small & Medium REITs with scheme-level rules. Key highlights you should know:
- Asset size per scheme: at least ₹50 crore and below ₹500 crore (vs ₹500+ crore for regular REITs). (Business Standard)
- Unit price / minimum ticket: ₹10 lakh per unit at issue; units must be listed via exchange book-building. (Business Standard, Securities and Exchange Board of India)
- Portfolio quality: At least 95% of scheme assets in completed, revenue-generating properties to stabilise income. (Securities and Exchange Board of India)
- Distributions: REIT/SM REITs distribute ≥90% of net distributable cash flows (NDCF) to investors. (INDIAN REITs ASSOCIATION (IRA))
- Migration window: Existing fractional platforms (FOPs) were given time to migrate into SM REITs. (Corporate Professionals)
Listed REITs (context): SEBI (June 2021) reduced minimum application to ₹10k–₹15k and trading lot to 1 unit, widening access for retail investors. (BDO India)
RERA angle: Legal opinions suggest FOPs functioning like intermediaries may need RERA registration as real estate agents, reinforcing compliance obligations in the unlisted SPV model. (SNG & Partners)
How do returns work?
- Rental distributions (quarterly/half-yearly):
- In REIT/SM REITs, payouts retain their nature—interest, dividend, or return of capital—with TDS/ta x treatment per the business trust regime (Secs. 115UA, 10(23FD)). (Brookfield India REIT)
- Capital appreciation:
- Value can rise with rent escalations, lower vacancies, better cap rates, or asset improvements. Market cycles can also hurt values; e.g., Indian office rents/vacancy shift with supply–demand. (Knight Frank)
Simple yield formula:
Gross Rental Yield (%) = (Annual Rent – Property Opex) ÷ Purchase Price × 100
IRR (concept): Use all cash flows (negative at purchase; periodic distributions; exit proceeds) to compute the rate that sets NPV to zero.
Rewards (why investors like fractional/SM REITs)
- Access to Grade-A assets without ₹50 lakh–₹2 crore cheques typical in direct deals. (Business Standard)
- Regulation + listing (SM REITs): Standardised disclosures, public listing and book-building bring transparency and potential liquidity. (Securities and Exchange Board of India)
- Cash-flow focus: REIT/SM REITs target completed, rent-yielding assets; ≥90% NDCF distribution policy is investor-friendly. (INDIAN REITs ASSOCIATION (IRA))
- Portfolio diversification: Add real-asset income alongside equity/debt.
- Professional management & valuation standards mandated by SEBI. (NSE India Search Archives)
Risks (what to watch)
1. Liquidity risk:
- While SM REITs are listed, volumes can be thin (especially for single-asset schemes). Unlisted SPV models can be illiquid until asset
sale.
2. Tenant & lease risk:
- Vacancy, rent renegotiation, or sector downturns (e.g., GCC hiring cycles) can dampen cash flows. (Knight Frank)
3. Concentration risk:
- Many fractional deals are single-asset; a tenant default can materially impact returns.
4. Fees & leakage:
- Check management fees, performance carry, brokerage, SPV costs—they reduce NDCF.
5. Tax complexity (know what you’re getting):
- In business trusts, distributions can be interest (TDS may apply), dividend (depends on SPV tax regime), or capital repayment (reduces cost base). For specifics, rely on the offer document/FAQ of the trust you buy. (Mindspace REIT, Brookfield India REIT)
- 6. Regulatory & documentation risk:
- Ensure any legacy FOP you consider has migrated or operates under the SEBI/SM REIT framework; scrutinise KIS/offer docs and RERA compliance where applicable. (Corporate Professionals, SNG & Partners)
Fractional (SM REIT/Unlisted SPV) vs Listed REIT vs Direct Property
| Feature | SM REIT (Fractional, regulated) | Listed REIT | Direct Property |
|---|---|---|---|
| Minimum ticket | ₹10 lakh per unit at issue | ₹10k–₹15k; 1-unit trading lot | Often ₹50 lakh+ |
| Diversification | Usually single asset/scheme (or few) | Multi-asset portfolio | Single asset |
| Liquidity | Listed, but volumes vary | Listed, better depth | Low (sale/lease) |
| Governance | SEBI REIT norms; trustee, investment manager | SEBI REIT norms | Self-managed |
| Distributions | ≥90% NDCF payout rules | ≥90% NDCF | Discretionary |
| Tax reporting | Pass-through by nature of income | Same | Full owner—rent & CGT |
| Effort | Low–moderate | Low | High (leasing, upkeep) |
Sources for thresholds & rules: SEBI amendments/FAQs, Indian REITs Association, media coverage. (Securities and Exchange Board of India, Business Standard, INDIAN REITs ASSOCIATION (IRA), BDO India)
What returns to expect?
- Residential yields in major cities hover around ~4% gross; Grade-A commercial can be higher, but varies by city, vacancy and lease terms. Use cap rate/yield in the KIS as a guide, not a promise. (AssetMonk)
- For a realistic estimate, build two cases (Base/Stress) with:
- Starting yield, annual rent escalation, vacancy buffer, fees, and an assumed exit cap rate.
- Cross-check with the scheme’s valuation report and market snapshots (Knight Frank/JLL). (Knight Frank)
DD checklist before you invest (print & save)
- Legal & compliance: SM REIT registration, listing venue, RERA relevance, title diligence, encumbrances. (Securities and Exchange Board of India, SNG & Partners)
- Asset quality: Grade, micro-market, WALE, tenant covenants, lock-ins, rental escalations, fit-out ownership.
- Financials: Projected NDCF, expense ratio, leverage, distribution frequency and policy (≥90%). (INDIAN REITs ASSOCIATION (IRA))
- Exit: Secondary market mechanics, potential buyback/asset sale timelines, valuations.
- Tax note: Map distribution types (interest/dividend/return of capital), TDS, and capital gains rules in the KIS/FAQs. (Brookfield India REIT)
Worked example (quick math)
Suppose you invest ₹10,00,000 in an SM REIT scheme.
- Expected first-year net distribution: ₹80,000 (8%), paid quarterly.
- Rent escalation: 5% annually; exit after 3 years at ₹11,00,000.
Yield: Year-1 gross = 8.0%.
IRR idea: cash flows = −10,00,000;20,000;20,000;20,000;20,000;…;11,00,000+lastdistribution-10,00,000; 20,000; 20,000; 20,000; 20,000; … ; 11,00,000 + last distribution. Compute IRR from these flows; compare Base vs Stress (e.g., vacancy or lower exit price).
(This is illustrative—use the scheme KIS for exact inputs.)
FAQs
Is fractional real estate now “SEBI approved”?
SM REITs are. SEBI notified amendments on March 8, 2024, creating a regulated path for fractional deals to list and operate like mini-REITs. (Securities and Exchange Board of India)
What’s the minimum I need?
- SM REIT (IPO): ₹10 lakh per unit. (Business Standard)
- Listed REIT (secondary): ₹10k–₹15k; trading lot 1 unit. (BDO India)
How are SM REITs taxed?
They fall under the business trust regime; distributions keep their original character (interest/dividend/return of capital). TDS and final tax depend on that character and SPV tax elections—check the scheme KIS/FAQ. (Nishith Desai Associates, Brookfield India REIT)
What about returns—are they guaranteed?
No. Payouts hinge on tenant health, lease terms, vacancies, and cap-rate moves. Review the valuation and risk factors section carefully. (Knight Frank)
Bottom line
Fractional real estate via SM REITs gives Indian investors a transparent, lower-ticket route to institutional-grade assets with rule-based distributions and exchange listing. That said, single-asset concentration, liquidity, fee drag, and tenant risk mean it belongs to a satellite allocation, not the core of your portfolio. If you want pure liquidity and diversification, consider listed REITs; if you want full control, go direct—but be prepared for higher capital and operational effort.
Sources: SEBI amendment & FAQs; Indian REITs Association; Knight Frank; BDO; PTI/ET Realty; Mindspace & Brookfield REIT investor tax notes. (Securities and Exchange Board of India, INDIAN REITs ASSOCIATION (IRA), Knight Frank, BDO India, ETRealty.com, Mindspace REIT, Brookfield India REIT)
Note: This explainer is for education, not advice. For tax rates and classification of distributions in your case, rely on the live KIS/offer document and your tax advisor.