Mint Primer: Will the Strata crisis hit small & medium Reits?

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What went wrong at Strata?

Strata, a dominant fractional real estate platform, surrendered its SM Reit licence following a dispute with its developer-partner over a warehousing project in Hosur. Strata CEO Sudarshan Lodha obtained anticipatory bail from Madras high court on 22 April amid allegations that a company official had impersonated a Sebi official to get information from its project partner Avigna. The Securities and Exchange Board of India asked investors to exercise caution due to legal proceedings against the Strata SM Reit promoter. Strata said it gave up its SM Reit licence without admitting or denying any wrongdoing.

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What does this mean for SM Reits?

It is a reminder of the corporate governance and ethical standards to be followed by promoters and issuers of SM Reits. Failure to adhere to these can adversely impact all parties involved in SM Reits, particularly unit holders, said Vedika Shah of law firm Pioneer Legal. The industry is still at an early stage. Property Share Investment Trust launched the first SM Reit scheme last year and has applied for a second. The Strata crisis has happened at a time when the growth of SM Reits has been muted. Industry experts believe this is a wake-up call for existing platforms and potential entrants into the space.

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Why did Sebi regulate fractional realty platforms?

In fractional ownership, a pool of individuals investors own commercial real estate. After the pandemic, this attracted retail investors, drawing Sebi’s attention. In March 2024, to protect investors’ interests and make fractional ownership a viable financial product, Sebi issued SM Reit regulations and established a governance framework.

Is this a setback for small & medium Reits?

Industry experts believe that SM Reits have the potential to reshape and organize the commercial property market that is fragmented. As per property advisory CBRE India’s estimates, the country’s potential SM Reit market value is likely to exceed $60 billion by 2026. The Strata issue therefore is a temporary glitch, and doesn’t question the business model or viability of SM Reits. However, these will be closely monitored and regulated, just like traditional Reits going forward.

Can Strata bounce back?

While surrendering the SM Reit licence, Strata said it intended to apply for a fresh licence after the case is over. This matter does not affect the existing investments with Everstrat (the real estate platform), the firm said. Industry experts believe the brand value and market perception of Strata as a fractional ownership player would take a beating due to the crisis. So, while it may not affect the overall SM Reit space, it is a promoter-specific matter that will be a setback for Strata. It has to be seen how Sebi handles the matter.