India's first SM REIT IPO opens today. Here’s the good and bad of it

The initial public offering (IPO) of Property Share Investment Trust (PSIT), India’s first registered small and medium real estate investment trust (SM REIT, will open for subscription today and close on 4 December. 

The minimum subscription for the share sale of PSIT's first scheme—PropShare Platina—is ₹10 lakh. After listing, one can buy and sell it on stock exchanges like any other REIT in lot sizes of ₹10 lakh. 

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What's an SM REIT?

SM REITs can raise between ₹50 and ₹500 crore to invest in commercial or residential real estate. They are smaller than regular REITs, which have to be above ₹500 crore in size. SM REITs also generally take bets on specific properties rather than a basket of properties like regular REITs.

What is this SM REIT about?

It is an offering by a fractional real estate player PropShare Investment Manager Pvt. Ltd that manages PSIT. Propshare Platina is the first scheme under PSIT. 

The Propshare Platina SM REIT is raising ₹353 crore to invest in Prestige Tech Platina, located on Bengaluru's Outer Ring Road. The office space was built by the Prestige Group. 

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PSIT proposes to lease it to [24]7.ai Inc., a US-based tech company, at a rental yield of 9%. The lease would be for 9 years.

Will there be property appreciation?

REITs are generally bought for rental yield rather than property value growth. But if it happens, investors will benefit.

What's the tax implication?

If PSIT distributes the yield as dividends, investors get 9% tax-free. If part of it comes as interest, it is fully taxable. If one sells units within one year, a 20% short-term capital gains tax (STCG) will apply. After one year, a long-term capital gains tax (LTCG) of 12.5% will apply.

What's good?

Nine per cent is a high rental yield. If the same is distributed as tax-free dividends, investors will also get good post-tax returns.

What's bad?

The REIT is for six floors. While the lease tenure is nine years, the lock-in for the 1st, 2nd, and 3rd floors is only three years. It is five years for the 5th floor and seven years for the ground and 4th floors. The rental escalation starts after three years. It goes up by 3.85% after three years and 15% after six years. So even as escalation starts, lock-in ends on many floors.

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Secondly, the investment manager will take a 0% fee in the first year, rising to 0.3% in the third year. If it is not clear where someone is making the money from, generally, that's a worrying sign.