Post Strata, Pre 2026: The SM REIT negotiation Manual
On 1 January 2026, Indian real estate will show two very different hands of the same capital stack—one already wearing an equity glove, the other still fumbling with migration, governance, and deadlines. The story of 2026 sits at the intersection of three things: a failed SM REIT experiment in May 2025, a brand‑new 12‑month tax arbitrage, and a regulatory spine that decides who is allowed to handle retail capital.
The Two Hands of 2026
On one side stand the large, listed REITs. From 1 January 2026, their units are formally treated as equity instruments for mutual funds and other regulated managers, which means REITs now compete directly with listed stocks inside “equity” buckets, not just as exotic alternatives. Once index eligibility unlocks from mid‑2026, these REITs can start entering broad indices like the Nifty 500, forcing passive capital—ETFs and index funds—to own them as long as they stay inside those indices.
On the other side are the SM REIT platforms, whose world is much messier. They are racing a 31 December 2025 deadline to migrate old fractional‑ownership structures into fully compliant SM REIT schemes under SEBI’s new framework, or risk leaving investors stuck in a grey zone of private companies and disputed control. The assets—warehouses, mid‑market offices, industrial parks—may be attractive, but the gate into 2026 is narrower, guarded by SEBI registration numbers and trustee‑controlled SPVs.
The Strata/Everstrat Warning Shot
To understand the “risk corridor” of 2026, it helps to revisit May 2025. Strata, later rebranded as Everstrat, did not implode because its warehouses or tenants evaporated; the real crack was in the governance bridge connecting investors, developer, and regulator.
In May 2025, SEBI accepted the surrender of Strata SM REIT’s registration and, unusually, issued a public caution advising investors to exercise due diligence and discretion in their dealings with the platform. Around the same time, coverage emerged of a criminal complaint alleging that the promoter had used a fake email ID resembling that of a SEBI official to obtain confidential information from a developer counterpart, eventually leading to an FIR and anticipatory bail from the Madras High Court.
The commercial ground zero for this breakdown was Avigna Industrial Parks in Hosur, where certain mezzanine floors linked to investor money were allegedly not delivered as expected, and rental flows became hostage to a dispute between the platform and the warehouse partner. Investors were caught not by a macro downturn but by the fact that operational control, documentation, and cash‑flow rights were shared, contested, and ultimately weaponised when the relationship soured.
From Fractional Chaos to SM REIT Spine
The Strata episode is exactly the sort of chaos SEBI is trying to fence in with the SM REIT framework and the 2024 REIT amendments. The idea is simple: if retail money is going to fund warehouses and offices through listed units, the rules should look more like institutional REITs and less like club deals dressed up as apps.
Four pillars define this new spine:
- Under the SM REIT framework, at least 95% of the scheme’s assets must be in completed, revenue‑generating properties, sharply limiting exposure to under‑construction or speculative projects.
- Investment managers must keep meaningful “skin in the game” by holding a minimum percentage of units for a lock‑in period, with higher requirements if the scheme uses leverage.
- Each scheme must sit between roughly ₹50 crore and ₹500 crore in asset size, focusing on the small and medium assets that large REITs ignore but still enforcing institutional‑grade structuring around them.
- SM REITs must distribute at least 95% of their Net Distributable Cash Flows, usually on a quarterly cycle, turning cash flow into a legal obligation rather than a marketing promise.
SEBI’s Master Circular for REITs, issued in July 2025, pulls all previous REIT circulars into a single operating manual for disclosures, financials, and ongoing compliance. The cost of sloppy reporting or hidden related‑party deals rises sharply when every manager and trustee is working off one consolidated checklist.
The 12‑Month Arbitrage Weapon
Alongside the regulatory spine, the Union Budget 2024‑25 rewires the capital‑gains system in a way that quietly turns SM REIT units into a tax‑efficient weapon. The new harmonised regime proposes that listed business trusts, including REITs and SM REITs, enjoy long‑term capital‑gains status after 12 months, with long‑term gains taxed at 12.5% above an annual exemption slab.
Physical real estate still needs 24 months of holding to qualify as long‑term under the new regime, and while the rate for long‑term gains is also 12.5%, the asset itself remains chunky, illiquid, and encumbered by high transaction costs and slower exits. In contrast, listed SM REIT units combine:
- A 12‑month path to long‑term capital‑gains status at 12.5% under section 112A, subject to the exemption threshold.
- Exchange listing, which provides screen‑based liquidity and visibility, especially once the ecosystem of brokers and platforms matures.
The comparison that matters in 2026 is no longer “SM REIT versus buying a flat,” but “SM REIT versus fixed‑income instruments.” Many fixed‑income options—especially certain debt funds and interest‑bearing instruments—continue to be taxed at the investor’s slab rate, often in the 20–30% range, which makes an 8–10% rental yield plus 12.5%‑taxed capital gains on an SM REIT look far more competitive on a post‑tax basis.
The New Tax Triangle
| Asset type | Holding for LTCG | Typical tax treatment | 2026 reality |
|---|---|---|---|
| Physical commercial | 24 months | 12.5% on long‑term gains | Illiquid, high entry/exit costs |
| Debt mutual funds | No special LTCG; slab‑based | Up to 30%+ depending on income | Tax drag on predictable yield |
| REIT / SM REIT units | 12 months | 12.5% under section 112A | Listed, equity‑like exposure |
The Investor’s Pot of Gold Checklist
A generous tax regime and a strong rulebook do not automatically protect anyone who writes a cheque; the real protection is the ability to filter platforms. The “pot of gold” in 2026 is not just a high yield; it is a structure that can survive a dispute without freezing investors the way Strata’s investors were frozen.
Three questions sit at the heart of that filter:
Is the license real?
A genuine SM REIT will have a clear SEBI registration number (e.g., starting with IN/SM‑REIT/…) visible on the SEBI website or in formal documents, not just “under application” or “awaiting approval.”Who actually owns the asset?
Under the new framework, the property is held in a Special Purpose Vehicle (SPV) that is 100% owned by the SM REIT scheme, with a SEBI‑registered trustee as custodian; this ring‑fences the asset from the developer’s wider legal or financial troubles.Which regulation protects you?
Assets migrated under the SEBI (Real Estate Investment Trusts) (Amendment) Regulations, 2024 framework are subject to ongoing REIT regulations, while legacy fractional units sitting inside private limited companies are not, even if the marketing language sounds similar.
The Dec 31 Dashboard
| Checklist item | Green flag (safe) | Red flag (risky) |
|---|---|---|
| Registration | SEBI‑registered SM REIT with visible code | “In‑principle approval” or “applied” corporate professionals |
| Asset state | Completed, leased, rent‑yielding properties | Under‑construction or vacant |
| SPV ownership | SPV 100% owned by SM REIT scheme; trustee holds keys | Joint venture or shared control with developer |
| Minimum ticket | Around ₹10 lakh, consistent with framework | Arbitrary small tickets, non‑compliant |
Negotiating the 2026 Risk Corridor
By early 2026, Indian commercial real estate will look very different from the world of private club deals and Excel sheets that existed a decade ago. Large REITs will trade as mainstream equity, increasingly pulled into indices and mutual fund mandates, turning office towers and malls into tickers that sit next to banks, IT companies, and FMCG stocks.
Below them, SM REITs will either emerge as a genuine, regulated bridge between ₹10–50 lakh cheques and mid‑market assets—or be exposed as platforms that never crossed the regulatory fence and stayed stuck in the fractional grey zone. The line between those two outcomes will not be in the marketing copy but in the SEBI registration, the SPV shareholding pattern, the trustee's name, and the specific regulation under which each scheme is run.
The ghost of May 2025 shows what happens when governance, ownership, and regulation are treated as optional extras. The “two hands” of 2026—institutional REITs and fully compliant SM REITs—offer a different possibility: real estate where uncertainty stays private and listed income is backed by law, disclosure, and a 12‑month tax weapon that finally lets investors negotiate on equal terms with every other asset class in their demat account.
Comments
Post a Comment