Fractional Real Estate vs REITs vs SM REITs: What's the Difference and Which one is Better

The Indian real estate market is opening up to a wide range of investors, thanks to innovative models like REITs, Small and Medium REITs (SM REITs), and fractional ownership platforms.

These investment vehicles offer a lower entry barrier, making real estate more accessible to retail and HNI investors alike. However, each comes with its own structure, risk profile, return potential, and level of liquidity.

Whether you're a first-time investor looking to diversify, or a seasoned one exploring stable income-generating avenues, understanding how these models work is essential.

What are REITs?

REITs (Real Estate Investment Trusts) are investment vehicles that pool money from multiple investors to buy, manage, and sell income-generating commercial properties. Listed on stock exchanges, REITs function much like mutual funds for real estate.

Key Features of REITs

• Listed and regulated by SEBI
• Investment in income-generating commercial real estate
• Offers liquidity through stock market trading
• Minimum investment: ₹10,000–₹15,000 (for listed REITs)
• Mandatory dividend payout of 90% of net income

How do REITs Work?

REITs collect capital from investors and use it to acquire and manage a portfolio of income-generating assets like office buildings, malls, or warehouses. Investors earn income through dividends from rental income and capital appreciation.

What are SM REITs?

Small and Medium REITs (SM REITs) are a new SEBI-regulated category introduced in 2023, aimed at democratising access to real estate by allowing investments in smaller projects through private placement.

Key Features of SM REITs

• Target smaller real estate projects (₹50 crore–₹500 crore)
• Minimum investment: ₹10 lakh
• Structured as privately placed, unlisted vehicles
• Ideal for HNIs and accredited investors
• Regulated under the REIT framework

How do SM REITs Work?

SM REITs pool funds from qualified investors and allocate capital to 1-2 mid size real estate projects. The aim is to offer stable income and moderate capital appreciation through private deals.

What is Fractional Real Estate?

Fractional real estate allows investors to purchase a fraction or "share" of a high-value property. The ownership is legally recorded and gives rights to rental income, capital appreciation, and usage (in some cases).

Key Features of Fractional Real Estate

• Minimum investment: 10 lakhs
• Direct ownership in Grade-A real estate
• Rental income and capital gain sharing
• Managed by a property management platform
• SEBI has proposed regulation (currently less regulated than REITs)

How does Fractional Real Estate Work?

A real estate asset is split into shares by a platform. Each investor buys a share and co-owns the asset with others. The platforms handles leasing, documentation, maintenance, and distribution of income.

REITs v/s SM REITs v/s Fractional Real Estate: Comparison Table

Should You Invest in REITs or SM REITs?

Benefits of Investing in REITs/SM REITs

• Regulated by SEBI
• Stable returns through rental income
• Diversification of portfolio
• Tax efficiency in listed REITs
• Low involvement, professionally managed

Risks of Investing in REITs/SM REITs

• Market-linked volatility (REITs)
• Low liquidity in SM REITs
• Limited upside due to income distribution rules
• Dependence on commercial real estate cycle

Should You Invest in Fractional Real Estate?

Benefits of Investing in Fractional Real Estate

• Direct ownership in premium assets
• Higher return potential via appreciation and rent
• Lower capital barrier for premium properties
• Transparent management and asset-level visibility

Risks of Investing in Fractional Real Estate

• Illiquidity: Resale may take time
• Platform reliability varies (regulation evolving)
• Shared ownership decisions may require consensus
• Higher risk if asset performance under-delivers.