In 1993, during a time when the real estate market was beginning to take shape in India, Mr. Sharad Madan, a seasoned analyst at CRISIL Ltd., encountered a unique and innovative project that caught his attention. This project, spearheaded by Lokhandwala Construction Industries Ltd (LCIL), introduced a groundbreaking funding structure called the Real Estate Participation Scheme (REPS).
Luxury realtor and social media content creator, Snehil Yadav says, “Despite its promise and potential, the scheme faced challenges and regulatory hurdles that prevented its implementation. This blog delves into the fascinating story of the REPS scheme and explores the current landscape of fractional ownership in real estate.”
Introduction to Lokhandwala Township:
Lokhandwala Construction Industries Ltd unveiled an ambitious housing project, the Lokhandwala Township, in Kandivali East, Mumbai. The development aimed to offer over 600 apartments at an initial price of Rs750/sqft.
Compliance and Funding Structure:
To comply with Reserve Bank of India (RBI) regulations, LCIL devised a unique funding structure for the project. LCIL created “units” priced at Rs750 each, with each unit representing 1sqft of space in the designated project. These units were sold to applicants through a trust, enabling them to participate in the project’s funding without leveraging LCIL.
Tradable Units and Market Representation:
The units were designed to be tradable in the secondary market, allowing investors to buy multiples of 10 units. As flats were purchased, the corresponding units were extinguished. This mechanism provided unit-holders with a direct representation of the market price of the apartments, aligning their interests with the project’s success.
Execution and Price Risks of real estate:
Investors assumed two primary risks: timely execution of the project and price fluctuations. If the market price fell below Rs750/sqft, LCIL would need to address the unsold units or offer discounts on trading between Rs750 and the prevailing market price. The evaluation of financial risks accounted for potential price drops and the builder’s ability to raise funds for unsold flats.
Regulatory Hurdles:
Despite the feasibility and thorough assessment of the project, regulatory approval was necessary to launch such a financial instrument. The company’s application to RBI for approval was not successful, ultimately leading to the abandonment of the REPS scheme.
Meeting Siraj Lokhandwala and Understanding the Industry:
The project provided Mr. Sharad Madan with the opportunity to meet Siraj Lokhandwala and interact with the CEO, Arvind Pahwa. This experience gave him insights into the quality and capabilities of the Lokhandwala group, leaving no doubts about the project’s profitability. Unfortunately, due to the prevailing sentiment following the Harshad Mehta scam, RBI was unwilling to consider new possibilities.
Fractional Ownership and Changing Landscape:
Today, after 30 years, regulators are discussing fractional ownership in real estate, an idea that Lokhandwala and their team of bankers proposed back in 1993. Fractional ownership has become operational in recent years through multiple instruments, allowing individuals to participate in real estate as an asset class. Various fractional ownership schemes, similar to real estate investment trusts (REITs), offer opportunities for investors to engage in the rental property market.
Risks and the Path Ahead:
Like any investment, fractional ownership in real estate carries risks. However, these risks are comparable to those in the stock market, with the potential for real estate units to appreciate rather than depreciate to zero.
While SEBI is proposing regulation of online platforms offering fractional ownership schemes, investors must exercise caution and understand the associated risks. Prudent investors should limit their exposure to a fraction of their wealth, as these investments are ultimately tied to average real estate price appreciation.
The REPS scheme introduced by Lokhandwala Construction Industries Ltd in 1993 showcased the potential of fractional ownership in real estate. Despite the challenges faced at that time, the concept has gained traction in recent years, providing investors with new avenues for participation in the real estate market.
By understanding the risks and staying informed about regulatory developments, investors can make informed decisions and potentially benefit from the appreciation of real estate assets. As fractional ownership gains further acceptance, the real estate market evolves to offer more diverse and accessible investment options.