Imagine a property scenario where buyers and investors enjoy the very real perception of getting more than they paid for, where everything is legal, and everyone is happy. Welcome to fractional ownership.
Fractional refers to the concept of purchasers obtaining a deeded partial interest in a specific property. Fractionals may be individual homes or villas sharing major attributes. They offer the benefit of ownership at a fraction of the cost of full ownership.
The asset is divided into portions or shares. If the asset is a property, the title deed can be legally divided into shares. This can be done by creating a ‘mezzanine structure’, i.e., creating a company which owns the property; then allowing multiple owners or investors to own shares in the company. In the case of Saint Laurent, we created a private property company (Société Civile Immobilière – SCI) for this purpose.
Each owner is guaranteed a prescribed amount of access to the asset, which typically can be used or offered to the public for rental. Additionally, each owner pays a portion of the annual running costs, relative to the percent of ownership.
One of the main motivators for a fractional purchase is the ability to share the costs of maintaining an asset that will not be used full time by one owner.
Sounds Like a Timeshare
That’s the knee-jerk reaction. However, fractional ownership is not the same. Fractional ownership affords the freedom and usage benefits offered in timeshare, but with the fundamental difference that the fractional purchaser owns part of the title. Therefore, if the property appreciates in value, then so do the shares. As with sole ownership, fractional owners can sell whenever they deem necessary or prudent, releasing any capital growth from their investment.
Who’s Buying Fractionals?
The fractionals phenomenon is generally attributed to the coming of age of the Baby Boomer generation – those born in the post-World War II era, beginning in 1946 and tapering off by 1964. The ageing of this population is expected to create a high demand for luxury vacation destinations over the next 15 to 20 years. This segment continues to reach its peak earning years, tends to place a high importance on leisure and travel, is increasingly experiencing the freedom of being empty nesters, and either has inherited, or may inherit substantial capital.
Something Doesn’t Seem to Add Up
This is another common knee-jerk reaction. But:
- For those wishing to purchase a primary residence, fractional ownership ensures that you get ‘more for your buck’. It provides your own private space, but offers extensive communal space, which might otherwise get little use or prove unaffordable.
- For those looking for a high-end second home, fractional ownership lowers the cost by eliminating the excess time that normally accompanies a second home.
- The annual use of a second home averages only three to four weeks per year.
- A single second-home buyer pays for 100 percent of a second home and uses it for less than eight percent of the time. By cutting out this 92+ percent wastage, purchasers buy only that part of their dream vacation property that they can actually use.
- Paying for 48+ weeks of ownership that cannot be used every year makes second home ownership impractical for most households. By eliminating the wasted months of use, fractional ownership makes a luxury purchase not only feasible, but attractive.
- Fractionals are highly acceptable in the marketplace, and have become an important sector of vacation ownership.
- The typical fractionals buyer is at least partially motivated by investment and rental income and tends to be younger and less affluent than the luxury whole ownership second home buyer.
- For owners, statistics show that the market for vacation homes holding the promise of rental income is nearly twice the size of the market for vacation homes that are seldom rented.