Is There a Future in Fractional Real Estate Ownership?

fractional real estate ownership can improve affordability for vacation homes

Fractional Real Estate ownership is an interesting concept that first became popular for business jets. Richard Santulli of NetJets is believed to have first pioneered this concept by allowing businesses to purchase shares in a jet to reduce costs (source). In parallel to this concept, Real Estate Timeshares began in the United States in Hawaii in the late 1960s. Exchange programs emerged in the 1970s that helped expand adoption. Fractional real estate ownership is a viable industry with expected future growth. But where and how viable will that future growth be? How will technology advances and the digitalization of the real estate industry impact its future?  

Covid had a dramatic impact on the overall hospitality industry. According to a study by ARDA International Foundation, in 2020 during the onslaught of Covid, the sales volume of the Timeshare industry dropped to $4.9 billion and then began the road to recovery in 2021 to a sales volume of $8.1 billion. The 65% jump was driven primarily by an increase in occupancy rates, from 49.2% to 73.1% (source). The industry was forced to adapt to sudden environmental changes and new health concerns.

How is Fractional Real Estate Ownership Different than a Timeshare?

While it may seem that a Timeshare is the same as Fractional Real Estate ownership, the two are different. Part of the confusion is that these terms are often used interchangeably. A big difference is the size of each market segment. The Fractional Real Estate Ownership industry is comparatively small, with an estimated total sales volume of about $179 million in 2020.

According to Sirkin-Law, the term fractional ownership is generally used to describe arrangements involving a much smaller owner group, a single shared home (as opposed to a multi-unit property or resort), and a higher degree of owner group autonomy and control (source). This makes sense. Timeshare purchases are typically for no less than a week, and typically not more than two. This translates into at least 26 owners for a property or “unit” and up to 52 different owners if all purchased for just one week.

In contrast, most Fractional Real Estate transactions involve 2-12 owners per unit (source). So, there are fewer owners – who likely will visit their property more frequently and stay longer. It also means that the cost will be higher, given there is a smaller pool of buyers to allocate costs. Interestingly, this change of ownership pattern has an indirect side effect. These owners will have a greater stake in how the property looks and feels – more of a pride of ownership. This will impact future appreciation.

What are the Benefits of Fractional Real Estate Ownership?

Timeshares are a viable alternative to buying a second home. So too can a Fractional Real Estate purchase. The initial and ongoing costs will be less than if you were to purchase a comparable single-family home instead. Given the assumption a second home will remain vacant for a good part of the year, the rationale is reasonable.

Another deciding factor is the ease of property management – especially for those who are not a “handyman.” A joint ownership model means that the maintenance tasks will be split up amongst owners, creating an incentive to outsource this type of activity.

An early issue the Timeshare industry had to overcome was that buyers were restricted to a specific week in the year that they bought. This policy was put in place to avoid an oversold condition. Buyers, however, wanted the flexibility to vacation during different weeks. Vacation clubs and point-based systems were then introduced to allow greater flexibility, which has effectively overcome this issue.

There are now over 1,500 timeshare resorts in the United States with over 270,000 units (source). Hospitality companies such as Marriott, Hilton, Wyndham, and Disney have launched their timeshare programs with resorts across the world. The industry has achieved mainstream status.

Challenges of the Timeshare Model

The timeshare business has a couple of challenges. One is that transaction costs can be quite high. A commission-based sales model has led to aggressive tactics that often get out of hand. The other challenge is that “owners” don’t always treat the property as if it were their own. This condition has led to higher capital expenditures than expected. This has resulted in higher maintenance costs than originally forecast.

The Fractional Real Estate industry has done much to distance itself from the Timeshare industry. Seldom will there be a reference to the “T” word in Fractional Real Estate literature!

Future Growth Opportunities

Regardless of these shortcomings, the global vacation ownership market (Timeshares, Vacation Rentals, Travel Clubs, Fractional Real Estate, and other ownership models) is projected to reach $29 billion by 2028, up from $17.7 billion in 2021, growing at a CAGR of 7.3% during 2022-2028 (source).

Real Estate, Title, Property Management, and other firms seeking to capitalize on this growth will need to think creatively and be willing to invest in new technologies to achieve success and profit as part of this market growth. Fractional Real Estate purchases can be 10-12 times more complicated than a transaction with a single buyer and seller. Mechanisms will need to be put in place to accommodate higher, more complex purchase processes with multiple buyers and sellers. Marketplaces will also need to be created to help facilitate the purchase and sale of these fractional ownership interests.

In the future, for the Fractional Real Estate market to scale as part of this expected growth, the industry will need to digitally transform in a secure way. These types of purchases can’t exist in the traditional world of paper-based documents, manual title search processes, and lending documents designed to be secured by a single property with a single owner.

Read more here, Blockchain and the Future of Real Estate

New digital technologies and marketplaces are now emerging that can help usher in this type of Real Estate purchase strategy. The companies that are first to market in streamlining this process will reap big market advantages and growth opportunities. As the price of Real Estate has increased substantially over the past several years, buyers will be more than eager to consider new options in their search for home ownership.