Fractional Ownership of holiday homes - an agent’s perspective

The pandemic impacted our lives in indescribable ways. More than anything else post March 2020 almost all aspects of our lives have been redefined especially in relation to how and where we now choose to live. The urge to seek out havens of solace for our loved ones has resulted in unimaginable rush to buy larger primary homes as well as invest in vacation homes in top tourist as well as offbeat destinations. From the hills of Himachal and Uttarakhand to waterfronts of Alibaug or Goa and the soothing landscapes of Nilgiris - there is a discernible and steady demand for second homes for those who can afford them. That point of affordability is now being turned on its head by new ventures promising shared ownership of your dream cottage in the hills or the Spanish hacienda you always dreamt of owning.?

This concept of shared ownership or Fractional ownership has already been experimented with and refined in the West and is now promising to take roots in the Indian landscape.?

Let’s start with the basics first -

Fractional ownership of real estate allows a group of unrelated individuals to come together and jointly purchase a property with each of them individually holding a certain share of the asset which typically might be reflected in terms of nights/days of usage across the year.?

To illustrate it in simple terms: a villa in North Goa costing 8cr is offered to 8 individuals at ticket size of 1cr apiece making them 1/8th owner of that property. How would that reflect in terms of usage - out of 365 days they get exclusive usage rights for 1/8th of 365 or 45 nights/days across the year.?

Sounds simple enough - however like everything else the devil lies in the details. The execution of this simple concept and making it into a sustainable and scalable model has got most of the early operators stumped.

On the face of it, this is an amazing opportunity to own a holiday home at 1/8th or 1/6th the price so what is stopping buyers from plunging headfirst into this unique opportunity - why isn’t it the hottest offering in the market - and why isn’t every developer exploring this avenue??

What should be the parameters to identify which companies and their fractional ownership propositions could be worth considering? Sharing my two cents of what to look for:

A.? The Team - background of the promoters and who all comprise the core team in my opinion is one of the biggest tests. More than anything else fractional ownership of holiday home is about real estate and service quality. The underlying asset is the real estate, and the competitive advantage is the service aspect - right from onboarding the possible diverse group of individuals to managing their expectations during the term of ownership and even while exiting the pool. And then there’s the question of legal diligence, and taxation aspects - so essentially it boils down to a team comprising of stalwarts from real estate, hospitality backgrounds aided by legal eagles and tax experts to make it a seamless and sustainable business model.

B. The entry criteria laid down by the company: what should be the threshold for participating in this - should it be 10 lacs or 50 lacs or couple of crores? What is the entry ticket size chosen by the firm – because that would go on to determine how far wide would they be casting the net. In other words what should be the minimum buy in for the subscribers. In my opinion, that number should be north of 75-100 lacs. That ensures homogeneity in the subscriber base and most importantly creates the combined purse size to purchase an asset that is exclusive and aspirational – and more importantly would continue to be relevant 4-6 years post first purchase.?

C. Their geographical presence: why do most people feel safer going with mutual funds rather than investing in specific stocks? It’s about diversifying your risk and relying on the domain knowledge of experts to ensure a steady stable growth in value. In the same vein mutual funds themselves place bets on diverse industries and players basis their understanding of how different industries and specific players are going to perform over the next few quarters or over longer periods of time. Similarly for fractional ownership enterprises to succeed, they need to be able to tap into geographies that offer different backdrops or flavours to their clients. Coffee plantations in Coorg to the thrill of being amidst tiger reserve areas to the beaches of Goa or Alibaug and valleys of Munnar or Lonavala- the spread should be there for everyone to satisfy their urges.? The second benefit that accrues out of this diversification is the ability to tap into clients who have the capacity to invest in multiple subscriptions - so instead of buying 1 holiday home for 4-5cr in Goa or Himachal - the client can now pick 3-4 different assets to invest across geographies and allow themselves the freedom to pick and choose their next family holiday experience.

D. How many shares are they dividing the asset ownership into: This question would plague all entrants in this space as there is no one right number. If we are to go by data and a fair bit of instinct - we need to understand the vacation pattern of typical Indian family.? Assuming a nuclear family planning vacation with or without grandparents - typical vacation day count is around 15-25 days. If you add an existing holiday home - the count rises to 35-45 days in a year and if you factor in an element of weather-based getaways - it rises to 55-65 days across the year. The overriding factor for this schedule involves school calendar as well as health- wellness related travel for grandparents / parents and ease of accessing the destination. ?Depending on the geography that these holiday homes are based there are varying peak seasons / long weekends as well as no go dates. If you add typical maintenance cycle of 3-5 days per quarter that gives you almost 12-15 days where the property won’t be available for use. Sewing all these pieces together a pattern begins to emerge which helps us arrive at a ballpark 45-55 days of usage per family. That can be a good starting point for offering 6-8 shares per asset.

E. Use of technology: The critical success factor for a product like this comes from the ability to create a real time dashboard that allows transparent handling of the asset and the underlying usage rights, revenue stream details and well as support service. For any venture in this space to get a clear advantage over its competitors they need to use technology as an enabler and as a differentiator. Those unable to stitch this into their business operations would invariably end up stumbling along the way and worse still impact customer confidence and inadvertently affect the entire business ecosystem.

F.? Choice of asset type: Given that we are living in the age and under the glare of social media - there’s a need to bear in mind the urge to belong. Everyone with a handset now is an influencer of some sorts and the options that get showcased keep growing day by day. The portfolio of offerings needs to include products or rather Experiences across different architectural influences, landscapes and backdrops, and configurations to cater to varying needs that might arise from the asset owners.?

Remaining asset light - easier said than done. The urge to juggle between pre owning the asset and then finding part owners vs only playing the role of the aggregator and sourcing part owners on the trot will be a constant struggle. The only ones left standing would be those who do not get sucked into the whirlpool of valuation game but focus only on creating a sustainable scalable business model.?

To sum it up - the market for fractional ownership is ripe for taking provided the players entering into this space have planned it through and sharpened their business plans considering all possible scenarios.