Pacaso, which is a relatively new (2020) co-ownership vacation home company, has been making the rounds online lately. That’s because the founders are accomplished, they’ve reserved their Nasdaq ticker, and they’re raising money from retail investors through their website.
Fractional ownership is a topic we’ve discussed a number of times on the blog. And as I’ve said before, I think it’s an answer to this real estate problem: “I have a desire to own a home, or multiple homes, around the world. However, I don’t know how often I’d actually use it/them, and this desire is both expensive and a pain in the ass.”
So it’s not surprising that the market invented timeshares, membership clubs, and fractional ownership models. Timeshares, however, have a bad rap and generally don’t involve the direct ownership of real estate. Instead, what you’re buying is the right to use a property during a certain period of time.
Fractional ownership, on the other hand, typically does involve direct ownership of the asset. In the case of Pacaso, my understanding is that each property is acquired through a single-purpose entity (usually a US LLC). Buyers then acquire a membership interest in that SPE.
This is obviously better. It’s how most real estate projects are structured legally. But there remain a number of important questions about this model: Are fractional shares in a vacation home liquid? How big is the market? And should owners expect appreciation over time?
I haven’t seen great data on this ownership model. There are lots of fractional opportunities and, in theory, a 100% sale of the home could always be offered — which should appreciate like any other property in the market. But selling fractional shares is always going to be less liquid and more challenging.
Maybe that’s okay. Maybe it’s best to think of it more like a consumer good than a real estate investment. But then, why not just spend your money on hotels when you vacation?
This could be my developer GP bias at work — where I’d rather not own an asset with a bunch of strangers and have no control — but I have a hard time getting my head around the fractional ownership model. I think it serves a very clear desire in the market. But is it a good business, and is it the optimal way to buy a vacation home?
Note: None of this is financial advice.
I think that lots of people would like to live in multiple places around the world. I know I would. That's why when people get rich and have the means, they often start to buy second homes. To that end, here's an interesting concept out of Japan called Not a Hotel.
Their model is fairly simply. What they do is build incredible design-forward vacation homes across Japan and then sell fractional shares, while at the same time offering full concierge and management services.
The typical fraction is for 30 days (1/12th), but if you'd like, you can buy up to the entire year. Ownership gives you access to the property for the amount of days you've purchased, or you can trade your days and stay at other homes within the Not a Hotel network.
On the nights you don't use, the company operates the home like a hotel and the owner gets the benefit of reduced management fees.
Most of their homes are already completely sold out. But 1/12th of this home in Kitakaruizawa is available for US$490,000. And on the other end of the spectrum, 1/36th of this Bjarke Ingels-designed home is available for US$2,460,000.
Here's a video of the home:
Fractional ownership is not a new model, but it is still relatively niche. I also think that the way Not a Hotel is going about it -- with their focus on over-the-top design and architecture -- is pretty unique.
I don't know for exactly how long, but for a very long time people have been trying to solve this real estate problem: "I have a desire to own a home, or multiple homes, around the world. However, I don't know how often I'd actually use it/them, and this desire is both expensive and a pain in the ass."
And so unless you have a lot of money and can make the pain in the ass part go away, there seems to exist an ongoing need to make fulfilling this desire both cheaper and easier. Perhaps the most common ways are through a timeshare property or through some kind of fractional ownership structure, where you own a share of a property.
Some companies are even "tokenizing" this second structure on blockchains. I have read about one company that is buying vacation homes and then issuing 365 corresponding tokens. Each token represents 1 day of occupancy (and actual title ownership apparently). In theory this sounds kind of neat, but you're also buying a second home with potentially 364 other strangers.
So here's another approach that I just learned about. The UK-based company, August, has devised a model that works like this:
August starts with "homeowner curation." Meaning, they start by vetting homeowners to make sure that they're not weird or something.
Once they have a suitable collection of homeowners, August sets up a new real estate entity that all of the homeowners must then fund equally.
This entity, by way of August, goes out and buys 5 properties, and each homeowner receives an equal share of the ownership. (Typically, they target 16-21 groups per entity.)
August renovates the 5 properties, gets them ready for occupancy, and then manages them on ongoing basis. This includes bookings.
Finally, each homeowner gets an average of 8-10 weeks per year across all of their homes.
In terms of the homes themselves, their pied-à-terre collection includes homes in Paris, Rome, Cannes, Barcelona, and London. They are typically between 70-100 square meters with 2 bedrooms and 1-2 bathrooms. And the average price/value is supposedly around €1,250,000 (post-renovation?), with the entry price of a share starting at €340,000.
I'm not sure if this share figure is based on 21 homeowners, but if it is, then that's €7,140,000 of equity being raised in order to buy somewhere around €6,250,000 of real estate. Is the spread their margin for setting this all up? There's also an annual fee per owner (€8,600), which presumably covers operating costs and the ongoing management of the properties.
A model like this naturally provokes a lot of questions. What happens if somebody wants to sell? Does the next buyer need to be similarly vetted for overall weirdness? And how liquid is 1/21st of a 5-property apartment portfolio? I don't know these answers, but intuitively these shares have got to be less liquid than a 100% sale.
However, as a solution to the problem of "I have a desire to own homes across Europe but I'm not quite rich enough to make it truly carefree", this seems like a pretty clever solution.