Tourism is one of the world’s major economic sectors. It is the third-largest export category (after fuels and chemicals) and in 2019 accounted for 7% of global trade.
The Tourism Industry was hit the worst by Covid with estimated losses of USD $910 billion to US $1.2 trillion, according to UNWTO.
💸 Just to put that figure into perspective it is USD 1200000000000 (look at the 0s), which could buy you 64,000 units of the most expensive car in the world (Bugatti La Voiture Noire, each costing close to USD 19 million) or 80,000 Asheanas (Mr. Gautam Singhania’s luxury yacht)
At times, when the losses are so great it becomes difficult to sustain the business on cash-flows and reserves. So the industry looks at external funding or liquidating of their assets. This is done in many ways and fractional ownership is just one of the many ways. This process of fractional ownership can be done by the company itself (who owns the asset) or investment firms that specialise in this process.
“Fractional Ownership” is the new buzzword but the principles of it have been in the financial markets for ages, may since the inception. The simplest form is to think of bitcoin, you cant afford to but an entire bitcoin (okay maybe you can, I can’t) but I want to benefit from the “ups” of bitcoin. So what do I do? I buy a fraction of bitcoin. The value of my “fraction” of bitcoin goes up and down as the price (or let us say perceived value) of bitcoin goes up and down. Sounds familiar to something else? Yes, buying shares of a company is the same concept where we own a part of a company (held shares divided by total shares) that we have bought in exchange for money (or sweat in some cases) and the price of the share goes up and down factored by the market.
Well that is same principle, of fractional ownership in tourism related assets.
Unlikely, you will find large, established or publicly traded companies follow this model. So you wont see Indigo or the Taj offering fractional ownership. If they need cash they will raise money through equity or debt. The simple reason is is that in fractional ownership the key is to get like-minded people or have a well structured documents that all the fractional owners are contracted to adhere to on the onset that protects each an every investor.
But the beauty of Fractional Ownership is that it helps investors to own tourism-related property and luxury holiday resorts at extremely pocket-friendly prices. Fractional ownership refers to a set-up where a group of investors pools in their funds to purchase a property.
🏦 I have used the word “property” and “asset”, as a generalisation and it may be used interchangeably. Property (or asset) could be a hotel building, a home, a car or a fleet of cars, a boat liner or an armada or boats - you get the idea, no?
There travel and tourism property owners share passive ownership of a high-value asset. One of the main advantages of this approach is that it allows the investor to earn returns on the investment. Apart from that, it reduces the financial burden on a single investor to own a property.
By investing in the travel and tourism sector, the investors can share the expenses and incomes related to such assets and property in the right proportions based on the investments. Fractional ownership is the right approach for the assets that are unaffordable for small investors, difficult to manage, or less liquid. The key reason for the concept of fractional investment to get a lot of traction is the cool quotient.
🛥️ Cool quotient: All of us would like to own a yacht like Mr. Gautum Singhania. Ashena is valued at US$ 15 million at it estimated annual running cost could be US$ 1.5 million and above. Now he is not selling his yacht, but at that price point most of us would not be able to afford it. So in cases like this, fractional ownership comes to the rescue where a group of investors can share the burden of the investment and running cost and in return be able to use the asset or sweat it to generate cash (income)
So isn’t fractional ownership the same as time-share?
I get asked this question all the time. Well no it is not! Time-share should not even be confused for share (or shares) in the company. It is exactly as the name iterates, time-share i.e. you get a share of time to use the asset. You do not own the asset, nor are you liable for any expenses or benefit from any income. And the asset can not be valued as part of your portfolio.
Fractional ownership models
There are multiple ways of structuring a fractional ownership, below I have listed the most common and the most accepted models
Joint Ownership
- All the owners have title to the property and reserve the right to usage without harming the rights of other co-owners.
- Any co-owner has the freedom to sell their shares on the property with the consent of the other co-owners.
Co-operative Model
- All the investors interested in buying an asset are to form a co-operative society and then purchase the asset in the name of the co-operative society.
- All the investors become members of the society, and each holds the shares of the property.
Company Structure
- The fractional share-owners form a company and they become the shareholders of the company.
- The fractionally-owned property becomes a property of the company.
Trust
- The prospective fractional owners must create a trust where the property seller is the author of the trust.
- The seller has to execute a trust deed for the benefit of the proposed fractional owners.
Usage Rights for Fractional Owners
Again, usage right can be structured in multiple ways and it best to know this before investing in the fractional ownership. Here below, I have listed to most common ways that usage rights are allocated to the fractional owners.
Pay-to-use
- Co-owners pay a usage fee calculated on a per day or per week basis to use the property or asset.
- The usage fee plus the rental income is used to pay for the expenses.
- If there is a surplus, it is divided among the co-owners.
- If there is a shortfall, all co-owners contribute to cover the expenses.
- The investment of each co-owner can be based on their affordability, investment goals, and other criteria.
- The investment proportion does not have any impact on the usage rights.
Usage assignment
- Each owner is assigned the exclusive right to use the property for a specific number of days per year.
- The usage period can be fixed, variable, or a mixture of both.
- During a co-owner’s usage period, the co-owner can use the property as per their wish or even leave it unoccupied.
- The purchase price and the usage rights of each co-owner are to be proportionate.