Fractional Market

Is it an Investment Opportunity?

May 6, 2007 Linda Banks

An overview of the fractional marketplace, why would someone use fractional ownership as an investment opportunity and industries that lend itself to fractionalization.

Concept

The word fraction is a mathematical concept. A fraction is basically part of a whole thing – one half of a pizza or one quarter of a pie. In the business world, the word fractional was used to represent a market where there is more than one owner of an asset, with the asset being considered a luxury item and a management company taking care of the responsibilities. In some industries, the group of owners is called a syndicate.

What is conducive to fractionalization?

Any type of luxury market is conducive to fractionalization. The target market of fractional investments is those who wish to occasionally enjoy the lifestyle of the super rich, without the price tag or the responsibility. In addition, some fractional markets are very good investments, while others are riskier.

What markets are fractionalized?

Private jets and airlines have long been in the fractionalization business. JetBlue, owned by Warren Buffet’s company Berkshire Hathaway, has long been associated with fractional jet ownership. Other industries that currently use this business model are yachts, luxury cars, race horses and high-end real estate. But – basically – any market that has normally been associated with the super rich can be fractionalized.

How does it work?

A foundational aspect of the fractional market is the management company. For example, if someone were interested in investing in fractional real-estate, one would have to look for a fractional real estate property management group. The property management group would then help find the right luxury property, usually priced at more than a million dollars, explain the arrangements and regulations concerning house rules and schedules. Most luxury houses are split between 4 and 6 owners and if the owner cannot use all of his allotted time frame, the management company will be in charge of renting it out thereby providing rental income to the owner.

These owners do not have to be individual persons. Some businesses also engage in fractional ownership for tax purposes, convenience for executives and entertainment of high-end clients.

In addition, the property management company helps to provide the luxury lifestyle. When the owner shows up, the management company will ensure the fridge is stocked, cater to your needs, make sure the house is maintained and provide concierge services. The market for yachts, jets and luxury cars work in a similar manner. If an owner wants to take the yacht out for a vacation, the yacht management company will stock the caviar, filet mignon and champagne! In short, the management company is the foundation that holds the ownership structure together.

Is it a good investment?

Sometimes it can be. However, there are aspects of the fractional market that can be quite risky. Many investors in the fractional market buy into the asset for the luxury of living like the super rich or convenience of having the asset available to them. Jets and yachts may depreciate in value as assets over time, especially if they are continuously in use. Racehorses may appreciate in value depending upon the number of wins and real estate may also appreciate over time depending upon the location.

Overall, the fractional market is a good one to watch. There is still no one business model that lends itself to every fractional industry that seems to work over a long period of time. In the next several years, expect growth in the fractional market!

The copyright of the article Fractional Market in Investment is owned by Linda Banks. Permission to republish Fractional Market in print or online must be granted by the author in writing.