[+] Divide and Conquer: Funding Stream Joins Fight for Feasibility

Divide et impera. The Latin phrase translates as ‘divide and conquer’ and has been used in a political and military context since the days of Roman ruler Julius Caesar. But in the modern post-pandemic era, the strategy behind the maxim has taken a twist to become a disruptor in a new dimension—bricks and mortar. Amid the lingering slew of market challenges, growing numbers of developers are embracing the emerging real estate model known as fractional ownership as a sales channel for their projects. The nascent concept enables the ownership of a single asset—such as an apartment or house—to be divided and collectively owned between multiple parties, who share usage rights, expenses and any returns. It has been variously described as being similar to “buying a slice of a pizza”—albeit a very expensive one—or shares in a listed company. And by significantly reducing the capital needed to get on the property ladder, some pundits believe it even has the potential to “democratise real estate investment”. For developers wrangling with project feasibility due to inflated construction costs and the fallout from interest rate hikes, the model has been gaining ground as a method to get projects to stack up and out of the ground. “The developer environment has changed so dramatically over the past couple of years, it’s definitely pulled a lot of interest our way,” says Ryan Fritsch, co-founder of fractional ownership platform Ko. ▲ Ryan Fritsch, co-founder of fractional ownership platform Ko. “But when we first started formulating our model, what we hadn’t really considered was how beneficial we could be to developers. We were thinking of it purely from a client perspective, being the purchasers who are going to use the asset. “However, what quickly became apparent after we launched last year was the fact that developers were looking at this “And we’re now being approached quite a bit by developers saying ‘this is what we actually have to achieve in order to bring this out of the ground otherwise it's not happening, at least not in the next couple of years’.” Fractional ownership originally became popular in the 1960s for business jets, allowing high-flying companies to purchase shares in aircraft to reduce costs. In the US, the concept crossed over to real estate with the first fractional property developments in the Rocky Mountains ski resorts in the early 1990s. More recently, it has gained traction—propelled by the pandemic—through the rise of proptech and tech-driven solutions to streamline traditional processes and improve efficiency. The global proptech market is forecast to expand from $18.2 billion to $86.5 billion during the next decade and fractional ownership is expected to be a key driver of growth. In Australia—even before Covid accelerated the digitisation of the country’s $10 trillion real estate sector—two of its property giants, Stockland and Mirvac, made their move to get some skin in the game. ▲ Renders of Spyre Group’s 13-storey Bureau Proberts-designed Cala Dei at the southern end of the Gold Coast. Both listed companies staked claims in an Adelaide-based fractional ownership start-up platform called Bricklet. “The rapid pace of change in technology unlocks great opportunities for innovation,” Stockland chief executive Mark Steinert said at the time. “We're interested in how emerging technologies can be applied to Stockland's assets, communities and customers—now and into the future. “Bricklet presents an opportunity to explore fractional home ownership models, helping to make property more accessible, and we're excited to be a part of it.” Powered by blockchain technology—a shared database or ledger that facilitates the process of recording transactions and tracking assets in a business network—other platforms to emerge include TickX, Domacom and BrickX. Ko’s Fritsch says: “Technology is central to us being able to provide a seamless ownership experience. And whatever technology that we need to implement into that is what we will do”. Among the latest property developers to join the fractional ownership fray is south-east Queensland luxury residential developer Spyre Group. It is collaborating with Ko, testing the waters with an offering in its high-end, 13-storey Bureau Proberts-designed Cala Dei project, comprising 30 apartments across the road from Greenmount Beach at the southern end of the Gold Coast. Ko specialises in holiday home fractional ownership in the Asia Pacific region and is currently marketing properties in Queensland and NSW as well as Indonesia and Fiji. ▲ Blockchain technology is a key component to the fractional ownership model. Under its model, each property is split into eight shares, equivalent to 42 days or six weeks annual usage or higher, depending on the number of shares purchased. However, individual ownership in each asset is capped at up to 50 per cent. “There’s a couple of different reasons fractionalisation makes sense,” Fritsch says. “If you’re looking at the ultra luxe side of the market, a lot of people may even have already had exposure to fractional ownership in other things such as yacht or racehorse syndications. “They know they actually don’t need [to own] the whole thing. Even if people have the cash, it’s still not necessarily the best use of cash because they’re not using it all the time. “And [fractional ownership] gives them the opportunity to potentially invest in multiple assets rather than just putting all their money in one property.” But he concedes there are some complexities, particularly in Australia which he describes as “probably one of the the most complicated countries around fractional ownership … it’s quite restrictive, mainly because of timeshare fiascos a couple of decades or so ago”. In the early 1980s, the Gold Coast became the epicentre of those fiascos with timeshare touts harassing tourists on the streets with heavy duty sales pitches to buy into so-called “white shoe” developer schemes, locking them into contracts for up to 99 years. It led to a Federal parliamentary inquiry and recommendations to outlaw pressure sales and other dodgy practices. Comparisons to fractional ownership—sometimes referred to as Timeshare 2.0—ignore “a couple of fundamentally large differences”, Fritsch says. Significantly, he says, fractional ownership is a “true ownership and real estate play”. Each of the co-owners is registered on the title, although in some models the property is held by a company or trust, into which the purchasers are investing. ▲ The Gold Coast in the 1980s was an epicentre of dodgy timeshare operations. “Even though we are usage focused, we still act and operate in line with what you would expect with a traditional real estate investment, which is very different from how the timeshare market is designed,” Fritsch says. “[Timeshare] is purely usage based and you are forward-buying your vacation. It isn’t a real estate play.” He adds: “From a legal perspective, we [Ko] are a completely independent party and we’re not the asset owner. The fractional owners are the equity owners. We’re just representing them and managing it on their behalf. And, technically speaking, we can get fired if the owners decide they don’t want to use our platform anymore.” Fritsch says the potential growth of fractional ownership in Australia and the Asia Pacific region is huge and Ko already has been approached to fractionalise larger hospitality assets. “In the past six months we’ve seen a dramatic rise in interest from developers and I think it will be an ever-growing level of interest, particularly with all the issues that are going on in the industry.” And although the proptech behind fractional ownership is gamechanging, he says the other big disruption potential will be in terms of sustainability. “There’s almost a million vacant properties in Australia … if you just look across the Gold Coast skyline on any given night only half the lights are on. “The average holiday home is used less than 20 per cent of the time. All these assets are underutilised. “Fractional ownership is really about better utilising the assets we’re creating, which I think is quite important. “I struggle to see a world 10 years from now where things are being built at the pace and the level of utilisation that they have been during the past decade. I just don’t think the next 10 years can look like the past 10.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

Residential
Phil Bartsch
Mon 06 Nov 23

[+] Divide and Conquer: Funding Stream Joins Fight for Feasibility

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[+] Divide and Conquer: Funding Stream Joins Fight for Feasibility

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