by Michael Aumock
One of the first things most of us are taught when we are children and we have to interact with other children, is to share. Share our toys in the sandbox, share our sweets with our siblings, share our summer holiday stories on the first day of school. It’s strange then, that by the time most of us reach adulthood, the LAST thing we want to do is share ANYTHING…that has been changing over the last 5 years.
Fractional sales of luxury homes have become a very attractive solution for HNWI (high net worth individuals), and a whole new generation of the aspirational wealthy, who want access to a beautiful vacation home, without having to foot the bill for the whole thing. As luxurious resorts such as Aspen or Monaco or St. Barths grew in popularity, the cost of homes in those areas went from expensive, (150-€400/sq. ft.) to extremely exclusive (1500-€2000/sq. ft.), causing people who didn’t want to spend 4Million on a 3-bedroom condo to reconsider their options.
While some of those potential buyers went to different resort towns, many looked for creative ways to have a home in the place they wanted at a more reasonable cost. Thus, the fractional market boomed along with the rest of the housing market for most of the next two decades. And despite a few fits and starts, it is quickly regaining momentum.
As the media looked at the wealthy of the world with an increasingly jaundiced eye, the HNW individuals began to keep a lower profile, feeling that they were being demonized for having money…so they stopped spending so lavishly. However, one very important thing happened to many of them: they came to grips with the fact that it was no longer a dealbreaker to not be able to get exactly WHAT they want, exactly WHEN they wanted it. So, with that re-alignment of the financial planets, and a little taste of bourgeois crow…. They collectively gained some patience. It’s been a few years now, since I’ve heard anyone say “Whatever it takes….Money is no object!”
Now however, our HNW client might say something more like: “Hmmmm, I COULD afford that, but 4M is an awful lot of money for something that I use 5 weeks a year. Hell, the kids won’t come up with me, and Bethany (my doting and fictitious wife) doesn’t even ski anymore since the ACL thing.” The end result is a HNWI who wouldn’t have dreamed of sharing any of his sandbox with anyone 5 years ago, is now happy to pay for only what he uses, and forego the headaches involved with whole ownership.
There is no denying the fact that the numbers work out in his favor, despite the fact the fractional company has to get their taste, and the property might not be available every single time he wants it. Just by opening himself up to the possibility of fractional, he has already accepted these trade-offs, in exchange for the extra cash in his pocket. A 1/8th share of a 4M house will cost him (approximately) 550K and maybe 30K in maintenance and that’s it. All he has to do is schedule his trips, and write checks. With a whole ownership scenario, he would be out the entire 4M, plus about 350K/year in maintenance, insurance, housekeeping, etc… PLUS the hassle of having to deal with all of it.
When you consider the pros and cons, it is easy to understand why a little change in the social acceptability of spending big dollars, combined with HNWI’s newfound willingness to share their toys, would morph into the perception that fractional was a completely acceptable if not preferred method of second home ownership. (For simplicity’s sake, I am leaving out the obvious value of write-offs and potential appreciation, and made the argument simply about raw dollars spent.)
What about depreciat ing assets like jets and yachts?
Fractional is a fine solution for assets that (in theory) appreciate. There is a certain comfort in the knowledge that if everything goes to hell in a hand-basket, that you can get most or some of their money back in a property liquidation. But what about yachts and jets?