Co-Ownership: Real Estate Flop or Disruptor?

Co-Ownership: Real Estate Flop or Disruptor?

Real estate is synonymous with safe investment and passive income. Its ownership is embedded as an important goal to achieve in cultures worldwide. Yet, world dynamics have rapidly been changing and resulted in restricted real estate ownership. Depleting customer purchasing power within a receding global economy has made it extremely difficult for people to purchase real estate to live in and/ or use as an investment tool. A recent survey conducted by Qualtrics for the real estate company Redfin revealed that nearly 40% of 3,000 U.S. renters surveyed in February 2024 doubt they will ever own a home, citing affordability as their main reason. This paved the way for businesses to venture into the blue unknown ocean of co-ownership. Co-ownership, also known as fractional home ownership, allows for the purchase of fractional shares of a home, often with the right to use, rent out, and sell. These shares are typically co-owned by strangers. Despite its vast potential, this business model remains largely an untapped field with limited market players. 

What is Co-Ownership?

Co-ownership addresses the need for a more affordable way to enter the real estate market for individuals worldwide. However, it is often confused with time-share. Unlike time-share, which provides temporary usage rights in a vacation property, co-ownership involves actual share ownership, granting long-term rights over time in a much more convenient way. While timeshare is a valid business model, its reputation has been tarnished with scams occurring under its name all around the world, necessitating a new concept to be created. 

What Gave Rise to Co-Ownership?

Beyond the tarnished reputation of time-share and co-ownership market growth, the world economy has been rapidly changing, necessitating the conception of co-ownership. According to the IMF, global inflation has seen its peak in July 2022, however, it remains significantly higher than pre-pandemic levels. This created the need to protect the value of money and potentially increase it. 

Co-ownership platforms heavily rely on robust technological and legal infrastructure. Technology facilitates property share transactions locally and globally, offering transparency, security, and efficiency. One key component of this infrastructure is property technology (PropTech), which integrates real estate with advanced technologies like AI, VR, and blockchain to simplify, accelerate, and expand real estate transactions and management. Meanwhile, legal frameworks protect their users against potential risks, such as potential damage done by other users, bankruptcy of other users and in case of business cessation. 

Forecasts by BlokZen predict a 4.2% CAGR in the global co-ownership market from 2021 to 2027, growing from $8.92 billion in 2020 to $12.07 billion in 2027. This statistic portrays the value of venturing into this market within the coming years. While high inflation, advancements in technology, legal frameworks, and co-ownership growth ensure an attractive market opportunity; it is important to weigh the advantages and disadvantages of this model.

Advantages and Disadvantages of Co-Ownership 

On the one hand, the model gives people access to real estate ownership which typically requires substantial down-payments to enter. Secondly, while it is not the first benefit that comes to mind, it also reduces user carbon footprint by substituting each person owning a full home as a method of investment/ leisure with multiple people making use of one property. Also, co-ownership still does not have a lot of operational businesses which means early entrants will get to enjoy the added benefits. 

On the other hand, the person will not enjoy the full benefits of the property. There are also doubts about how sustainable this model can be since it is a relatively new idea that will require a lot of testing and model validation for it to be deemed successful. Addressing sustainability concerns through further business model analysis while keeping current market trends and future prospects in mind will be key to ensuring long-term success.

Co-ownership Business Models

The co-ownership industry operates under two primary business models: the investment and usage model and the investment-only model, each with its own success story.

Investment and Usage Business Model

The first operational model gives people access to full real estate usage and investment according to the number of shares they brought. This allows co-owners to use the property, rent it out, and benefit from its appreciation. As a result, ownership is commonly limited to 8 shares to provide fair and equal access to the property across the year. This model typically covers vacation homes and not first homes and the core of the idea lies in the fact that people can use the fractional share the same way they would use their fully owned property. 

Current data points towards the rise of this co-ownership model. According to Pacaso, there is a positive correlation between the rising Home Price Index (HPI) in the US and co-owning with friends and family. The research further cites that “on average, counties experienced a 6.8% increase in HPI [2022/2023] and 21.1% co-ownership growth”. This insight suggests that as prices in the housing market continually increase, so does the notion of this type of co-ownership. Businesses like Pacaso in the US and Partment and Seqoon in Egypt exemplify this model. 

Within this model, the business manages maintenance, hygiene, and a booking system for a small monthly fee, creating a hassle-free experience for co-owners. The technology-powered booking system provides convenience, ease of us,e and visibility on booking availability. Furthermore, even if the business closes, co-owners are protected from liabilities since each home is established as a separate limited liability company (LLC).

However, since multiple people own the property, a co-owner will be restricted to a limited number of days within each year that need to be booked in advance which could deter people looking for a higher level of flexibility. Also, unlike regular real estate ownership, a co-ownership share is restricted to one person only in one of the investment and usage businesses: Partment.

Summary of Investment and Usage Model

Investment Only Model

The second model currently in operation offers smaller property shares, lowering the entry barrier and enabling companies to offer a diverse range of real estate (not just vacation homes), often located in premium, highly desirable locations. Therefore, the property can be divided between hundreds of owners. Here, owners don’t use the properties but instead receive rental and appreciatory returns when the property is rented/ sold by the company. Companies like Stake in the UAE and KSA, BlokZen in India, and the recently launched Nesba in Egypt engage in this model. 

This model provides an easy and affordable way to enter the real estate market without the hassle of a large downpayment and the tiring research process. The business manages the property offered, rents it out for people, and eventually sells the homes when the property has significantly appreciated. Not to mention, it has a valid legal framework in place that protects users in case the business goes bankrupt. In the case of Stake, a Special Purpose Vehicle (SPV) is created under the Real Estate Regulatory Authority in Dubai (RERA) in which all investors in the property are legally registered to the property. Additionally, since Stake is regulated by the Dubai Financial Services Authority (DFSA), client assets are separate from Stake’s business operations, and a Business Cessation Plan is set by Stake as required by the DFSA to protect users from any disruption and guarantees that user investments are secure. Stake in KSA is regulated by the Capital Market Authority and has similar measures in place in case of business cessation. 

However, investors face limited control over renting and exit strategies which may limit their financial gains. 

Summary of Investment Only Model

Success Stories

One of the first businesses operating under the investment and usage model is Pacasso which opened its doors in 2020. Pacasso sells shares in luxury vacation homes across premium locations in the US and the world. In the first half of 2024, Pacasso has had 38% year-over-year growth in their adjusted gross profits and an approximately 19% decrease in real estate inventory which reflects the success of the business model and the growth and acceptance of co-ownership. While this reflects Pacasso’s success in co-ownership; it also indirectly reflects consumer willingness to become a part of the co-ownership model. 

Another success story important to mention is Stake under the investment-only model. Stake opened in 2021 and allows its users to invest in real estate properties across the UAE and KSA for a minimum of AED 500 ($136). According to the Dubai Department of Economy and Tourism (2024), Stake “experienced a 30% compound quarterly growth rate in … two years”. This underscores the potential of the investment-only model in the Middle East and the world given its success in one of the world’s largest business hubs.

Comparison of Co-ownership Models (Summary)

Overall, both models address the growing need for affordable real estate investment; however, none of the models are considered better than the other since they speak to different audiences. This gives businesses considering venturing into co-ownership plenty of room to innovate.

Co-ownership in other Industries

Co-ownership extends beyond real estate, flourishing in industries like the art and yacht industries. Like real estate co-ownership, it gives people access to assets that are typically out of reach for the regular individual. One of the businesses that operates within the art industry is Masterworks in the US where people buy partial shares in contemporary art pieces that are deemed by Masterworks likely to appreciate. According to ArtTactic, 16% across all age groups of collectors surveyed in May of 2024 invested in a fraction of an art piece within the past year which is up 9% from the year before that. This goes to show increasing interest in co-owning in art. 

Meanwhile, in the luxury yacht market, MIY Yacht gives users access to co-ownership through yacht syndication. This allows multiple individuals to share ownership of a yacht. According to MIY Yacht, co-ownership within this segment is increasing by more than 20% per annum. 

Conclusion 

Co-ownership is a groundbreaking new idea with a lot of potential to revolutionize the real estate industry. With the PropTech sector expecting to attract $133 billion in global investments in 2032, up from $30 billion in 2022; businesses have a lucrative market opportunity to tap into. The pivotal question remains, will co-ownership disrupt the real estate sector as fundamentally as Uber revolutionized the transportation industry or will it be a fleeting trend unable to withstand the test of time?