Fractional ownership is a way of building an investment portfolio. But not just your bog standard investment into equities on the stock market. No, this could be a portfolio of property, fast cars, art and even aircraft.
It’s a potential way of making money from things you enjoy, using very small amounts of cash, however you need to be clear on the risks. Investing into the stock market is highly regulated and there is a huge amount of data you can research. This is not the case with fractional ownership and if you don’t know what you are doing you can lose money.
What is fractional ownership?
When I was a young lad growing up in the 90s I dreamt of owning one of the amazing sports cars around at the time.
My top three were the:
- Ferrari F40
- Jaguar XJ220
- Lamborghini Diablo
I had the Matchbox toy cars, the posters and even the Top Trump card game.
It was brilliant to see the programme Top Gear cover these exact three cars in a recent episode.
Never did I think I would ever own one. Fast forward to today and now that dream could soon become a reality. But rather than own one, I could potentially own shares in all three!
This is fractional ownership. Rather than owning a very expensive asset outright, instead you own just a small piece.
A Ferrari F40 may cost you around £850,000 today if you could find an owner who would be willing to sell. Not many people are going to have that sort of money spare. So the seller could opt to sell it via fractional ownership.
The car could be split (not physically!) into 850 units. Each unit would cost £1,000, meaning you could invest just a £1,000 and own a 1/850 share of a Ferrari F40!
This is the whole point of fractional ownership, it brings very expensive assets like property, fast cars, art, yachts and aeroplanes to the mass market.
If you did decide to invest into something like a yacht via fractional ownership then you wouldn’t actually own a physical piece of the boat like the propeller for example. Instead usually a limited company is formed to purchase the underlying asset and you then own shares in the limited company in the proportion of your investment.
Remember we are talking about an ‘investment’ here. Not just the chance to say you own a piece of a yacht or a Ferrari.
There are essentially two ways you earn a return through fractional ownership:
1. Through the potential increase in value of your underlying asset over time. E.g. classic cars tend to rise in value the more rare they are.
2. Income produced from the underlying asset. E.g. the car/yacht could be rented out and used in movies, music videos, promotional events etc.
Fractional ownership is a relatively new concept in the UK but has been around in the US for longer. One of the leading fractional ownership companies over there, Rally have built a platform that now even includes rare collectibles like American football cards, watches and famous sports kit.
The list really is endless when it comes to fractional ownership. You could own a piece of anything as long as there are other willing buyers and sellers.
In the UK we have mainly seen fractional ownership platforms used for property like that operated by Property Partner. We now have the likes of The Car Crowd who offer fractional ownership of classic/sports cars.
This is a growing area of investment and could be the next big disruption to the investing world.
What has been around for a while in the UK is the concept of a Timeshare. Fractional ownership is very different to a Timeshare because you actually own a share of the asset. Whereas with Timeshares you own a share of the time that asset can be used.
The good and the bad of fractional ownership
If your immediate needs, emergency fund and retirement planning are all in check and you have the money, fractional ownership can add an element of fun to saving.
You may have a real interest in some of the items discussed like cars and art. Fractional ownership allows you to buy into this.
A lot of the platforms will allow you to have fun with the asset, like:
- Going to view it, have pictures taken with it.
- Driving the car during track days.
- Sailing and lunching on the yacht.
There is also an element of diversification here. Assets bought via fractional ownership are unlikely to go up and down the same way the stock market does.
But before you dive in and get involved in this area of investing you need to be clear of the following:
1. Your understanding. You should never invest in something you don’t understand. For example, are you an art expert? Do you know if the price you are paying for a share in a piece of art is good value? Some of the assets used in fractional ownership require a unique understanding.
2. Regulation. Whilst any type of UK investment platform should be regulated and authorised by the Financial Conduct Authority (FCA), this is a relatively new market. Make sure you do your due diligence on the platform and know what you are getting into. These types of schemes will not be covered by the Financial Services Compensation Scheme.
3. Ownership. Check how the asset is owned and who makes the decisions. Is there a management company involved in trying to look for opportunities for the asset to earn an income? What is their cost?
4. What happens if there are not enough buyers? Typically a seller will sell via a fractional ownership platform after not being able to find a single buyer. They won’t want to hang around forever so there will usually be a time limit on how long investors have to buy shares in the asset. What happens if the total purchase price is not reached? When do you get your money back?
5. Selling your shares. Once invested it can be difficult to sell your shares. There is no natural secondary market like the stock market where shares are traded all the time. The platform may be willing to offer your shares to other shareholders so they could increase their ownership but there is no guarantee. Your money could be locked away for some time.
6. Tax. This is still an investment so your income and gains will still be subject to the normal tax rules so make sure you understand your tax position.
Fractional ownership is not something that you should use to fund your retirement and form 100% of your investment portfolio but it can add a ‘fun’ element to a small part of your portfolio. Especially if you know what you are doing, understand the risks and really engage in the assets you part–own.
Whilst we don’t formally advise and make recommendations on fractional ownership investments we are always happy to discuss the options available to you and give you a second opinion. Particularly on the risks involved. Please secure a free 15-minute video call with us. You can speak to a Chartered Financial Planner who will listen to your situation, give you an outline of what you need to consider and guide you in the right direction.
Question: Do you have expertise in a particularly unusual asset? Please share your answer on LinkedIn.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.