Originally published May 2023.
Innovations in fractional ownership and use of space
Fractionalisation means many things to many people. Shares in REITs, syndicates, tenants-in-common, even land subdivision and strata title are all examples. Since the mid-2010s, we have seen a surge of technology-enabled fractionalisation platforms in real estate and beyond. US-based Pacaso is often cited within this cohort of startups. It was founded in 2020 by Austin Allison (Dotloop) and Spencer Rascoff (Zillow Group). Via this platform, you can own a one-eighth share in a multimillion-dollar holiday home of your choosing and enjoy it 44 days per year. In 2021, Pacaso’s $125 million Series C fundraise led by SoftBank valued the company at $1.5 billion. More recently, Kō has made waves with a comparable business model in the Asia-Pacific region. Other platforms haven’t been as fortunate, with an expanding graveyard of fractionalisation initiatives which didn’t quite make it before their well of funding ran dry. This prompted some months of research, culminating in a white paper titled ‘A piece of the action: innovations in fractional ownership and use of space.’ The goal? Gaining a better understanding of how fractionalisation platforms differ to one another and based on these variables, which platforms offer more promise than others. Our analysis included 165 fractionalisation “schemes” (individual investment products) around the world—spread across residential, commercial, land and other (see Figure 1). Approximately three-quarters of the schemes were equity investments, with the remaining quarter debt.
Approaches to fractionalisation
When comparing one scheme to another, the relationship between fraction price and fraction quantity is an insightful starting point. In the case of Pacaso and Kō, fraction prices are high (up to and exceeding $1 million) and the fraction quantity is low (eight per property).
This contrasts with Ark7, for example, where fraction prices are low ($20) and fraction quantity is high (22,500 in the case of a particular scheme analysed). Consequently, a difference between these platforms is that Pacaso and comparable models facilitate shared use for fraction holders, whereas the likes of Ark7 couldn’t possibly do this effectively (one fraction in an Ark7 property would be equivalent to about 23 minutes of time each year). This is an important distinction, because while the likes of Pacaso facilitate shared use (a non-financial return), the likes of Ark7’s lower emphasis on non-financial return will lead investors to emphasise financial return.
