As the global economic situation sends shockwaves around the property industry, more and more developers - and buyers - are looking to fractional ownership.
The dream of owning a home overseas still beats strong in the heart of most Brits - the recession can't change that. But potential buyers are being forced to cut their cloth according to the current financial turmoil, and they are finding that fractional ownership is an attractive solution.
Consequently, the number of developments available on a fractional basis is growing fast, along with the volume of related transactions.
Brad Lincoln, chief executive of fractional consultancy The Best Group, says: "In five years' time, the only people not buying fractional will be retirees. Fractional is going to take over completely. Freehold ownership will become a luxury, with only high end buyers taking this path."
Graeme Grant, managing director of Resort Group International, agrees, saying: "Fractions have been successfully marketed in the USA for some 10 years now and will become the major leisure property product in Europe within five years, easily outselling freehold within that period."
The first thing to emphasise is that fractional ownership is most definitely not the same thing as timeshare, although there are still plenty of timeshare operations out there. Timeshare is not necessarily a bad thing, despite the acres of negative press it has garnered largely due to a handful of unscrupulous individuals.
So what exactly is fractional ownership? Les Milton, chairman of the Fractional Ownership Consultancy says: "Fractional ownership is the shared ownership of a property, with the title deed being divided into fractions, usually quarters but sometimes into as much as twelfths. A £400,000 property, for example, owned by four owners would cost each £100,000. The owners of each fraction then have the right to stay in their home for the corresponding amount of time. For example, if you own a quarter share, you may stay in it for a quarter of a year - 13 weeks.
"This very much suits people looking for a holiday home abroad. Not only are their initial costs in purchasing the property greatly reduced, but the costs of running it are also shared. And it is very unlikely that they would wish or be able to spend more than 13 weeks a year in their holiday home. Furthermore, they really do own 25 per cent of the property, so they take proportionate advantage of any property price rises and asset appreciation. They can also sell their interest at market value at any time.
Milton continues: "Most fractional ownership properties are available in quality resorts with a full range of amenities and facilities, which means the resorts are professionally managed with a full rental programme in place. That is the final benefit to the fractional owner. When he or she is not in residence, the property can be let to generate income, probably enough to pay the overheads for a whole year."
Another aspect of fractional ownership that needs highlighting, is financing. Although the potential is there for a wisely chosen fractional scheme to be a good investment, these are not get rich quick schemes, where you can pay a small deposit, get a mortgage and rely on capital appreciation to make a buck before flipping on completion. Most lenders won't touch fractional ownership due to the complications of repossession should the lender default, so they are cash purchases in the majority of cases. Having said that, the Manchester Building Society has just become the first British lender to introduce mortgages specifically for certain approved fractional projects.
Fractional ownership - the golden rules
- Decide how you want to use your property. Make sure the number of guaranteed weeks meets your requirements. Sometimes buying two fractions could guarantee this if one doesn't provide enough time. Some properties offer a fixed plan with the same exact weeks each year. Others offer floating weeks, with different dates each year on a rotating schedule.
- Find out whether you can let out the weeks you do not intend to use. Is there an option of renting out some of the time booked each year in order to bring in more income to cover annual maintenance costs? In a case of the fraction being part of a larger development or resort, it is essential to know if there is a broker or if the development itself facilitates rentals and what share of the rental income belongs to the fractional owner.
- Is your property also part of an exchange program? Some fractional developers also offer owners the opportunity, through external exchange companies, to trade some of the available weeks with other properties around the world.
- What are the actual costs of running and maintaining the property? Are you really paying only a fraction of the cost of running the home or are there hidden extras? It's important to know what the annual costs are and to ask for a list of fees clarifying what is included.
- Find out what the ownership includes, in terms of services, discounts and other amenities. For instance, if golf is offered what is included for greens fees, cart fees and other services?
- Compare prices of similar properties on the market. The total price of your fractional property should never be more than 25 to 30 per cent higher than the same property sold outright. A certain uplift is necessary to cover the costs of the legal framework, the furniture package and the management system, but it must never be higher than this level. When you sell, this margin will still be built in.
- Will you be the true owner? Check you have an equitable right to the interests of the underlying real estate. Is the property deeded? Deeded properties give the investment a better chance of appreciation and allow you to leave or "will" it to a family member the same way as with a wholly-owned property. Or is it a share in a company formed purely for the property? This gives you the same ownership rights and ability to will your share but also means you are free to sell your share without recourse to other names on the deed.
- Can you sell your fraction at any time without penalty? Check for hidden exit fees which may dent your return. Make sure your documentation is comprehensive and compliant with country-specific laws. Find out what the legal structure of the project is in terms of local laws and prohibitions, check if the fractional system you are being sold has a proven track record.
- Find out if the building has been completed properly. Take a thorough tour and look at more than one unit. If the building isn't complete, visit the show home. Potential fractional buyers need to ask how similar the final product will be and what may change. Check out the site to get an idea of the views and the architectural plans. Do some research on the developer and look at some of their previous projects.
Some information contained within this article may have changed since it was first published. HomesOverseas strongly advises you to seek current legal and financial advise from a qualified professional.