Fractional ownership
– owning a percentage share of an asset and sharing the rights to use such an asset.
WHAT TO BUY FRA
fractional ownership makes a lot of sense. It allows you to own a share – or fraction – of the
F
property which equates to a set number of weeks usage per year without the worries of maintaining an asset that sits overseas in a diferent tax jurisdiction. The concept has worked with other expensive assets such as aircraft and yachts, and really kicked off in North America where the recreational home market is highly evolved. Of course it also means that people can afford to “own” something they would not be able to afford in its entirety, thus opening up a “luxury” lifestyle to them that matches their aspirations. Such schemes – in order to support themselves – are usually restricted to locations which offer year-round appeal: city-break destinations or golfi ng regions being good examples. It is fair to say that fractional has enjoyed less success in Europe to date than it has in North America (though it is a growth sector) But what should you be looking at if it appeals to you? Firstly we must clarify how fractional ownership generally differs from timeshare, although there are some types that are more similar than others. In timeshare schemes you as a owner don’t own a share of the underlying asset. You only buy time periods of usage, say two weeks a year for twenty years. In what is arguably the most cost-effective type of fractional ownership, a group of owners decide to purchase a home jointly. This is not untypical in US ski resorts,for example, where four parties share a chalet - a formalised form of co-ownership. The downside is the fi ddly purchase and management (and potential disputes!); though you avoid paying hefty mark-ups to developers.
Then there are developer managed schemes where you buy a share of the freehold - typically a twelfth (one month) – and thus enjoy owner priorities and even a
or busy people who only use a holiday home a few weeks a year and don’t want the hassle of maintaining it for such a short space of time,
slice of capital appreciation when you sell. They differ from the third type – which embraces residence or ownership clubs – which tend to involve owners paying into a pool to receive usage in one or more properties around the world.
The cost of managing complex forms of ownership can be high and this adds a premium so if you are buying a tenth fraction, for example, it will not cost a tenth of the market value of the property. Clearly there has to be a cost attched for removing the hassle of managing your property, so when investing it is essential you analyse how much more and compare running costs - the monthly service charges - so you know if it’s worth your while. Some fractional schemes fail because of poor management and their inability to sustain occupancy levels so check out the company’s track record thoroughly and talk to other owners where possible. Use a lawyer who has expertise in fractional which many people still do not fully understand. Finally, as always, consider your exit strategy if this is
important to you. Are there any contractual restrictions on how and when you can sell? Finding a buyer for your fraction may be trickier than selling a whole property, but if you’re purely a lifestyle buyer the benefi ts may outweigh any downsides.
Questions to ask…
Ë What will I actually be owning and how much control over it do I have?
Ë What will be the monthly running costs/ service charges?
Ë Will the management be strong enough to run the scheme effectively?
Ë What will my exit strategy be? Fractional is typically much more attractive to lifestyle buyers than pure investors, but it’s still important to find how / when you can sell the fraction on.
AIPP CONSUMER GUIDE 19
SECTION 2 PLANNING YOUR PURCHASE
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