Petzer, Du Toit & Ramulifho

Fractional ownership offers the opportunity to buy partial ownership of a quality home in a first class resort area. It is the ideal vehicle to acquire a share in something that would otherwise simply be too expensive. Fractional ownership is among the fastest growing sectors of the resort, real estate and hospitality industries worldwide, including Southern Africa. Fractional ownership is today regarded as a strong investment in any equity basket, while enabling members to own a share of a desirable residence – to be used at their convenience and at a fraction of the cost.

The concept of fractional ownership opens investment at the top-end of the market to a broader range of buyers and follows the dramatic growth in the property market in recent years where returns on property investments have outstripped bonds and equities. It is when potential investors are priced out of the market that the way is paved for fractional or syndicated ownership. The concept allows investors to reap the rewards of owning property without carrying all the financial responsibility or having to manage the investment.

2. WHAT IS FRACTIONAL PROPERTY OWNERSHIP?

Fractional ownership is an adaptation of syndications, born out of the fact that many investors would prefer a hassle-free approach to owning a holiday home. This convenience is realized in many guises for example exclusive 24-hour concierge services (personal assistance both on- and off-site), transport options such as a chauffeur, jet charter, travel, butler and chef services, etc. More importantly, the rules are pre-determined by a management company and ensure the buyer a combination of having access to peak- and non-peak holiday time.

3. HOW DOES IT WORK?

On condition that there are multiple investors for the same property, the property is purchased with ownership secured by way of shareholding or an interest in a company or close corporation which owns the property. Shareholders' investments are held in a share block company; shares are fully tradable, owned in perpetuity and can be sold or bequeathed. The ownership arrangements usually divide the ownership into quarters or more units with each owner having an equal number of days a year to use the property on an agreed rotational basis.

Fractional ownership may offer extra flexibility through the under-subscribing of the product. In some cases, as much as 20 percent of the inventory available is set aside as a buffer so that last minute bookings by owners can be accommodated; for maintenance of the units to be undertaken; or so that owners can earn additional rental income.

A rental pool may be operated, which may be backed by local and international marketing campaigns. Higher rates and better occupancies are thus achieved as existing infrastructure and marketing support is firmly in place. The option for local and international exchange into similar fractional developments around the world may exist, providing the owner with more variety than when purchasing into just one destination. In this case an investment locally would pay for international accommodation that provides a change of scenery, as well as lifestyle activities.

4. THE ADVANTAGES OF FRACTIONAL OWNERSHIP

The obvious advantages of fractional ownership, which it shares with the options of time share and syndication, is the sharing of the cost of the property, sharing the cost of the maintenance of the property and saving on buying a property which the owner cannot use 100% of the time.

The fractional ownership innovation is basically a more affordable alternative than outright ownership. Since a smaller amount is invested than would have been the case with an outright purchase, government taxes and legal fees are incurred at lower rates. For the same reason, because transaction values are lower more buyers are attracted, which greatly increases the liquidity in a sector of the property market where the air is normally thin.

The benefits to the purchaser include a hassle-free ownership option whereby the levies, refurbishment of the units, general upkeep, golf-membership, international exchange, use of spa facilities, restaurants, hands on butler and chef are all provided for. Because fractional ownership provides a plethora of added value offerings, it is available at a premium price. However, if well-managed, the investment will be protected for life without any effort on the part of the purchaser.

The advantage of this model is that it allows the owners to tailor-make their holidays to suit their life style. Should an owner be unable to take their holiday it can be put in a holiday pool for rental.

Perhaps one of the most enticing benefits of fractional ownership is that investors can arrive at the holiday home without having to clean and prepare it before they unpack.

5. THE COST OF FRACTIONAL OWNERSHIP

Buying into fractional ownership secures world-class annual holidays for the investor or family. The initial purchase price may seem high, but bonded over 20 years and then compared with what 20 annual holidays of four weeks would cost; the purchase price appears more attractive. The price per fractional share is based on the number of shareholders and the price of the unit.

On top of the purchase price investors can generally expect to pay levies that cover satellite TV, water and lights, domestic staff, pool and garden maintenance, insurance, estate levies, rates and taxes and annual auditing costs.

Investors are responsible for a pro rata percentage of the deposit and transfer costs and maintenance charges. Depending on the vehicle used to own the property (company, close corporation or trust) mortgage financing may be unavailable and often buyers will obtain finance through their existing primary properties.

All the owners may decide to use most (for instance 46) weeks a year for themselves, leaving the remaining (for instance 6) weeks free to rent out to holidaymakers, the proceeds going towards levies, maintenance and building alterations, if required.

6. IS IT SIMILAR TO TIME SHARE?

There are similarities, in as much as the more fractions that are sold; the more it resembles a time share. Both can be bought as deeded properties (sometime shares are also sold as club memberships instead of time in a specific unit), and can be rented out, shared with family and friends, sold or left to someone in a will.

However, there are distinct differences between the two concepts; with fractional ownership you own bricks and mortar; with time share you own nothing but time. Other differences between time share and fractional ownership properties are pricing, financing and fees. While time share can be bought for a couple of thousand rand, fractional ownership are far more expensive, starting at around R300 000-00 per defined share. Fractional title is also a good tool for investment whereas time share is not focused on investment and the real cost of a unit sold for every week of the year usually represents a total value far in excess of the real value of the unit.

Fractional owners express a greater satisfaction in really owning their home as opposed to the impersonal and hands off time share ownership and management structures with their questionably high levies. There is far greater control with fractional title in that the owners can easily agree to effect improvements etc.

Fractional ownership moves with the market and at the very worst the investment will grow at the same pace as the best areas in the country, but due to all the added benefits, it usually does better. In time share, investors often find it difficult to use or acquire their time, due to availability. Fractional ownership on the other hand has a fixed roster.

7. IS IT SIMILAR TO SYNDICATION?

Typically, syndication is when between four and fourteen individuals divide the costs of a second home among themselves. The group can form a company with the various shareholders owning a stake in the property, entitling each to usage rights. A calendar is set up for usage, the owners furnish the property, provide funding for services, levies, insurance, extra's, etc.

If an individual wants to rent out their time, he or she needs to obtain consensus from the other shareholders and engage private agents to manage the rental. Typically this scenario exists in estates where a formal hospitality service is not established or provided. In such a case, no professional management company is in place to manage the unit, provide cleaning services, check-in, laundry, refurbishment, etc. The benefit is that the group pays only for what it believes it will make use of and levies are thus lower due to the fact that no third-party professional services are being utilized.

On the other hand, fractional ownership is far more sophisticated with value added service offerings included in the mix, which ultimately positions and ranks it ahead of syndicates when it comes to luxury and convenience.

While similar to syndication, the most distinctive difference between syndication and fractional ownership is found in the provision of professional luxury services which affords buyers the convenience and exclusivity they ultimately seek.

Both forms of ownership will appeal to different markets. Fractional ownership is proving to be the fastest-growing leisure ownership option in the world. On the other hand, syndications continue to provide good value where owners are prepared to put in more time and effort.

Both syndication and fractional ownership are distinctly different from timeshare in that the investor secures part ownership of a fixed asset via a shareholding in a company or membership in a close corporation.

8. QUESTIONS TO ASK BEFORE ENTERING INTO A FRACTIONAL OWNERSHIP SCHEME

As this is a typical long-term investment, buyers should become acquainted with the finer details of the scheme. Professional advisers urge buyers to establish whether properties are owned or leased and by whom, and if you will have any equity or appreciation benefits. Check on facts relating to termination of membership, cancellation fees, annual costs, and how future increases are determined. Additional information should be obtained on the quality of staff and services provided by the company, how rule changes are communicated to the members, and what percentage of costs goes into the properties themselves and who covers marketing expenses.