Fractional ownership

Fractions are remembered by many as a dreaded maths lesson where your sums leave you ending up with less.

Yet fractional ownership – buying a share of a luxury property, usually overseas, for your private use – can increasingly add up as a holiday home and investment too.

An informal idea for the concept was first sparked in the US at the tail-end of the 1980s, and originally simply saw a dedicated group of friends, family or colleagues each investing a lump sum of money into a pool of cash to buy a luxury ‘good’ – chiefly property in sought-after resorts or cities – that they could all then use at their leisure.

"Fractional ownership’s popularity has seen it quickly mushroom into a fast-growing multi-million pound industry.”

One member would draw up a diary schedule, and each party would then agree to visit and use the property at an agreed date – for days or weeks at a time, say – with how much time allowed reflecting the money you invested in the first place.

So far, so simple.

However, the popularity of such an idea has mushroomed over the past two decades to see fractional ownership morph into a multi-million pound business that’s continued to develop into one of the biggest growth sectors in the global leisure and property industry.

A new David Lloyd resort shortly to open in south-east Spain, offers a number of its holiday homes for sale on a fractional ownership basis. At the Desert Springs resort, in the region of Almeria, prices start at £24,000 for a 1/13th share with properties ranging from two-bed apartments to three-bed townhouses.

So how exactly does it work?

In a nutshell, you buy a percentage – or fraction - of a property itself. Typically, this can be anything from owning the lion’s share - as much as 25% - to paying for just a twelfth of the property. You’ll also tend to buy on a leasehold basis, just like the lease on a city-centre flat, say, ranging from 99 to 999 years.

The fraction that you buy allows you to spend a corresponding amount of time in your chosen luxury home – so if you’ve bought a twelfth, you’ve usually between four and six weeks’ stay a year. However, if you’re in a club, you could even swap your allocation for another property elsewhere, and if you can’t make it because of other commitments, you can let your friends go too.

 "It’s a cheap way to buy into a property you’d otherwise have no way of affording – with potential for a rise in the value of your investment.” 

As a rule, a management company will run the property for all the different owners, and – in turn – you’ll have to chip in to pooled fund to cover the costs of annual maintenance.

And like any other property investment, you can also sell your fraction when you like, assuming you can find a buyer.

No prizes for guessing the upsides: a cheap way to buy into a property you’d otherwise have no way of affording that’s yours to visit when you want – as well as the potential for a rise in the value of your investment if you want to sell.

“Fractional ownership has significant advantages over traditional second home ownership,” says a spokeswoman for Savills property consultant.

“Firstly, you can enjoy living in a property of considerably higher value than your capital outlay. And secondly, all the usual worries of second home ownership such as security and maintenance are looked after by a management company whose cost is shared by all.” In many fractional ownership schemes, it’s also possible to rent out your property slot if you can’t use it all up.

Michael Sugden, spokesman for international property investment fund, The Hideaways Club (www.thehideawaysclub.com), says its members enjoy not having to worry about the stresses and unforeseen pitfalls of second-home ownership.

“If you buy a second home somewhere overseas, it’s very easy to worry about it – you’ll be at home anxious about security and its upkeep, and feel obliged to visit it more often than you really can.”

The Hideaways Club currently owns 27 properties outright throughout Europe, Africa, Mauritius and South-East Asia. With the company's recent alliance and reciprocal agreement with Banyan Tree Private Collection and the US based company Equity Estates, members have a choice of over 45 properties throughout the world from which to holiday.

At the Hideaways Club – where membership starts from £122,500 – you receive so-called ‘destination points’ to be used to reserve homes in any of the portfolio of properties you buy into. Each home is valued at different ‘destination-point’ levels at different times of the year, so summer in resorts tends to use up your allocation much more quickly than if you visit in the colder months.

For example, if you wanted to reserve its South of France property in August, it would ‘cost’ you 30 destination points, yet reserve the same home in November, and it’ll only set you back 20 points. By comparison, a long weekend will use up 14 points.

The fractional ownership industry goes to great lengths to stress that fractional ownership is not a ‘timeshare’ sleight-of-hand.

With timeshare, your money only effectively gets you a licence to buy ‘time’ in a property for a given period each year – and you’ve no potential benefit from any rise in your property’s value.

Instead, with fractional ownership, the “fractions” are usually equity shares sold as a percentage of the property; member shares of a club of affiliated homes; or part of a fund that owns and runs a portfolio of properties.

The downsides? Naturally, not every owner will be able to bask in summer climes at the same time: a fixed rota means you’ll have to accept not being able to spend all of July in your home.

Also ensure that your property company is reputable and has a well-respected portfolio of homes; ask to speak to co-owners and see if it’s even possible to visit your home before you make any decision.

On the financial side, it’s absolutely vital to check that the management company you’re buying into owns the property (or portfolio), as with The Hideaways Club, and that you are purchasing your share from them. Double-check to see if annual maintenance costs are fixed in advance, and ask to find out when – and if – the property is regularly refurbished.

And check to see if the fractional ownership company offers a guaranteed buyback if you want to sell in the future – rather than wait for a new investor to emerge, a guarantee will give you peace of mind of an easy exit.

You could start your research using websites such as www.fractionallife.com  to get an idea of what to expect.

If you’re unsure about the costs of financing such a deal, always ask your personal banker to guide you through any options.

It’ll also be worth taking legal advice on your purchase as there’s no precise legal definition for what ‘fractional ownership’ is. You must be completely comfortable with what you’re buying and the way that you’re buying it – whether it’s a direct purchase, via a club or a part of an international property fund.

Even though you’re buying into a valuable asset, fractional ownership operators – like any companies – can run into trouble, so make sure you’re happy with its history and the overall set-up.

By Sam Dunn