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There is a new buzzword on the property block: Fractional (Share) Ownership. These two words, to be exact, but certainly two words you are likely to be hearing more and more of in the future if you take an interest in the property market, particularly in upmarket and highly desirable areas such as any of the GOlf Estates in the Waterberg region.. Feted as a new and exciting way to afford luxury property in the best places, Fractional Ownership, which began in the USA in the early nineties, is gaining popularity in South Africa as in other countries.

What is Fractional Ownership?

As the name suggests, Fractional Ownership allows you to buy a fractional share of a property. Along with the fractional cost of both purchase and maintenance, this clearly allows you to enjoy fractional usage of a property that is (probably) far more luxurious than you may otherwise be able to afford. For “fractional”, we can substitute the word “shared”. You could think of it as buying shares in a company.

Isn’t that “timeshare” by another name?

The answer is that yes it is, technically, as the legal definition of timeshare also covers most Fractional Ownership agreements. However, there are essential differences in most fractional sales from the old timeshare deals.

Timeshare property deals – the old way

Timeshare as a concept won itself fast popularity in the eighties, followed swiftly by a reputation that stopped little short of criminally bad. Unsuspecting innocents abroad (often for the first time as cheap foreign travel opened up the possibility of holidays in sunshine places such as Tenerife to the masses) were duped by means of gifts, persuasive presentations, unsubstantiated if enticing claims and dishonest sales people. They were duped into purchasing timeshares in properties that were often not even built. All too often they quickly realised their mistakes, only to find themselves locked into deals that were financially punitive and impossible to escape from, and suffered the consequences finding themselves stuck with undesirable and unsellable properties or unworkable usage options.

Timeshare agreements split between many

In general, timeshare agreements only offered purchasers the rights to use a property or a portion of a property for a set number of days per year. The number of co-timeshare owners in any given property tended to be high, with purchasers frequently owning rights for just one week out of fifty-two. This resulted in a high volume of visitor traffic in every property, with the inevitable result of high wear and tear and property and fittings degeneration. As the agreement offered only the rights of use rather than any real investment, timeshare owners also tended to lack any enthusiasm for anything other than basic, essential maintenance.

Fractional Ownership – a better way?

Fractional Ownership, on the other hand, usually offers ownership of actual bricks and mortar, and is (again usually rather than always) a deeded ownership. The properties tend to be upmarket and more luxurious and the clientele the wealthier, better informed and more investment savvy middle classes. Typical Fractional Ownership properties are found in fashionable estates  and in the more expensive private nature reserves such as the Mabalingwe Nature Reserve.

A financial investment in a luxury property

A Fractional Ownership deal is attractive in that it offers part ownership and access to the type of luxury property that could not otherwise be afforded and still can serve as a financial investment. Deals vary, with some being for a fixed time after which the property is sold and the proceeds divided between the Fractional Owners (after, of course, all fees payable to the broker etc. are taken out).

Advantages of Fractional Ownership

The advantages of Fractional Ownership over the old timeshare system would seem fairly self-evident. Actual bricks, mortar and deeded ownership encourage a sense of investment in the maintenance of the property, as does the financial standing of the clients themselves. A typical example of a fractional buyer is an educated, reasonably well off professional person, well travelled and with good access to information and advice, both legal and financial.

Higher standards and greater usage possible

Fractional schemes also tend to provide for far greater usage of the shared property than in the old timeshare schemes, with a typical arrangement being for each property unit having between two and twelve shared owners. This allows for greater usage per owner, and also more flexibility. Another obvious advantage is that although prices and maintenance costs are higher, so are standards. In many fractionally owned properties, the level of maintenance and service equates to that of a top quality hotel, with cleaning services, room service if required, grounds and pool maintenance and even a chef being provided in some!

More reasons to buy a Fractional Ownership

In addition to the above, those who have bought Fractional Ownerships have cited other reasons for choosing the concept. Fractional Ownership makes it possible to own shares in not just one but several holiday properties, enabling for more varied travel and experiences. Those in the fortunate position of being able to spend, say R1 000,000, on a holiday home, can choose instead to own fractional shares of two or even three luxury properties in different parts of the world. They also like the idea that a deeded ownership appears to offer greater security and the possibility for capital gain over time. Further, as most Fractional Ownership deals entail co-ownership of the managing company, owners retain the right to reject and replace poorly performing management.

What to look out for with Fractional Ownership property

For all the positivity and excitement surrounding Fractional Ownership, there are also voices of dissent. Many warn that almost all of the problems associated with timeshare are present in fractional ownership, just more cleverly hidden. They claim that anyone who owns only a share in a property still has to accept that other people will also treat the property as a home, sleep in their beds, eat at their tables and store their food in their fridges, with the possibility of misuse or unpleasant habits always on the cards (access to substantial financial resources does not always guarantee good manners or high standards of behaviour).

No guarantee of financial gain

They also point out that an investment in a Fractional Ownership property is no guarantee of financial gain when the property is sold, as the property market in modern times is as likely to fail as it is to succeed, and that shared properties have a record of being harder to sell on than privately owned ones.

A balanced view is the best view to take

As with most things, the balanced view is the wisest one to take. There are Fractional Ownerships and Fractional Ownerships, some good and some not so good. The devil is in the detail, and the details can be complex so careful research is advised before entering into any such commitment. Not all Fractional Ownership schemes involve deeded ownership, although many sellers declare that this is the essential difference between Fractional Ownership and timeshare.

Types of Fractional Ownership agreements vary

The types of Fractional Ownership agreement vary massively, so be very certain what the rules are, and shop around for the type that suits you best. Will you want to sell the property after a number of years whether or not the value has increased? Would you prefer to keep the property for longer as a lifestyle investment as opposed to a financial speculation? (Both types are possible.) Are you certain that the Fractional Ownership agreement will afford better value, given the relatively high costs, than many years worth of ordinary holidays or full ownership of a property that you can “swap” with others in different places?

Many advantages, just check the details

Fractional Ownership may suit you as it removes the worry and expense of maintenance when you are not in residence, can have tax advantages and allows the part ownership and use of a top end property in the best locations. Just check the details before signing up.