Fractional Ownership: The joy of sharing

By on April 8, 2013
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In these turbulent financial times, if there’s one thing investors don’t mind sharing, it’s risk.

There’s nothing like a global financial crisis to sap your enthusiasm for buying abroad. So when the world economy went into turmoil in 2008, many would-be investors decided to sit on their cash and wait for things to pick up.

However, not everyone was willing to shelve their investment plans or dreams of a sunny second home, which is why an increasing number of investors have been turning to fractional ownerships schemes.

Such schemes allow unconnected buyers to share ownership of a specific property, which usually forms part of a holiday resort, residential building or private members club. As well as sharing usage of the property, buyers also split maintenance fees, rental incomes and any appreciation or depreciation in the property’s value when they come to sell.

“With money earning little interest in bank accounts, people are looking to invest in bricks and mortar,” says Jerry Cobb, CEO of the Fractional Ownership Consultancy. “With fractional ownership there’s still a risk [that the value of the property will depreciation], but you are putting less at stake.”

Existing schemes are many and varied, but investors can pay as little as €55,000 for a share of a property (usually a quarter) and are generally able to have exclusive use of it for up to 13 weeks.

Unsurprising, fractional ownership has proven popular with buyers who have small budgets and lofty ambitions.

“With prices from as little as €55,000 for a share of a two-bedroom, two-bathroom apartment, those who never thought they would be able to afford an overseas property now have one right in their reach,” explains Nick Stuart, Director of Spanish Ownershare.

And while fractional ownership is a leg-up for those getting on the overseas property market, it also allows wealthier individuals to invest in a property that would otherwise be out of their league.

Versus timeshare

The obvious rival to fractional ownership is (whisper it) timeshare, but it’s difficult to make it stack up as a viable alternative; essentially it is just an investment in time and, as Jerry says, “fresh air.”

“Fractional ownership is for individuals who want to invest in something more equitable than timeshare,” says Jerry. “You are investing in a proportion of bricks and mortar rather than just time.”

Granted, some timeshare schemes have been tailored to offer subscribers access to multiple properties around the world, but ultimately they are overpriced, more restrictive and hard to sell (after all, who wants to buy an expensive idea, when they could invest in bricks and mortar).

For example, The Good Property Guide found a four-week-per-year timeshare in a one-bedroom apartment on the Costa del Sol for €79,000, which is fairly uncompetitive when compared to some of the fractional ownership options we have stumbled upon.

“We can give three times that (12 weeks) and an extra bedroom for just €55,000,” says Nick. “And what of its resale value?  A fraction is an asset that can go up or down in value and be sold at a profit. On the other hand the market is flooded with cheap timeshare resales as owners struggle to even give them away.”

Although the concept of fractional ownership has been popular in the States for a number of years, its popularity is now expanding in Europe thanks to a mixture of market uncertainty, low real estate prices and a desire for reduced risk investments. Thanks to the European Fractional Ownership Directive, buyers can also enjoy greater protection when investing in such schemes. Introduced in 2011, the directive was designed to safeguard consumers from the kind of scams that ruined the reputation of timeshare when it first emerged. Amongst other things, it legislates that buyers should have a cooling off period of 14 days from the date of the contract, during which they can withdraw for any reason and without cost.

This legislation applies not only to properties being marketed on a fractional basis in the EU, but also to properties outside the EU which are being marketed to EU residents.

“We have fractional ownerships around the world and all of them are busy,” says Jerry, whose company is currently expanding into other territories. “Fractional Ownership is growing in popularity across the world as it offers great benefits to buyers and property developers alike.”

Tips for buying fractional ownership…

Seek specialist advice

Although Jerry is keen to extol the virtues of fractional ownership, he accepts that there are good and bad products out there. His advice is to seek specialist advice and have contracts checked to make sure they are receiving a clean equitable stake in individual properties with no restrictions when it comes to selling up.

Beware of service fees

Service fees vary depending on the scheme, but expect to pay £2,000-£4,000 per annum, plus a small contribution to what is known as a “sinking fund” to cover incidental expenses.

Know the law

Introduced in February 2011, the European Fractional Ownership Directive applies not only to properties being marketed on a fractional basis in the EU, but also to properties outside the EU which are being marketed to EU residents. It ensures buyers have a cooling off period of 14 days from the date of the contract during which time they can withdraw for any reason and without cost.

The regulations also require buyers to receive detailed information relating to the property, including full details of costs payable, the services, the nature of the rights being acquired and details of any exchange scheme.

Possible pull quotes…

“Fractional ownership is for individuals who want to invest in something more equitable than timeshare. You are investing in a proportion of bricks and mortar rather than just time.”

“With prices from as little as 55,000 euros for a share of a two bedroom two bathroom apartment, those who never thought they would be able to afford an overseas property now have one right in their reach.”