Fractional ownership enables people to own an interest in a luxury property (often in an exclusive holiday resort or glamorous city centre location) that they might otherwise be unable to afford. It is equally attractive to those who can afford to purchase property outright, but do not have the time to use or maintain it all year round.
It is commonly sold in anything from quarter to one twelfth shares, with periods of the year being allocated on either a rotational basis or a mixture of fixed and floating periods within a season. As well as having all the benefits of a management company to take care of the property, Fractional Owners usually have a direct interest in the value of the asset and are likely to benefit from any appreciation in the property value, although this may not always be the case.
Extremely successful in the US, the concept is increasing in popularity in Europe – the number of residences increased from 60 to 90 in 2008/9 and it is anticipated that there will be substantial growth of the market over the next 5 years.
It is, however, not just confined to real estate. Luxury Yachts, Prestige Cars and Private Jets are just some of the other luxury products that are available under fractional ownership schemes.
Length of schemes
Fractional ownership is more akin to real estate and short term leases tend not to be offered. Some schemes are freehold, others have leases of, say, 50 or 99 years.
Do fractional residences retain their value?
It is too early to tell in Europe as the fractional market is relatively new, but in the US they track local property values.
Do fractional operators offer a cooling off period?
From February 2011, fractional operators were governed under the same Directive as timeshare and are required to offer a 14 day cooling off period. Deposit taking is illegal.
How much does a fractional residence cost?
The average in Europe is between €100,000 and €200,000 although mid market developments cost from as little as around €25,000.
What are the management fees?
They vary from between 2% – 4%, ie from around €2,500 upwards to €15,000. The amount will depend on the facilities available on site.
Can purchasers get finance?
It is possible to obtain an unsecured loan of up to £50,000.
How are fractional residences protected?
A common structure is through a trust scheme.
Flexibility of the product
Owners can book their allocation up to 12 months in advance (in some cases it can be longer) but, can make last minute changes for a small fee. It is also possible to rent your property out – the managing company will organise the let and take a share of the revenue, leaving you typically with around 60 per cent of the rental income after cost.
Do the exchange companies offer exchange?
Group RCI through The Registry Collection, Interval International, and Preferred Residences offer a fractional exchange service.
What should purchaser look for before buying?
* Check the track record of the developer
* Review the quality of the resort and the amenities available – is it right for you?
* Ensure you’ve read the sales agreement carefully and understand the legal structure, what you are liable to pay and what the management fees are
* Is the resort affiliated to an exchange company?
* Find out what additional services the fractional ownership covers (eg. car rental, airport pick up / drop off) and whether this involves an additional fee
* What other properties, if any, are available within the company’s portfolio?
* Find out how the bookings system works, particularly during peak periods
* Check that you are offered a cooling off period in writing
Other Use Schemes
Private Residence Clubs
Private Residence Clubs are most often sold as a high-end fractional product, enabling the customer to own a part of a luxury home, often in unique locations and with the added benefit of maid or concierge type services, airport lounge access and a personalised travel service, as well as discounts with preferred travel and leisure partners.
They are designed to meet the needs of high-net-worth individuals who are looking for luxury, flexibility and a high level of personal service akin to that of a 6 star hotel or exclusive private members’ club.
Clubs are owned by members, with fractions broadly ranging from four to 12 owners per residence.
Companies frequently offer members access to other properties within the company portfolio or operated by selected affiliates.
Buy to Let Hotel Rooms/Condo Hotels
There are many variations of buy to let schemes but the underlying theme of all projects is that the purchaser buys a hotel room for the period of the project, deriving a share of the income from its letting. This can be on the basis of a fixed sum per night let or a percentage of the gross or net revenue for the room.
At the end of the specified period the hotel is sold with all parties sharing in any resulting capital appreciation, whilst in the interim, the purchaser is free to sell his own interest on the open market.
Condo Hotels are generally operated by prestigious and upscale hospitality brands and sold as a fractional lifestyle and investment purchase, with some offering a guaranteed yield over a pre-determined period of ownership.
Fractional owners are generally attracted to the flexibility of personal hotel room usage and the investment potential when the room is placed in the condo hotel’s rental programme.