Frequently Asked Questions

5 tips to keep in mind before you buy your fractional ownership shares

Fractional ownership is becoming more and more popular in South Africa, boosted by the burgeoning costs and headaches of whole ownership of holiday homes. Founder and Managing Director of fractionalownership.co.za and member of the Vacation Ownership Association of Southern Africa (VOASA) fractional ownership committee, Dirk Wilson, provides five expert tips to be aware of when looking at buying fractional ownership property shares.

1. Is the developer or selling agency VOASA approved?

As with any industry, there are rouge traders out there who are happy to make a quick buck at your expense. It’s comforting to know that the Southern African fractional ownership industry has its own regulatory body that is here to help, support and advise consumers and developer alike.
The Vacation Ownership Association of Southern Africa or VOASA is a self-regulatory body mandated by the Department of Trade and Industry (DTI) to regulate the growing shared vacation ownership industry in Southern Africa. VOASA educates and assists fractional ownership developers, promoters, and service providers to adhere to the various legislation and guidelines that fall within the applicable legal ambits of South African law.
Approved VOASA Fractional ownership members are required to operate within the comprehensive Constitution and guidelines in order to market and sell fractional ownership shares to the public; therefore we advise that you ask the selling agent if they or their organisation is registered with VOASA, as this is your best protection against rouge traders.

2. Request an estimated breakdown your levies for the first year

With all property purchases that are subject to an incremental levy, you need to know what you are liable for each month - and what is being funded and covered by the collective levy. Typically, you are purchasing a share in one property that is looked after by the management company, and so your levy should comprise the management fee, housekeeping, insurances, DSTV, check-in procedures, and possibly a maintenance fund. (Most levies are reviewed at the shareholder AGM and subject to vote, so in essence you have a vote as to which services are rendered as well as the amount spent on them. Levy structure can vary, depending on what is included in the purchase price; for example, some include access to the golf course, so you need ask if that's for a life time or only for an initial period.

3. Make sure your deposit is held in a trust account

When you have decided on your fractional ownership purchase and are committing to the deal, possibly by making a deposit, make sure that the account you are submitting your deposit to is a legitimate account and held in trust. The last thing you want is to put a deposit down for your dream fractional property in a resort yet to be completed, perhaps from a company you have never heard of before - and a few days later the company and your deposit disappear. Check the details, scrutinise the contact, ask questions - and if you are still hesitant contact your attorney for their opinion or perhaps VOASA for a reference.

4. Check the date of delivery of the actual property you are purchasing

Many fractions are being sold in units, property or resorts still to be completed. While there is a return on investment upside to getting into your fractional property investment early, you should be aware that the property you have bought into could take longer to build or be delayed for some reason. Do some research on the resort or area that you are buying into to ensure you are going to get what you have been promised in terms of resort infrastructure and resort amenities, and that the quality of building and interior finishes will be as you have been shown or told. To avoid disappointment, scrutinise the sale of shares contract for the estimated transfer of shares date as well as the occupancy dates of your unit for usage. Beware of open-ended delivery dates. If planning to use the unit close to the transfer

5. Review your rental options and liability in your contract

One of the benefits of a buying fractional ownership is that you can rent out your unused days or weeks and accrue the rental income. This is handy to off-set your levies or simply to deposit into your account. Should your allocated time be rented out on your behalf by a third party such as the managing agent, this income would possibly be subject to a handling fee or commissions. Make sure you are clear on these rates before you rent out your weeks. It is advisable to check your insurance liability should breakages or more serious damage arise in your absence or while in occupancy of the unit. If you are unsure regarding liability, it may be worth getting your attorney's opinion on your contract or to discuss your queries with your insurance broker.
 

It is advisable that you make sure the property is adequately covered.

Your monthly fees (levy) should cover household or 'content' insurance (fire & theft etc...), however  in the case of small damage, such as breaking a drinking glass, this is typically noted by the managing agent and reclaimed from the shareholder responsible for the damage.
In the event such as fire, serious damage or even theft, this then gets handed over to the insurance company to evaluate under the management 

To date there is no official record of how fractional real estate shares have performed over time. Feedback that we have received from some of the leading fractional agencies in South Africa is that the vast majority of owners have indeed re-sold their shares for more than they paid for them a few years prior.

As with most fractional ownership properties,the fractional shares are underpinned by the market value of the entire property. Over time, should the total market value of the property increase, your fractional shares will typically increase directly in proportion with this percentage.

According to the 2010 First National Bank (FNB) house price index - general house price values in South Africa increased by 200% over the period July 2000 to July 2010. This is a fair indicator that fractional property shares are likely to increase in resale value over the next decade. 

We recently asked John Loos Property Strategist at FNB Home Loans:

Fo.co.za - The South African FNB house price index reports that general house prices grew by 192% in South Africa between the years 2000 and 2010. This indicates that over the medium to long term general South African real estate values had experienced positive growth  - even through the depths of a global recession experienced recently is this correct?

John Loos FNB - Yes that’s right. Tomorrow (1 June 2010) we will release the May FNB House Price Index, which will show 200% cumulative rise from July 2000 to May 2010. So the decline of last year couldn’t nearly offset the overall boom period price inflation rate.

We endorse that fractional real estate shares should not be ‘sold or bought’ as a pure financial investment product, further to this we are of the opinion that fractional ownership is a ‘Lifestyle investment’ for you and your family to enjoy for many years to come and Fractional ownership provides a convenient and hassle free real estate ownership option that sits between 100% ownership and non-equity ‘right to use’ time only products. 

With all this said, real esate values anywhere in the world can change at any time, there are no guarantees, as we all know it’s Location, Location, Location!

Upfront fees may include a deposit of sorts. Monthly fees are likely to be in the form of a ‘levy’ or ‘monthly due’ – this is a collective fund that contributes towards the total costs of running of the properties, such as rates, cleaning and maintenance, insurance and additional guest service fees that commonly include cable TV, pool cleaning, garden services and management of the asset.

Yes you can, providing your shares include membership to an exchange program. Some companies offer exchange programs within a closed portfolio of real estate, and some company’s partner with global exchange networks to offer their owners a more flewxible global network of resorts and destinations to exchange into each year. Exchanges are fast becoming a must have for developers, as most owners enjoy the flexibility of usage and destinations each year.

To date none of the ‘big 5’ South African banks offer an over the counter loan or bond product specifically to purchase a fractional ownership share. Apart from the very strict debt management and lending criteria recently implemented in South Africa - which ultimately has made it more difficult for people to get any type of bond these days, there have been other external factors which have delayed the banks to release these types of specialised lending  products. 

Feedback that we have received is that the banks are still getting over the hangover from the global economic recession, and until such time as they have more risk appetite for lending we unfortunately will not be seeing any of the high street banks offering fractional ownership finance products. 

All is not lost though...

Increasingly fractional ownership developers and promoters themselves are working with micro lenders and indeed offering finance on their own products. From what we understand the lending term on these loans are relatively short (5 to 10 years). 

You also have the option of a personal loan, or drawing equity from your primary home loan in order to fund or part fund your purchase. Where there is a will there is a way!    

In most cases yes you can rent your unused time and receive the rental income, minus a few fees. This is one of the benefits of owning fractional ownership shares. The actual rental rate would be subject to supply and demand and likely to be on par with similar properties in the immediate area.

Should a rental agency rent out your time on your behalf there are likely to be fees associated for their efforts, these are typically in the region on 10% to 20% of the total rental rate.

Check your ‘usage’ or ‘right to use’ agreement clauses, as each fractional scheme is unique and therefore subject to variation.

Yes you can. If you are looking to re-sell your share, you might be obligated to offer the shares to the other shareholders for a period; thereafter you are generally free to find a buyer yourself.

When you transfer your shares to another person, either the new buyer or perhaps you are passing it over family or a friend, this process is a simple ‘Transfer of shares’ process which can be facilitated by an attorney. 

We advise that you refer to the terms in your contract before your begin the transfer of shares process.

Shareholders do not necessarily know one-another, their only interaction is on the annual general meeting of home owners, when the financial statements are submitted, budgets discussed and the general operations are discussed. This can be done in person or by proxy vote via the internet.

We are seeing that over time most shareholders will get to know each other, and in more cases want to know weach other - once again the internet is a convenient way for this to happen.

In pre-sale instances, generally not - developers have a close relationship with their preferred interior designers in order to deliver a shared ownership residence to a specific standard that is suitable for shared usage. The overall quality of the designers work, complimented by the appliances and hard furnishings should be a key selling point for any promoter. Fractional and private residences are typically decorated to a high standard, with quality and durable appliances, as well as comfortable and luxurious furnishings.  

The building specifications and décor comply with specific standards as set out by each Fractional Ownership Provider/Company and may not be altered to suit the needs of a specific individual. It is near impossible to decorate a property to suit the wishes of every individual and owners need to understand this as part and parcel of shared ownership.  

Once the property has been sold out – the individual shareholders reserve the right to put forward suggestions for future renovations and topics regarding upkeep and maintenance, this is generally facilitated by proxy vote or discussed and auctioned at the AGM’S. The management company appointed to oversee and manage each fractional property facilitates the communication, logistics and AGM’S on behalf of the owners.      

Fixed time would imply that you have right to use of the property for a fixed date period each year, for example: a specific week or month each year. Flexible on the other hand will provide owners with a number of days or weeks to use on an availability or priority basis. With a flexible right to use structure each owner is allocated let’s say 21 days per year to use in one or a portfolio of properties each year, and the owner will request this time period to be booked in advance.

There is variety of exciting exchange programs available, some companies convert time and value into a form of currency such as weeks, points and credits, and these can be used to trade or exchange for time in another property or resort locally or internationally. The larger global exchange companies typically create levels of membership programs which will allow these members to exchange within the level. The levels of membership are determined by the level of luxury, exclusivity or general value of the real estate or resort.

Each year the shareholders are invited to vote on the various aspects involving the day to day running of the fractional residence. These AGM’s provide the opportunity for the owners to have their say on how the residence is managed. The collective voting will dictate the service providers as well as who is appointed as the managing agency.
 


 
 
 

Your annual usage is typically equated directly to the number of fractional shares you own in the property or portfolio of properties. Annual usage is commonly structured on the 365 days or 52 weeks per year models. The annual right to use is then divided amongst the owners and according to shareholding status, simply put the more you shares you own the more you can use the property.

There is a variety of fractional interest structures. Each of these ownership structures are related to the usage of the property, 4 common structures are:
 
1.    ‘Quarter ownership’ with 4 owners each with equal usage over the year 
2.    13 shareholders each with 4 weeks usage per year
3.    26 shareholders each with 2 weeks usage per year 
4.    52 shareholders each with 1 weeks usage per share

There are other club based memberships which provide members (owners) with access to a portfolio of properties and resorts, these shares can be sold to many people, however buyers must be cautious that there are not over sold, which causes issues when it comes to booking usage time. 

Shareholders can typically increase their fractional interest by purchasing more than one share.

It is common for developers to retain one or more shares in the property as to show their commitment to the growth, maintenance and management of the property.

Fractional residences are cleaned and serviced the same way luxury rental, hotel suite or holiday accommodation is managed. Cleaning and inventory checking will be done before each guest (owner) arrives to ensure the best and most relaxing experience during their stay.
 
For larger maintenance work, such as painting, the managing agent will book out the residence for the period required to complete the work.

At the date of publishing this, Yes. South African Capital Gains Tax is applicable of profit when you sell your fractional share, GGT is calculated as follows:

Natural Person = The 1st R10, 000 of the Capital Gain is exempt, 25% of the remainder of the Capital Gain is added to the personal income tax payable at the applicable income tax rate.

Legal entity = 50% of the Capital Gain is taxable at 29%

For more information its reccomended that you contact your tax consultant, as each persons / companies tax situations are unique and this may effect the percentages.

This is probably the most commonly asked question by people that are enquiring into purchasing a fractional property ownership share. The answer can be very made very complicated or very simple. We opt to give you the simple explanation that demonstrates the fundamental differences between the two.

Fractional property ownership can be defined as lifetime shared ownership (equity) of leisure use real estate. Each owner (shareholder) is allocated a number of days, weeks or months each year, and this usage is directly related to the number of equity shares they own.

Conventional Timeshare in its various forms (weeks & points) can be defined as non-equity ‘right to use’ of leisure real estate for a number of days or weeks each year. Ownership is for a limited number of years and typically purchased within a resort environment.

All of these shared ownership with shared usage options are promoted under the umbrella of ‘shared vacation ownership’. In South Africa these forms of shared vacation ownership are regulated and legislated by various acts including the property timesharing control act 1983. The fractional and timeshare sectors are both regulated by VOASA.

In essence they are very similar, however fractional is perceived as a long term lifestyle investment into luxury real estate, and timeshare is a convenient and cost efficient way of owning vacation time for a number of years only. 

This will depend on how you are purchasing the shares, and taxation obligations chnage from time to time - therefore we advise that you seek the latest guidelines from SARS. At the time of posting this here are our findings:

Purchasing in your personal capacity

Typically when you buy the share in your individual capacity, no transfer duty is applicable, on any shares under ZAR 500K, then transfer duty is applicable on the balance over ZAR 500K.

Purchasing in a CC, PTY or trust

An entity such as a CC, Pty Ltd or trust, an 8% transfer duty will be applicable on the value of the share,minus the  value of the 'fixtures  & fittings ' this is known as the 'fair value'.

As with all property transactions, transfer duties are only payable on fixed assets and not tangible/ movable assets such as furnishings and so forth.

Credible management companies should make financial provision for the future replacement of linen, beds and hard furnishings. In the case of unexpected damage, such as a broken TV – this will generally be replaced as soon as possible and covered by insurance.

Managing agencies typically collect a ‘special levy’ which may be added to the monthly or quarterly levy in order to create a fund for future replacements.

The Vacation ownership Association of Sothern Africa (VOASA) is here to assist the public with all aspects of purchasing shared vacation ownership. If you need to contact VOASA they have offices in both Johannesburg and Cape Town, or visit the voasa website www.voasa.co.za 

This is dependent on the insurance and personal liability within the shareholder or right to use agreements. In the event, the damage will be reported to the management compnay which in turn must follow the correct procedures ensure fair evaluation and subsequent claims.

You have the a few options available to you that include renting, swapping with another owner in your property or exchanging your time into another property or resort, or simply leaving it empty. Let’s look at each of these in a more detail.

Rentals

Most fractional ownership purchases allow the owners to rent out their allocated time, this can be facilitated through your managing agency, the appointed rental agency for your property or resort, or perhaps you prefer to provide access to your family, friends or co-workers.

Private rentals are generally accepted through your own marketing efforts, however it’s  vitally important that you look into your liability when renting out or providing access privately, as you are probably personally liable for any damages or injury caused while giving or renting out your allotted time to a third party. Renting out your unused time is one of the many benefits of owning fractional ownership, as you can use this income to offset your monthly levy contributions, or simply put it in your pocket.

Swapping

Here you can swap your time with one of your fellow shareholders in your property or resort, This should be facilitated by your managing agency.

Exchange into another destination

Providing your shares, developer, property or resort is affiliated with a local or global exchange program you will have the flexibility of exchanging some or all your time into a global portfolio of luxury properties or perhaps a luxury yacht! This is another fantastic benefit of owning fractional shares that are affiliated with a global exchange network as you can choose to go somewhere different each year, however your fractional shares investment is pinned to a specific property or portfolio of properties.
 

Each Fractional Ownership Provider/Company assigns their own specialist conveyancers to draw up the various contractual documentation. Typically you are obliged to use these nominated conveyancers to buy your share.