Fractional Ownership News

Fractional ownership models clarified

Date: 28/09/2009
Article source: Eprop.co.za

Fractional ownership is merely the evolution of the well known residential syndicate, in other words, the shared ownership of an asset by pooling resources and costs. Syndicates have been used in South Africa as a form of leisure property ownership for years, focusing on game farms and golf resorts or family beach houses. The problem, however, was who takes management responsibility, or what to do when the fun is over and you want to exit?

With fractional ownership, the entire turnkey project is now offered on a professional level with all the aspects taken care of.

Concept

In essence, fractional ownership is the joint ownership of a luxury asset, usually one with a high monetary and aspirational value, where the cost of acquisition, maintenance and usage is shared according to a structured agreement. The property is then managed on behalf of the investor owners and enhanced by the addition of all sorts of value-added services.

A promoter provides the investment opportunity and also manages the entire process.

The services which form part of typical fractional products include:

• Financial management (all financial matters are managed, expenses paid, levies collected and returns are done on owners behalf);

• Housekeeping and hospitality are supplied on site – the properties are serviced and maintained with no effort from the investors;

• Exchange and rental facilities are provided for unused time; and

• Value-added services like exchange programs and use of other luxury assets are provided in the same offering.

Various types of fraction models

The international industry of fractional models, or more correctly of ‘shared vacation ownership’ programs, consists of a number of different products, each type or category with specific attributes. The various types are:

• Timeshare;

• Syndicates;

• Classic fractions;

• High-end fractions;

• Private residence clubs; and

• Destination clubs.

All of these types have a few common aspects, shared ownership, agreed use and external management being the most obvious. However, there are fundamental differences in the value-added services, the level of luxury, the intrinsic underlying property value and the legal structure of the products.

The best known examples of a few of these are the classic fractions offered by Pam Golding on Pinnacle Point and the Pezula Private Residence Club, also launched through Pam Golding.

Legally sound

As the fractional ownership products are the latest additions to the shared vacation ownership industry in South Africa, legislation is still lagging behind this new development, hence there is no specific legislation to conform to. This means the products are affected by portions or aspects of various acts, where an overlap is evident.

In effect the most products are affected by the Companies Act, the Timeshare Control Act and the Shareblock Act. It is therefore extreme important to deal with promoters and developers that take cognisance of this and have compliant structures and agreements.

How good an investment is this?

This is undoubtedly an excellent investment in lifestyle, with the added advantage of being underpinned with a property profile, allowing for capital appreciation.

In the worst scenario, you will have the benefit of use and get your money back when you sell. In the best scenario, you will have the use value and at least the normal property appreciation on your share. In our experience, this capital growth can exceed 15% per annum if you buy right!

The best method to determine the investment value is to assess the payback period. In other words, how long will it take to repay the initial capital purchase sum with the annual usage value?

Example: San Lameer

A three-bedroom villa will cost you R300 000. The daily rental rate for this villa ranges from R1 000 to R2 800 per day. In the fractional case you own 28 days, hence the potential rental value is between R28 000 and R78 400.

If an average of R60 000 is used, the payback is five years – if you include levies and other costs, maybe six years. A good investment will be if the product can be repaid in less than seven years!

Is there any proof of capital appreciation on these shares?

As with any purchase or investment, the end result is a function of the initial decision. We have seen up to 20% appreciation in San Lameer fractions and 24% at Pinnacle Point over the last year.

The Private Residence Club memberships at PEZULA have increased from R600 000 at launch to in excess of R850 000.

However, it is still a function of the initial decision and the management of the products, thus a function of the promoter’s role as well!

Are there any warning signs?

We believe that the future of the industry and the protection of the investment value is a function of the quality of the product management. Therefore it is paramount that promoters of fractional products should be able to deliver the product, manage the fraction in all aspects and still be there in years to come. Without this, the future value of your purchase could be in jeopardy.

What investments would be worth considering?

From experience we know that clients prefer to invest in categories of products where the brand value of the underlying destination is well known and very well established, for example:

• Well known and rated golf estates, like San Lameer, Fancourt and Pinnacle Point;

• Beach apartments where the units are on the beach, like Blouberg in Cape Town; and

• Countryside breakaways where there are sufficient activities for the whole family, like Hermanus or the Drakensberg.

(It is important to keep this in mind as it will influence your resale value.)

Current recommended buys are:

•               San Lameer, KZN: R260 000;

•               Pinnacle Point, Garden Route:R345 000;

•               Blouberg, Cape Town: R240 000; and

•               Alpine Heath, Drakensberg: R199 000.

What do you get in a nutshell?

You buy a 1/13th share in a company that owns the property. Each shareholder has 28 days use of the property, regulated by an agreement allowing you four weeks equally spread throughout the year. The unit is fully furnished and is managed in its entirety by the promoter.

You merely enjoy the holiday and the rest is taken care of!

(Thys Geyser is Managing Director Pam Golding Fractional Ownership)

Contact detail: 083 452 4774