Fractional Ownership News

Making your fractional ownership investment work for you

Date: 28/09/2009
Article source: Real Estate investor magazine

In the May/June edition of Real Estate Investor Magazine we took a look at fractional ownership as one of the property market sectors still showing steady growth in the vacation ownership world. In short, we discovered that fractional ownership offers investors a host of benefits, including:

• affordable ownership of exclusive properties, which still enjoys higher capital appreciation than other residential properties
• better value for money since you only pay for your time and not the entire year
• a share in the increase in the value of the property
• lower maintenance costs
• better security
• the ability to rent out your unused time
• Your time at the fractional ownership property

The amount of time you will be allocated at the property depends on the number of shares you have bought.

In a conventional structure, a fractional ownership company has 13 shares and a maximum of 13 shareholders. This would translate into 28 days of use of the property per year for each shareholder. However, configurations of four shares, eight shares and 52 shares, which translate into twelve weeks, six weeks and one week per year for each shareholder, respectively, are also used.

The weeks are allocated according to a predetermined schedule. This roster or use plan usually advances with one or two weeks per year, so each shareholder will have a different time allocation each year, indicated on personal calendars.

Various roster systems are used at different properties, but the three most commonly used for a 28 days fractional share are:

• 1 x 4 weeks – the four weeks are continuous and usually advance one week per year.
• 4 x 1 week – each shareholder is allocated one week in each quarter of the year, also advancing one week per year.
• 2 x 2 week – each shareholder is allocated two weeks in the first half of the year and two weeks in the second half of the year, usually advancing two weeks per year.

You may find that resorts close to Johannesburg or Cape Town work on a 4 x 1 week roster, while coastal resorts operate on a 2 x 2 week roster.

Use it or lose it

Your allocated time cannot be carried over from one year to the next, so if you don’t use it, you lose it. You can allow friends and family to use your share, but you remain responsible for any damage to the property during that time, as well as for the housekeeping or cost of cleaning after each stay.

Some schemes also offer a ‘swap-out’ system whereby you can interchange with other shareholders. You could also place you time in the rental pool and pay for another time, or if you wanted to stay longer than your allocated time, you could rent more time from the other shareholders through the management company. You may also be able to rent out your unused time.

Renting out your unused time

Not all fractional ownership companies allow the shareholders to rent out their allocated time. If this is allowed, this right will be stated in the shareholder’s agreement that all the shareholders sign when they invest in the fractional ownership company.

If you are allowed to rent out your weeks, you can either do this yourself or ask the management company to manage it on your behalf. Remember the latter option will attract rental administration charges, which can range between 12% and 20% of the rental charged. This administration change covers the rental logistics as well as the marketing of the weeks available for rent.

Rental pools

Fractional ownership companies may offer a rental pool to its shareholders. The benefit of the rental pool is that you no longer have to concern yourself whether your specific weeks are rented out or not.

The net distributable earnings from the rental pool are divided equally among all the owners according to each owner’s participation quota, regardless of which units were actually occupied.

Rental pools differ between various fractional ownership companies and you need to check whether a rental pool is available and what the conditions are before you make your investment decision, particularly if you are buying the fractional share with the view to generate an income.

Typically, rental pool agreements are fixed for a number of years. Most of the newer fractional ownership schemes and even some of the older ones do not have an exit clause whereby you can give notice to withdraw from the scheme.

If the rental pool agreement allows it, you can still use your time at the property, even though it is in the rental pool. However, since your time is removed from the rental pool, you will not earn any share from the rental pool during the time you are using it.

Seven questions you must ask 

Fractional ownership offers investors many benefits, but it is still vital that you do the homework, as with all other types of property investment. Wilson suggests seven questions you must ask to ensure you choose the right fractional ownership opportunity.

1. What am I getting?

The brochures look amazing and the unit is large, spacious and right on the beachfront. Or so you thought? Don’t rely on the marketing materials to make a decision. Do your own research on the area that you are buying into to verify the information about the resort infrastructure and the location. Also research the resort and visit the site, to ensure the amenities, the quality of building and the interior finishes will be what you have been shown or told.

And while you are in research mode, check out the development company, the construction company, the interior decorators and the management of the resort, especially if the property is still being developed.

2. Is the seller or promoter SAAFI-approved?

SAAFI is the self-regulatory body that guides fractional ownership promoters as well as service companies in South Africa. Its objective is consumer protection and SAAFI members adhere to a strict Constitution and guidelines. Before you select a fractional ownership opportunity, ask the promoter or service company to provide proof of SAAFI membership or visit www.saafi.co.za/members.html to find out which companies are SAAFI-approved.

Following the recent World Fractional Ownership Conference held in San Francisco, USA, SAAFI has made some changes to its approval process. There are now three different categories of membership – developer; broker/sales company; or management company. For every specific project undertaken, the member must submit legal documents with a list of compliance criteria, and demonstrate that everything is compliant at the outset, from their legal documents to their marketing promises. If they comply, SAAFI will approve the project, after which members can market the project to consumers. As a result, SAAFI members comply with all requirements both as a company and ongoing on a project-by-project basis, which is the way it works in the USA.

3. What are the monthly levies for the first year?

Levy structures can vary, depending on what is included in the purchase price. Most levies are reviewed at the shareholder AGM and subject to the shareholders’ vote, so in essence you have a vote as to which services are rendered as well as the amount spent on them. But the first AGM will only be a year down the line, so you need to know what you are liable for each month until then.

Ask the promoter or service company for a full breakdown of the levies for each month of the first year, as well as a detailed explanation of what the levies will be used for. Typical costs covered by the levy include the management fee, housekeeping, insurances, DSTV, check-in procedures, and possibly a maintenance fund. Query additional costs. For example, access to the golf course may be included, but you need to know if it is only for the initial period or for a life time.

4. Will your deposit be held in a trust account and purchase amount be applied according to a mandate?

Once you have decided to invest in a fractional ownership property, you may be required to pay a deposit. Before you transfer any cash, make sure the account you are paying the deposit into is legitimate and held in trust. As with any property investment, check if the interest on the deposit accrues to you and at what rate.

hereafter, the balance of the purchase amount will be payable. Make sure that the contract protects this investment and that the promoter acts according to a mandate.Check the details, scrutinise the contact, ask questions. If necessary, ask your attorney to look at the documents or contact SAAFI for a reference.

5. When will your unit be completed?

Often, fractional ownership opportunities are available in units, properties and resorts that are not yet completed. Buying early means that you will benefit from the capital growth while the development is being completed, as well as the rising cost of building materials in the current economic climate, but the completion of the project or your unit may be delayed for some reason. Beware of open-ended delivery dates. Check the sale of shares contract for the estimated date for the transfer of shares, as well as the occupancy dates of your unit for usage. And, if you are planning to use the unit close to the transfer of shares date, be ready for possible delays before you book your flights!

6. What rental clauses are contained in your contract?

If you are renting out your unused days or weeks, check whether your insurance liability will cover breakages or more serious damage that occurs in your absence, or while renters are occupying the unit. If you are unsure, it may be worth getting your attorney’s or insurance broker’s opinion.

Should your allocated time be rented out on your behalf by a third party, such as the managing agent, you may be liable for a handling fee or commissions of up to 20%. Make sure you understand these fees, and know exactly what the managing agent will be responsible for, before you rent out your weeks.

7. Is there a rental demand?

If your investment in the fractional ownership opportunity is based on generating a rental income, check the rental demand in the area. Your weeks will not be in peak season every year, and off-season the demand drops even in the most prestigious resorts. Speak to the local tourism office, the rental management companies and the estate agents in the area to get a firm indication of the demand and the rentals you can expect. The premium resorts to invest in are the resorts that maintain a stable rental demand through out the four seasons.

The hot spots

Fractional ownership has taken the property market by storm, particularly as the interest rate increases impact on affordability. “The interest rate is certainly making fractional the more sensible option at this stage,” says Dirk Wilson, co-founder of fractionalownership.co.za and member of the South African Association of Fractional Intermediaries (SAAFI) Working Committee. “It is also creating an influx of individuals and developers who want to fractionalise their properties – from homes and resorts to guest houses and farms - and keep a share of them.”

Wilson adds that fractional ownership is becoming very popular in Gauteng, where typically people buy within a five-hour drive of where they live. “Mozambique is really popular right now, and there is a great trend towards people buying resort brands. Pinnacle Point, Zebula, Zimbali, Pecanwood, San Lameer and Cape Town are the leading resorts being sold at the moment.”