Fractional Ownership News

SA's property slump increases interest in fractionals

Date: 28/09/2009
Article source: Financial Mail

New products flood the market, but lack of debt funding depressing sales.

HARDLY a week has passed since the beginning of 2009 without yet another new fractional ownership product being brought to market. Latest offering to cross Finweek’s desk is an opportunity to buy a two week fractional ownership for R220 000 at the Greg Norman-designed golf resort Le Grand on the Garden Route near George. The invitation to `selected` investors by Broad Brush Investments promises a rental income of R4 800/month linked to a five year lease starting January 2010. There are apparently no monthly costs involved for levies or maintenance during the lease period. Information on the website is scant, which makes the offer seem too good to be true.

Be that as it may, key question is whether South Africa’s fledgling fractional ownership industry can sustain more new products at a time when demand for leisure property is arguably at a 20-year low. Also, will the industry be able to deliver on its promises of fractional ownership offering better capital growth potential than traditional timeshare?

Dirk Wilson, co-founder of industry portal fractionalownership.co.za, says SA’s property slump has prompted more * not less * interest in fractional ownership.

``The current economic climate, coupled to the fact that most consumers have limited access to capital is pushing the possibility of owning 100% of a holiday home out of reach, driving demand for more affordable leisure property options.’’

A search on the fractional ownership website sshows that shares in fractional residences in most upmarket golf or lifestyle resorts typically sell for between R350 000 and R550 000. That would usually entitle a shareholder to four weeks scheduled usage per annum.

Wilson says the number of resorts offering fractional opportunities in SA has swelled to around 50, up from less than 10 three years ago. He notes that leading global vacation ownership and exchange brands are now seriously looking at expanding their presence in SA, setting the scene for the local fractional ownership industry to ``explode onto the global map’’.

Wilson says US-based Interval International was recently awarded Southern Sun’s holiday exchange business while Registry Collection and Platinum Destinations are keen to build their portfolios of existing residences. These will be added to their global exchange networks, opening up more international holiday destinations to SA fractional owners.

Wilson says if the 2010 Soccer World Cup is a success, more international investors are likely to buy shared ownership products in SA. It’s much cheaper for international investors to buy into a SA private residence club that is linked to an international exchange network than to buy in Paris, London or Dubai. Says Wilson: ``Investors can use rands instead of pounds or dollars to buy into a luxury, co-owned residence in SA but still holiday anywhere in the world.’’

However, Wilson concedes that despite growing interest in the fractional concept, sales are currently depressed. ``Volumes are down 50% to 60% on early-2008 levels in line with the drop in general housing sales.’’

Wilson argues that prices of fractions (shares) at many resorts have nevertheless kept their value over the past 12 months, with some products actually recording a price increase as new properties came close to selling out.

He says a new trend is for companies selling fractional ownership to reduce the average four to five week/annum usage option to two or three weeks. This will reduce entry levels from the current R300 000 to around R150 000, which is likely to significantly boost sales volumes when the overall property market recovers.

Whether investors will see capital growth upside on re-sales anytime soon, is another question altogether. Wilson says unfortunately the resale market is gaining momentum at a much slower pace than initially expected. He ascribes this to the fact that most families are purchasing fractions as a long-term real estate and lifestyle investment. ``Hence the majority of fractional owners are not looking to exit just yet.’’

A shortage of debt funding is no doubt also placing a dampener on re-sale values. Talk early last year that most major banks were looking to introduce mortgage products to finance fractional ownership has come to naught. Jack Trevena, a former MD of Nedbank’s home loan division, has over the past year tried to convince financial institutions to join the fractional ownership party. ``But no one wants to lend into non-core property sectors,’’ says Trevena.

He believes that SA’s fractional re-sale market will only take-off once the banks start to provide end-user finance to buyers. Trevena says SA has top quality fractional products with resorts such as Zimbali or Zebula comparing with the best in the world, but debt funding is needed to develop the industry to its full potential. Says Trevena: ``We have the car but not the fuel.’’