Fractional Ownership - the new solution to having a "huisie by die see"?

Industry Comment by Theuns Hanekom - SAMO

I am sure many of you still remember the “good old days” when many
families could still afford both their primary residence as well as a holiday
home at their favourite holiday destination. And as Koos Kombuis sings:
“…almal wil ‘n huisie by die see hê…” But, with the sharp rise in property
prices over the past 5 years or so, especially those in coastal towns, as well as
the latest increase in interest rates, it might seem to many of us, that the
closest we will ever come to owning a “huisie by die see”, will be if we join
Koos Kombuis in singing his well-known song.

That is, of course, until you discover the concept of Fractional Ownership.
Many of the leading estate agencies such as Pam Golding Properties and Seeff
Properties offer Fractional Ownership packages at many of the leading golf,
coastal and game resorts. Although fractional ownership has been around for
quite a few years in South Africa, there are still a lot of misconceptions about
what it is exactly, how it differs from timeshare, and whether or not it is a
sustainable concept.

Fractional Ownership, or Property Syndication as it is also known, is a manner
in which more than one individual or legal entity, acquires ownership of an
asset, and more specifically the ownership of fixed property through a legal
entity. Simply put, a company will own the fixed property, and a limited
number of shareholders will, through their shareholding in the company,
become the owners of the fixed property. The shareholders are the owners of
the property and will therefore be jointly responsible (according to their
shareholding in the company) for all costs relating to the property, including
the purchase price of the property and all maintenance costs. In return, the
shareholders will own a share in the property and therefore will be entitled to
use the property according to the rules and regulations contained in their
shareholders’ agreement. Therefore, if you own 8% in the company, you will
be entitled to 4 weeks use per year, or if you own 12% in the company, you
are entitled to 6 weeks per year.

There are a number of benefits to Fractional Ownership. Firstly, if you were
to buy a second property on your own, you would have to pay the full
purchase price yourself. And let’s face it; you can only go on holiday for a so
many days in a year. You would therefore be paying for a full year’s use, but
only use it for about 4 weeks per year. With Fractional Ownership, you will
pay only for the value of your 8% share in the property, and still be able to
use it for 4 weeks’ holiday per year. Through minimal capital outlay, you get
the maximum return. Secondly, as you are investing in fixed property, you
get capital growth. Thirdly, the maintenance and cost thereof is shared by all
the shareholders. In most instances a maintenance company is appointed to
look after the maintenance of the property, allowing the owners carefree use
of the property. Another benefit is that you may sell your share in the
company at a price proportionate to the value of the property.

Although this might sound very similar to time-share, there are some major
differences. With time-share, you only buy “time” or “use” of a specific
property. You don’t own the property or shares in the property holding
company as with Fractional Ownership. And as the value of the property
increases, so does the value of your investment, which is not necessarily the
case with time-share.

Another drawback of time-share is that there are usually contract terms,
which need to expire before you may sell your share, but with Fractional
Ownership you may sell your shares whenever you want to.

Although time-share has over the years created a lot of negative sentiment,
prospective Fractional Ownership buyers can take some comfort in the fact
that the fractional ownership industry is a regulated industry. SAAFI (South
African Association of Fractional Intermediaries) was formed about 18 months
ago with specific regulations to which its members must adhere. The
advantages of such an industry body is that it will ensure the long terms
sustainability of fractional ownership, as a fractional ownership project will be
bound by the regulations for the entire existence of the project.

Of course there are other concerns with Fractional ownership. How will I sell
my investment if I want to? Will I get the weeks I want? What about my
fractional partners? And so on. All of these are reasonable questions that
have been dealt with in a number of ways by fractional ownership
developments. Fractional ownership will not be for everyone but it makes
sense for my family and me and might suit you or your clients.

I believe Fractional Ownership is well worth having a look at and who knows,
maybe having a “huisie by die see” might be more realistic than you think!