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Fractional property market report
publication date: Mar 3, 2010
Fractional ownership is one of the new buzz-words in property. It is – at least for some developers – one of the few growth areas in the property market right now. It’s also a concept that struggles against confusion with timeshare. David Rogers, director of Rocksure Property, says, “I have some issues when I’m marketing our funds, because the market here was so scarred by the timeshare scandal, even though that was now 30 years ago – timeshares were so aggressively sold and there was so much marketing cost in the price.”
Piers Brown, founder of FractionalLife. com, points out that timeshare did, in the end, clean up its act, and, “there are a lot of timeshare owners who are very happy with their timeshares.” But he also explains that fractional ownership is a very different matter. “While with timeshares all you buy is a slice of time, with fractions you have a deeded interest in the property, or sometimes a share certificate if you’re buying into a fund.”
At its simplest, fractional ownership splits the interests in a property. “You are an owner, you have a title deed just like owning a whole property,” says David Burden, CEO of Timbers Resorts. Other models give shares in a fund, such as Rocksure’s and the fund holds the properties directly. Rocksure is rewarded for its stewardship by a 17.5 per cent share of any capital gains made at the end of the fund’s life – the same sort of success fee that hedge funds charge.
So it is a simple concept – but one that still isn’t well known in the UK. David Burden says that while it’s not understood well here, “In the US it’s been around for a dozen years or so and people are much more familiar with it.”
Most developers offer between one quarter and one twelfth fractions. Piers Brown says, “I’ve seen one week fractions, which to me is very close to timeshare – however the standard is twelve fractions, that’s four weeks.”
The appeal of fractional is very simple. In most overseas property markets, particularly the most mature ones such as France and Spain, overseas property is now highly priced - it is no longer the steal for UK buyers that it was ten or twenty years ago (particularly not with the weak pound). Credit tightening has further priced some overseas property out of the reach of the averagely wealthy. Piers Brown says “What fractional does is lower the price point and the level of entry for people.”
But fractional property is generally not addressing the bottom end of the market. For instance at Castello di Casole, some of the restored Italian farmhouses are priced at €4-5m or more. David Burden says that, “We find a broader audience by opening up to fractional ownership for €5–600,000.” The properties also include services such as cook, housekeeper, and concierge; “high end, but not ultra-ritzy,” Burden says.
Fractional properties are now available in many property markets. Timbers has resorts in Colorado, Mexico and the Caribbean, appealing to the US market, as well as Castello di Casole in Tuscany; Yoo’s Phuket development offers fractions from €45,800; and Rocksure is currently launching a fund with ten properties in Europe, focused mainly on the city break market, with an entry price of €115,000 giving 14 nights a year.
There are even fractional properties offered in the UK now; Kingfisher Apartments at Lyng in Norfolk, on a fishable stretch of the Wensum, offers 25 per cent fractions, and Barrasford & Bird is now offering fractional ownership at its Tregrenna barns development in Cornwall, from £39,000 to £86,000.
It seems to be the mid market that is doing best. Though some fractions are ‘bargain basement’ with Panama flats from €25,000, the average fraction in Europe appears to be around the €100,000 to €200,000 level. Most of the properties offered are on resorts, though some city centre properties in destinations such as Paris are also being offered on a fractional basis; the market is definitely being driven by developers.
Piers Brown says, “A lot of developers are looking at fractional at the moment.” He points out that services and inventory all have to paid for at a resort, so fractional can help to defray expenses. It’s not surprising that developers see fractional as a useful addition to their sales armoury.
Les Milton of the Fractional Ownership Consultancy points out another advantage of fractional ownership for the developer. “Most importantly, fractional ownership creates a year-round resort population,” he says. “Resorts that have no ‘buzz’ don’t last.”
Most developers have adopted a ‘mix and match’ policy, with both fractional and whole ownership being offered on the same resorts. David Burden says that Timbers Resorts has a Residential Club or Fractional Ownership component on almost every one of its nine developments. “It’s another way of selling. We’re very careful that we don’t just have one single residential offering at any of our resorts.”
So who is buying fractional property? The answer to that question depends to some extent on who you ask. David Rogers says Rocksure’s purchasers are generally in their early fifties, often partners in professional firms. “They’ve got a nice UK house, a good income, they’re still in work but they also want to have some fun. They pay cash, we pay cash – there’s no gearing in the Rocksure fund. Our target is wealthy, but not super wealthy.”
Les Milton, on the other hand, divides fractional buyers into three main types. Mature couples, looking for a family holiday property within 3-4 hours flight time, younger people using fractional as a way of getting started in overseas property. And then the pure investors, who want a trouble-free investment and perhaps the chance to diversify their property portfolio by holding fractions in different countries rather than buying a single property.
David Rogers says that diversification is often a motive for fractional purchase, particularly with Rocksure which offers a fund, rather than a single-property investment. “They’re attracted by the idea of overseas property assets, but they don’t know enough about it and are worried about the time involved and the need to select wisely. The spread of destinations, gives them a spread of risk. They like the fact that there’s a planned exit.”
But there’s also a lifestyle motivation. Piers Brown says, “Another key driver for fractional becoming more popular is that people’s time is more constrained and more valuable.” Purchasers don’t want the responsibility of maintaining property – they want a trouble-free investment that is managed for them, and that is what developers are increasingly offering.
It’s interesting that David Rogers comes from a travel background, not from the property sector. He is clear that what Rocksure is offering is a lifestyle choice. “Instead of taking £800,000 to buy a hous in Provence all for yourself, have the hassl of looking after it and the knowledge that you have an underutilised assets, you can spend £189,000 and buy a share in six properties around the world, and in different climate zones, so you can use them at different times of year.”
So far, most developers are marketing their fractional properties direct. David Burden says, “For the most part it’s direct, though we market to intermediaries too and look for referrals from them.” David Rogers says “We haven’t yet got to grips with how agents should be working with Rocksure.”
Piers Brown believes most agents will struggle to make money out of fractional property. For a start, he says, it’s a completely different sales process from whole ownership; he also points out that there is less commission on a fractional sale. “You might make commission on a £44,000 fractional sale but on £250,000 for a whole house sale – and sales people are usually greedy, and they go where the money is.”
That hasn’t stopped Morgan Forbes from bringing estate agents into its marketing mix for the sale of fractionals on its Madeira development, Ponta do Pargo. According to John Ward, marketing manager at Morgan Forbes, the company wants to increase its third party list in the near future. “Agreements are still to be finalised, however at this stage we offer an eight per cent commission,” he says.
While commission from fractional sales is lower, he says that repeat business is often easier to get than with whole property sales. And he states, “We can also upsell from a fractional product to a 100 per cent ownership.”
Fractional investment still has a number of regulatory hurdles to jump – as well as the ‘timeshare’ problem with its image. A trade association has recently been founded, the Fractions and Shared Ownership Trade Association (www.fsota.org), which should help address many of these problems. But fractional ownership is affected by the EU Timeshare Directive – vendors must offer a 14 day cooling off period, and cannot sell fractions as an investment.
In fact Piers Brown is very wary of selling fractional as an investment. “In my mind, fractional is a combination of lifestyle and property purchase; access to a luxury property at a fraction of the price. If you’re looking for investment, there are better investments out there than fractionals.”
On the other hand fractional investment can free a purchaser’s money up to work harder in other asset classes – if property turns out not to be the best performer over the next few years.
Brown is also worried that some fractions give the buyer a poor deal. While most fractions sell at a 20-30 per cent premium to the price of the same property wholly owned, he has seen some developers trying to achieve a 200-300 per cent uplift. “That’s outrageous, it’s people just jumping on the bandwagon,” he says. “Transparency and prudence are two words we’re going to be hearing a lot about over the next few years,” he predicts, and while that could help the fractional industry – by making purchasers concentrate on getting value out of their investment – it could also damage it, if disreputable dealers try to get in on the act.
Another issue with fractional is lack of finance; unsecured lending is available to purchase fractions, but mortgages are not. David Burden comments that, “In Italy you can’t have a mortgage on a fraction; in the US you can.” However, lawyers are now conversant with fractional – they’re no longer a bottleneck for purchasers.
And there is, as yet, no real resale market for fractions in Europe – that’s still a big issue facing the industry. However, Fine & Country has just announced plans to sell fractional alongside normal property sales – and the involvement of mainstream agents should help create a resale market.
Resale is one area where the funds, like Rocksure, have an advantage as they sell up the properties after seven or 10 years, and distribute the funds to the shareholders.
There is now widespread consumer interest. Piers Brown says, “From the consumer perspective our web traffic has more than doubled to 1.3m hits,” and the Fractional Expo grew from 100 delegates to 210 last year and is expected to see further growth this year.
Les Milton points out that fractional isn’t just a temporary quick fix for developers stymied by the credit crunch – it’s already demonstrated staying power. “Over the last five years, that is, before we entered the global recession, fractional ownership has been the fastest growing sector of the US property market,” he says. “Growth has been five-fold over the last 5 years.” That’s made it a USD 1.6bn market.
And David Rogers believes fractional has much, much further to go. “Right now, the prevailing model is that you sell a whole house to someone who’s got the money to buy it outright. That’s the old way,” he says. “Your grandchildren will think that’s a damned stupid thing, something their grandparents used to do! Fractional ownership is the future of overseas property for the British market.”