Fractional Ownership is essentially a “re-branding” of timeshare and first appeared, in the US in the early years of this century and gradually spread worldwide but take-up in Europe was, and still is, very sluggish. In the absence of any agreed (or legal) definition, in holiday terms fractional ownership appears to offer: –
- Ownership in holiday accommodation on a shared time basis (exactly like timeshare)
- In up-market accommodation (claimed to be superior to that of timeshare)
- For a fixed period of ownership – often 15 to 25 years or so
- With a number of weeks of use per year e.g. 6 weeks being a 1/8th fraction etc.
With a “guarantee” that the assets (accommodation) will be sold at the end of the ownership period with the proceeds of sale being distributed according to the fractional share owned.
There is suspicion that some so called “fractional” schemes are yet another “investment“fraud. A number of fractional schemes are now marketed on a “Buy to Let” basis which raises serious doubts about their financial standing. The concern is that whilst not classified as an investment, it is after all only a long term holiday product; in many cases the emphasis at the point of sale is that it is an investment.
- With woolly worded contracts that any competent lawyer would advise against involvement
- The “investment” prices are many times greater than the fractional value of the original property as a whole – buyers are paying up to 8 times over the odds – which does not auger well for any capital refund, let alone profit, at the end of the ownership period.
- Promises of a distribution at the end of the ownership period are being made by off-shore or limited liability companies that may have disappeared before pay day or who may arrange a private sale at an artificially low price to a friendly company
- Many developers are offering loans at interest rates to make the purchase, which would totally negate any potential profit that might accrue.
A whole different meaning to “floating weeks”
Fractional ownership is not confined to property. Aircraft, yachts and vintage cars can also be fractionally owned. A typical example of a failed fractional scheme is “Dames de la Mer” (a trading name of Shakespeare Classic Line Ltd) launched in July 2009. The sailing boats were constructed by the French company Beneteau. All were Cyclades 50 class
The scheme was to market fractional ownership in yachts in Turkey selling one week “fractions” for around £8,000 each. The boats originally cost c. £220,000 so selling 52 weeks at £8,000 means each boat sells for a total of £416,000 generating an immediate profit of £194,000 to the seller.
The term of ownership was 35 years meaning the sale of the boats wouldn’t take place till 2044. The question is how much would a 35 year old boat be worth at the point of sale?
Out of matter of interest we decided to look at the second hand market for the specific yacht, we only found two for sale. The example below was used because the manufacture date of 2007 was the closest to the scheme date of 2009.
From this we see an asking price of £113,328; the interesting point is that the listing, at the date of this article, shows 609 days and still no bids. Even if the scheme came to fruition today and the yacht was sold, each fractional owner would receive £2,179, so much for an investment of £8,000. Of course, like any timeshare annual maintenance fees would also have to be taken into account.
A final point, Shakespeare Classic Line was a company run by Andrew Harris who was convicted of fraudulent trading and various unfair selling techniques in late 2013 and received a 4½ year custodial sentence.
Will property fare any better?
First off, it has to be said that bricks and mortar stand a much better chance of increasing values than fibre glass boats. This is true if the mathematics work, unfortunately they seldom do. Our research would indicate that a one week fractional ownership in Europe has an entry price tag of about £20,000. Unlike the yacht fractional which sold for an entire 52 weeks, most property base fractional contracts cover 50 weeks, with two weeks being retained by the developer for maintenance.
On this basis, selling 50 weeks at £20,000 yields £1,000,000. Remember the property sold is likely to be a two bedroom two bathroom holiday apartment not a luxury villa.
To add some reality into the mix. Club la Costa (Wyndham) based near Fuengirola in Southern Spain were very active in the past selling fractional timeshare contracts. CLC had their own estate agency, and still have, rebranded under the name of Idiliq. A quick visit to the Idiliq site reveals some interesting properties, all within the Club la Costa resort:
From this can be seen that even the top end Wyndham Grand Residence apartment has a price tag of nothing like £1,000,000. A very important point to remember is that Club la Costa builds their own properties and even when factoring in the cost of the land, the build cost is nothing like the retail cost.
The resale market at Club la Costa offers even better value:
From these few examples it starts to become clear that the only guaranteed profit from the fractional scheme lies with the developer. Much like the yachting example, the corporate acquisition cost versus the sale cost leaves a very favourable profit margin; can the same be said for the purchaser?
Future values
One thing is for certain, both EU and UK legislation prohibit the communication of a fractional ownership to a prospective buyer as an investment; in fact it’s illegal to do so. Does this stop the sales reps? Of course not. In general, property has stood the test of time as a solid investment; however as with all investments values may fall as well as rise.
There are many sound reasons why EU timeshare legislations preclude fractional schemes as investments, some of the more obvious ones we shall look at below:
Over pricing: If any item is sold at considerably over the going market rate then the period of wait for the item to reach par comes into play. In the Club La Costa example the market value of the apartment is about £171,000 whereas the sale price is £1,000,000. The buyer has paid £20,000 against a fraction with a true value of £3,420.
Term: Most fractional contracts are sold for a term of between 10 to 25 years. The only sale date that is mentioned is that of the maturity of the fractional. There is no guaranteed route to sell a fraction during the term. Even if there were, the return would be minimal.
Multi owners: Potentially there could be as many as 50 owners. 50 weeks being sold to owners and the developer keeping 2 weeks for maintenance. For anything to happen to the property there has to be a consensus of opinion. If 40 owners wish to sell but 11 don’t, stalemate.
On top of all this, both holiday trends and destinations are all important. Whilst Spain is still the top foreign destination for Brits holidaying abroad, there is no way to guarantee this will still be the case in 15 or so years time.
Another important fact to remember is that these properties have been built as holiday accommodation. The build quality will invariably be inferior to properties built for the private sector. Another factor is size, 80 to 90 M2 may be ideal for a two week holiday but permanent living may be a different scenario altogether. All these points will have an impact on resale values.
So, good or bad?
Expensive to get into, expensive to maintain, no proven investment opportunity, long term with no guarantee of a sale, restricted market place, overvalued product. So that about summarises a fractional contract but there are still other factors we haven’t looked at. At a starting price of about £20,000 not many people have this sort of spare money laying around so opt for finance. Finance for timeshare/fractional, call it what you like is subprime unsecured lending and as such often brings interest rates of 19% plus.
At these interest rates a £20,000 loan will cost double in repayments over a 10 year term. Borrow 20 pay back 40. Add to the equation the absolute no chance of a true investment return and financially you have more likelihood of a gain by playing roulette.
At best, you can rely on your holidays for the coming future and rest in the knowledge that you have paid through the nose and will continue to do so for as long as you own a fractional contract.
For more information regarding this article or assistance in any other timeshare related issues please contact the TCA on 01908 881058 or email: info@TimeshareConsumerAssociation.org.uk