The timeshare industry has travelled through a lot of changes in its history. Fixed weeks became floating weeks, floating weeks became points, and whilst straightforward points still exist, the new kid on the block is fractional ownership.
We asked if fractional ownership was an investment, well straight away it cannot possibly be because the EU Timeshare Directive of 2008 specifically outlaws the selling of any form of timeshare as an investment so why is fractional ownership understood by many who purchase it to be an investment? Below we will try to answer.
What is an investment?
First off the word investment is a noun, to give it an explanation we turn to the dictionary and this is what it says:
The investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.
So in other words you pay money to either obtain a gain or an income or both. Pretty straightforward stuff, so now we know what an investment is, let’s see if fractional timeshare is an investment, on the understanding that it’s not allowed to be an investment.
Fractional ownership explained then taken apart
Fractional ownership is just a timeshare in a different wrapper so if it’s just a timeshare it cannot be an investment. Traditional timeshare be it weeks or points have a value that literally falls to zero before the ink is dry on the sales contract. Given this, we can hardly call it an investment because it will neither offer the chance for capital appreciation and doesn’t provide an income.
So how does fractional differ? Put simply, the buyer is actually buying a fraction of the holiday accommodation on the resort. Fractional contracts are sold in multiples of weeks so a single fraction could be one week, two fractions, two weeks and so on. So far it looks like any other timeshare but one difference is that the term is much shorter; 15 years would be the norm, and at the end of the term the whole property is offered up for sale and all fractional owners will receive a cash payout from the net sales proceeds. Now we hear you say that this is looking like an investment, well it is, sort of, however when we dismantle it further on it may look different.
In the UK, investments and their regulation come under the remit of the Financial Conduct Authority (FCA). Now the FCA demand that every supplier and retailer of investments needs to be regulated to do so, furthermore they must clearly point out that:
The value of your investment and any income derived from it may fall as well as rise and you may not get back all you invested.
Dismantling the product
From here we will dismantle the fractional contract and see if it really does stack up as an investment which it’s not allowed to do as timeshare cannot be sold as an investment.
A good place to start would be the cost. On average in most European resorts that offer fractional ownership then expect a starting cost of about £20,000 for one fraction. Given that the majority of purchasers don’t have that sort of spare cash around, finance may well be necessary.
Finance for timeshare is unsecured lending, so the interest rate charged is higher than secured lending, such as a domestic mortgage. TCA have seen finance contracts with an APR as high as 18% but for the purposes of this article we will use the rates and calculator supplied by MoneySuperMarket. According to MoneySuperMarket a current interest rate would be around 9.9%, so for £20,000 borrowed over 10 years the total repaid will be £31,025. This would be based on monthly repayments of £258.55.
So that’s the finance sorted but are there anymore expenses, of course. Like any timeshare there is the annual maintenance fee to pay. At present, for this sort of fractional contract the fee is about £1,000 per annum but maintenance fees go up every year. Using the TCA Maintenance Fee Calculator and assuming a 5% rise in the annual fee. Over the 15 year term the total cost would be £22,657. From this we can say that at the end of the term, the total paid for our £20,000 “investment” is £53,682 (finance plus maintenance fees). But as you own a fraction of the property surely all that expense will come back to you, or will it.
The property
We failed to explain that the whole property is not sold as fractions. Normally 50 one week fractions are sold allowing two fractions or weeks to be retained by the developer for apartment maintenance. For the type of fractional we are working with, the property would normally be a 2 bedroom 2 bathroom unit on a large resort, something along these lines:
Now if all fractions are sold on a single week basis, it means collectively if all 50 owners have paid £20,000 for their fraction, this means the total paid for the 2 bed 2 bath apartment is a mere £1,000,000. By way of comparison, below is a current sales listing for a 2 bed 2 bath on the market in a well know southern Spanish resort, not far from that coasts’ largest timeshare resort, who incidentally sell fractional:
From this, we ask, is it possible that the 2 bed 2 bath fractionally purchased apartment for a total of £1,000,000 will ever rise to a value £1,000,000 over the next 15 years? The property market is fickle so there is a slim chance that in 15 years the apartment could be worth over a million, who knows, but it’s a big gamble, especially when the market seems to be suggesting that today it’s roughly £770,000 over priced,
Adding it all together
If an assumption is made that all 50 owners have had to finance their purchase, then to break even in 15 years the property would have to attain a distributable value, after tax and expenses of £1,551,250 (total finance cost of £31,025 X 50). This doesn’t include the maintenance fees because purchasers still require holidays so we are treating them as a committed expenditure. But just dwelling on maintenance, if this years’ fee is £1,000 then collectively it infers that to cover property and resort maintenance, this one apartment has collected and contributed £50,000.
Fractional timeshare – Investment or not?
To finish we will once again define an investment:
The investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.
It would be a brave investment advisor to hang their hat on fractional timeshare as being an investment; the good news they can’t. Due to the law in tablets of stone, this type of timeshare must not be sold as an investment. Most developers have several cautionary notes in their sales contracts stating that the product is not an investment, maybe an investment in future holidays is OK but that’s as near as it gets in using the noun “investment”.
From the numbers we have crunched earlier in this article, we think that most would have come to the conclusion that fractional ownership is far from an investment, in fact, liability would be a more apt description. The numbers we refer to above are just estimates; below we look at a real example:
Return versus expenditure
Fairways Club Tenerife was one of the early entrants to the fractional market and recently some of their first issued contracts have reached maturity. In the particular contract we reviewed the purchaser was, and we quote promised “1/52 of the net sales proceeds” indicating the purchase of a one week fractional ownership, the property was a one bedroom apartment. The contract was entered into with a term running from Jan 2014 to December 2018 representing a five year term. The cost for this single fraction was £4,950. Bearing in mind this represents 1/52, if we assume that all fractions were sold it would give a total sale price of £257,400 (£4,950 X 52), could that be a true market value for a one bedroom apartment? It has to be apparent from the total sale price above that this is considerably more than a one bedroom apartment would retail for on the open market in 2014.
The sale proceeds
We have already established that this particular fractional contract came to maturity in December 2018. With this in mind the specific apartment was offered for sale on the open market. With a slow property market and the intervention of Covid 19, the sale and administration took longer than expected. As is common with many timeshare resorts, the assets are ring fenced by being placed with a trust company, in this case FNTC on the Isle of Man.
FNTC wrote to all the owners of the particular scheme informing them of the proceeds of the sale and the share of said proceeds to be paid to each fractional owner. The gross sale price of the apartment was £110,000, however there were considerable expenses as per below:
After all these expenses are taken from the gross sale proceeds this leaves £71,754.87 which means a distribution of just £1,379.90 to each one week fractional owner.
Analysis of the numbers
An apartment that was fractionally sold for an estimated £257,400 against a recent sale value of £110,000
As we established earlier the individual purchase price to buy into this particular fractional contract was £4,950 per week fractional. We understand that the annual maintenance fee was initially £279, if this fee rose by say 5% pa this would have cost £1,620 over the term making the total outlay £6,570. This owner will receive the sum of £1,397.50 from the sales proceeds meaning a net outlay of £5,190.10.
We already know that Regulation 14 paragraph 3 of the EU Timeshare Directive 2008 prohibits the sale of any form of timeshare as an investment. Given the figures above, this fractional could hardly be described as an investment, but, the Financial Conduct Authority health warning does state:
The value of your investment and any income derived from it may fall as well as rise and you may not get back all you invested.
This could still mean that this fractional may be considered an investment even though it has depreciated by over 75% against gross expenditure, the answer is yes, but of course it can’t be sold as an investment.
TCA comment
Our primary question would be, how is it so many fractional timeshare owners actually think they have an investment? And as a secondary question, how is it that the very same people don’t understand that the timeshare and finance are not related? A constant thread of inbound enquiries TCA receive are from owners who can’t afford what they purchased, most we hasten to add have purchased via finance, they simply want out. We have the unenviable task of explaining that even if they can surrender the timeshare, this won’t extinguish the finance.
Those who are sold this product don’t just dream that they have an investment and don’t dream that cancelling the timeshare will cancel the finance, somehow they have been informed. It’s all very well developers going to great printed lengths to disclaim the investment aspect but in some way purchasers have been sowed the investment seed.
Financially we think we have proved that fractional ownership is not an investment from an investment gain point of view; however we also know that investments may fall as well as rise. Just because you invest a sum, doesn’t automatically mean you will show a profit.
At this juncture we will introduce the term “collective investment” so what is one of them? Any group of investors who invest in the same thing are a collective. Common products such as Unit Trusts, Investment Bonds even private pension plans are all forms of collective investments and as such are regulated by the FCA. Discussion is currently taking place as to whether a number of people who buy a single timeshare property via a fractional are in fact entering a collective investment scheme.
If 50 private individuals all buy a property then this is a private purchase, not a collective from a regulatory stand point, but when the asset is sold and managed by a company, this casts a different light on matters. Here is a conflict; if fractional timeshare is reclassified as a collective, then the selling and regulation would come under the remit of the FCA. The EU Timeshare Directive and its adoption into UK law prohibits timeshare to be sold as an investment, that being the case then it’s conceivable that fractional timeshare will cease to exist, or at least have to become a regulated product under the Financial Services and Markets Act.
Finally, should you be thinking of buying, and we say buying not investing in fractional timeshare, think twice. Even with the derisory interest rates at present and the assumption that you have a spare £20,000 needing a home, deposit accounts probably offer a better bet of return. If you’ve already committed to fractional, then lower your expectations of returns and do what the developers says “enjoy your holidays” which of course will be subject to availability.
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