Back in May TCA published part 1 of this subject where we took an in depth look at the product from a timeshare perspective, the conclusion we came to was that the product was far from an investment in the conventional sense of the word. In the article we pointed out the over inflated price to purchase a fraction versus the current bricks and mortar value, then projected forward. Assuming our maths was remotely correct then the numbers don’t crunch.
Fractional ownership, a new thing?
Fractional ownership spans many areas, some may offer an investment opportunity, others not. Below we will look at two fractional purchase concepts.
Our first example is aircraft. Private pilots rarely can afford to purchase a light aircraft singularly, so a syndicate of a number of pilots often club together raising enough money to by an aircraft, this is fractional ownership. This sort of scheme is a private contract and as such has no real legislation surrounding or governing the scheme. This is unlikely to present an investment opportunity as aircraft; much like cars will depreciate in value over time. Costs of maintenance etc are passed on to the co owners.
Our second example involves fractional ownership of property, which is an entirely different ball game. An article published in the Sun newspaper in July had the headline stating:
“Stunning four-bed townhouse in swanky Chelsea on the market for £824k – but it comes with a huge catch”
For those who follow the property market in Chelsea will know that a four bedroom townhouse will cost considerably more than £824,000, the huge catch referred to in the article is that the purchase price represents one eighth ownership. Given this fact, if all eight fractions are sold, the purchase price would be a far more realistic £6.5m. Naturally a contract is drawn up and much like timeshare, maintenance and sundry costs must be paid by the fractional owners.
This type of scheme could certainly represent an investment. Whilst property does have its dips, the prognosis is for growth over the medium to long term.
Timeshare fractional ownership and the law
Other than the European Union we are unaware of other nation specific law. Within the EU the Timeshare Directive 2008 Regulation 14 paragraph 3 (2008/122/EC) in simple terms states:
“A trader must not market or sell a timeshare or long term holiday product as an investment. For example, there should not be any inference that the cost of the contract would be recoupable at a profit in the future”
This specifically forbids the fractional style of timeshare being referred to in any way as an investment. Unfortunately, whilst many developer purchase contracts clearly state that what the consumer is buying is not an investment; this doesn’t seem to have filtered down to the sales force.
The recent Judicial Review in London heard evidence from a number of fractional timeshare owners whose main interest in purchasing into the scheme was that it offered an investment opportunity. It’s inconceivable that these owners came to the investment conclusion themselves; somewhere during the horrifically long sales presentation a seed was sewn.
Impact of the Judicial Review
The review centered on whether the Financial Ombudsman Service (FOS) had misinterpreted the law having upheld a claim originally rejected by the lender. At the end of the review the judge confirmed the FOS was within their rights. Mrs Justice Collins Rice handed down judgment in respect of two joined judicial review claims challenging decisions of the Financial Ombudsman.
“Just because it was possible to sell [timeshare investments] without breaching Regulation 14(3) of the timeshare regulations doesn’t mean that’s what happened in practice, or in the present case,” the judge said. “And I still think that, on the balance of probabilities, the supplier actively relied on the [timeshare investment’s] potential to provide an investment return as a significant selling point in its presentation.”
“It was open to [the Ombudsman] to proceed to make an assessment as to whether the relationship between the banks and the consumers was made unfair because of the acts or omissions of the timeshare companies in the antecedent negotiations,” the judge said.
The main three lenders funding purchases of fractional schemes being Barclays Partner Finance, Shawbrook Bank and Novuna (formally Hitachi) are now subject to clearer guidance as a result. The corollary of this is an expectation of further claims being presented.
TCA comment
Given the EU Directive, timeshare developers had more than enough time to clip the wings of their overzealous sales teams. It may be very well to caveat purchase contracts but the reality is that those who purchased fractional timeshare schemes were not buying the contract, rather the dreams presented by the sales teams.
A throwaway line such as “timeshare points are worth nothing, but with fractional ownership you could get your money back and even a profit” is enough to imply an investment. Investment implied, law broken, simple as.
We are in no doubt that many owners of fractional contracts purchased on the basis that it represented real investment opportunities. Those who purchased via a loan may now have some right to reply. If you believe that you have been affected, TCA are here to chat over the ramifications and offer guidance.
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