Fractional title - hype or opportunity?
Fractional ownership is one of the fastest growing leisure real estate trends in the world and has been catching on in Southern Africa over the past year or two.

According to figures released by Pam Golding, VIP fractional interest sales totalled the equivalent of R7.250 million worldwide during 2004, which constitutes a substantial increase over estimated fractional interest sales of R3.445 million during 2003.

With the number of local fractional ownership destinations fast approaching the 30 mark and an estimated 13 players currently active in South Africa, local role-players have recently formed the SA Association of Fractional Intermediaries (SAAFI) to promote the regulation of the industry.

While fractional ownership has a focus on leisure destinations in common with timeshare ownership, it is important that potential investors understand that there are vital differences between the two forms of ownership, says Thys Geyser, MD of Staytus, an agency specialising in fractional ownership with 12 properties in its growing portfolio.

Geyser says the main reason why timeshare owners have difficulty in recouping their initial investment when they want to resell their timeshare, is because the hidden marketing cost included in the timeshare ticket price can be as high as 60%, whereas fractional sales carry normal brokerage fees like all other real estate transactions. Furthermore, timeshare is a usage right whereas fractional ownership is a real property ownership right.

“Fractional ownership value is underpinned by an identifiable property and has a true reflection of market value of a luxury real estate asset shared between a limited number of owners, ranging from four to a maximum of 13.”

Fractional real estate ownership has its origins in co-ownership or “fractional ownership” of aeroplanes, explains Geyser. It started in the US and international investment guru Warren Buffet has acquired substantial interests in it over the past few years. “He saw great investment potential in this concept of a number of owners occasionally requiring the use of a private aeroplane, co-owning one and making full use of the asset at a fraction of the cost of each buying their own and not being able to fully utilise the asset.”

Fractional real estate title avails a limited number of shareholders the opportunity of access to an exclusive, upmarket residence, apartment or private hotel suite for three to four weeks each year at a fraction of the cost of each buying an individual property.

“In a market where secondary home values are fast reaching values that compete with primary residences, the investment logic in owning such under-utilised properties is under threat, opening the option to rather invest in real esate with the right profile and to limit exposure to pure lifestyle or emotional investments.”

The prime locations, exclusivity, and added service benefits of fractional title products ensures strong resale demand, making them a strong investment option, says Geyser.

The recently announced fractional ownership option at the exclusive Pezula Private Estate on the eastern head above the Knysna lagoon, is a case in point. The Pezula Private Residence Club offers limited fractional ownership at a share price starting from R650.000, including VAT, to only 70 owners. This will give them three weeks per year access to five of the 250 exclusive residences in the resort, situated in a private fynbos nature reserve bordered by indigenous forest, as well as access to all the exclusive sporting and other facilities and services at the estate. The share can also be exchanged for usage of residences in luxury resorts in other parts of the world.

While most fractional real estate is situated in leisure destination areas such as coastal and bushveld regions, Geyser says some are situated in urban centres such as Melrose Arch in Rosebank, Johannesburg, where fractional ownership in a number of apartments are being taken up by local business people for use on their business trips to Johannesburg.
Geyser cautions that potential investors should avoid pitfalls by ensuring that they deal with reputable intermediaries that are members of SAAFI. Not every luxury residence is going to be a good fractional investment, no matter how beautiful its surroundings might be.

“Part of the underlying value of fractional ownership is the number of luxury amenities associated with it. We’ve had to turn away well-situated, luxury residences because they simply did not have the surrounding infrastructure to ensure the required maintenance and service delivery.”
Seasonality is another important issue, says Geyser. Places like Zimbali on the KwaZulu-Natal north coast and Oubaai on the Garden Route coast have all-year round demand, whereas products in exotic locations with no demand out of season are a no-no!

He advises that there are also important differences in fractional title ownership options. Some provide one block of long-term access, which is ideal for swallows – investors who like to follow the sun – while others provide scattered shorter access slots of three separate weeks or even shorter periods. Some provide usage exchange with other fractional title properties and others don’t. Investors have to ensure that the product on offer meets their needs.

Article From: Cape Business News - www.cbn.co.za