Fractional ownership hits SA

First there was timeshare, and now there is fractional ownership. Like a tsunami, fractional interest in property started in the United States about a decade ago, is fast building up momentum there and is now breaking on the shores of South Africa.

Less than a year ago a Johannesburg-based journalist phoned me and enquired what I knew about fractional ownership. "Vrek wat?" I didn't have a clue. A developer was launching the concept in Johannesburg, and we quickly had to find an Afrikaans word for it. The Afrikaans press seems to favour deeleienaarskap, but because this word sounds too much like deeltitel, I favour the more direct translation of fraksie- or fraksionele eienaarskap.

My ignorance regarding fractional ownership has now been rectified, largely thanks to StoneBridge, which sponsored my attendance at the second European fractional interest symposium end of last year in Barcelona. The symposium, organised by an American company, clearly had as objective the furtherance of the concept in Europe with a view to eventual exchanges between the USA and Europe.

Exchanges? Sounds like timeshare. Fractional marketers will probably hate my guts for this, but it is inevitable that buyers out there will compare fractional interest with timeshare. So let's first consider what fractional interest and timeshare have in common.

• Firstly, central to both is the compelling logic that a holiday home is used maybe one month per year, but you have to foot the ownership cost for the full year, including the attendant maintenance hassles. So why own a property 365 days a year when you are only going to use it for, say, 30 days?
• Secondly, both potentially offer exchangeability - nationally and even worldwide. Not everyone wants to holiday year after year at the same place.
• Thirdly, in the opinion of RCI, both fall under the Property Time-Sharing Control Act, from a buyer protection perspective.
Now the differences:
• The basis of ownership in the case of timeshare may simply be "weeks", whereas fractional ownership gives you a "bricks and mortar" investment, through share ownership in a company that owns a property or unit. The ownership is described as fractional as you are one of a limited number of shareholders, usually thirteen, that own the company. Your use of the unit is by agreement with the other shareholders (typically 4 weeks each), so that may be the same as timeshare, but you've got the added benefits of the ownership of the property or unit, through your shareholding, plus the additional protections and regulation offered by the Companies Act.
• Fractional interest is typically upmarket as you are buying into a property or unit, rather than time in a hotel room or resort. In the USA, promoters go for truly exclusive properties, for instance a residence (as distinct from a house or accommodation) in a ski resort. And then, on top of that, they would offer shareholders value-added VIP services. Examples of these would be a limousine (not just a car) parked in your garage when you check in, your preferred champagne in the fridge, your family's pictures on the walls, and concierge services.
• The marketing costs of timeshare are typically much greater than those of fractionals. Hence the mark-up of fractionals is lower
• It is general knowledge that timeshare has been a poor investment - not just in South Africa but also elsewhere. And the reason surely must be a chronic oversupply created by developers, plus that there is no underlying property investment. One hears many a story of timeshare owners trying to give away their units in order to escape having to pay the levy. Of course, the jury is still out on the performance of fractionals, but I expect their exclusivity will prevent an oversupply developing. That is to say, as long as developers don't go downmarket and market these as fractionals.

Thus, from the buyer's point of view, the best insurance against an oversupply is to buy into upmarket exclusivity. Ask yourself the question: How easily can this property be replicated? - Erwin Rode

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