1. The increase in secondary luxury properties has rocketed over the past few years.
2. These secondary homes are now in most instances worth more than primary residences.
3. Full ownership of such a valuable but underutilized asset could mean an overly "leisure" weighted investment structure.
4. The rise in these property prices did not go hand in hand with an equal rise in the spending power of the owners.
5. High levels of "speculative" investors in lifestyle resorts who now own vacant land and very little secondary demand.
6. Fractional ownership is a method of creating lower barriers of entry into the leisure market.
7. The concept balances use with cost.

Confusing terminology

Fractional ownership is the method of acquiring and owning a share or portion of a property and having an agreed usage system of the property and the responsibility of the cost associated with that portion.

Fractionals is the portion that a shareholder owns, typically 4 to 8 weeks per annum.

Fractions is the week that the owner owns.

Private residence is the dwelling or residence, typically furnished to the highest standards inclusive of luxury appliances, destinations toys and some customised luxuries.

Private residence clubs is a structure to accommodate the use and exchange of use between the owners of fractions in various Private Residences.

Private residence company is the shelf company that owns the property, and in which shares are bought.

Industries prone to fractional ownership

Fractionals today are used in a wide range of industry. Aircraft, jet, yachts, boats, homes, vacation homes, condos, hotels, apartments and real estate. An opportunity was recently offered to buy a fraction of ….metal then being kept in safe custody in a London vault!

The use

Ownerships of fractionals give the owners exclusive access to this property for the set term, or interval owned on a perpetual basis. In South Africa the most fractionals are structured according to a usage roster, which could vary from a "week in every season" to clusters of weeks every year, or 2 weeks in the first part of the year and 2 weeks in the later part of the year. Some providers offer the fractions as a set number of weeks or days per annum but with no defined time of use.Similarly fractionals are offered in two basic methods of use in private residences, either with no exchange which means you can only use your own Private Residence, or alternatively you own a specific unit, but you can use any of the similar units, be it in the same or in a different resort or destination.

How many fractions to a property?

Fractions vary substantially, but shared interests generally begin at 1/26 of a year (14 days) and go up. Annual intervals can be 1/26 (14 day) or 1/12 of a year (30 days) 1/13 of a year (28 Days), 1/8 of a year (45 Days) to as long as you want. Two weeks annually to a month annually, to 6 weeks or more on an annual basis.We found that the combination of the destination and the product should be the determinant of the fraction number and not a set rule.

In the Kalahari a client would seek a maximum of 2 weeks, whereas a Golf resort close to Gauteng would be better suited to a higher frequency of use and thus a lesser number of fractions.Traditionally 12 fractions implied 4 unused weeks which was then reserved or used as maintenance weeks, however this is not always as functional and maintenance is done as and when required.

Is fractional ownership timeshare?

Fractional ownership shares some attributes with timeshare in that multiple people use the same property with a defined usage agreement, that's where the similarity ends.

Fractional ownership is underpinned by property ownership, it is a real right, either in an undivided share of the property, or through a share in a private company which owns the property.
Timeshare is a "right of use" with no property ownership.

Who buys into fractional ownership?

With the industry still in its formative phases it wouldn't be accurate to define the exact profile of a typical buyer, however we have found a number of attributes that may identify the most likely buyer.

• People with an established primary residence
• Aspiring wealthy
• Financially educated
• 30 Plus age group
• Decision is driven by the husband in families
• Multiracial profile

Finance of fractionals

Finance of fractional ownership is still a grey area as the commercial banks in South Africa are still assessing the potential, the demographics and the most suitable structures. Some providers offer a structure where the Private Residence in question is bonded and the different shareholders pay their respective portions. In the instance of Shareblock Companies this is however much more difficult.Finance offered through some of the niche banks is more reliant on the profile of the buyer, where the overall position is assessed and the sharecertificate is but one of a few assets in the client's portfolio.

Structure of ownership

A host of different structures are currently on offer all offering property ownership, ranging from undivided shares in the property direct, shares in a private company that owns the property, shares in a private company that owns a number of Private Residences, or shares in a Share block company.
The share block being the most onerous structure for the fractional company, but offering the best protection to its investors.

Exchange programs

Two schools of thought exist on this aspect.

The purists who believe that fractional ownership is a simulation of owning your own private holiday home, customised to your needs and reflecting your own personal touch. (This is where the extreme value added service of having your own family pictures hung on your visit applies) These clients want absolute no resemblance to timeshare, with no other people thus occupying their residence, and no desire to use someone else's house.The inverse group want the best of both worlds.

Ownership of a specific residence, with the knowledge and expectation of its growth and scarcity value, combined with the flexibility to use an alternative as and when needed.We initially anticipated that the market will predominantly be purists, but however that was proven wrong! The majority of clients and interested parties would like an exchange program to be linked to the product.

Concept structure

The fractional ownership market in South Africa has 3 distinct components:

• Product identification conceptualisation and development.
• Intermediary marketing and sales
• Operational management
• It is not necessary to be active in all three stages to participate in the market, only true vertically integrated companies would do so