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General: Fractional evolution - Peter Esders, Chebsey & Co

Fractional evolution

I have always taken the view that progress is good. Evolution is good. Things must change, advance and mature. However, sometimes it is also good to stop, take stock and remember why something is happening in the first place in order to make sure that we are on the right path. Let’s take Fractional Ownership as a good example.

A couple of years ago Fractional Ownership was being touted as a way in which people could buy property more cheaply than buying the whole property. In fact it still is. Property prices had got so high in some areas that there needed to be a way of allowing those on more modest incomes to buy. The old concept of Co-ownership was taken out of the cupboard, repackaged as Fractional Ownership and sold to the masses as the solution to the problem. Suddenly those people who could not afford to buy a whole property could afford to buy a place abroad by purchasing a share in the property. Those people who wanted to diversify and buy in several different markets and countries but couldn’t afford to now had a way of doing so. The international property world was saved. Buyers would continue to buy. Agents would continue to make their sales and get their commissions and we could all sleep well at night. Hurrah! Well……not quite.

The basic concept behind Timeshare (yes, I know, it is impossible to talk about one without the other) was that instead of buying a whole property you only had to buy a week. Instead of spending £100,000 on a property you only had to spend a couple of thousand and shared in the running costs. Sound familiar? Yes, the idea behind Timeshare is the same as the idea behind Fractional Ownership (not surprisingly as Timeshare is a form of Fractional Ownership) but the figures are different.

However, one of the problems with Timeshare has always been their price. Buyers used to be told (and are occasionally still told) that Timeshare is an investment. Invariably it isn’t. The reason why it isn’t generally an investment is that it is too expensive in the first place. If we ignore set up costs etc you would still expect to pay slightly more for a share than the actual share is worth. There has to be some recompense for the person who put the scheme together and they are rightly entitled to make a profit. However, 2, 3 or more times that cost takes away any potential benefit of the purchase. Let us take a £150,000 property. If you sell 50 weeks (you always need one or two for maintenance) then each week is worth £3,000. That seems perfectly reasonable. Even a bit more than that seems reasonable. However, I have seen timeshare weeks in such apartments going for £9,000 per week. That suddenly turns a £150,000 property into one which is being marketed as a £450,000 property, which is clearly overpriced. That in turn, would mean that the property would have to increase in value to £450,000 before the buyer of the week broke even – and that is ignoring the cost of maintenance. Clearly this isn’t an investment.

Unfortunately I see the same mistakes being make with Fractional Ownership and hope that this doesn’t continue – after all the public are not as stupid as some people think that they are. Yes, there are set up costs to a fractional scheme. Yes, there is extra marketing and work to sell the fractions. Yes, there has to be some profit to compensate for putting the scheme together. But no, two, three or 4 times the actual cost does not make it a good product. It certainly doesn’t make it an investment. Despite not selling property I was recently offered a commission of 20% for selling Fractional property. That means that the seller is making enough money to be able to give away 20% of their sale and still make a profit. This on it’s own to me says that those particular properties are overpriced (particularly at the moment with a buyers market). A well set up and well priced Fractional Ownership scheme can make sense , both from the point of view of the seller and the buyer. A badly set up and overpriced one doesn’t.

If prices of Fractional Ownership become too high then they start to make “Full” ownership more attractive again – after all, the whole purpose of Fractional was to be attractive to those who could not afford to buy the whole property.

Perhaps we sometime need to sit back and remember why things happened in the first place in order to progress them to the future.

Peter Esders

Peter Esders is a UK Solicitor who studied Spanish law in Spain and who has been dealing with Spanish law for over 15 years. He can be contacted at Chebsey & Co, 51 London End, Beaconsfield, HP9 2HW

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