Monday, December 8, 2008

Fractional Ownership - Pros or Cons?

The inevitable is knocking at the door folks! With the downturn of late in the overseas property market resulting in companies going bust, disappearing, downsizing and generally crying in their empty offices it had to turn up in Europe sooner or later.

Fractional Ownership.

What is it?

In a nutshell, you take a resale property, or indeed a new property, and sell sections of it. The idea being that you can own 1/4 of a 1 million Euro property for just 250k. Sounds like a fairly good idea, understandable given the lack of money around at the moment.

Where did the idea come from?

Originally the idea came about from the aircraft industry. Owning your own private jet is not cheap at any level, but if you use it as a work horse, part ownership is a good idea, mainly because even the busiest professional is not going to spend their entire life in an aircraft, and it is an excellent offset for tax purposes, as well as reducing long term costs.

So what is different here?

Well, at the very start, not a lot, the principles of buying the asset in the first place if you are a cash buyer are much the same for property, aircraft or yachts. The difference starts soon after, or even at the dotted line if you are looking for finance. Raising a mortgage on a split asset is not an easy thing to do at the best of times, let alone in today's lending environment. If you are cash buyer, there are other things to take into account, the primary one being the differences between a property as opposed to a boat or a plane.

Boats and planes have definable lifespans, scrap values, and calculable costs. Planes and boats can also have business loans raised on them in most cases, whereas your luxury villa on the Algarve cannot. Houses and property in general are supposed to rise in value on the whole, giving the owner equity.

Surely this is a good thing?

At first glance, one would think so and in some areas it is true. If you are a lifestyle buyer, wanting a holiday retreat for your own use, then yes, the whole thing makes a modicum of sense. The fractional concept appears to work very well in Canada and the USA, and there is legislation in place to govern it, South Africa in the most part seems to be getting there with its laws too.

Ok, so where is the catch?

Over the past few weeks we have seen a substantial increase in "Fractional Investment" ideas. A few of the old obvious scams like banana plantations in Panama, ethanol plantations in Brazil, "Make nine times your money in 5 minutes" "Be a millionaire with 10k in 6 years" etc etc.

What is alarming is the new "Investment" angle being used to lure struggling agents or brokers into promoting something that has little or no legislation behind it. On top of that, the promotion to prospective agents is through an "Inside Track" style of seminars at £95, offering insight to how "intelligent products" can bring "swift revenues" in a difficult market if packaged and sold correctly.

The mailshot we received here really does go for it, saying the "Fractional Awareness Days" will tell you how to sell a SIPPable fractional, and even how to deal with the "t-word" (Basically explain away how it's not like timeshare)

Now don't get us wrong here at the Investment Property Rumour Mill, We do know people that own fractional property, granted they are Canadians, funnily enough in Canada where there is legislation and finance tools in place. Also substantial legislation for agents too, far more than there is in the UK and certainly more than Spain where many agents are still based.

Fractional ownership can work for some, in just the same way that timeshare can work for a few.

So what is there to worry about?

Well, the company bringing the mailshot to the table is none other than Richmond Green Marketing, the ones we reported on before in connection with OPP (The self proclaimed aficionados of the overseas property industry). RGM are not the main players behind this though, and appear to have a page just for the promotion in the back of their site that isn't linked in from anywhere else. Best Group Limited appear to be the suppliers of this "tool" with there address at Salisbury House in London, but a postal address in Chester, and a domain registration in South Africa.

The site itself does seem to be specifically vague, talking about PenTICs and how they believe they are unique, stating that ski lodges have great track records, (so that must mean everything is like a ski lodge?)

The next question answered on the site is how easy is it to sell a PenTIC? Apparently they'll handle it for you if you wish. Now isn't that nice of them? No info on any other way of selling it, nor quite how they go about it or what they charge (Remember the calculable costs for fractional aircraft?)

Then we go on to have our minds put to rest about "management fees spiralling out of control" The response to that? "in some locations they fix them for a number of years" (Ok) but in others "We might link them to inflation" Might? sounds to me that someone hasn't quite thought this one out have they?

Of the products they have, there is waterfront South Africa, Caribbean, New Zealand and Panama. Having had a quick google, there seems to be a distinct lack of ski lodges in these locations, maybe our geography is a bit out? (Or global warming)

Best do have some fine testimonials on their site, even one about All Blacks player Zinzan Brooke, but if we look back a few years at Viva Estates with Ian Botham, and more recently Red Hot Homes with Kirstie Allsopp, and the general media hype that went into Inside Track in the early days, where are these companies now? Either sat on your cash in Panama, hiding under a rock selling leads from a bedsit in England, or inventing ever more devious ways to extract hard earned cash from the public, or getting agents to work for them and not pay them!

With this particular post, we will be surprised if we don't get some posts from Best or RGM and so on, and as usual, The Rumour Mill is not responsible for their opinions, but then we have sailed very close to the wind with a number of high profile companies, and we haven't had to remove any posts yet.

The public are likely to be badgered to death with this by agents far and wide promising riches and lifestyle beyond your wildest dreams for a fraction of what it could be.

As always, buyer beware. Whether it's a whole house, 10/52 of a house, or a spaceship with a side car and a walrus detector, if you don't understand it, don't invest in it!


Anonymous said...

I'd like to offer the anonymous author of this post the opportunity to see first hand why genuine fractional product makes sense. If the author would like to identify themselves to us here at RGM Fractional or Best Group - try - then I will invite them to the next Fractional Awareness Seminar completely free of charge so that they can see the content for themselves. If the author is interested in providing genuine insight then we'd be delighted to offer them the chance to do so based on first hand experience.

If the post helps distance the reputable providers from those who may damage the industry, then so much the better.

Thanks also for the valid comments on our website, which really does need updating.


investmentpropertyrumours said...

Hi Brad,

Thank you for your comments on the fractional ownership article. As we did state, we are aware and do understand fractional ownership, and also have spoken with several fractional promotors in the past, some good, some not so good. As I am sure you will appreciate, there are good and bad in every business.

The point of the article was to highlight a number of things.

The fact that fractional ownership in Europe is a relatively new concept.

New concepts are rarely well explained to the public investor well, especially where there is little or no legistlation covering them. (Take not just fractional ownership, but landbanking also)

Given the number of agents that are likely to be taking this on, as well as the need to illustrate or "get round" the "t-word" to sell this product, we feel we are pointing out potential areas of concern for the public to at least consider before investing.

We very much appreciate the offer of an invitation to one of your seminars, but afraid we must decline for a number of reasons, the primary one being that we would be unable to report what we do if went public.

We would also like to point out, that we did mention in the article that fractional ownership as you say, can and does make sense for those that have a use for it and understand what they are investing into.

If you feel there are unreputable companies out there that should be exposed specifically (As we did with Red Hot Homes) then we would be happy to cover that.

Investment Property Rumours.

fractious said...

If you want a structure checked out by a legal guru or are thinking about setting up a proper fractional- the man to speak to is Eric Gummers

Unknown said...

Please note the RGM fractional awareness days discussed above and taking place in London and around the country are in no way associated with Fractional Summit 2009,23-24 April, London, Europe's largest fractional property conference This conference takes a completely impartial industry approach towards growing the fractional property marketplace. Fractional Summit should also not be confused with any other fractional property seminars, workshops or conferences by any other name.

Anonymous said...

Fractional Ownership sold as religious timeshare in Saudi Arabia are scams. Le Meridien Towers in Mecca was sold as a great investment or religious timeshare, however Saudi Law does not allow non Saudi's to own or lease property in mecca.

The promotors non other than Northcourse (RCI & Wyndham).

Now the developer and promotors have ran away people are left holding worthless pieces of paper

Unknown said...

We were invited to attend a presentation from an unknown company, which turned out to be Apex Fractional Property Ltd, by another marketing company Clearwater Consultants. We were promised that they would offer to buy our Timeshare off us. As it transpired, they said our timeshare was worthless, but they would take it off us for £0 and dispose of it - so that we don't have to pay off the annual maintenance charges.

However, they will only do this if we invest a minimum of £65k in a Fractional Property Development in Phuket. They say that they need us to give them £3,995 on a Visa Credit card to dispose of our time share (in-perpetuity agreement) which will be refunded when we invest in their fractional property development.

They offer to pay us in the 1st 2 years a 6% return on our investment (no bad in the current environment). After that time the property will have been built and we will then receive 50% of the rental income - estimated as being an annual 10% return on our investment. All in all they estimate a 39% return on our investment after 5 years (if we were to sell) and also the free disposal of our (apparently worthless) timeshare.

Supposedly, we can resell the share in the property back to them at any time (which has an estimated annual 5% capital gain). I am not sure who will want to buy it off us – for £65k plus an annual compounded 5% increase in value? After 5 years our share will apparently be worth £83k, but the annual rental income is only £6,388 – a 7.7% return.

As you intimate in your article it all sounds too good to be true. Is it? Have you heard of Apex Fractional Property Ltd?

Student Property Investment said...

Thanks for highlighting both this new investment development along with potential dangers and possibly even companies looking to take advantage of the situation. Of course it's always important to do background checks on any potential companies to ensure they are legitimate but also speak to their advisors who will be able to provide more in-depth information.