A second property may seem like a mirage as the once fertile housing market turns to desert, but the fractional ownership industry is defying the trend, and having a share of a foreign home is more than ever a reality.
Globally, the industry is worth an estimated $1.8bn (£1.2bn) and the amount of fractional ownership projects under construction in Europe has risen from 60 to more than 90 in the past year alone. It's being plugged as a great investment and a way to ditch the financial burden of owning a second home outright, but is it too good to be true?
Fractional ownership does what it says on the tin. You purchase a fraction of the property, between one quarter and 1/25th, and this entitles you to stay there for a set amount of time each year. For example, buying an eighth of a property will get you six weeks' residency. It is similar to a timeshare scheme. However, the advantage fractional ownership has over timeshare is that you are buying a share in the property which you can sell on, as and when you wish.
The purchase price for a timeshare is a cost that you can rarely recoup, yet a fractional ownership share will track local property values and can be sold to regain the initial funds invested. Nick Turner, vice president of The Registry Collection, a fractional ownership scheme, says: "People in Europe and particularly in Britain are not interested in timeshare because they want to own something. The equity piece is the key. People feel reassured and secure if they know their names are on the deeds of a property."
Fractional ownership has kept going despite the slump in property markets in many parts of the globe. Developers abroad are working hard to shift their units and fractional ownership is another way to package a property sale. Piers Brown, spokesman for the Fractional and Shared Ownership Trade Association, says: "With the lack of finance available on whole ownership, the developers think that fractional is the answer to their prayers. It lowers the price point and opens up the marketplace."
As well as investment potential, fractional ownership comes with other benefits. The main perk of many projects is their exchange programmes. These enable you to buy a fraction of one property, but if you decide you don't want to spend your full time allocation there, you can exchange a few weeks for a stay at another resort. So, although you are buying a share in the freehold for a property in one country, you get access to properties around the world.
Another added bonus is membership of a fractional ownership club that often comes as part of the purchase price. Services on offer to members include 24-hour concierge, airport lounge access and a personalised travel service, as well as discounts with preferred travel and leisure partners. Fractional ownership also offers a certain amount of flexibility. You can book your allocation up to 12 months in advance, but, at the same time, chopping and changing holiday dates and locations is perfectly acceptable and only incurs small charges if it is done at the last minute. Also, if for any reason you don't take up your full allocation of holiday time, you can rent the property out. The managing company will organise the let and take a share of the revenue, leaving you typically with around 60 per cent of the rental income after costs.
Traditionally, fractional ownership had been exclusively for high net-worth individuals who already had a second home and wanted an extra investment opportunity. The majority of properties were valued at £1m or more and therefore were only accessible to those with high incomes. However, as developers expand the types of properties they make available for fractional ownership, the prices have become more varied. Today, buy-ins can be as little as £20,000, while the average sits between £100,000 and £400,000. These prices are more attainable and provide a convenient alternative for those who are trading down from full ownership of a second or holiday home. These people can sell up and use the cash to buy the fractional ownership outright, allowing them to enjoy having a holiday home without any mortgage payments. For those without a second home to sell, there are virtually no financing options for the purchase of fractional ownership properties. The only real opportunity is to raise the cash by remortgaging your UK property.
David Hollingworth of mortgage broker London & Country says: "Buying a second property would generally be deemed an acceptable reason for remortgaging as long as you retain a fairly low loan to value [LTV], say around 60 per cent. With interest rates still low, it's a fairly cheap way of borrowing compared to a personal loan. There are just a few more hoops to jump through to get the cash."
One important factor that affects purchase price is the location of the property, which will be priced in the local currency. The weak position of the pound at the moment means that buying outside the eurozone or the US offers much better value for money, and, because the exchange schemes allow you to stay wherever you want, tactically buying a property outside the eurozone or US right now could make sense; popular locations to buy include Croatia and South Africa, home to the 2010 World Cup.
Mr Turner notes: "People buy fractional ownerships sometimes with a view of never going back to the resort in which they bought it, but instead to travel around the world staying in five-star resorts. Ultimately, it allows you to use your second home purchase as a currency."
The purchase price is not the only cost you have to consider. As with a time-share property, fractional ownership incurs annual maintenance costs. These can be anything from 2 to 4 per cent, on average between £5,000 and £15,000 per year depending on the value of the property. Mr Brown says: "Fees are one of the big decisions associated with fractional ownership. When people realise what they get for their money – security, maintenance, concierge and all other five-star services – then it's perhaps still a consideration, but not so much a deal breaker."
As a fractional owner you are also expected to pay your share of the utility bills and any local residential taxes. These are averaged out and the cost is shared between all the property's part owners. You are responsible for meeting these costs even when you rent out your property.
These costs are not insignificant and although letting the property is a way to make some quick cash, after commission and the cost of utilities your rental income is significantly reduced. However, there should not be any hidden costs. As with any other property purchase, it is always advisable to seek qualified legal advice.