Fractional property ownership explained

Fractional property is a concept which is rapidly gaining popularity, and is making inroads in markets across the world. But there is still a long way to go in terms of consumer and media awareness and understanding of the concept, mainly because there are several different versions of fractional ownership, all with different terminology.

So here is a brief guide to explain the main forms of fractional ownership and how they work – the vast majority of fractional developments will fall in to one of the categories below.

The first and most common misconception about fractional ownership is that it is timeshare by another name. With timeshare you don't own a tangible asset, but you are buying the right to use one or more holiday properties at certain times. With fractional ownership you are buying a percentage of actual bricks and mortar – whether this is a share of a deeded ownership or a property held in trust by a specialist trustee company. This fraction then entitles you to use the property for a certain number of weeks a year, and unlike timeshare, you can transfer or will ownership or sell your fraction on.

• Basic fractional ownership. The basic form of fractional ownership consists of buying a fraction of a freehold of a unit in a fixed location. Typical share sizes range from 1/13th to ¼, although larger and smaller options are available in certain circumstances. You may be buying in a specific unit in the resort, but at some resorts you may stay in any available unit of the same size and style. For the sake of differentiation, I am going to use the guidelines set out by US consultant Richard Ragatz who defines units with a selling price of less than US$1,000 per square foot as basic fractional ownership, and anything with a price above that as a private residence club (see below). Annual dues are payable towards maintenance and upkeep.

• Private residence club. With higher prices, more amenities, bigger units and the very best locations, private residence clubs are essentially the upmarket end of the fractional ownership market. In terms of ownership and legal structures, they are usually the same as basic fractionals (see above). The PRC market took off in the top US ski resorts of Aspen, Vail and Deer Valley, and it is these sort of sought-after locations that work best.

A PRC will usually have a comprehensive range of on-site amenities and services, with a concierge on hand to arrange an owner's activities during their stay. Again annual dues are payable. A common feature of both basic fractionals and PRCs is that the typical buyer can usually afford the whole ownership price for a property in the area, but chooses to buy a fraction as they can see the benefit of only paying for what they use and having maintenance fees and admin taken care of.

• Destination clubs.
The destination club sector has seen the most evolution in recent years and has been hardest hit by the recession. In the days before the collapse of Lehman Brothers, there were dozens of non-equity destination clubs. These offered membership of a club which entitled the user to a certain number of nights' usage at a range of properties across the world, typically including the US, Europe and the Caribbean, but did not include any ownership of the actual properties. If you wanted to leave the club you would typically be refunded between 80 and 100 per cent of your joining fee. Many of these clubs have now folded, with one now dominating that market.

The trend in recent years has been for equity-based destination clubs. These are essentially investment funds which acquire a portfolio of properties, which are jointly owned by the shareholders. Some funds have a finite lifespan and will sell the portfolio after a set period, distributing the proceeds between shareholders.

Members are entitled to a set number of nights' usage across the portfolio. In terms of specification, amenties and pricing, destination clubs tend to be at the top end of the market, along with PRCs. As well as a membership fee, annual dues are payable.

There has also been a move towards destination club models which include rental programmes and more friendly usage calenders which offer members a much more flexible vacation experience.

• Exchange programmes
Many fractionals and PRCs are affiliated to exchange programmes. These allow owners to swap some of their allotted time at their home resort for nights at other participating resorts around the world. The exchange programmes range in size from just a few resorts to several hundred.

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06/05/11

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