What is fractional ownership?

Fractional ownership can apply to anything: cars, yachts, even designer handbags. But sharing possession of a holiday home, popular in the US for years, is finally taking off over here.

In brief, fractional ownership gives a buyer ownership and use of a property for an agreed number of weeks each year to enjoy themselves, or rent out for profit.

For a yearly fee the maintenance and bills are taken care of by a management company, so the owners are free to relax, rather than spend two weeks redecorating and cleaning out guttering.

Some fractional ownership deals operate very simply. You, along with several complete strangers, buy a long, eg 999 year, lease for a percentage of a given property, while the freehold is held by the management company.

Owners are at liberty to sell their share whenever they want, either through the management company, or a local estate agent, or pass it on when they die in the same way as they would in an entire property.

Others have a short lease period of as little as five years, after which the property will be sold, with the profits shared between the owners. 

The number of owners can vary widely too; four or five is common, rising to more than 50 in some circumstances. 

The fewer the owners, the higher the price, but the more access to a property the owners will be allowed.

Some schemes also have an option for the owner to exchange their weeks for stays at another location.

If this reminds you of the dreaded T word, remember there's a very important difference.

In a fractional ownership deal buyers always have equity in the bricks and mortar they initially invested in.

A corner of a country cottage

Penhaven Country Cottages in Devon are a good example of a very straightforward fractional ownership deal.

Owner Geoff Baker was inspired to create an upmarket holiday development comprising a hotel surrounded by fractionally owned cottages after seeing the method working in the States.

And, though it has taken a bit of explaining, his scheme has gone down well with the locals.

"There’s a huge demand for holiday homes here, but most of them are empty 90 per cent of the time. This way there’s no pressure on local housing stock, but it still encourages the tourist pound into the county."

For £21,000 to £50,000, plus £1000 to £2000 service charge per year, ten people share ownership of a cottage. Each owner has the right to five weeks’ access, including two during the high season, worked out on a rotating matrix.

Sue Walker is one of the first owners at Penhaven Country Cottages. She was attracted by the idea of a holiday home without the financial outlay and responsibility of the maintenance. "It takes all the stress away," says Sue.

"I’ve visited it three or four times so far. I won’t be letting it but I will make it available to family and friends. And it will appreciate in value. The price already seems to have gone up by £5,000 in a year."

A fraction of the world

But if roses round the door aren’t your kind of thing, fractional ownership deals are also appearing in smart locations all over the world, particularly in the Caribbean, South Africa, and Dubai.

Select Property has been offering off-plan fractional ownership in Dubai since July 2006, and is attracting a variety of investors.

For under £7,000 the company offers a 1/25th share in a one-bed apartment in The Torch, Dubai, with access for two weeks a year for 15 years, after which the property will be sold.

"I really liked the idea of the shared ownership. For those individuals who may not be able to afford to purchase a property fully, it is a great alternative.

"Once the development is completed I can look at the weeks that I have available to me and decide which ones I would like to take as holiday and which ones I will rent out to cover my annual management costs."

What’s the catch?

You’re unlikely to bag a bargain. Fractional ownership guarantees bigger profit margins for developers who can charge far more by dividing the ownership.

Add up the cost of the shares and you may find you’re paying around 20 per cent more than if you purchased the whole.

But the question is, does it really matter to you? If the arrangement enables you to take part in a lifestyle that would have been out of your reach under normal circumstances, is it worth paying slightly over the odds?

The other drawback is finance.

You probably won’t be eligible for a mortgage, so, at the moment, fractional owners tend to be cash buyers, or people who have borrowed against their main home.

Developers may offer to help buyers to raise finance, though you might be wise to explore other avenues first.

Lawyer Jonathan Silverman at Silverman Sherliker is currently helping several clients to buy part shares in property.

"Go into it with your eyes open," says Silverman. "Just because you’re only buying a part of a property doesn’t mean you shouldn’t take all the usual precautions.

"If there are five of you buying, it doesn’t mean you need five surveys, but get one together."

And Silverman warns potential buyers to be prepared for the worst when it comes to the maintenance charges.

"Look at the running costs, not just now, but in five years' time. If it’s being used most of the year it will get tired very quickly.

"And don’t assume it will be readily saleable on the open market. You may not be able to sell it quickly if you need to. And you may have to forfeit your weeks if you can’t pay the service charge."

And, most importantly, get independent legal advice. "Don’t go to the developer’s lawyer. If you’re British, go to a UK lawyer who has a network overseas."

Top Tips

1. Go through all the legal checks you would do if buying a whole property.

2. Be clear about how the allocation of weeks will work.  Will you be happy if you can’t use your holiday home in August?

3. Make sure there are no barriers to selling on the open market, and don’t assume that resale will be quick, particularly abroad.

4. Treat guarantees of rental income and capital growth with healthy skepticism, particularly in a less proven market.