Fractional ownership: a credible property investment?

Even industry experts disagree on fractional ownership. Advocates maintain that, unlike timeshare, fractional owners at least purchase a share of the property until they choose to sell, while detractors believe the approach to be little more than timeshare by another name.

Timeshare has been subject to a significant amount of negative press. In some instances customers were locked into fairly restrictive arrangements while in others the realities of the property investment failed to live up to the sales pitch. According to the sceptics, as the timeshare model became increasingly tarnished, some salesmen came up with the new title of fractional ownership.

Owning a place in the sun is a dream for many, but given the financial circumstances of most this will remain exactly that: a dream rather than a reality.

Fractional ownership, however, purports to offer a way of realising this dream. It works by providing members with an opportunity to buy a share of a property usually anywhere between a quarter or a thirteenth of the value. The size of your share dictates exactly how long you can use the property for each year and depending on the contract, whether or not you can rent it out.

It could be argued that tarnishing fractional ownership schemes with the timeshare brush is a little harsh. In addition, there’s little doubt that in the right circumstances fractional ownership could work for certain investors. But, as with all property investments, it will be essential to do your homework.

If you think fractional ownership might be right for you then find out everything you can about the developer. You should look at previous projects, for customer feedback and check whether they are regulated by any official financial authorities and/or a member of the Fractional and Shared Ownership Trade Association (FSOTA).

It sounds obvious but read the small print and think about legal representation. There may be additional annual costs to consider for maintaining and managing the property. These could amount to thousands of pounds per year. Contracts have been known to include a clause releasing a share of any profit to the developers on any future sale of the property.

As the property is most likely to be abroad, you may be required to enlist the services of a local lawyer. Although the initial price may seem expensive, this could save money should anything go wrong. And aside from legal guidance, having a local ear to the ground can also be useful for knowing or hearing of such a development taking place.

Some protection does exist in the form of the 2009 Fractional Ownership Directive from the European Union. This provides buyers with a two week cooling-off period within which they can opt out of the agreement without any financial implication. It also offers the right to translating the contract into the language of the purchaser.

Owning a property abroad can be very tempting due to property investments long established reputation of having the potential of good returns. But, as the Spanish market has demonstrated all too clearly in recent years, overseas property is by no means immune from a financial downturn.

If you think fractional ownership might be right for you, please seek appropriate financial and legal advice and view it as a property investment first and as a lifestyle choice second. Research conducted by the website www.fractionallife.com suggests that many of those who have been ultimately disappointed have adopted the opposite approach.

Important Information

Any views expressed by Bank of Scotland Private Banking are our current in-house views as at 22 September 2014 and should not be relied upon as fact and could be proved wrong. This article was prepared as at 22 September 2014. The information and opinions may not be accurate after this date.

Bank of Scotland Private Banking assumes no responsibility for the content or any reliance upon the content of the third party websites detailed in this article.

The forecast of future performance is not a reliable guide to actual future performance. Past performance is not a reliable indicator of future performance. The value of investments and the income from them can go down as well as up and cannot be guaranteed.

Bank of Scotland plc. Registered office: The Mound, Edinburgh, EH1 1YZ. Registered in Scotland, no. SC327000. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under number 169628.

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