Written for The Sunday Times by Paula Hawkins

If you cannot afford your own luxury villa in some sun-drenched idyll, you can now buy a piece of one instead. Fractional ownership is the latest buzz phrase in property investment: from The Palm Jumeirah island in Dubai to the Devon countryside, buying a slice of a luxury property is increasingly popular.

Fractional ownership is billed as the cheap, stress-free way to buy a holiday home. It has been popular for years in the US, where it is used to buy into ski chalets, but has only recently become a global phenomenon, primarily as a way of buying into upmarket holiday destinations such as the Caribbean, the Seychelles and South Africa.

Under a fractional ownership scheme, you buy a share in a property (often through a company), entitling you to spend several weeks a year there. Different companies sell stakes of various sizes, but most deal in quarter or fifth shares. You are allocated four or five chunks of three to four weeks, during which the property is at your disposal, to use or to rent out. There will be a rota that runs over three to four years, which should ensure that over the course of the cycle your allocated weeks fall at different times of year.

Fractionally owned homes are usually managed and maintained by a third party, to whom owners pay a annual management fee. In many cases fractional ownership properties have links with resorts or golf clubs, and owners are given access to facilities, or at least discounted membership.

If all this sounds similar to timeshare, there is one important difference. With timeshare you purchase the right to use the property for a number of weeks; with fractional ownership, you are buying the bricks and mortar, so if the property appreciates in value you will be entitled to a share of the profit when you sell.

Whether fractional ownership offers real value for money is debatable. “Fractional ownership has become increasingly popular because there are much bigger profit margins for developers,” says Simon Conn, managing director of Conti Financial Services, a mortgage broker specialising in overseas property. “Developers can sell a £100,000 house for £120,000 if they split it into four shares.”

Take the Vigia Group’s properties in Portugal, sold both on a fractional ownership basis and on a traditional freehold basis. Buying a property outright is considerably more expensive, but you do get more for your money. Outright ownership of a golf villa with a pool and a garden at Vigia’s Parque da Floresta in the western Algarve costs just over €1 million (£743,000). A quarter share in the same property would cost £224,000.

The other drawback is that fractional ownership schemes are difficult to finance. Because you are purchasing only a share in a property, mainstream mortgage lenders will often refuse to offer you a loan because they cannot be sure of having first charge on the property should you default. “Fractional ownership buyers tend to be cash buyers, or people who have borrowed against their main residence,” Mr Conn says. In some cases the management company organises finance: Vigia Group has teamed up with Manchester Building Society to offer mortgages on its villas in Portugal, and Bank of Scotland is offering loans on fractionally owned apartments in Loch Lomond.

Usually you must pay cash, which means that buyers may not carry out the due diligence that they would if a mortgage lender were involved. “You must go through all the legal checks that you would do if you were getting a mortgage,” Mr Conn says. “Get an independent lawyer to check the scheme: how easy is it to sell? What are your rights to use the property?” He also advises buyers to treat guarantees on rental returns with scepticism. “In some countries, like Dubai or South Africa, there is little or no track record to go on, so you have to ask on what basis guarantees about rental returns are being made.”

Links to articles:

Fractional Ownership News and Articles

Fox Business News - (1/21/2008)
Fractional Property Ownership - Owning a small piece of big luxury

From CNN Money - (6/7/2007)
Deluxe vacations on the cheap. Private residence clubs, or fractional's, let owners share a second home with five-star service

ABC 30 News Article - (5/28/2007)
Think You Can't Afford Your Dream Vacation Home? Think Again

From ABC news Los Angeles - (5/17/2007)
Living the High Life With Shared Ownership

Hotels Magazine review of fractional vacation ownership - (15/03/2007)
Fractional Property Ownership. A Home Away From Home

Golfonline Magazine - (3/1/2004)
The Ultimate Time-share. High-end homes for the traveling golfer

Bankrate.com - (12/11/2003)
Fractional ownership: Get a piece of a vacation home