Why shared ownership is the way to go for holiday homes

Real estate owners in Kenya, especially those whose investments sprout from the shores of the Indian Ocean or areas where tourists flock, are quietly minting millions from a concept introduced in the country two years ago of owning a house for only a stipulated period of time in a year.

Fractional ownership, popularised by American investors and property developers in the 1990s, took years to get to Kenya, but now, as more and more people begin to take interest in unconventional property ownership deals, it is proving a hit along the Kenyan coast.

The idea is simple: instead of one selling off the complete rights of a house, one reserves part of the ownership of the same, hence creating a co-ownership agreement that can accommodate as many as 15 people. The buyer, then, only owns the house for a specified period of the year — say, every August — during which he or she is at liberty to either live in it or rent it out.

This form of property ownership made its debut in Kenya about two years ago when Baobab Development Group invested millions in a holiday homes development in the country.

The group’s sales manager Miriam Magare says the motivation was the growing awareness and buzz around property in the country and the relative growth of domestic tourism, especially during holiday seasons.

ONE-OFF FEE

At Baobab, therefore, one can fractionally own an apartment for four weeks every year after paying a one-off fee of Sh1.8 million.

That way, one gets 30 days, staggered across the year, to enjoy the services of the establishment “because our customers need to own a house during the peak months of the year but the units we have cannot allow that, so we allocate a week each quarter of the year for the owner until the four weeks elapse”, says Magare.

Although one can purchase the two-bedroom, fully furnished units for Sh17.7 million, Magare says the concept of fractional ownership is more popular among people who are “not here to stay”.

“Most of them are here for business and therefore prefer buying shares of the house and then receiving returns even when away because we rent the houses on their behalf,” she says.

“This, therefore, could be explained as partial ownership of an expensive asset. In this case, consider an expensive holiday home that you only get to use once or twice a year, as do a number of other people.

It does not make economic sense to own a holiday home when you know very well that you will only be there for a week or a month in a year.”

According to Finweb, a real estate website, fractional ownership allows an individual to take part of a valuable asset without putting up the cash to purchase the whole thing outright. This is very similar to owning stock in a corporation.

MULTIPLE BUYERS

In fact, fractional ownership can apply to assets other than real estate. In the case of real estate, fractional ownership allows multiple buyers to grab part of a property title, and if it declines in value, the owner can sell the asset and write off the capital loss. If it increases, the owner can sell the share and receive capital gains.

In this arrangement, multiple parties hold rights to use the property and each sharer is allotted a period of time in which they may do so.

“In the case of Baobab, a home owner will be given a chance to choose the time of ownership for four weeks, eight weeks and 12 weeks a year in accordance with the number of shares under a 99-year lease,” says Magare, adding that the one key advantage of the concept is the flexibility of ownership as the owner of a fraction is at will to lease out to a second owner and also has the freedom to swap the time of use with other owners.

Fractional ownership has always been confused with timeshare, another popular ownership method that allows a person to own a unit with other multiple parties. All these owners hold rights to use the property, and each share owner is allotted a period of time, mostly a week, in which they may use the property.

In a fractional ownership arrangement, though, the purchaser becomes the actual owner of equity in the property.

MORE VALUABLE

“If the property goes up in value, the fractional owner’s share becomes more valuable. With a timeshare, ownership is not distributed. The owner purchases only weeks or months of enjoyment in a property, and these weeks or months do not rise and fall in value with the value of the property. The title is still owned by the principal owner,” Magare clarifies.
So, why is timeshare more popular in Kenya as opposed to fractional ownership? Experts say the clause on ownership, which also means the fractional owners are responsible for maintenance of the property, may explain the slow uptake of the concept locally. Eugenio Diaz, a real estate developer, agrees, saying when one is not connected to the property title in any way, maintenance of the property is not his or her responsibility.
“Although you contribute to these expenses through your fees, you are absolved of any liability to the property as a whole,” says Diaz, adding that he prefers timeshare to fractional ownership because of the unpredictability of the number of tourists that make their way to Kenya yearly. Most tourists visit different countries each year, he argues, so it is better to complete business with someone once they leave.
But Magare sees a bright future for the business concept Baobab has embraced and, to cement her vision, says the group intends to expand into other towns in Kenya in the next few months, with Naivasha, Watamu and Lamu being on their radar.

Even though timeshare beats fractioning in uptake, there are two common reasons why people prefer the latter. These are to allow transfer of shares without the need to reflect changes on the title or deed to the property, and for tax benefits.

ROOTS OF THE CONCEPT

The roots of the concept can be traced to Europe in the 1970s, where it was then known as co-ownership and was pioneered in southern France, Spain, Portugal and the Canary Islands. It never really took off, however, largely because of the inflexibility of the usage plans, which often relied on a very basic rotational use arrangement.

However, in the early 1990s, the fractional property industry gained momentum in the US, particularly in the Rocky Mountains ski resorts, which explains why in Kenya it is concentrated on active tourism circuits.

The first fractional developments recognised that people did not want to buy whole homes which they would only use for a few weeks a year in the mountains. The concept then spread fast into other parts of the world.

David Disick, a fractional ownership consultant, says investors who go this way are highly demanding in terms of luxury, quality and service. Therefore, to attract this affluent clientele, fractional properties must offer a prime real estate location; top-notch construction and finishes; attractive furniture and furnishings; and a wide variety of on-site amenities.

Also, a caretaker to help with pre-vacation planning and to make recommendations and reservations for members while in residence is a necessity for fractional owners.

“Most countries define both fractional real estate ownership and timeshare as ‘shared ownership’. So, these different property types are treated legally as the same,” Disick says in a blog.

REAL ESTATE INVESTMENT

From the point of view of fractional owners, however, what they own is not the same as timeshare. They believe their fractional real estate property is higher quality than timeshare and affords a more luxurious vacation experience.

Most important, it offers them solid real estate investment value. “Of course, ‘higher quality property’ and ‘more luxurious experience’ are in the eye of the beholder,” says Disick. “Subjective matters of taste, such as these, are not to be disputed.”

Real estate experts have termed fractional ownership as a financially smart alternative to whole ownership of a property and timeshare as a financially smart alternative to hotel rentals. That is why hotels at the tourists’ hotspots prefer timeshare as opposed to fractional ownership.

An article by Fox Business last year likened fractional ownership to a whole pie which may look delicious, but which doesn’t make financial sense to buy alone if you only intend to have a few bites.

“It allows you to create a connection between the time you spend in the home and the amount of money you pay for it,” Andy Sirkin, a fractional homeowner and attorney who specialises in real estate co-ownership, was quoted as saying.