Buying a second holiday home at the coast is probably not within your budget with property prices having rocketed in the last five years and with coastal property being highly sought after.

Many families have opted for timeshare over the years — where you get your little slice of the sun for say three weeks a year. Fractional ownership goes one step further — allowing you that time, plus you get to own a share of the property — making it an asset rather than an expense. On top of this, management and maintenance is usually taken care of by the fractional ownership company/provider.

There are also certain schemes which offer international exchanges as well as a concierge service and many other benefits.

Here are some essentials you should know about fractional ownership — complements of www.fractionalownership.co.za

How does management work?

Fractional ownership companies normally manage the property on behalf of all shareholders. They either sub-contract management services to external parties or in certain instances this is done by themselves.

Management services include inspection of the inventory list after each and every shareholder’s visit, domestic service, maintenance, accounting and auditing, attendance of the Estate AGM on behalf of the shareholders, and updating shareholders on general aspects of the property.

How can fractional be financed?

There are numerous financing options for prospective buyers. Aside from a cash purchase, home equity loans and first home refinancing, there are also lenders who will create new mortgages on shares.

A mortgage loan of up to 60 percent can be arranged through a commercial bank, usually over a 10-year repayment plan. The loan is in the name of the legal entity, owning the property. You sign surety for your proportional share. The growth of this industry will see a number of new financing plans being offered by financial institutions.

Is capital gains tax applicable?

CGT is applicable and works as follows for the natural person — the first R10 000 of the capital gain is exempt, 25 percent of the remainder of the capital gain is added to the personal income tax payable at the applicable income tax rate, while for the legal entity 50 percent of the capital gain is taxable at 29 percent.

Is transfer duty payable?

This will depend on the structure of the investment. Normally when you buy the share in your individual capacity, no transfer duty is applicable. When you buy the share as a CC, Pty Ltd or trust, a 10 percent transfer duty will be applicable on the value of the property. As with all property transactions, transfer duties are only payable on fixed assets and not tangible or movable assets such as furnishings and so forth.

How much will the shares grow?

To date there have been very few fractional resort developments in South Africa. As a result it is likely that there will be a substantial appreciation unlike the depreciation that usually occurs with timeshares.

The value of the shares is related to the value of the residence, less the borrowings. Therefore, the increase in property prices will directly increase the value of the shares. Leisure property values have seen a 20 and 30 percent appreciation per year for the last four years. One can assume capital growth of 15 to 20 percent per year.

Can you sell you shares?

Any owner wishing to sell can trade his shares freely on the open market. Some fractional ownership providers/companies require the owner to notify the existing shareholders in writing of the intent to sell. The existing shareholders then have 30 to 45 days right of first refusal to take up the shares at the sales price. If no one takes up the offer, the seller may proceed and sell to an external party on the open market.

There may also be time restrictions on the selling of one’s membership — some fractional ownership providers restricts one to re-sell your membership within the first 24 months of ownership. Commission charged on the re-sale of a membership is negotiated between seller and respective agent.

For more information or investment opportunities visit www.fractionalownership.co.za.