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How will the fractional ownership market be affected by the credit crunch?

Date: 28/09/2009
Article source: Article Alley

One area of the real estate market is bucking the generally negative trend, with values and sales volumes up. Bring on a period of falling real estate values (both in the US and in the UK) and panic in the banking world. It all started with a relaxation of lending criteria, both with regard to the size of loans compared to income and the credit rating of the borrowers.

Sales of homes are forecast to be down 40-50% in 2008 compared with 2007, with the decline in prices being put at between 5 and 10%. Whilst it is true that the value of fractions over time should increase, and should be much better than timeshares, it is still not primarily an investment. Many purchasers of fractional ownership have been "cash buyers" and are therefore not dependent on getting a mortgage.

A Real Example

Steve Navaro runs Paris Home Shares LLC, a company specializing in fractional developments in Paris. The fractional market looks set for more years of growth whatever the fate of the wider economy and real estate market.

Neil Robertson is a fractional ownership consultant who runs his own website promoting fractional ownership schemes and giving advice and information on the fractional ownership of real estate, yachts, cars etc.

Up until the article, things had been pretty slow". People should regard fractional ownership as a life investment.

3. This seems surprising, given that the main selling point of fractional ownership is that you own a fraction of the real estate - an asset that is declining in value. The party ended when interest rates in the US were raised and some of the more ridiculous deals that had been sold (balloon/deferred interest schemes) started to go wrong. Some of the losses for individual banks on mortgage-backed securities are truly amazing, running into tens of billions of dollars.

What Effect is it Having on Real Estate Values?

Whilst all the chaos has been going on in credit markets banks have been unwilling to grant new mortgages without the security of large deposits. All connected with home sales are feeling the effects, and there is no end in sight to the crisis.

Why is Fractional Ownership Different?

Fractional ownership so far seems to be less affected by the problems in the credit market, and is still growing in popularity. Interest has continued at a high level, and Steve's next Paris development is 50% sold out even though the renovation is not complete.

This example supports the idea that the limiting factor for fractional ownership sales is market awareness. After a recent article in the New York Times featuring his developments, Steve was overwhelmed with enquiries and quickly sold out one development. These loans were then packaged up by "clever" bankers and sold on to financial institutions around the world. This fueled a boom in asset valuations and while this continued everything appeared OK - if people couldn't afford to pay their mortgage interest they simply rolled up the interest into a new loan. Fractional ownership is growing from a relatively small base. Fractional ownership of luxury real estate has been slowly gaining in popularity over the last 10 years or so, but now seems set to reach a tipping point and become a mainstream concept.

What is the Credit Crunch?

In case you've been living in the wilderness for the last year, a short history of the credit crunch! People who 10 years ago wouldn't have been able to get a mortgage at all were offered large loans with very little proof of income. Steve admits that the exposure from the article made a big difference, "I think that if the product is done well, and priced fairly, it will sell, but only if there is plenty of exposure. Market penetration is still small when compared to timeshare. This is continuing to this day, with rates on mortgages increasing (in the UK) whilst the official rate charged by the Bank of England falls. There are however genuine reasons for the continuing success of fractional ownership:

1. The negative effects of the current credit crisis are more than offset by the rapidly increasing reach and acceptance of the fractional concept. The people buying fractional ownership are not (or should not) be motivated mainly by investment concerns.