Fractional Ownership Exit Strategies

Fractional Ownership Exit Strategies

Fractional Ownership - Exit Strategies
Fractional ownership schemes are marketed using the​ advantage that fraction valuations are underpinned by the​ value of​ real estate .​
However as​ soon as​ real estate is​ put into a​ fractional ownership scheme it​ will no longer be valued in​ the​ same way as​ it​ would have been as​ a​ complete unit.
When is​ Real Estate Not Valued as​ Real Estate?
Answer: When it​ is​ part of​ a​ fractional ownership scheme!
This is​ not always a​ bad thing, because resale fractions could (and sometimes have) been valued at​ more than their fraction of​ the​ original real estate value .​
However a​ proper exit strategy is​ required to​ cope with the​ possibility that the​ fractional valuation may be less than the​ value suggested by the​ underlying real estate.
Why is​ Real Estate a​ Good Long-Term Investment?
Real estate has proved such a​ reliable investment over the​ long term (ignoring the​ last year or​ so) because:
1 .​
It is​ produced using a​ scarce/finite resource - land .​
This has a​ greater effect in​ crowded countries like the​ UK but is​ true to​ a​ greater or​ lesser extent with all locations.
2 .​
It has an​ enduring utility value .​
Everyone needs a​ place to​ live .​
Even properties in​ typical vacation locations have this utility value, since they can be used by the​ support staff that are needed to​ run a​ resort.
3 .​
Unlike most investments, you can borrow to​ buy it .​
This gives the​ potential benefits (and losses) of​ investment gearing.
Why Are Fractional Valuations Different?
If you compare a​ fractional ownership unit with the​ above you can see that point 1 is​ still true, 2 is​ not (or is​ much reduced) and​ 3 is​ difficult to​ achieve (perhaps more so with the​ recent credit problems) .​
The fractional ownership unit will be owned with other people and​ probably looked after by a​ management company .​
Part of​ the​ valuation of​ the​ fraction will be based on the​ perceived quality of​ these external factors .​
In some circumstances these external factors could push the​ valuation of​ the​ fraction below that suggested by the​ underlying real estate value .​
In this case an​ exit strategy/contract clause is​ required to​ safeguard the​ fraction owners investment.
The Exit Strategy
I would personally advocate a​ winding-up clause in​ fractional ownership schemes, to​ enable re-alignment with the​ underlying real estate value after a​ specified number of​ years(if advantageous) .​
In this case the​ fractional ownership scheme could only continue if​ all fraction owners agreed to​ another period of​ ownership.
Alternatively it​ would be possible to​ specify a​ clause in​ the​ fractional contract that would permit termination of​ the​ scheme with the​ agreement of​ a​ specified number of​ fraction owners.
Either of​ the​ two approaches above make sure that the​ investment interests of​ fractional owners are protected by the​ underlying asset value.

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