Banks eyeing co-ownership sector

South Africa's Banks are becoming increasingly innovative in their mortgage offerings, with major players now looking to create dedicated products to finance investments in the fast-growing fractional ownership market.
Fractional ownership - widely touted as the SA property sector's next big thing - offers investors the opportunity to co-own a holiday home in various top-end golf and leisure resorts. Most fractional properties marketed by estate agents, developers and other intermediaries are sold from around R200 000 right up to R1,2m, depending on the number of shareholders (usually between four and 13), usage allocated to each buyer, location and size of the particular property and add-on amenities offered on site. Fractional investors are issued with a share certificate, because they become shareholders in the company that owns the particular property (usually a share block company).

The strong increase in new entrants to the market over the past 12 months has prompted major industry players to form the South African Association of Fractional Intermediaries (Saafi), a self-regulatory body, to protect the interests of investors and companies involved in the marketing, sales and development of fractional products.

Saafi chairman Thys Geyser says its official launch in Cape Town last month attracted overwhelming interest from leisure property promoters and developers. Financial institutions, including Absa, Standard Bank and Rand Merchant Bank, were also represented at its inaugural meeting, underscoring the perceived growth of the relatively new but rapidly expanding fractional ownership sector.

Banks are naturally keen to share in the spoils of this potentially lucrative industry, with Geyser estimating the fractional market to be possibly worth between R5bn and R10bn. Internet portal puts the number of marketers and developers already active in the market at close to 30.

Geyser says banks don't yet have the structures in place to issue individual mortgages to co-owners of a fractional property, as its title deed is in the name of a company and not linked to any individual. As such, investors currently pay cash for their share of the property or have to access finance via a short-term loan or an advance on an existing mortgage.

Anna Bonanni, manager: Absa Home Loans Business Initiation, says the bank is working on a product to bring to the fractional ownership market. "We know that there's a huge demand for fractional ownership and we want to be where the action is." However, Bonanni says it's still early days and as such couldn't put a timeframe on when such a product would be launched. Other banks are following suit. Mark Boshoff, head of Nedbank Home Loans Product Innovation and Development, says the challenge is to structure fractional loans in such a way that risk is reduced for both the buyer and the bank. He says it's a tricky product to develop, due to the multiple ownership structure, which presents multiple risks. "When only one or two shareholders default on loan repayments, who does the bank attack?"

Leon Barnard, Standard Bank Home Loans director, says though it's looking at possible ways to finance fractional investments, it still needs to determine if the size and growth potential of the sector warrants developing a dedicated product. Barnard says banks are also uncertain whether fractional products will prove a better buy than traditional timeshare. That's a valid concern as timeshare has proved to be a dismal investment over the past decade, with industry commentators estimating an average loss of 30% to 40% on resale.

However, Henry Greyling, CEO of Seeff International Golf & Leisure's joint ownership division, dismisses the notion that timeshare and fractional ownership are comparable products. Greyling says the two differ vastly, as timeshare is merely paying upfront for the future use of holiday accommodation while fractional ownership is an investment in bricks and mortar, allowing buyers to benefit directly from capital appreciation on the underlying property asset.

Greyling says Seeff has already concluded a number of resales, with investors realising capital growth of between 25% and 40% over the past 12 months. Seeff is regarded as one of the pioneers of fractional ownership in SA, seeing sales more than double year-on-year, with turnover for the year to date (January to August) already at R130m. Greyling says it offers investors who buy into existing properties the opportunity to finance fractions with a loan-to-value of up to 50% repayable over 10 years. But these loans are made to the share block company that owns the fractional property and not to individual buyers. Greyling says that if banks can create a product to finance individual share certificates, co-ownership of a luxury holiday home will become affordable to the man in the street - no doubt creating significant upside in syndicated leisure property demand and values.

Source: Finwek, Joan Muller