Is Phuket Ready for Fractional Ownership?

Posted: 27 Jun 2009 | 1:52 pm

With property transactions in the broader market flat and forecast to remain so into the foreseeable future, one of the emerging trends we are seeing is the conversion of pure residential projects into alternative investment vehicles. Condominium and apartment projects are branding and looking to sell under an ongoing yield or lifestyle strategy. Now developers are introducing fractional (or shared) ownership schemes with lower pricing points to entice buyers off the fence.

Timeshare or vacation ownership has been selling on the island for most of this decade at Laguna Holiday Club, Royal Resort and Marriott Vacation Club. More recent entrants are Absolute, David Lloyd and a handful of other developers operating independently. Thai law is well equipped to deal with these operations. Even omnibus legislation such as the Consumer Protection Act covers relevant conditions such as cooling off periods and complaint administration.

With the downturn in tourism the next new wave of fractional products look to be hotel residences, with the Royal Phuket Yacht Club - now owned by the Purnavarna Group - selling residences at increments of 1/18th share in a unit. The LaTour Signature Group, which recently took over Indochine Villa Santi, operates this way extensively in North America and is eying further expansion of these products.

Fractional ownership in most developed countries can be divided into two distinct categories. In the first, the buyer purchases a portion of a deeded property and receives a title or deed. The transaction is therefore regulated under property law. In the second, the buyer purchases a specific time usage of a property and no title is provided.

Most timeshares fall into the latter category, with regulatory laws falling under consumer and civil administration. With holiday club or points-based systems, which are becoming more popular, you can transfer your usage into other vehicles such as airline tickets, rental cars and cruises.

What is being marketed in Phuket by many as deeded co-ownership falls into a very gray area and is hard to regulate under prevailing property law. In the West most timeshare uses undivided interest, condominium, co-op or trust vehicles as entities. One of the most interesting developments in timeshare recently has been a considerable amount of litigation in the US and Australia. Brokers were found not to be selling property, but rather securities - which most were not licensed to do. Successful suits resulted in a rather serious revamp of structure in those markets, to the detriment of the entire industry.

Providing a clean legal framework for both purchaser and developer remains a challenge in Thailand given the ambiguity of the law for fractional ownership at present. There are international hotel companies such as Ritz Carlton that operate residential clubs. These require developers to actually split mixed-use components, including land titles, and ensure no property that is sold to fractional buyers has any liens or securitization. There is much apprehension when a long-term residential property is attached to a somewhat volatile asset like a hotel. In a downturn if bankruptcy or insolvency takes place then considerable risk is taken by interval purchasers.

Internationally when hotel brands operate fractions, management agreements are scrutinized to determine what guarantees are made if you purchase a fraction in a branded property and then in a few years the operator is changed. Additionally, as properties age, what are the consequences when the asset is no longer able to viably operate as a hotel? How can investors exit what is not traditional real estate?

Unfortunately there are more questions then answers in the current Thai landscape. But with real estate a major industry here we have seen ancillary laws such as the revised Condominium Juristic Act become more sophisticated over the past few years. Most likely, fractionals will move more into the limelight of the Thai property market over the next few years, with developers needing to see improved cash flows. Lower investment thresholds are possible, thus widening the potential market, and a volume approach can be taken to revenue generation.

For the most part developers try to do the right thing. But for potential buyers of fractionals it's important to look closely at all of the aspects of the transaction along with the carrying cost. Consultation with an experienced legal advisor is always recommended. A resale market for fractionals without historical performance figures to rely on introduces additional unknowns.

Phuket's property market is diversifying. This is simply a sign that Phuket is conforming to the greater global development cycle. As for fractionals - they are going to be with us for the long term.

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