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August 20, 2017
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Part of paradise

Should you consider fractional real estate? We look at a case study in the Turks and Caicos

The Turks and Caicos Islands could have been Canada’s 11th province... if only things had turned out differently. The islands moved toward full independence from Britain in 1979. But a change in government in the early ’80s led to a policy reversal, and the Turks and Caicos approached the Canadian government to discuss a possible union. But unification was put on the backburner for a couple of decades.

Then, in 2004, Nova Scotia extended an invitation to the Turks and Caicos Islands to join Canada (which is apparently somewhat beyond the mandate of a provincial government). Ottawa said it would look into the matter. And so far, of course, nothing has moved. If this collection of Caribbean islands (40 in total, although only eight are inhabited) had emerged as the southernmost region of the Great White North we'd have access to year-round warm weather — no passport required.

Perhaps it worked out for the best: after all, if the Turks and Caicos had joined Canada it would’ve meant the incursion of the Canadian Revenue Agency in this currently tax-free jurisdiction.

One Canuck who decided not to wait around for Canadian/Caribbean confederation is Rob Ayer, president of Apollo Developments Ltd. A native of Kitchener, Ontario, Ayer lives part-time in the Turks and Caicos, where he owns a home.

Ayer says he was smitten by the islands on his first visit there almost a decade ago. What’s not to love? In the past eight years, he’s only had to miss a single game of golf due to inclement weather.

Your own private hotel

In March 2009, Apollo Developments unveiled a luxurious 52-unit condo-hotel on Providenciales Island. The resort was constructed so that each room has a view of the ocean. There are over 120 metres of beach frontage on the quiet western end of Grace Bay Beach, and 300 metres of parkland next door. To give the property a recognizable brand identity, Ayer arranged for the New York-based Gansevoort Hotel Group to come onboard to manage the property. And so was born the Gansevoort Turks + Caicos (gansevoortturksandcaicos.com).

The attraction of these islands goes beyond the weather: there are direct flights from Toronto on Air Canada and West Jet and they're close to mainland North America.

So, while the Turks and Caicos never did become part of Canada, Canadians can become part of the Turks and Caicos via the vacation/investment strategy of fractional ownership. Pricewise, a quarter-share in a spacious studio unit (670 square feet/62 square metres) starts at $150,000. (All prices in US dollars). A two-bedroom quarter-share (1800 square feet/167 square metres) is priced at $350,000 while a three-bedroom quarter-share (2600 square feet/240 square metres) is $450,000.

Maintenance fees work out to $16 per square foot, including insurance (or $173 per square metre) and although the Turks and Caicos is a zero-tax jurisdiction, buyers must pay a one-time stamp tax of 3.6 percent at the time of purchase on real estate priced up to $500,000. Each unit at the Gansevoort comes equipped with designer furnishings, state-of-the-art appliances, flat-screen TVs and a well-appointed kitchen. Owners also receive discounts at the restaurant, spa, retail shops and on rooms if they refer guests. Owners also enjoy the resort's amenities like the fitness club and swimming pools.

And unlike an impersonal hotel, a fractional ownership property has those little touches that make the place a home away from home. With a phone call, staff can stock your condo’s fridge with food and beverages, retrieve your “stuff” from storage, and even decorate your unit’s mantelpiece with your family photos.

Learn your fractions

Although fractional ownership set-ups may seem like timeshare schemes, they’re actually quite different. A timeshare is typically sold as a prepaid vacation and the emphasis is on vacation time, not property ownership. A fractional ownership on the other hand allows a small number of people to share ownership of a high-priced recreational asset.

Fractional owners have the right to use greater allotments of time, typically a minimum of four weeks per year. And the shared ownership allows owners to reduce the purchase cost and operating fees. Indeed, while fractional owners can use their condos up to 12 weeks a year, Ayer says most put some of those weeks back into the rental program to earn revenue to help offset the costs.

Owners needn’t worry about lining up prospective renters as that's handled by hotel management. However, there is a steep cost for the service, as the resort and the fractional owner split rental revenue on a 50/50 basis. Ayer notes that last year, fractional owners were able to rent out their units about 60 percent of the time (there are no promises made in terms of guaranteed rental income). As for rental rates, a 53-square-metre (575-square-foot) studio goes for $350 to $945 per night (depending on the season) whereas a beachfront three-bedroom suite rents for $1350 to $3390 per night.

Market timing

And 2011 would appear to be a good time to buy a fractional ownership property notes Richard Ragatz, president of Ragatz Associates (ragatzassociates.com) of Eugene, Oregon which tracks trends in the resort market.

Fractional ownership properties were hit hard by the economic meltdown of 2008. Some properties lost as much as 25 to 50 percent of their value in 2008.

“I’d say today is definitely a good time to buy compared to the heady days of 2006 and 2007,” says Ragatz, who notes that during “the good times, appreciation of the price of a fractional property was keeping pace with the growth rate in the economy.”

Ayer agrees that as far as the Gansevoort Turks + Caicos is concerned, “this is a great time to consider buying. We’re basically selling at prices that we were selling at in the pre-construction days” — a number that ranges from $150,000 for a small studio to $3.75 million for a posh penthouse.

Would-be buyers of fractional ownership properties shouldn’t wait too long. There are signs that the market has pretty much bottomed out. Ragatz says there was $2.7 billion of fractional property development in 2007, before that number plunged to less than $1 billion in 2009. However, thanks to a recovering economy, $1.5 billion in fractional property development is anticipated to be built this year and, according to Ragatz Associates’ semi-annual report, prices for existing inventory will likely start creeping upward.

Vacation first and foremost

In any event, Ragatz cautions against buying a fractional ownership property if your prime goal is investment. It would be foolish to assume you’ll receive any sort of guaranteed rate of return.

“Those buying fractional ownership properties should be doing so because they want to use the property for vacations,” he says. If, over time, the fractional ownership property actually appreciates in price, consider this a “bonus.”

The age-old real estate mantra of “location, location, location” is a paramount driver of prices when it comes to fractional ownership properties. Values per square foot vary significantly: the average price per square foot in 2008 for Canadian fractional ownership properties was $590, whereas it was $765 for Mexico, $1100 for the Caribbean and $1300 in the US. Annual maintenance fees, meanwhile, averaged $7125 per share.

As for future trends, Ragatz is bullish on fractional ownership. In his most recent report, he notes: “It is widely felt in the resort real estate industry that shared-ownership resort real estate will rebound more rapidly and more strongly than whole-ownership real estate as [the U.S.] economy recovers. Reasons include being a concept that is based on (1) personal use rather than speculation; (2) being able to purchase only the amount of time that have vacations to use and discretionary income to spend on; (3) lowering household spending habits and capabilities; (4) being hassle-free, i.e., ‘show up and enjoy’; (5) the opportunity for flexibility and variety of use due to the external exchange process.”

Bottom line: fractional property ownership isn’t for everyone. But if you have some disposable income to park and you want a vacation property that feels more like a second home than a hotel, maybe a fractional ownership scheme is a good fit. And buying a fractional ownership property in 2011 makes for a far better deal than if you had bought one pre-2008. Enjoy the economic recovery with a tropical drink in one hand and a tube of sunscreen in the other.

This article was accurate when it was published. Please confirm rates and details directly with the companies in question.

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