What are Fractional Sales?
Fractional sales (or buyer funded deposits) have been utilised heavily across the UK (but particularly in northern UK cities) over the last 5 years. They are essentially an off plan sale of a new build property to an investor who pays more than the standard 10% deposit on exchange. In many cases the buyer has been paying up to 50% on exchanged and more than often another 25% before completion. Hence the other term of buyer funded deposits. Fractional sales are also normally associated with “guaranteed yields” where many developers have been offering guaranteed income/rents often in excess of what is considered open market levels.
What makes Romal stand out above the rest when it comes to Fractional sales?
Its all about trust and building a long lasting relationship with investors, Romal Capitals CEO Greg Malouf works with the belief that a 20% desposit from the beginning gives a true reflection the team will finish through to completion. Romal believes that looking after the investor through to supporting the agents and then the tenants will leave a feel of trust and reflect the outstanding service that the team provides, its all about delivering the end product.
Why have so many sales been of the fractional sales type?
Developers have seized on the attractiveness of selling schemes using fractional sales as this has helped them develop more units/schemes than through a more traditional funding model. Where they are collecting between 50-75% before completion they are in effect using the buyer’s money to fund the construction of the development. The serious lack of traditional bank funding for residential developments has logically forced many more developers down this route.
Are there any other issues/challenges regarding fractional sales?
Whilst not definitively linked many fractional sales schemes have been sold with the “benefit” of a guaranteed yield by the developer. Often these guaranteed yields have been offered for a period of 3-5 years at levels of between 7-10%. This has appeared extremely attractive to overseas buyers who have viewed the returns as an additional bonus to any capital growth they may experience during that period. Unfortunately with the vast majority of these sales the quoted yields have been in excess of what is genuinely achievable and have resulted in returns lower than anticipated. Although these investors did at least get the property they had paid for (unlike those in the stalled schemes), disappointing returns have continued to erode confidence in the sector.
What about the future for Fractional Sales?
Investors have become more risk aware than in the past and are looking for those developers where there is a track record of delivery and schemes that are well located and honestly marketed. Although the issues discussed above would suggest that it has become almost impossible to sell off plan property to investors this is not the case. There are numerous developers selling off plan in the city that are selling on a more traditional 10% deposit on exchange (or sometimes up to 20%) and delivering the product in a timely and professional manner. There is still a good strong demand for Liverpool property from both overseas and UK investors but the focus of these buyers will be those developers like Romal Capital who can afford to fund schemes with more normal deposits and deliver on their promises.