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AN OVERVIEW OF THE FRACTIONAL INTEREST INDUSTRY

AN OVERVIEW OF THE FRACTIONAL INTEREST INDUSTRY. Presented by RICHARD L. RAGATZ, Ph.D. PRESIDENT, RAGATZ ASSOCIATES AMDETUR June 22, 2012. THE SPECTRUM OF RESORT REAL ESTATE Whole-Ownership Traditional second homes, resort condos, etc. Hotel-condominiums Shared-Ownership

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AN OVERVIEW OF THE FRACTIONAL INTEREST INDUSTRY

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  1. AN OVERVIEW OF THE FRACTIONAL INTEREST INDUSTRY Presented by RICHARD L. RAGATZ, Ph.D. PRESIDENT, RAGATZ ASSOCIATES AMDETUR June 22, 2012

  2. THE SPECTRUM OF RESORT REAL ESTATE • Whole-Ownership • Traditional second homes, resort condos, etc. • Hotel-condominiums • Shared-Ownership • Resort timeshare • Fractional interests* • private residence clubs • destination clubs • The “Evolving” Competition • Vacation clubs • Home Away, AirBnB, OTA, etc. • Renting versus owning *Emphasis of presentation

  3. BASIC CHARACTERISTICS OF THE FRACTIONAL INTEREST CONCEPT • 1/15 (three weeks) to 1/4 (three months) • Deeded ownership • Equitable use throughout the year • Floating unit • Appropriate use plan/reservation system • External exchange

  4. BASIC CHARACTERISTICS OF THE FRACTIONAL INTEREST CONCEPT • Subsets • Private residence clubs (PRC) • higher prices and annual dues • higher quality and more services • prime real estate and lifestyle • different consumer profile and eligibility • Destination clubs (DC) • usually non-equity • 30-year membership • refundability • multiple locations • recent trends

  5. SHARED-OWNERSHIP, BUT NOT RESORT TIMESHARE • More time, more services, higher quality product (usually) • Higher price, consumer profile and income-eligibility • Real estate ownership rather than vacation ownership • Appreciation (in normal times) rather than depreciation • Higher consumer satisfaction

  6. SHARED-OWNERSHIP, BUT NOT RESORT TIMESHARE • Better public image • More selective external exchange • Less craziness in marketing and sales • More of purchase price to the product

  7. MORE RATIONAL INVESTMENT THAN WHOLE-OWNERSHIP • Buy amount of use that fits available vacation time • Buy amount of use that fits discretionary income patterns • Not all funds committed to one product and location • Higher quality vacation home for less costs • Allows for multiple purchases • Show up and enjoy • More of a true lifestyle product • More variety and flexibility via external exchange

  8. ADVANTAGES OVER RESORT TIMESHARE FOR THE DEVELOPER • Less complex and disruptive • Normally less need for JV partner • Fewer sales • Better image • Allocations for product costs • <Narrower market> • <No receivables income>

  9. ADVANTAGES OVER WHOLE- OWNERSHIP FOR THE DEVELOPER • Broader market • Higher profit due to mark-up • Higher occupancy rates & ancillary income • Nice complement for cross-selling/mixed-use • <More sales> • <Confusion with timeshare> • <Higher product and operating costs>

  10. THE MARK-UP FACTOR • ±1.25 to ±1.6 (recent trends) • Influencing factors • Size of fraction/size of unit • Desirability of location • Whole-ownership prices and availability of inventory • Quality of product • Extent of services • The name

  11. Whole-OwnershipFractionals sample unit 3-bed, 1,850 s.f. 3-bed, 1,850 s.f. cost per s.f. (const. and FF&E only) $150 $200 cost per unit $277,500 $370,000 other product costs similar sales price $647,500 @ $350 $971,250 @ 1.5 operating costs <$64,750 @ 10%> <$194,250 @ 20%> const. costs* <$277,500><$370,000> remainder $305,250 $407,000 difference $101,750, or 33% more *Not including all other product costs, which are assumed similar. IMPACT OF THE MARK-UP FACTOR

  12. SUMMARY CHARACTERISTICS OF THE FRACTIONAL INTEREST INDUSTRY • ± 325 projects in North America • ± 65,000 owners • Recent trends in sales performance • Influencing factors and outlook • Average size: 40/50 units • Trend toward mixed use: 58% with W-O; 28% with hotel • 74% two- or three-bedrooms (1,400 to 2,000 sq. ft.) • Average size of share: 1/8 (trend toward smaller) • Average price per share: $170,000 ($250,000) • Average price per square foot: $900 ($1,560) • Average weekly maintenance fees: $1,270 ($1,990) • Trend toward fewer extraneous services, but more owner benefits • Expenses: 55% for product; 15% for operating

  13. FRACTIONAL INTERESTS IN MEXICO • At least 9 active projects • Sales volume of US $30 million in 2011 • Average of $3.3 million • Average: • price per share: $215,000 • price per week: $36,500 • price per sq. ft.: $755 • Much larger units • Most are within a larger development

  14. SOME CURRENT CHALLENGES • Uncertainty of economy • Lack of consumer financing • Decrease in home equity funds • Glut of whole-ownership inventory and resales • Increasing competition from rentals and rental clubs • Excessive prices and maintenance fees

  15. CRITERIA FOR SUCCESS THE LOCATION • Historical demand for resort real estate • High prices for whole-ownership resort real estate • Higher-end tourist profile and repeat visitation patterns • Limited seasonality or two lengthy high seasons • Limited competition (at this time)

  16. CRITERIA FOR SUCCESS THE PRODUCT • Positive name recognition/brand • Size of fraction • Use plan/reservation system • Quality versus space • Price versus dues

  17. CRITERIA FOR SUCCESS THE EXTRAS • Lifestyle rather than simply brick and mortar • Amenities • Services • Preferred access (ski, golf, spa, etc.) • Exchange and rentals • Resales • The “value” issue • Consumer financing

  18. CRITERIA FOR SUCCESS THE DELIVERY • Lead generation • Proper positioning, i.e., the comparative advantages • The “fine line” in marketing and sales • The experience and sensitivity • The patience and follow-up • The listening ear and consumer hand-holding • Multiple programs

  19. SOME SUGGESTIONS • Use industry averages for benchmarking only • Don’t simply copy • Don’t use a company trying for your marketing and sales contract • Don’t use your attorney • Avoid personal ego, love for property, and wishful thinking

  20. SOME SUGGESTIONS • Understand industry standards (esp. operating costs) • Understand the critical unique components of fractionals • 1. mark-up ratio • 2. use plan/reservation system • 3. size of share • 4. beyond simple brick and mortar • Rely on objectivity, realism, thoroughness, experience and listening ear

  21. SOME SUMMARY COMMENTS • Recent market trends • Just tapping the potential • Consumer acceptance and recognition • Positive image • Based on rationality for the consumer and the developer • One piece of the puzzle • Not a “quick fix” • Proper planning • Welcome to the challenge and opportunities

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