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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