January 23, 2009

So, here's the staying-in-business question: Once the market begins to come back will it be led by fractions? And, of course, WHEN?

This is a long blog, but I think the comments, below, are worthwhile reading. I hope you agree. Let me know?

Boy, that's the multi-million dollar question isn't it? To help clear up my crystal ball I ask a number of leading resort professionals what they thought. This is real time - in the past week. Where's Dick Ragatz? Good catch! He came out with a broadcast release last month stating that fractions would lead the comeback.

Now, I'm not the one to question Dick, but I thought I'd get a wider number of views than his ‘release-sponsor’ who was obviously generating business from the release.

So, among the respondents:

Greg Traxler of East West
John Veering fmr. Villa la Estancia and now Contact Development Corp.
Scott Burlingame of Vacation Ownership World
Greg Cory and Bob Chickering both of ERA
Mary Borgia of her own powerhouse consulting company
Dave Howe of Greenangels
Jeff Prostor of Brookfield Hawaii
Tom Goetchius - guru
Sherman Potvin of Luxury Fractional Guide
Dean Kneider of Resort to Resort
Tom and Bill Ward of Ward Financial
Jim Marmorstone of Tenstar and the inventor of points-based programs
Hart Rist of Bald Head Island at The Hammocks

Here are excerpts taken from their replies to the question: Once the market begins to come back will it be led by fractions?

>I believe more buyers will indeed consider fractional options as caution fades and market returns. One major factor in this opinion is the amount of consideration / interest we have seen with our fractional projects here through recent trends. As our prospects have discovered what previously was not an ideal purchase option, they have gained insight into the level of quality and benefits fractional projects offer

>The fractions really need to sold as a product that is thought out and is specially designed before the shovel hits the ground. It has to have particular elements that reflect product owned and used through the world but also the real estate investment and use to that particular local

>They need to be marked differently not cheaper but an alternative purchase in mix use and the only way to go in single use. Generous trade in policies are important.

>As affluent and semi-affluent consumers very slowly emerge from the fear and lack of confidence resulting from the steady drumbeat of dire news about the state of the economy, and get on with their lives and, in particular, their leisure lifestyle, they, I believe, will be more cautious and conservative about what they buy and how they buy it

>My gut check says yes…. We collectively thought there will be a whole segment of the baby boom market that will pass on the purchase decision altogether because they will be working longer and saving more to replace their paper and real losses in the market (me included). There will be another segment that will be risk adverse, and be looking for a lower priced alternative to whole ownership. There may be a moral suasion reaction too, where in an austerity environment owning the 'whole thing' may become viewed as wasteful and tacky.

>After all, Fractional Ownership was making a lot of sense before the economic collapse. Isn't it reasonable to predict that it makes even more sense in a post economic meltdown era.

>… that are no longer driven buy the Developer reaping the reward of a multiplier greater then 1.5 as the Greed factor in fractional was always the #1 reason for failure in my mind (along with poor use plans and high HOA fees, as close 2nd & 3rd)

>Fractional may lead as a value statement. Buyers may embrace the "buy only the time that you need" aspect of fractional ownership ( more of a statement and above Time Share still ) as they try to limit their financial obligations.

>The recession has made the barrier to entry come down in virtually every market, which was one of the key factors for fractionals in the first place.

>The fractional alternative will give the buyer all of the benefits of the vacation property but without the capital commitment of whole ownership. So when the US consumer finally does start to return they will behave differently and will be more financially conservative for quite some time to come. The fractional product will be a very good match for this new consumer behavior.

>As the market rebounds, a percentage of buyers will certainly find fractional products the product of choice...if it suits their family's needs... usage, size, location, price, etc... early buyers will be users and cautious as opposed to scavengers.

>… also believe there is be Fed policy and regulation that could severely impact our ability to do- have a business. The initial fix is on primary owner occupied housing - it appears.

>The depth of market that can pay cash - and not use the equity in another property is very limited ,,. and again that may want to use their cash for this purpose...

>I would think that the fractional product would be more appealing since buyers may be more reluctant to make a large investment in the whole unit purchase. On the other hand getting financing for fractions will be critical.

>We are probably going to emerge from this economic crisis slowly and in fits and starts. As the economy improves, people's confidence will gradually grow. They are more apt to re-enter markets in a cautious and piecemeal fashion given what they/we all have been through. (Use-)Value and utility are likely to be more important considerations in leisure real estate purchases than profit.

>All of the folks that have lost value in their second homes as well as those contemplating a second home purchase will think twice before stepping up to the plate for a whole ownership vacation home, they will all look at alternatives and will find the fractional industry attractive as their risk is minimized and they can continue their quality vacations with their families.

>I am clinging to the belief and hope that this malaise and bloodletting won't snuff out the dream of owning secondary real estate among boomers and Gen-Ys. People have short memories. . I want to believe that when the mushroom cloud dissipates, the roaches will emerge again from the cracks.

>Flight to value & downsizing are coming into vogue. No longer does conspicuous consumption sell. Products priced for status are likely to suffer. The planet can no longer afford the waste that 2nd home whole ownership connotes. Economy is no longer a demeaning word.

>The high-end market will be more challenging as job losses and downsizing has allowed companies to make cuts at the high end of market (in terms of compensation). My opinion is that some or many of these high-end positions will not be refilled in the short-run and thereby reduce the pool of eligible high-end buyers. Their return to the market will be more gradual than the middle market for whom timesharing will be affordable

>Further impacting this former high-end of the market will be that many will have suffered irreversible losses in their investment portfolios and real estate assets. This will further reduce the interest in second homes.

>As a result, value will become even more important to all buyers.

>In the next few years, to counter the inroads of fractional developers, I see timeshare developers offering point-based programs that have the attributes of fractional programs and products. Further, I see a move by fractional developers to offer points-based programs to become more competitive with the timeshare developers and increase the flexibility of the programs offered, thereby eliminating the need to sell fractions of a home (i.e. 1/12th, 1/10th, 1/8th, 1/4th, or other)

>…my assessment is that timesharing will be the first to experience growth and recovery. Next, will be the fractional market, driven by the desire of consumers for value and a reduced financial commitment as compared to whole ownership. Finally, whole ownership second homes will begin their recovery. Overall, the year ahead will be focused on rightsizing, stability, and reestablishing the financial conditions to support the industry. In 2010, I predict the recovery of the timeshare business as they begin to rebuild their marketing and sales organizations to align with an increased buyer base. In late 2010 and 2011, we’ll begin to see the recovery of the fractional market.

>First of all, through more education and public awareness! Secondly, as fear is replaced by more confidence and pent-up demand continues to build, I predict a surge in sales across the land. Thirdly, I see a burst in single family stand alone homes as brokers, buyers and sellers get more educated and exposed to this second home alternative.

So, what do you think? Good stuff in my opinion. Thanks for reading. Carl