Fractional Property - The New Normal

The resort real estate world has radically changed in the last six months.  Those of us in the luxury resort development industry are faced with the most challenging environment in generations. There has been a monumental change in the economy.  Hence, the "New Normal"

We in the luxury resort industry need to adapt to the "New Normal." and continuously monitor events so as to be responsive to evolving circumstances.

If we do, we can and will prosper.

If we don’t, we won't.

In this Paper, we will explore the changes in the product and in purchaser  resources, motivation and psyche.  We will then outline a specialized Luxury Fractional Program designed to be responsive to "the New Normal."

This Paper is directed to developers and investors and to prospective Owner Members in luxury fractionals.  We will set forth the advantages of our specialized luxury fractional program to each group. 

The bottom line is that there are substantial bases for optimism, not the least of which is the degree of "dry powder" on the sidelines.  In past recessions, the ratio of private capital outside equity markets relative to the capitalized value of equity markets was low.  In contrast, today an unprecedented $9 trillion of capital, or nearly 75% of the capitalized value of the Dow Jones Index, sits idle, earning little or no returns.  A significant portion of this  capital will inevitably return to the luxury real estate market. 


In the "New Normal," whole ownership sales of second homes have come to a virtual standstill.  At the same time, sales of luxury fractional interests have continued at a respectable, normal  pace. While they have obviously declined somewhat in the current climate, the decline has been much less than whole ownership real estate.  The evidence is that fractionals will be the first to rebound in the recovery and will become a dominant product in resort real estate.   The dominance of luxury fractionals is a natural evolution from prior vacation real estate structures. 

However, the inquiry cannot stop there.  No one needs a second home – it is clearly a discretionary product.  We may all want a second home, but wanting it is not synonymous with buying it. 

We will explore how to move the consumer from "wanting" to "buying."


The most significant changes are a result of significantly reduced personal net worth.  The value of 401K plans, stock portfolios and first homes has deteriorated.  Consequently, consumers are either unable or disinclined to purchase second homes at this time.  The basic question is when this situation will change.

The current climate is replete with uncertainty.  Prospective purchasers ask   Has the market hit bottom; how will I know when it hits bottom; how do I know that the development is sound in terms of planning, management, finance, etc.?  Perhaps most insidious is what we would call "free flowing anxiety" – where a prospective buyer may not be able to point to the specific cause for anxiety, but he or she just feels it.

One consequence of this anxiety is the pressure on prospective buyers to make an economically sound purchase in terms of price point and ongoing carrying costs.   Another consequence  is that the sense of trust between the resort real estate industry and potential consumers has been attenuated if not broken, resulting in buyers significantly increasing their due diligence prior to purchase.  Buyers in the "New Normal" will focus on reducing the unknowns.    Full disclosure is essential.  Prospective buyers want straight accurate disclosure so they can believe they are making a wise decision.  "Tell it like it is."

A consequence of the reduced net worth is that with regard to general real estate, it is more difficult to sell luxury whole ownership real estate.  NorthCourse Leisure Real Estate Solutions ("NorthCourse"), a leading industry feasibility analyst, points out an interesting distinction with respect to the luxury fractional market in its 2009 report on the American fractional market: 

        ", PRC share prices are trending much higher together with larger sizes and more exclusive locations.  In the 1990s, share prices were seldom over $300,000 and often began well under $200,000.  Today, average prices for new PRCs are in the mid $300,000's, and now range up to $3 million.  It is not unusual to find 3 and 4 bedroom residence clubs priced at over $500,000 per fractional share.  Prices per square foot are also increasing and there are many projects selling for well over $1,500 per square foot in exclusive 5 star national and international resort destinations.  The highest price in the market is $8,500 per square foot.  A select number of projects in the planning stages will sell for over $2,500 per square foot."

        These trends underscore the validity of the luxury fractional because (a) the affluent still want the trappings of luxury and don't want to change their habits; but (b) want the affordable prices available in  luxury fractionals.

A.        Luxury Fractional PRC Growth

NorthCourse states in its 2009 fractional interest report on the U.S. market that: 

"...The [fractional industry] is still in its infancy and has not been exposed to the majority of the market.  Considering that 80% of the income qualified households in the U.S. do not own a second home, the market is deep.  Even 5% market penetration would produce over $4 billion in sales."

NorthCourse further comments that:

    "In the future, fractional developers expect fractional sales to continue gaining  market share over  whole ownership.  Due to high land and consumption costs, fractionals are the only economically feasible residential use on many prime development sites.  These costs drive the price of whole ownership beyond what the market is willing to pay.  The demand for high priced second homes is diminishing currently and into the foreseeable future."

As NorthCourse notes in its 2009 report on the European fractional industry, fractionals are at the "cutting edge" of the resort real estate industry and will experience "substantial growth" on a global basis. 

NorthCourse has previously commented that:

    "The fractional product is clearly robust and set to grow.  It appeals to people who want to purchase leisure real estate without the expense and aggravation of a wholly owned second home even though they can afford one.  The current economic uncertainty appears to be having a positive effect on fractional sales, as the managing of expenditure and the value of investments becomes more important than ever."  Perspective Magazine, October 2008, Page 46.

    See  the special report of the London Daily Telegraph, October 2008, entitled, "An Introduction to Fractional Ownership":

    "Fractional ownership is a phenomenon that is flourishing.  While traditional luxury business product markets sink, and numerous business sectors batten down their hatches, it's a market that continues to thrive apparently undaunted by the wider western economic downturn.  If anything, the market is actually growing." 

See also the Sunday Telegraph supplement of June 7, 2009:

"Analysts and experts agree shared ownership is the future, not just in property but in other key lifestyle areas."

According to Ragatz Associates ("Ragatz"), a leading feasibility analysts in the fractional industry, significant further expansion of the industry can  be anticipated.  Ragatz has opined that existing PRC owners represent only 1.5% of income qualified households and that with the following penetration rates, the following would be the number of households owning PRCs. 

Penetration Rate                 Additional Demand – Number of
Qualified Households

        5%                            147,500
        10%                            345,000
        15%                            542,500

B.    Reasons for Growth of Luxury Fractionals/Advantages to Owner Members; Advantages to Investors and Developers

The average use of second homes in the United States is approximately four weeks annually.  A dramatically growing segment of the second home ownership market has the means and desire to own a second home but is not prepared to tie up substantial assets in owning and maintaining a single property that will be used for only a few weeks a year.  These purchasers want to be free of the burdens of absentee property management.  They ask, "Why pay 100% of the cost of a vacation home used only a fraction of the year?"  For these buyers, the decision to purchase a luxury fractional ownership makes good financial sense.  Moreover, fractional affordability allows the buyer an opportunity to purchase much higher quality than he or she  might otherwise acquire .

From the perspective of investors and developers, luxury fractionals broaden and diversity the market  by creating new demands through better market price points which usually result in increased profitability.

Moreover, luxury fractionals offer potential for greater profit from a particular property than would otherwise be realized if it was sold as whole ownership.  Industry experience is that revenues from vacation homes sold as fractionals generate 1.5 to 2  times the proceeds of the home sold as a whole ownership.  The following examples illustrate why fractional sales can generate additional revenues

•    Assume a whole ownership price of $2,000,000 and a 1.5 fractional multiplier, meaning that fractional revenues would be $3,000,000 .  The average price of a 1/10 fractional in this example would be $300,000 , or 15% of whole ownership cost.

•    Assume a 1.75 fractional multiplier, generating $3,500,000 in revenues, the average price of a 1/10 fractional would be $350,000, or 17.5% of whole ownership cost

•    Assume a 2.0 fractional multiplier, generating $4  million of fractional revenues, the average price of a 1/10 fractional would be $400,000, or 20% of whole ownership costs.

C.    Luxury Fractionals in the Current Economic Climate.

Many industry professionals believe that luxury fractionals are the strongest segment of the vacation home ownership industry and will be the first to recover when the economy inevitably turns around.  As pointed out above, today's buyer realizes that actual vacation home use is rarely more than a few weeks a year and accordingly, that  luxury fractional ownership makes logical financial sense.  This recognition is borne out by luxury fractional sales statistics in 2007 and 2008. 

1.  Performance in 2007

Ragatz has reported that 2007 luxury fractional PRC sales reached $2.297 billion, an increase of 12.4% in sales volume and 8% on the average price per fraction over 2006.   NorthCourse reported that 2007 fractional sales in the U.S., Canada and the Caribbean reached $1.98 billion, an increase of 20% over sales in 2006. 

This is notably better than the performance of whole ownership real estate in 2007.  The National Association of Realtors reported that sales of vacation homes in 2007 fell approximately 31% from 2006.

2.   Performance in 2008

Fractional sales did experience some decline in the 2008 macro economic climate.  However, Ragatz reports that:

•    North American luxury fractional and PRC sales reached $1.52 billion in 2008
•    While this represented a drop of approximately 30% from 2007 sales, in contrast, sales of wholly owned second or vacation homes dropped by about 40%
•    Moreover, the top fractional segment, PRCs, dropped only 24%

Ragatz and NorthCourse and many industry analysts opine that fractionals will be the first to bounce back when the economy improves and will become increasingly more popular than other vacation ownership types. 

Another industry expert, Sherman D. Potvin, founder of the recognized website, Luxury Fractional Guide, has commented that : 

"Even in the economic downturn of 2008, the fractional market was still the fastest growing real estate product."

"Despite the economy, fractional real estate is steadily selling, and... [though it] might not be selling as quickly...people are still buying." 

"Over the next year, we are going to see a substantial growth in the fractional industry.  The good news is that people are not going to give up their lifestyle.  They are still going to vacation in nice places.  Because of the current economy, many of those people who would have otherwise purchased a wholly owned vacation home will turn to the alternative vacation home market and fractional real estate will be there waiting." 

D.    Fractionals in a Credit Crunching Environment

Fractional mortgage financing on any large scale is virtually non existent currently.  As noted by NorthCourse, the fractional real estate market is less affected by the credit crunch because:

•    Many fractional buyers are cash buyers and thus not dependent on mortgage financing.  Moreover, if they do need to raise mortgage financing against their primary residence, they are likely to be in the category of consumers to whom local banks are still willing to lend by reason of their high primary home value and sound credit rating.
•    A fractional purchase is primarily a lifestyle investment as distinct from a purchase  motivated by investment factors. 

Moreover, from the authors' current experience and endeavors in this regard, fractional mortgage financing on a large scale is a distinct potential at this time.   

E.    A Program for "The New Normal" – a Multi Site Luxury Fractional PRC

Vacation homes are among the ultimate discretionary purchases – something most people want, but do not absolutely need.  Vacation homes can be hard to justify because of the expenses of whole ownership and the burdens of property maintenance.  In the ongoing effort to increase the attractiveness of vacation home ownership, each of the following vacation ownership concepts has, over the past 40 years, evolved into new structures seeking to improve on their predecessors.

•    Whole Ownership Vacation Homes – This is the classic "cabin in the woods"  or "cottage by the lake."

•    Whole Ownership Condominiums/Condominium Hotels – To help relieve some of the burdens of whole ownership, condominiums and condominium hotels offer property management services and rental programs and amenities such as pools, tennis courts, reception facilities and other such items. 

•    Time sharing – To make vacation ownership more affordable to more people, time sharing began as sales of individual weeks in vacation residences.  Early time shares were generally non deeded right to use interests.  However, the majority of today's time shares are deeded properties, due to buyer demand for real estate ownership.  They have moved up market, offering higher quality properties and more amenities and services.

•    Fractional Ownership – To further raise the quality level of time sharing, fractional ownership offers higher quality and service levels, and larger time intervals.  Quality is generally upper middle market or higher, but below that of PRCs. 

•    PRCs – PRCs are the highest end of the fractional ownership market.  They blend fractional ownership with the exclusivity, privilege and superior services enjoyed by members of fine city or country clubs.  Though there are a few hotel affiliated clubs with exchange rights at several sites, most current PRCs are single site properties. 

•    Destination Clubs (DCs) – There are two types of DCs – non equity and clubs characterizing themselves as equity clubs. 

These clubs provide an exchange network of sponsor owned properties.  Vacation planning and scheduling services are provided.  Membership is via a "refundable membership deposit" entitling members to vacation at the residences in the club's networks. 

In the non equity clubs, the sponsor owns all the properties.  In the clubs characterizing themselves as equity clubs, the members own the real estate on a pooled basis – not in individual fee simple deeds.  However, members do not have an essential indicator or ownership – free transferability of their memberships – because they are bound to sell their memberships to the sponsor – rather than to the free market.

Most sponsors guarantee membership "buy back" after certain holding periods.  However, buy back promises are predicated on the sponsor making a specified number of new sales, and most of the clubs do not have a reserve fund for these "buy backs".  Some clubs predicate buy back upon original cost – 80 to 100%; others predicate buy backs at 80% to 100% of current market value at the time of buy back.

•    The Multi Site PRC – A product for "The New Normal"

When the author (DMD) inaugurated the PRC segment in the mid 90s, he focused on providing a vacation experience – not simply the bricks and sticks of real estate.  While most potential Owner Members are aficionados of a particular resort, the popularity of DCs has demonstrated the appeal of having a network of available vacation properties.  Accordingly, a multi site PRC combines the benefits of individual deeded fractional real estate ownership and the services and amenities of traditional PRCs with the exchange network flexibility of DCs.  The Owner Member purchases a fractional fee simple interest in the residence of his or her choice, has priority use rights in the residence and use rights throughout the network. 

The multi site PRC is the natural evolution of DCs and PRCs, retaining  both the individual real estate ownership of PRCs and the multi site vacation benefits of DCs.   This evolution is comparable to that of timeshare from the initial right to use structure to today's deeded individual fee simple ownership.  The multi site PRC is the culmination of trends in the vacation industry – the desire for individual real estate ownership and the desire for vacation flexibility.

F.    Marketing and Sales 

Notwithstanding the performance and expectations for the luxury fractional segment, the analysis cannot stop there.  This is indeed a "New Normal" and marketing and sales methodology must adapt to that in order to be successful.  As we stated at the outset, the potential Owner Member must be moved from "wanting" to "buying" what is a distinct discretionary purchase. 

Prior to the current meltdown, many sales programs were built around a "launch" concept, creating "hype" and demand that was subsequently serviced by the sales agents.  In the new normal, this won't work.  We need to get back to basics.  That means techniques such as the following:

•    State-of-the-art web based programs
•    Public relations/strategic branding alliances
•    International marketing
•    Local broker programs
•    Focusing on personal relationships with prospective buyers incorporating one on one marketing – the art of relationship selling
•    Marketing strategies to allow prospects to experience the ownership and enjoyment of the luxury fractional  
•    Enhanced co op broker relationships
•    Constant monitored followup with customers, realtors and owners
•    Owner/Member referrals
•    Sales staff that is well trained in the distinct art of selling fractionals
•    Careful ongoing monitoring of each marketing and sales initiative and personnel
•    Creative incentives to drive traffic to the project
•    Additional on site incentives creating value and "fear of loss" when the prospective customer is on site
•    Strategies directed to re motivating previous visitors to return and take advantage of incentive driven offerings for a "new" release


There are many reasons for optimism, notwithstanding the current general climate. 

•    As pointed out above, in past recessions, the ratio of private capital outside equity markets relative to the capitalized value of equity markets was low.  In contrast, today an unprecedented $9 trillion of capital or nearly 75% of the capitalized value of the Dow Jones Index, sits idle, earning little or no returns.  A respectable portion of this  capital will inevitably return to the real estate market. 
•    The growth and performance of fractionals in the current climate is self evident
•    The 75 million "baby boomers" are still out there
•    According to the National Association of Realtors, 57 is the median age for second home ownership and there are 10 more years of growth in the number of people turning 57. 
•    Given the enormous influx of government funds to the private sector, inflation is a likely outcome.  A resulting flight to hard assets is therefore likely, benefiting the tangible nature of real estate.
•    Psychographic trends continue to support second home ownership – namely, increasing desire for quality time with family and friends, pursuit of good health and wellness.
•    Consumers' basic desires to own a second home will not change.  The current negative perception of Wall Street plus the potential inflation from government increases in the money supply will make real estate an attractive option.

- By David M. Disick, Esq. and Brenda Wild

Edited by Edwin H. McMullen, Sr.

image description