Fractional Ownership research

The following page provides helpful research and analysis clarifying salient characteristics of traditional Fractional Ownership and Private Residence Clubs.
These comments do not address the Elite Destination Homes Model.

DEFINITION: These are both forms of Fractional Ownership, in which a group of 10-15 owners share the costs and use of vacation property usually offered in a resort-hotel. Fractional Ownership intervals are smaller as people generally buy only what they will use. This type of ownership is commonly offered by a real estate developer or hotel company. Typically, each co-owner owns a percentage of the property and is shown on the title and deed as an owner.

Private Residence Clubs are a more exclusive form of traditional fractional ownership.

Lack of clarity
Both Fractional Ownership & Private Residence Clubs (PRC’s) offer shared real estate ownership in a luxury vacation asset which is typically located in a resort. The distinctions between Fractional Ownership & Private Residence Clubs are unclear to most people. Furthermore, PRC’s are commonly confused with Destination Clubs. Generally speaking, PRCs are of a more exclusive nature than Fractional Ownership with fewer owners and brand name sponsors.

KEY CHARACTERISTICS

Fractional Ownership
Fractional Ownership properties offer equity for a fraction of the cost and no maintenance responsibilities.
Considering the average vacation home buyer uses the property just three to four weeks a year, Fractional Ownership tends to reflect an owner’s actual use of a vacation home. Buyers enjoy ownership privileges at high-end luxury resorts for a fraction of Sole (home) Ownership. Fractional Ownership (except Elite Fractional) buyers tend to purchase only what they plan to use vs. viewing the property as both a vacation home and an investment asset. Fractional Ownership buyers typically have a recorded deed and title.

Private Residence Clubs
A few of the key features of PRCs can be summarized as follows:

• Private Residence Clubs almost always are based in one location
• They typically offer members 20-60 days of usage, depending on the membership plan
• Private Residence Clubs often seek assets located in resort and hotel settings
• They allow members to rent multiple units if they bring more guests than one unit can manage

While these two sub-categories share far more similarities than differences, the following table summarizes some salient distinctions:

	$/Square Feet	No. of Owners	Ability to Trade	Sponsor Fee	Brand Name Sponsor
Fractional	<$1000/SF	8 – 13	Yes-Varies	100%-200%	Less so
PRC	>$1000/SF	6 – 10	Yes-Varies	100%+	Yes

Real Estate Fractional Ownership & PRC buyers’ characteristics
After conducting extensive studies on Fractional Ownership buyers, PriceWaterhouseCoopers cites the following key factors that impact purchase decisions for Fractional Ownership:

• Access to a highly desirable location
• Residential features, such as fully furnished accommodations; and
• Overall ease of the fractional ownership experience.

The consulting firm also highlights three resort features that commonly stand out as being critical to a majority of potential fractional buyers. These include

• A Pool;
• Premium bedding; and
• High-speed Internet access.

Awareness levels
Recent surveys conducted by PricewaterhouseCoopers (PWC) have revealed that “almost half of all U.S. households have heard of Fractional Ownership as a shared leisure real estate option.” The consulting firm also reports that “Forty-one per cent of high-income households have heard of Fractional Ownership or PRCs as a real estate ownership option while 17 percent indicated they were very familiar with the concept.” However, despite the up tick in buyer awareness levels, the timeshare concept remains the most widely recognized shared ownership model.

Leading Players
According to various industry sources, the following companies mentioned below are major industry players that in one way or another have contributed to the evolution, awareness and popularity of the world's most successful PRCs and Fractional Ownership offerings:

• The Timbers
• St. Regis
• Raffles
• Fairmont Resorts
• Regent
• Marriott Grand Residence Clubs
• Ritz-Carlton Clubs
  

The option is growing in part due to buyers’ uncertainty and the desire for the confidence that comes from having a brand name sponsor. This branding benefit comes at a premium price of about 15% over an unbranded alternative property.

The following report card gives a snapshot of the key ‘Travel’ and ‘Investment’ considerations that can be associated with the Fractional Ownership/PRC segment.

KEY: = Best = Good =Fair = Poor = Worst

FRACTIONAL OWNERSHIP/PRC REPORT CARD^SM TRAVEL DECISION DRIVERS

TRAVEL CONSIDERATIONS	KEY DRIVERS	COMMENTS	RATING
FREEDOM AND FLEXIBILITY	Variety of Destinations Size of the Asset (home) Timing & Length of Use Spontaneity of Travel	Stronger models provide the ability to access sister properties. Use schedules are highly structured.
“OUR PLACE”	Control Privacy (e.g., personal effects) Small Number of Other Owners Selection/Screening of Other Owners	The sponsor will generally have a one-size-fits-all approach. Size of owner group can be as large as 13.
“WOW FACTOR”	Asset (home) Quality Amenities & Activities Design Proximity to Natural Attractions (e.g., view)	This is generally a strong point with this model, especially with premier brands.
“NO WORRIES”	No Management Headaches Service (pre trip + onsite) Reporting Single Point-of-Contact	Also a strong feature of this model with established and successful operators.

 

INVESTMENT DECISION DRIVERS

INVESTMENT CONSIDERATIONS	KEY DRIVERS	COMMENTS	RATING
APPRECIATION & PRESERVATION POTENTIAL	Buy it Right (Make most of your money when you buy) Market Factors (Supply & Demand) Sponsor FeesVariety of Destinations Size of the Asset (home) Timing & Length of Use Spontaneity of Travel	Developer mark-ups are rich, but not as onerous as timeshare.
PRIDE OF OWNERSHIP	Brand and/or Beauty of Home/Destination Charitable Donation of Excess Time Bragging Rights Small Number of Other Owners	Can be quite high with premier brand properties.
COST OF OWNERSHIP	Initial Investment Rental Income (less expense and debt service) Carrying Costs My Time required to Manage It	Initial cost can be lower. But value is weak as sponsor fees increases as size of fraction decreases. Rental income varies but is shared with sponsor.
LIQUIDITY	Sell Minority Interest Sell Entire Asset Retain Ownership if Others Want to Sell Estate Issues (Heirs want to sell)	There is no established secondary market. Brand name offerings will fare better. Always subject to selling minority interest.