February 2010 Developments - 30

Fractional Focus Whole Ownership to Fractional Conversions—Tips & Pitfalls M any developers who brought whole ownership condos or second homes to market during this economic mire are barely staying afloat. In numerous situations, the lender has taken possession of such assets and is desperately trying to make them cash flow. A conversion of some whole ownership inventory to a fractional offering may be a life preserver for some. For others, it will only worsen the financial distress. As you consider offering fractional real estate, recognize that the industry is not recession-proof. The fractional real estate industry grew rapidly in the early 2000s, as documented by Ragatz Associates. By 2004, the industry reached $1.5 billion in sales revenues and grew steadily for the next three years, reaching $2.3 billion in sales revenues in 2007. By 2008, however, total sales revenues were again estimated at the 2004 level of $1.5 billion. At print-time for this article, no industry-wide data was available for 2009; but by all anecdotal accounts among industry insiders, 2009 will show further declines. The latest update on 2009 sales activity will be presented at the Ragatz Associates Fractional Interest Conference in March 2010. Despite all these changes, however, the industry’s decline between 2007 and 2008 was less dramatic other industries’ that are vying for discretionary consumer dollars. As Dick Ragatz pointed out during the Ragatz Associates Fractional Interest Conference in March 2009, fractional real estate sales were down 34% in 2008—compared to the stock market, which was down 38%, whole ownership vacation home sales (down 41%), boat sales (down 39%), and motor home sales (down 35%). As discretionary spending goes, maybe fractional real estate offers slightly less gloom during a recession. Major developer players in the fractional field albeit did suffer significant setbacks in 2008-2009 in markets all around the world. Add to this information the severe absence of acquisition and development funding available for new resort real estate projects right now, and we can assume that new purpose-built fractional developments will likely be more limited in the immediate future. Despite this outlook, many industry experts believe the industry will come back strong because of the value proposition it provides. Assuming that the credit crunch eases and fractional consumer financing re-emerges in the next 12 to 24 months, it is expected that fractional real estate sales volumes will ascend again. Existing fractional offerings that have been able to weather the downturn and well-planned conversion offerings will have both appeal and an advantageous market position. Sarah Rezak Tips In our current economy, speculation coupled with unsustainable yearly appreciation is gone. It follows that when second home purchases are made, consumers will buy for their own use and will want only the amount of time they can use (i.e., fractional). The general desire to preserve wealth will certainly not dissipate soon, and it follows that consumers will buy what they can afford and justify. The desire to spend time with family while on vacations lends itself to the product because it provides hassle-free ownership, typically with hotel concierge level services. The flexibility available through rentals and exchange will continue to be attractive for potential owners. As a developer having trouble selling a million-dollar home in today’s marketplace, it is easy to consider fractional conversion. Why not try to sell fractions of each home in $200,000 increments? It’s a great product when it works, but it will not be successful for every project. How do you know if fractional ownership conversion is right for your whole ownership property? There will be no demand for fractional real estate where there has been no historical demand for vacation homes in the past. Successful fractional offerings in a healthy economy provided exclusive access to multi-million dollar experiences at rational and affordable prices. Scarcity and market demand are key ingredients to create the urgency needed to motivate purchases. If a development of whole ownership condominiums includes 200 homes, do not expect that fractional is the answer to sell out the community. It might provide a complementary offering for a handful of homes, but it could easily not be a good fit for the market. A healthy tourist market with a vast tourist infrastructure nearby is also critical. Potential consumers should want to visit the area often at a variety of times throughout the year, and tourism demand overall should be fairly stable. Access to the fractional home should be relatively easy and typically less than five hours total travel time from the primary residence of the consumer. Within a tourism-based community, fractional offerings must offer A+ proximity to appealing amenities (ski hills, beaches, golf courses) and/or remarkable views. Notes of Caution Putting all of these location issues aside, some additional challenges for Developments • February 2010

February 2010 Developments

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