Luxury Returns On Lifestyle      

EMERGING MARKET TRENDS

Historically, vacation home buyers have employed the successful method of shared ownership and usage in an effort to defray costs for second homes which are generally used infrequently. Over the years, the vacation ownership industry has diversified into several categories to appeal to a wide range of travelers in a variety of income brackets.

For the upscale consumer, one of the hottest trends in vacations today is the high-end market for fractional ownership of luxury homes in "private residence clubs". These fractional homes are generally located in a five star resort environment featuring premium quality accommodations with country club style amenities and special services.

THE EXISTING FRACTIONAL OWNERSHIP CONCEPT

Fractional Ownership is usually defined as 4 to 12 weeks fixed ownership in a luxury home. While fractional ownership resorts originated in the 1980s, the category has experienced a surge of growth in recent years as high-end hotel chains, such as Ritz Carlton, Four Seasons and Starwood, and other smaller developers have rushed to meet the upswing in demand. According to research by Ragatz Associates, a leading researcher for clients in the global leisure travel industry, total sales volumes increased from nearly $90 million to $470 million between 1999 and 2000, experiencing an industry growth rate of 115% in 2000 and 24% in 2001. The rest of the industry grew only 15% in 2000 and 8% in 2001.

"The fractional market shows strong growth during the past several years, particularly in the high-end segments. For consumers, fractional interests provide the opportunity to own the vacation home they always dreamed about, often with a higher level of services and amenities, in a package that is easier to afford and maintain than a whole ownership vacation home of comparable quality,"
Richard Ragatz, Ph.D. - President, Ragatz Associates.

The majority of recently completed fractional-style properties are located in the Rocky Mountain ski areas, but the concept is spreading rapidly to other popular resort destinations in the United States, the Caribbean, Mexico and other international vacation hotspots. As of April 2003, over 138 fractional interest resorts could be identified, with an additional 31 in various stages of planning.

The accepted methodology for fractional sales is to base the unit prices on the value of luxurious wholly owned resort products, on a per-square-foot basis, applying a 1.5 to 2.0 multiplier to this value and divide by the number of shares per unit to obtain the price for a fractional share.

•  An example of typical costs would be as follows:

Average value of wholly owned vacation homes in area:	US$ 600/sq. ft.
Times average unit size of home:	2,000 sq. ft.
Equals wholly owned value:	US$ 1,200,000.
Times (1.75) equals unit value as a fractional:	US$ 2,100,000.
Divided by number of fractional (1/10 fractional):	10
Equals average fractional price for 4 weeks ownership which the owner will be able to sell, lease or will over the life of the investment:	US$ 210,000.

 Note: This leaves two months for maintenance and incidentals.

The multiplier (1.75) chosen is both market and cost driven. The multiplier must reflect the market conditions and perceived quality of the destination resort area. However, areas with more expensive land and high construction and marketing costs require a higher multiplier in order for the fractional return to be adequate for the risk incurred. For example, Aspen, Colorado justifies a higher multiplier because Aspen is a popular destination, and because land and home prices in Aspen are among the highest in the nation. The multiplier is also justified because buyers are willing to pay more for the availability of five star hotel services.

Even though the square foot price of fractionals are 50% to 100% more than wholly-owned condominiums, the total price paid is still less because of the smaller interest in the property.

In addition to the purchase price, annual maintenance fees are charged, similar to homeowner association fees in a wholly owned condominium. These fees typically range from $4,000 to $9,000 per year. There are also daily housekeeping fees when using the property.

The latest reports show a full 96 percent of luxury fractional owners express the desire to purchase additional fractional interests. However, according to Ragatz Associates, nearly 50 percent of existing private residence club or fractional owners have indicated interest for an external exchange program. Currently, private residence club owners have the opportunity to experience a "second home" atmosphere. However, in many cases their only flexibility is in seasons but not resort locations. As this interest in a more flexible exchange market accelerates, a unique investment opportunity exists to meet this demand.