Thanks for Sharing
Proponents of shared ownership see it becoming an important choice in a menu of options for resort ownership.
By Camilla McLaughlin
Ask owners of residence clubs, fractional properties or destination clubs what they like best about shared ownership, and they often say, “You just show up and you start to have fun right away.”
Having fun goes to the essence of ownership of resort and vacation homes. “It is the most underestimated reason to buy [a vacation property]. It’s a quality of life purchase, and what other investment can you say that about,” observes Chris Cain, a RE/MAX agent and author of “Your Made in the USA Home.”
For the affluent, having fun today often means being with family or friends, possibly multiple generations, often enjoying a variety of experiences in many different places in a single year. Making that a reality without the hassle of owning several properties, and also without compromising on quality, authenticity or a high level of service, is at the heart of the fractional or shared ownership vision.
Leading up to the financial crisis, interest in private residence clubs, destination clubs and other forms of shared ownership surged, making fractional ownership one of the strongest sectors in the resort marketplace. In 2007, fractional sales volume peaked at $2.3 billion. Since 2012, the shared ownership sector has hovered at or below $517 million in annual sales, with the volume for 2014 at $514 million, well below the record set by second homes overall.
Last year, sales of traditional vacation homes increased by 57.4 percent over 2013, reaching 1.13 million transactions, the highest number since the National Association of Realtors (NAR) began keeping tabs. Lawrence Yun, NAR’s chief economist, attributes the recovery in part to growing confidence among upscale consumers. “Affluent households have greatly benefited from strong growth in the stock market in recent years, and the steady rise in home prices has likely given them reassurance that real estate remains an attractive long-term investment,” he observed.
Everywhere a Sign
Experts in the shared ownership sector expect the same confidence and growth in equity among the wealthy to kickstart fractional sales. “During the recession everybody stopped buying everything,” shares Steve Dering, who pioneered the first residence club in 1991 and also founded DCP Partners, which specializes in equity residence club developments. “First primary, and then vacation home residences, and now fractionals are starting to come back. Within the last month I’ve gotten calls from developers in Hawaii, Fiji, Sun Valley. It’s coming back and I am thoroughly convinced the logic is as strong now as it was before the recession. In fact, in some cases, people who may have purchased whole ownership pre-recession will purchase residence clubs because there is less risk.” In many cases, he says, just the return on savings for vacations justifies the cost.
By mid-summer, reports of sales in a number of diverse locations and clubs were a good indicator that the fractional market might be coming back to life. New properties such as Fairmont Heritage Place Mayakoba, Mexico (which opened in March), came online. A few others, after being entangled in the financial melee, returned to the marketplace, often offering new incentives and a refined consumer focus. After 2008, marketing for The Cloister Ocean Residences at Sea Island, Georgia, virtually came to a standstill and Sea Island Company’s assets, including The Cloister Hotel and The Lodge, were eventually sold to a consortium of investment banking groups. This year, “marketing and development have kicked back into high gear,” says Randy Burgess, a veteran of the shared ownership industry who was brought in to revive marketing and sales
efforts. “We’ve had great success this summer already,” he says. Not only have interests sold, but a number of current owners have bought second ownerships. A purchase in these residences includes a membership in the Sea Island Club and provides a legacy for future generations.
At Christophe Harbour, a new luxury resort development in St. Kitts, all 10 shares in the first villa at the Windswept Residence Club sold before it was completed this summer, and 40 percent of the remaining villas in the first phase also are under contract. In addition to a super yacht marina and Tom Fazio golf course, Christophe Harbour includes restaurants, shops and a mix of residential opportunities.
Exclusive Resorts, the largest and oldest destination club, continues to expand and refine opportunities with over 400 residences and experiences. In 2013, Inspirato, which relies on a collection of rented properties, partnered with American Express.
Another industry leader, Timbers Resorts, expects to pass the billion-dollar benchmark for real estate sales this fall. Greg Spencer, Timbers’ CEO, attributes their success to a “property-centric” focus on legacy locations such as Aspen, Napa or Tuscany, which he characterizes as high barrier markets. “I think the thing that helped us navigate through the credit crises is that we’ve always led with location, location, location.”
Looking back on some of the industry’s growing pains, Spencer observes, “A lot of people either overpaid for land or got greedy. A lot of people weren’t grounded in what market they were serving, what location it was in and the underlying strength of that location.” Stability is a concern he rarely hears from potential buyers. “That was a bigger question three or four years ago. That’s been mitigated.” As an example, he points to their club in Tuscany, where owners are funding additional construction. “They have enough confidence in that market to do that. That really tells me the [shared ownership] market is going to come back,” he says.
Consumers’ New Mindset
“If you look at past cycles, shared ownership has been the last to recover, so it feels like we’re gaining momentum in that sense. I think that coming out of the downturn people were very skittish. Second home ownership was frowned upon. People were kind of gearing down and looking at their own finances. Now, they’re starting to open up,” says Kevin Morgan, vice president of acquisitions and finance at JMA Ventures, the developer of Fairmont Heritage Place, Ghirardelli Square, San Francisco. At the same time, he says, affluent consumers are also asking, “Do I really need to have a home 365 days a year, with constant maintenance, upkeep, et cetera, when I’m only using a second home 35 nights or 40 nights a year?”
In the post-recession consumer mindset, lifestyle might be important, but there is a sense of practicality that was absent during the run-up to the boom. “I think that consumers have gotten a lot more savvy,” says Morgan.
“People are more careful about investing and more mindful of how they spend money, even though they have a lot of money,” says Burgess.
Another reflection of this new practicality are evolving attitudes regarding rentals, particularly if there is an onsite management company or affiliation with a luxury brand. This shift extends to resort properties overall, as the new owners of the Pronghorn Club in Bend, Oregon, discovered. “It makes financial sense in today’s market, rather than a true second home that sits empty 10 months of the year,” says Michael Kosmin, The Resort Group project manager. “We are seeing more younger buyers and they have a bit more concern about the financial future.” Sales at The Residence Club at Pronghorn are expected to resume this year.
For marketers, the challenge presented by luxury fractional ownership hasn’t changed. There is confusion about the concept, which many still equate with timeshare, while the industry claims luxury fractionals and private residence clubs are an entirely different product.
Another misconception is that it’s an entry-level product for people who really can’t afford to buy at Sea Island on the oceanfront or ski in/ski out at Aspen or Vail. Burgess explains: “Having done this for 30 years all over the world, I can say that’s not the case. The buyers we’re selling to are the same buyers who ordinarily would have bought something on a whole ownership basis, until they understand the economic benefits of owning a fraction of it, especially when they’re not yet retired. They’re not spending extended time here, and they’re still busy running their businesses. Most of them have one or more other vacation homes already in other areas, so this is the ideal way to more closely align their initial investment to their practical usage, and it also reduces their ongoing carrying costs.”
In their latest annual report on the shared ownership resort real estate industry, industry consultants Ragatz Associates identified 304 fractional interest and residence clubs with 242 considered inactive because they are sold out. Of those in active sales, 26 were private residence clubs, which Ragatz defines as products selling for more than $1,000 per square foot. Owners have the opportunity to stay in a network of other properties through sharing relationships such as those offered by Elite Alliance. Many also offer a huge range of other perks. Like many premier brands, Fairmont offers owners an exchange with their other residence clubs as well as top tier status in the Fairmont President’s Club.
State of the Industry
Mergers and acquisitions have winnowed the number of destination clubs down to six. Unlike a residence club, which sells a deeded interest in a property, destination clubs offer memberships, often as long as 30 years, that guarantee use of a wide network of high-end vacation homes, often in a global roster of destinations. Historically, there was no equity involved with destination clubs, although some new hybrid ownership arrangements attempt to bridge the equity gap. Others offer new ways to participate in a network of homes.
Instead of a membership in a club, Rocksure Property, Ltd., offers an equity share in properties owned by several different funds. Shareholders are entitled to stay in the fund’s properties, which include a global collection of fully staffed villas with private pools or collections of luxury apartments in London or New York or other cities. The real estate is 100-percent owned and fully staffed. A planned exit strategy calls for properties in each fund to be sold at the end of 10 years. The first fund sold not too long ago and Rocksure’s founder, Alistair Ballantine, had an opportunity to learn what shareholders had liked best. They said, “We love the places where the villas were and we’ve enjoyed being able to stay and use them enormously, and if we get our money back, we’ll be very happy. If we make a gain we’ll be even happier.” Equity Residences also offers shareholders a similar investment opportunity.
Other spinoffs from shared ownership include luxury vacation clubs and exchanges for owners of luxury resort properties. Founded in 2010, 3RD HOME was devised to give luxury second home owners a way to optimize the potential of this asset. To be accepted in the program, a home must be in a desirable location with quality furnishings, appointments and amenities. 3RD HOME members also have the opportunity to stay at the five Ritz-Carlton Destination Club locations.
Onefinestay takes the rental concept offered by Airbnb or Home Away to a higher level by adding amenities such as top-notch linens and toiletries, and a higher degree of scrutiny. Before a home is accepted into the program, onefinestay does their own inspection to ensure quality. They also photograph everything in the home, which gives owners more security. Before each stay, a team goes in to replace linens and make sure the house is in tip-top shape. After a guest leaves, owners’ linens are returned and the home is inspected. Along with London, where it began, onefinestay has upscale properties in New York, Paris and Los Angeles.
Looking ahead, developers will continue to evolve and explore alternate forms of ownership. Private residence clubs already are appearing in new types of communities such as Carlton Landing, a new urbanist community on Lake Eufaula, Oklahoma. Another new offering, the Residence Club of Argentina, has properties in three prime locations — Buenos Aires, Mendoza and Bariloche on the edge of the Andes.
Dering and Burgess expect private residence clubs and upscale fractionals to, once again, become essential to the variety of residential real estate offered in new mixed-use resort communities, along with a premium hotel. In some parts of the world, it is difficult to develop a hotel without a residential component, including a residence club, according to Kevin Frid, president of the Americans for FRHI Hotels & Resorts.