Luxury Living International predicts growth for fractional ownership and private residence clubs
Who doesn’t want to experience the good life and enjoy the pleasures that come with owning a luxury vacation home in the Caribbean or Latin America? You’ve worked hard and earned your success but spending millions on the posh Aspen pad, the Caribbean Villa or the private jet is still tough to justify even if you have the cash. For many, making those goals a reality is only possible through fractional ownership; all the luxury – at a fraction of the costs.
Just four years ago, luxury second and vacation homes were the fastest growing segment of residential real estate. Baby boomers flush with cash and equity in their primary homes decided to live the dream of owning that opulent second home in places like the Rockies, Florida, Mexico and the Caribbean.
Between 2003 and 2006, luxury developments were selling out in months, in some cases, weeks. Now, those days are gone, probably forever. With much of their equity evaporated and the pile of fun money dwindled, baby boomers have pulled back from the $1M or $2M dollar vacation villa perched on a warm sunny beach.
But, there is one thing that has not dwindled — their desire to enjoy time and reconnect with family and friends in a beautiful location in a luxurious home in Bermuda, or on a white sand beach in St. Barts, or the Dominican Republic. From younger wealthy consumers to millions of Baby Boomers, consumers still have the urge to travel, to have exotic adventures and to do it all from a luxurious vacation home instead of a cramped hotel room. After all, they’ve still earned it.
But spending a couple of million on a beach house that you will probably only a use three or four weeks a year, for most, doesn’t make much financial sense. Upkeep expenses, maintenance hassles, taxes, and property management can really take the fun out of relaxing on the beach or playing a round of golf in paradise.
Luckily, for active and affluent vacationers, back in 1990 an advertising executive in Park City, Utah’s stylish Deer Valley ski resort came up with an idea that changed the vacation home ownership model forever. Steve Dering observed that multi-million-dollar Deer Valley vacation homes sat empty most of the year. Dering’s idea: build the luxury residences the Deer Valley market wanted, provide use that mirrored Deer Valley homeowners, offer more services and amenities than any other real estate product, and make the ownership price and annual cost proportionate to the amount of time they’d use it by spreading them among six owners per residence. The result was the Deer Valley Club.
Hence, the first private Residence Club, the luxury segment of fractional ownership, was born. Today, that simple concept has spread far beyond ski resorts and meets the needs of a new buyer for whom luxury and efficiency go together, and their playgrounds are North America, the Caribbean, Latin America and Europe.
The shared ownership business model has now grown into a billion dollar per year real estate option that is expected to grow at a much more rapid rate than traditional vacation home ownership. According to research done by Ragatz Associates there were over 200 residence clubs and other fractional developments in North America in 2006 alone and fractional ownership can now be found throughout the world. Others concur, “Fractional ownership is indisputably growing in popularity as the vacation home market continues to evolve,” said Scott D. Berman, Principal, and Hospitality & Leisure Practice at PricewaterhouseCoopers. “Despite the increase in product awareness, there are many US households with means who are still not familiar with fractional ownership and its lifestyle attributes, creating demand-side opportunities where fractional ownership is suitable.”
To put it into simple terms; The real estate is owned as deeded real estate or deeded equivalent in a corporation owned by individuals; each owns a percentage share in the asset and has equal rights and privileges to using the property. Normally a management company provides the daily asset management overseeing upkeep hassles and typically provides services often similar to those you would find in a luxury hotel. From transportation and travel services and grocery shopping to housekeeping, private chefs and pool butlers seems to be the norm in luxury fractional real estate.
Dering is now a principal and founding partner of DCP International, a consulting firm that has brought more than 30 residence clubs to market. He noted that residence clubs were the fastest growing segment within the vacation home market when the recession hit.
“There’s no question that our sales have slowed during this downturn,” Dering said. “However, existing clubs are still selling, albeit at a slower pace, and we are in the process of converting stalled whole ownership developments into residence clubs at ‘reset’ prices. Our concept makes even more sense now that the investment incentive has been removed from the vacation home purchase.”
Bill Shea, with Palms International and a partner in Cielo del Mar, a new boutique fractional project in Las Terrenas, a growing area on the Dominican Republic’s northern coast explains “Our research showed that most people only used their second or vacation homes 20-30 days per year. The fractional ownership model is appealing to more and more affluent buyers even allowing consumers who may not be considered wealthy to enjoy our luxury beachfront villas at a fraction of the cost. And they have many of the services and amenities of a five star resort, services that a single vacation homeowner can’t enjoy without substantial costs and management”.
Some luxury hotel groups run their own private residence clubs including Ritz Carlton, St.Regis and Four Seasons. Occasionally membership in a private residence club grants to its members only a right to use the club properties and services without ownership in the properties themselves. But in the case of Cielo del Mar, a Private Residence Club in the Dominican Republic, members own the real estate and share in potential appreciation. And ownership is a fully transferable asset like any real property.
In addition to luxury fractionals and private residence clubs, single “stand-alone” vacation homes can be converted into fractional ownership. Converting a vacation home can be accomplished by any knowledgeable seller or through a fractional consulting company such as the Palms Collection in the Dominican Republic. The benefit of fractional home conversion includes the ability of the homeowner to keep a portion of the ownership for themselves if they wish, cashing out some of their equity or to pay off debt and offset expenses.
The benefits of fractional home ownership are so compelling that many people who could easily afford their own place are opting for the fractional ownership model instead. Perhaps even more surprising, many people who already own vacation homes are choosing to sell some fractional interests in order to lighten their cost and management load while maintaining use of the property, as often as when they were the sole owner.
Without sounding like a sales pitch, it’s hard to find something that doesn’t make sense about fractional ownership. Lower acquisition costs offer more home for the buck than you could or would normally afford, professional management and luxury resort style services make it easy to see why fractional ownership and the residence club model is predicted to be the fastest growing segment of vacation and second home ownership for a long time to come. It just makes good sense.