Try Selling Fractionals as Lifestyle, Not an Investment

---

The recent bankruptcy filing by Ultimate Escapes, the luxury destination club, provided further evidence of the tumultuous state of the fractional and shared-ownership industry.

In an interview during a recent conference in Miami, Fractional Life founder Piers Brown discussed the status of the industry and the value proposition for fractionals in a rocky market.


So what have you learned about the U.S. market?

The U.S. market has been good for a long time, especially in the fractional space. In 2007 the market was worth $2.1 billion dollars. That dropped in 2008 to about $1.6 billion. Now I'm pleased that it is holding up at $1 billion and it looks like 2010 will be a better year.

How is the market different today than three years ago?

A lot of people are questioning whether real estate is an investment play. And fractionals should not be sold as an investment play. That gets into the mindset: I've got a limited amount of cash. It doesn't really make sense for me to buy real estate at the moment as a second or third home if I'm not going to use it very often. And I think fractionals offer buyers an extra dimension. And also the buyer is more of a lifestyle driven purchase.

However it is still a discretionary purchase--very much experiential, discovery, having a good time.

I think the importance of the brand is very important in a down economy. Ritz Carlton Destination Clubs have held up well. Timber Resorts is holding up well.

One speaker suggested that in the past 80 percent of the product was new build and now it's almost all resorts that have been refurbished or reconfigured for fractionals.

Yeah, I think developers who recently have had to sell off plan, that's non-existent. Hopefully when the market comes back developers will use fractional as a way of upselling and cross selling what they have. And fractionals will be an alternative to whole ownership.

There is a concern that there is a lot of product in the market.

I think generally there is too much product out there, be it whole ownership, fractional or even timeshare.

So what is the state of the market?

Are we in a recession? It depends who you listen to. The two things that I think are important. The consumer, the buyer, is still in recessionary mode. The poison in the market is uncertainty.

That's generally, that's not just fractional.

Two weeks ago there's an economist saying the GDP in the U.S. would bounce back eight percent--eight percent in the next 12 months. Then I read another economist's view that the real estate market won't bounce back to pre-2007 levels for another 10 to 15 years.

There's one theory that as prices come down on whole ownership the value proposition for fractionals diminishes.

I'd agree to a certain degree, especially on the low end stuff. When you get into the likes of $2 million plus, the differentiation between fractional and whole ownership starts to open.

One of our main sponsors, Timber Resorts, a high end developer, is doing OK at the moment. If you're a low end developer perhaps you're going to struggle with fractionals.

The higher end price point is doing better than the lower end?

I think it's easier if you're at the higher end of the market. If you're in the mid- to high-market place I don't think you've been affected as much. If you're in the low to mid market, with perhaps second rate or third rate resorts--in the good times, you did OK. But not in the bad times.

Have you seen differences in how fractional companies are structuring their deals?

I've seen quite a bit of convergence-reciprocal arrangements.

I think a lot of developers are reaching out more--yes, for sales, but more within the industry to generate sales. One is the exchange programs. Not every developer likes exchange program and some are big enough for their own exchange. But I think exchange is important. From a developer's standpoint, OK, you like what you're buying, great, how about if we allowed you to exchange a fractional share in Miami with 300 different resorts around the world? How about Tuscany? Whole ownership doesn't get you that.

What is going to be the key for the industry marketing going forward?

Transparency and trust. The days of consumers knocking the doors down at developers with their credit cards for deposits are long gone. Totally transparent--trust the sales person, trust all the literature, a good lawyer to go through it; I look the guy in the eye and I am 100 percent convinced it's the right buy for me. I think transparency is the key.

You're not just selling real estate. You're selling yourself and the whole company.

See related REAL ESTATE CHANNEL news post:

'Ultimate Escapes' Destination Club Files for Bankruptcy

---