Seers And Survivors: How the Fractional Industry Experts See 2010 and Beyond
Written by Susan Kime Thursday, 19 November 2009 23:31
An Optimist sees opportunity in every difficulty -- Winston Churchill
To many in the fractional interest and the destination club industry(s), this year has been the definition annus horribilis, a year most horrible, in the sense that the economy is flat, consumption has become more conscious than conspicuous, and lenders are not lending. It was projected to be, and actually was, the perfect storm of horror for developers on one end and buyers on the other. However, toward the end of this year, a few green shoots of hope have been popping up here and there, giving rise to some of the most reputable consultants, sales and marketing people and all around seers giving their thoughts on what happened this year and what’s to come.
Bill Orwig - Director of Sales, Pond Bay Club, St. Johns
I have been in fractional sales for the past ten years, having started selling the very first fractionals in Deer Valley, Utah. This year has been quite flat and really depressing. But I am convinced, especially after speaking to many this year, that the need is still there. Over the years, having worked with clients at the Villas at Rancho Valencia in Rancho Santa Fe, California, The Rocks in Scottsdale and Pond Bay on St John's, the need for the fractional is still there! But sales people have to be hired who have the ability to help the potential member/owner to overcome fear of the economic unknown, and guilt at buying something that is beautiful, and will provide pleasure for years and years to come. So, I am cautiously optimistic. I have heard there were seven sales at the Residences at Mission Beach this past fall, there were some sales at Old Greenwood in Lake Tahoe. There have been sales with the Timbers Company properties also, so not everything is flat..
Daned Kirkham - Fractional Sales Consultant
The fractional idea still interests people, and many want to buy, I speak to them all the time! It is just that the new idea “bloom” has worn off, so we as salespeople and consultants have to help those who sell second homes to give the fractional idea a more viable chance, through educating them as to what the fractional idea really is.
Meadowood, though not a true fractional, has been very successful here in Napa because the members can buy fractions of the vineyard and have their own wine and label. It is a club idea, with fractional purchases attached. These types of themed fractionals may be one of the waves of the future.
Wally Hobson – Hobson Advisors
I recently met with some bankers and developer/investors in Chicago, who helped me see a financial reality that I, and others also, were unaccustomed to seeing - how extremely complicated it is now, and will be for eth near terms, probably until first and second quarters 2011, for developers to get loans from banks, as bankers now must personally guarantee a loan will be paid in a defined period of time. Most bankers, according to those I met with, never personally guarantee loans for anything or anyone. It has historically been too risky, and now it is untenable.
What will happen now and in the future? Well, projects in Mexico are doing well. That’s because those projects are selling to the high-end Mexican population – one that is an interesting group. They do not have the uncertainty that the Americans have nowadays. They have other problems – drugs wars being the main one - but they do not have a deeply uncertain, recessed economy. Consequently, they are not as fearful in buying fractionals as Americans right now.
With that said, there are a few successful fractionals in the US right now. I heard of one, The Meriwether Ranch in Montana, that was selling quite well. But in general, as our economy becomes more stable, as consumer trust in the economy becomes stronger, so will fractional sales.
Jim Whitteron - President, Spring Creek Partners, Sales and Marketing Director, Capella Pedregal
Capella Pedregal has been exceptionally successful, even though sales have slowed somewhat in this new economic reality. This year and next, we have learned something new: that in order to adjust to the New Normal Part 2 (The "New Normal (1)" was a phrase coined post 9/11) we had to create new marketing ideas that were completely different from those of last year. In addition, our strategic alliance with Ultimate Escapes has been very successful.
What do I think about 2010 and beyond? I have some optimism that the industry will come back, but very slowly. Gone are the good old days when sales people were order takers. Gone are the days when people would write their checks after looking for a few minutes at the project.
Luca Franco – President of LLPI, Luxury Leisure Properties International
This year has been very difficult for everyone, but here and there are some fractionals that have been selling well. We manage the Four Seasons Residences in Punta Mita, Mexico, and there have been excellent sales there. The brand, of course, is exceptional, but the property is spectacular also. Slow, but picking up, Four Seasons Punta Mita has done very well this year.
I see 2010 as full of creative possibility. We are re-launching another of our projects in Mexico, Vallarta Gardens, in December. We have generated quite a bit of interest, and much of our marketing will target those who live in Mexico. Vallarta Gardens in Puerto Vallarta is a few hours from Guadalajara, a large city of ten million. In this economy, we have learned to use new strategies to market and to sell, and we have been successful. We must use new ideas for this new economic reality.
Eric Pierce - President, Pierce Group, LLC
Here are some standard answers for poor sales performance in 2009:
1) Consumers can’t afford to purchase second home real estate anymore because they took such a hit in their savings and retirement accounts.
2) Consumers can’t justify the expense right now because they are still worried about market turmoil and the possibility of values dropping further.
3) I even heard one example of someone who said they wouldn’t buy because it would look bad to their friends; i.e. “rubbing it in their faces”… whatever, not buying that one.
4) There is no consumer financing for fractional and until that comes back, nothing will sell.
But here is one that we don’t hear about:
The more difficult it is to sell, the more developers push super incentives and price breaks with sales people hammering the phones and email all day long to a point where they have offended the prospect. These tactics have been around for decades and are a recipe for disaster. What sales organizations have not done is provide methods to reduce buyer risk. I spoke to someone in Telluride recently and they said Franz Klammer fractional re-sales have been somewhat steady this year. This is because the development is sold out so there is very little risk. In July of this year, the Aspen Times reported that “fractional sales are carrying the market right now” with a 23% increase from the first half of 2008. So, instead of adding price breaks or trying to find financing for something that is already heavily discounted, developers should have been wowing their prospects with experience and lifestyle and using tools that reduce risk.
What will happen it 2010?
We should continue to see slower sales pace for the next 6 to 8 months but I’m optimistic for the start of a rebound in Spring/Summer of 2010. The high-end buyer will have been sitting on their hands (and wallets) for two years by then and will be anxious, especially as the stock market continues to correct itself. One point of caution however is primary home values. If they continue to remain stagnant, fewer buyers will have equity line opportunities that they can use for a new fractional purchase.
Developers without finished product will continue to struggle next year. We still have a glut of completed inventory on the market at very low prices. Furthermore, preview stays have becoming very popular and help bring in additional revenue to developers not to mention a strong audience of affinity buyers, so those developers without the completed inventory will be at a severe disadvantage.
Fractional sales should be the leader in the resurgence of resort real estate sales. We should start to see an emergence of new risk mitigation products and services for the industry which will help kick start sales again. When the perceived risk is reduced or eliminated and the market comes back the industry will take off.
Full ownership transactions might regain a little bit of the momentum they once had but definitely nothing like we saw in 2004 and 2005. It is just not practical for the majority of the vacation population. Due to the lack of demand for full ownership there will likely be fewer investment buyers as well for the foreseeable future.
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