Upscale Fractional Ownership Comes of Age

What do esteemed luxury brands such as Four Seasons, Ritz Carlton, Hyatt and St. Regis all have in common? All are players in the global surge in fractional ownership, and it's a trend that is growing in the worldwide property market. Upscale brands are increasingly becoming commodities and in their quest to gain further market penetration they are seeking out niche products to grow both the brand and the core operating business.

From a historical perspective, fractional ownership is an offshoot of the timeshare industry, coupling its ambition to attract a lucrative higher-end targeted customer base together with more a traditional real estate investment vehicle. Typically fractions are sold on usage rights for owners from two weeks per year (1/25th) up to 13 weeks (1/4th). Ownership structures vary but in many cases, as legally allowed, buyers are able to secure a deed and an undivided interest in the property similar to a strata title. In the case of a 1/4th fraction this would be a 25% ownership interest.

When comparing timeshare to fractional ownership it's more of a real estate investment than a lifestyle purchase. Unlike timeshare which is more focused on the mass market, fractions are aimed at rich individuals, and prices for the shares are often in the range of 3.32 million to 33.2 million baht (US$100,000 to US$1 million) and more. Upper-tier brands are required to service both the owner's personalized service needs and also to drive sales based on brand recognition and appeal. The more recognized the brand, the greater the premium that can be charged, with pricing differentials often in the range of 30-40% above non-branded projects.

The ability for owners to schedule usage time is of primary importance to the buyers. In general terms schemes range from rotating calendars throughout the year, to a set calendar or fixed weeks, and in many instances a lottery or rotating calendar plan wherein owners can register interest in multiple periods which may fit their individual schedules. Another common system, once owners have all registered their interest for a year in certain time period, is to allow booking on a space-available basis, which is more conducive to short-term booking and changes in holiday plans.

For developers evaluating the potential benefits of a fractional property this is often coupled with a mixed-use project such as a hotel so that expanded facilities such as spas, food and beverage and leisure facilities are able to be provided but the cost is not underwritten from a fairly limited customer base. The advantage to the hotel is the ability to capture more in-house revenue and in most cases higher customer spends.

Bottom line development profit for fractional ownership varies, but as a general rule projects get a bottom line profit in the area of 35% and upwards. Marketing costs exceed normal residential developments, which range from 5-10% of turnover, yet are less than timeshare and most often range from 20-25%.

The key attraction is the ability to sell luxury property at a lower price then stand alone units and the front-end cash flow and provide a faster take-up rate than traditional property offerings.

A spin-off of fractional owners is private residence clubs and destination clubs. In many cases these are city-center properties in high-demand locations such as New York City or London, and offer both a rational cost alternative to staying in upscale hotels along with the recognition and exclusivity of a private club. Fractional offerings and these types of clubs also focus on exchange opportunities within their other branded properties and offer owners the flexibility to stay in other desirable locations while utilizing their existing rights. Third party exchange programs such as RCI's Registry Collection are now focusing on the upper market as well and utilizing its network to offer owners similar offerings.

In Phuket the Banyan Tree has already launched it residence club (www.banyantreeresidences.com) which provides property ownership and exchange opportunities at its other branded properties, which are growing around the world. Expectations are strong that more international hotel brands will bring fractional products to the market in the next few years and the trend is one worth keeping an eye on.