Timeshare Tests a Theory

The prevailing wisdom is that while not recession-proof, timesharing is better able to weather the ups and downs of economic cycles than other segments of the hospitality industry. The current downturn in the economy will test that theory again.

“Vacation ownership has generally been a recession-resistant business and I expect it will remain so,” says Craig Nash, chairman and CEO of Interval International. “However, it's hard to compare today's environment with other economic downturns. Certainly the situation is different today than it was following 9/11 or during the recession of the early 1990s.”

Unlike the rest of the hospitality industry, which took a nosedive in the months following 9/11, vacation ownership sales continued to grow at a double-digit annual pace. As Dave Gilbert, executive vice president-resort sales & marketing of Interval, notes, “Following 9-11 we experienced smaller tour flow but higher closing rates. We believe that was a result of quality of life issues: People wanted to do things as a family and vacation ownership is a perfect fit.”

Ricardo Montaudon, president and managing director, the Americas, for NorthCourse Advisory Services, sees the entrepreneurial nature of the business as a factor in its recession resistance. “It's a business that has always thrived on crisis,” he says. “In fact, it was created during the global oil crisis of the 1970s when there was a glut of whole ownership condo inventory. And, as a sold rather than sought good, success in timeshare is built on strong sales and marketing.”

The vacation ownership industry continues to rack up impressive growth numbers. According to the American Resort Development Association, the nation's 1,615 timeshare resorts sold $10.1 billion in product in 2006. In 2000, sales were slightly above $4 billion. By the end of '06, 4.4 million consumers owned more than 176,000 units. In addition, more than 50 new timeshare properties are in the development pipeline, as well as 58,000 new units planned at existing resorts.

The high end of the business — fractionals, private residence clubs and destination clubs — is booming. According to a new study from NorthCourse Advisory Services, fractional sales reached nearly $2 billion in 2007, an 18-percent jump over the previous year.

“This segment of the business is still in its infancy,” says Peter Giamalva, president and managing director of NorthCourse. “While traditional timeshare has millions of owners, the fractional business has just thousands. However, the fact that more than seven million people own second homes speaks volumes for the growth opportunities for fractionals.”

As Interval's Gilbert says, “The value proposition is better than ever for fractionals given the increased cost of buying vacation real estate — not just the cost of the home but also the rising costs for taxes and insurance.”

Also, financing is often more readily available for a fractional purchase than it is to purchase a second home. “Some high-net-worth individuals look at fractionals as collectors' items,” says Giamalva. “It makes more sense for them to buy three or four fractionals — one at the beach, one in the mountains, one for golf — than it is to buy one million-dollar second home.”

Most vacation ownership industry executives believe development will continue at all levels of the business even though the current constraints of the capital markets will require more developer equity for many projects.

“While the majority of sales will continue to happen in the big-box destinations like Orlando and Las Vegas, there are plenty of new markets ripe for development,” says Nash of Interval International. He cites Dubai as a market filled with potential for timeshare.

“While only 50 units have been sold there to date, the pipeline of resorts is like nothing I've seen in my 30-plus years in the business,” he says. “And wisely, the officials in Dubai have adopted a well-thought-out regulatory regime that should help the business flourish.”

Mexico, the Caribbean and parts of Asia will continue to be strong vacation ownership markets. “The world has become a lot smaller,” says NorthCourse's Montaudon. “And consumers who like to explore new things will gravitate to markets like Vietnam or South America.”

In Mexico, in many cases, it is American developers who are building properties. Welk Resorts and Pacific Monarch, for example, both have substantial developments in Cabo San Lucas.

While standalone vacation ownership resorts are still viable in some locations, the mixed-use development is the wave of the future in resort development. The benefits of mixed-use include the spreading of financial risk, the efficiencies of operation and synergies in sales and marketing.

Another potential industry trend, according to Gilbert of Interval, is the biennial product. “With the increasing prices of timeshare in some locations, such as Hawaii where intervals can reach $75,000 to $100,000, it may make sense to market products that provide for usage every other year rather than annually,” he says.

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