Article

David Disick argues that the historical fractional multiplier is alive and well.

The Fractional Multiplier refers to the historical industry experience that revenues from sales of all the fractionals in one residence can generate between 1.5 and 2 times the cost of the residence.  There are some in the industry today who feel that the multiple should be lower in the current economic climate.  With respect, this author does not agree.

The Fractional Multiplier reflects the fact that fractional ownership is a better value than whole-ownership.  Since vacationers generally use their vacation home for some three to four weeks annually, it is financially smarter for them to pay just a fraction of the whole-ownership cost and upkeep.  Moreover, fractional ownership enables buyers to benefit from lower price points; to facilitate an all cash purchase; to qualify for a mortgage; or to enable purchase of a luxury vacation home that would otherwise be unwise financially or unaffordable. 
  
These value components are especially compelling in the current financial climate.
           
The value of fractional ownership is underscored by its performance in the 2007 to 2009 time frame as compared to the performance of whole-ownership.  The author has covered this in detail in a prior article.  To summarize: 

2007:  Ragatz Associates has reported that 2007 Luxury Fractional sales exceeded $2 billion, an increase of 9.5% in sales volume and 8% on the average price per fraction over 2006.  This contrasts with the whole-ownership performance which fell approximately 31%, as reported by the National Association of Realtors.

2008:  Ragatz has reported that North American fractional sales reached $1.52 billion, a drop of approximately 33% from 2007; whereas, in contrast, sales of wholly-owned vacation homes dropped by about 40%.  Moreover, PRCs, the top fractional segment, dropped only 24%.

2009:  Ragatz has reported that 2009 sales totaled $860 million, down approximately 44%.  However:

By comparison, 2009 whole-ownership vacation home sales were down by an estimated 60%

The average decline in price per fraction was significantly less than the estimated fall of the price of whole-ownership second homes, as follows:

              Segment                                     Average Decline
              PRCs                                           6.9%
              Fractionals                                   9.3%
              Shared Ownership Overall             8.6%
              Whole-Ownership Second Homes   20% to 25%

Moreover, Luxury Fractionals are more than the bricks and sticks of real estate. Fractionals combine the benefits of individual real estate ownership with service and amenity packages providing the exclusivity, privileges and overall experience opportunities that the affluent have come to expect and demand with their vacation time and their vacation ownership.  Accordingly, fractionals offer a vacation life style, responding to the desires of today’s buyers.  As Mr. Gregory Furman, Founder and Chairman of the Luxury Marketing Council, stated in a recent paper entitled “Luxury Marketing in a Recession”:

“NOW, more than ever, great experiences are high on the value scale… the most educated consumer is putting a premium even on things or experiences that cost little or nothing and provide significant satisfaction….”

Another thoughtful article is that by Susan Kime, published in the March 23, 2010 issue of Luxist, titled “From Conspicuous to Conscious Consumption:  Redesigning the Meaning of Luxury.”  The author states that:

 Those in the luxury field “have noticed a movement from objectifying to personalizing the meaning of luxury….” 

“Definitions of the luxury space are moving away from the model of conspicuous consumption—a lot of cars, watches, diamonds—to a softer version, one that is evolving to a more conscious consumption, involving family, philanthropy, authenticity and the awareness of the scarcity and privacy of time…”

Thus, the Luxury Fractional has increased value in the current climate, both from the economic point of view and from the perspective of the benefits sought by current buyers.  Accordingly, the author submits that the Fractional Multiplier should not be decreased in the current climate.  In fact, there is a persuasive case to be made that in the appropriate project, the Fractional Multiplier can be increased.  This will be the subject of a subsequent Paper.

    To be sure, there are prospective purchasers who will feel that the fractional is not a good investment because the fractional per-square-foot price is 1.5 or more times the whole-ownership price.  To those persons, the following is a simple response:
   
        “Am I correct in understanding that you wish to vacation in this resort?”

        “Yes”

        “Am I correct that you would like this size and quality of residence?”

        “Yes”

        “Am I correct that you and your family only vacation…four weeks per year?”

        “Yes”

“Would you prefer to spend X dollars for this fractional which affords you the use you need or four to five X dollars for a whole-ownership unit that will sit vacant for most of the year or be subject to the vagaries of a rental program?”

A friend of mine, who was one of the most successful resort area developers in America (Telluride Mountain Village master developer), was fond of holding his prices—and sometimes even increasing them a tad—in down times.  When asked why, his response would be “I am offering value.  The right purchaser will see that value.  By holding my price, I underscore the value and the right purchaser will understand that.”

The bottom line of this Article is:

• We in the fractional industry are offering value. 

• The prospective buying universe is huge.  For example, Ragatz has opined that:

• Currently, approximately 60,000 U.S. households own shared ownerships.

• There are approximately 5.5 million households that are income qualified for a fractional purchase.

• If the shared ownership penetration rate reached 5% of estimated income qualified households, that would result in another 215,000 buyers with still 78.1% of the qualified households remaining.

“Regardless of the penetration rate scenario used, …potential market depth for shared-ownership is just beginning to be tapped…a high number remain.”

Accordingly, there are more than enough persons in the potential buying universe to appreciate the value offered by fractionals. Therefore, the Fractional Multiplier can indeed be thriving.


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David M. Disick is the developer of the award-winning Franz Klammer Lodge in Telluride, Colorado, the first property to be branded as a Private Residence Club.  He has recently been named by Fractional Life to its list of The Top 21 Fractional Real Estate Professionals of 2010.

Mr. Disick can be reached at ddisick@msn.com.