44 | BUSINESS Fractional report WORDS | Geoff Hadwick
FRACTIONAL
www.opp.org.uk | AUGUST 2010
Balance is the future
OPP has been working with its International Executive Panel on a major piece of research into the outlook for the fractional market in Europe. Where is the sector right now ... and what does the future look like? It is all about balancing the different needs and demands of the sector. Geoff Hadwick reports.
ake a cool and detached look at the shared ownership model that lies behind the fractional sector and you will soon see that these are early days, especially in Europe. Right now, it would be a big mistake if agents and developers started to think that going fractional will help sell existing freehold stock that just isn’t moving. It’s all about research, expertise and timing and the current market outlook is tough. It seems highly unlikely that the European fractional business is about to take off and dominate the market. A new study undertaken with the support of the high-level members of the OPP International Executive Panel suggests that if the fractional sector wins just 1 % penetration of the current overseas property market in the next few years … then that would be a good result. Take a balanced view. For Richard Ragatz of Ragatz Associates (the company that produces the fractional industry’s market-leading Ragatz report each year) it is all about approaching the sector with “cautious, conservative and proven experience.” Ragatz believes that “shared ownership is part of the jigsaw but not the whole jigsaw.” He doesn’t think that a standard formula ever works and “every opportunity has to be investigated on its own merits. There really is no substitute for proven track record,” he says.
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So … what is the “fractional concept’ and what does it really mean for overseas property professionals? Is it really that different from developing and selling a 100% freehold project? The answer, strangely enough, is no … for the most part. To get it right from the start, don’t do or launch anything unless you have done plenty of detailed research,
fi nancial analysis and robust business planning. Don’t get carried away with the newness of it all. Keep your head screwed fi rmly on.
Indeed, many international property experts are beginning to think that the fractional market of the future is going to be created by fi nanciers … and not just developers, agents or hoteliers. Miguel Ruano of the Hotel Solutions Partnership exposes the fl aws when he asks experts to “name more than a couple of fractional projects
“Don’t get carried away with the newness of it all. Keep your head fi rmly screwed on.”
in Europe that work well for the independent investor?” Does the fractional model usually
stack up as a property investment he wonders? The devil is in the detail, as it often is for any serious property project.
Clarity and hard-headedness are the answers. So … where did it all begin? About 40 years ago a group of
friends in South Africa decided to club together and share the use of a game lodge on a rotational basis via a “Deeded Interest”. In South Africa this was called a “syndicational” rather than “fractional” arrangement and the seed was planted. Nothing much happened until the concept really took off a few years later in Colorado’s upmarket ski resorts.
Since then the whole thing has mushroomed in North America. Why? What has been its real appeal? Where shared ownership scores over timeshare is the deeds. Buyers own a fraction of the deed and often get a bundle of hospitality, privilege and
concierge services thrown in as well. Clients often like the idea of buying into an upmarket package. From the industry’s point of view that means higher prices can be charged and downtime minimised. These added extras (including sales, marketing and commissions) usually push up the pro- rata price of the property fraction in question by 26%.
Most shared ownership
developments can be split between fractional schemes and Private Residence Clubs (PRCs) and it is often the case that fractional units sell at just under $1,000/sqft and PRCs at more than $1,000/sqft ... the additional price being attributed to all those added value aspirational “extras” like a concierge or a spa.
Fractional schemes are often 1, 2 and 3 bedroom condos sold in ¼ to 1/8th fractions and PRCs are likely to be specialised 3 and 4 bedroom condos and single family homes and sold in 1/6th to 1/12th fractions. It seems that North America has warmed to the fractional model faster
“Fractional units sell at just under US $1,000/sqft and PRCs at more than US $1,000/sqft.”
than Europe because buyers get a good sense of value-for-money at a modest cost. The power of a well-known,
branded fl agship hotel on site is critical and should not be underestimated. Clients like the luxury lifestyle associations that the hotel will bring and developers like the cross marketing that can take place and drive down the cost of lead generation. Research shows that a hotel can
typically increase sales prices by 20% and increase sales absorption. The downside, of course, is that the brand will charge for this. Right now, there are about 90 fractional developments underway in Europe. What do they look like? ‘Seasons Holidays’ is based in the UK and has a good reputation. It also has strong branding within the fractional industry. It is selling 1/8th fractions for around £40,000 - £60,000 for a 4-star product. The company has sold out developments in Cornwall, Scotland and Forest Hills Spain (where it developed 43 units.) Why are they doing well? Because they make the sales pitch simple says Darren Ettridge of Interval International. The line is “buy a holiday with deeded ownership for six weeks a year for the next 16 years.” Buyers are also advised to allocate three of their weeks back to Seasons so that the company can re-rent them. Usage doubles from the developer’s point of view says Ettridge, and the payback for the client is that Seasons guarantees no annual maintenance charges if you go down this route. At the end of 16 years the property is then sold 100% freehold and the monies divided evenly between the fractions. De Vere at The Carrick near Loch Lomond in Scotland; Flaxby Hall in Yorkshire; Portugal’s Park de Floreste on the Algarve, Ireland’s K Club and Timbers In Tuscany are all European schemes underway.
They all seem to be saying that to be successful in Europe, you will need to combine somewhere that is highly accessible with a situation that is highly desirable, where accommodation is hard to get, and where 100% prices are very high.
Look for places that are easy to
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