Fractional Ownership News

Luxury Fractional Financing in the Current Economic Climate

David Disick,  regular contributor to Fractional Life, previous speaker at Fractional Summit www.fractionalsummit.com  and well known practitioner in the fractional vacation home marketplace in the United States gives his view on the state of luxury fractional finance in the current economic climate.

INTRODUCTION. 

In the current economy, there appears to be precious little developer financing available and virtually no purchaser mortgage financing for luxury fractional and PRC vacation properties.  This paper will set forth the case that can be made to sources of both types of financing. 

It will then set forth the case in favor of financing acquisition of luxury single family residences for sale as fractionals, and a special opportunity in the current climate.  Finally, the Paper will speak to development of alternative funding sources. 

1.    A CASE IN FAVOR OF FINANCING LUXURY FRACTIONALS AND PRCs.

Growth of the Luxury and Fractional PRC Market Segments.

Luxury fractionals and PRCS grew to $2 billion in 2007 sales, a substantial increase over 2006 sales, and even in the downturn of 2008 still reached $1.5 billion in sales.  These results were achieved even though this relatively new product was virtually unknown prior to the early and mid-nineties.

Based on growing public acceptance of fractional vacation home ownership and the strong sales history of this relatively new industry segment, it is reasonable to believe that, as the economy turns around, prospects for future sales will be bright.

Ragatz Associates (Ragatz), a leading feasibility analyst in the fractional industry, opines that existing luxury fractional and PRC owners represent only 1.5% of income qualified households and that with the following penetration rates, the following would be the number of households owning PRCs.

Penetration Rate                 Additional Demand – Number of
Qualified Households

        5%                            147,500
        10%                            345,000
        15%                            542,500

Clearly the potential market for qualified fractional buyers is very deep.

Reasons for Market Demand for Fractionals and PRCs. 

The average use of second homes in the United States is approximately four weeks annually.  A dramatically growing segment of the second home ownership market has the means and desire to own a second home but is not prepared to tie up substantial assets in owning and maintaining a single property that will be used for only a few weeks a year.  These purchasers want to be free of the burdens of absentee property management.   They ask, “Why pay 100% of the cost of a vacation home used only a fraction of the year?”  For these buyers, fractional ownership simply makes good sense. 

Source of Developer Profits. 

Industry experience is that revenues from luxury vacation homes sold as fractionals generate one and a half to two times the proceeds of t