An executive summary of the latest Ragatz Associates survey of the shared-ownership resort real estate industry in North America along with exclusive comments and interpretation by Dick Ragatz
The latest Ragatz survey is out, and it’s perhaps more valuable to developers than ever given the events of the past two years. This is the 10th annual edition of the project, which is considered to be the most thorough and comprehensive survey conducted of the industry. Here we present the summary of the findings together with observations from Ragatz Associates Founder and President Richard L. “Dick” Ragatz, Ph.D.
So what’s the biggest news out of this year’s study? “The major one that pops out immediately is the decline in sales volume by about 43% due primarily to lack of consumer financing and the general economic conditions,” says Ragatz. “That’s obviously the negative, but there was one positive coming out of the sales performance: the fact that prices on a per-square-foot basis, per-week basis and per-share basis did not seem to drop nearly as much as other types of residential real estate, especially whole ownership resort real estate.”
These results aren’t what Ragatz had expected. “We actually thought it was going to be more of a drop off; we thought it was going to be over 50%,” he says. “One surprise was that all three components (moderately priced fractionals, the high-end PRCs and the destination clubs) dropped off almost exactly the same amount – they all dropped off 43-44%. We had anticipated that the fractionals were going to drop off a lot more than the PRCs.”
Ragatz says the drop off was most severe in the Caribbean and Mexico, the least severe in Canada, and somewhere in between in the U.S. “So the 43% was for North America as a whole; in the U.S., that was only about 35%,” he says.
One of the other interesting findings was that in order to decrease prices on a per-share basis without decreasing prices on a per-square-foot basis, there is a tendency to have smaller shares, fewer bedrooms and less square footage in the new-construction units. Following are further details of the summary results. For purposes of definition, fractional interest projects and private residence clubs are similar, in that both typically sell deeded ownership in shares of vacation homes, ranging from a 1/15 share with three weeks of annual use to a 1/4 share with three months of annual use. However, the two components vary in terms of price, quality of product and degree of services and amenities. Ragatz Associates simply assumes that product selling for less than $1,000 per square foot falls into the fractional interest category, and product selling for more than $1,000 per square foot falls into the private residence club category. A destination club typically sells 30-year memberships on a non-equity basis into a wide network of vacation homes in multiple locations. Some clubs are equity-based, however. [member]
The concept is further characterized by a refundability policy when members leave the club.
Size of the Industry
Some 322 fractional interest projects and private residence clubs were identified in the survey, along with seven destination clubs. Of the 322 developments, 125 are currently in active sales, as are all seven destination clubs.
Included in the 322 developments are 68% in the United States, 17% in Canada, six% in the Caribbean and nine% in Mexico. The two states of Colorado and California contain 21% of all developments. Of the 125 active developments, 66% are fractional interest projects and 34% are private residence clubs. Most of the 197 inactive developments are older, sold-out fractional interest projects.
In the survey for 2008, there were 138 active projects. Some 18 new projects started sales in 2009, meaning that 31 of the active projects in 2008 dropped from the list. A few of these may have attained sell-out, but most simply ceased sales due to the country’s economic condition. It is estimated that total sales volume in the sharedownership industry in 2009 was $860 million. This amount includes new closed sales, presales, and resales. When looking at the three individual components, sales volumes were $150 million in fractional interest projects (17%), $515 million in private residence clubs (60%), and $195 million in destination clubs (23%).
In accord with many other goods and services in the United States, sales volume in the shared ownership resort real estate industry declined in 2009. The total sales volume decreased from $1.52 billion in 2008 to $860 million in 2009, or 43%. Decline occurred with all three components, including 43% for fractional interests, 44% for destination clubs, and 44% for private residence clubs. By comparison, whole-ownership vacation home sales were down in 2009 by an estimated 60%, resort timeshare sales were down by 32%, motor home shipments were down by 30%, total home starts were down by 30%, home prices were down 12%, resort hotel revenues were down 17%, etc. In 2009, the average annual sales volume in the 125 active projects was $1.8 million for fractional interest projects and $12.0 million for private residence clubs.
However, if excluding the top five private residence clubs, the latter figure would decline to $4.3 million. Of the total 125 active projects, 8% had sales over $10 million, while 42% had sales of less than $1 million. On a longer-term trend in sales volume for the entire shared-ownership resort industry, totals were $1.54 billion in 2004, $1.97 billion in 2005, $2.12 billion in 2006, $2.30 billion in 2007, $1.52 billion in 2008, and $860 million in 2009.
Several critical factors combined in 2009 to create the perfect storm for the decline in the sales performance of the overall shared-ownership industry:
• The uncertainty of the country’s long-term economic stability
• An almost complete lack of consumer financing
• Decrease in primary home equity funds for purchasers who previously paid cash
• Concern with making “conspicuous consumption” purchases
• Lack of marketing funds
• A glut of whole-ownership vacation homes on the market, with significantly decreasing prices
• A drop in luxury hotel room rates
Prices in the shared-ownership industry range widely. For fractional interest projects, selected average prices include $147,000 per share, $18,000 per week (when dis-aggregating shares to an individual weekly basis), and $580 per square foot. Among private residence clubs, these averages are $308,000 per share, $63,700 per week, and $1,750 per square foot. Per week and per square foot prices tend to decrease as the size of the unit and share increase. In comparison with 2008, average prices decreased by $20,300 per share (8.3%), by $3,075 per week (7.0%), and by $80 per square foot (6.6%).
Per square foot prices also vary significantly by country, e.g., from $590 in Canada, to $765 in Mexico, to $1,100 in the Caribbean, to $1,300 in the U.S. They also are higher in ski communities and at developments offered by branded hotel companies.
Annual maintenance fees average $7,125 per share, ranging from $5,570 among fractional interest projects to $10,150 among private residence clubs. On a per week basis, such averages are $750 and $2,200, respectively. Operating costs (including marketing, sales and general administration) remained fairly constant in 2009 compared to previous years, at about 18% of the overall sales volume.
Upon completion, the average development will contain 41 units. Some 68% of the units are either two-bedrooms (38%) or three-bedrooms (29%). Among all units, the average size is 1,550 square feet.
There are at least nine different sizes of shares being sold. Most frequent sizes for fractional interest projects are 1/4s (32%), 1/8s (27%) and 1/10s (19%). For private residence clubs they are 1/12s (30%) and 1/10s (23%). In efforts to have lower prices in accord with declining market conditions, there was a tendency in 2009 to have smaller shares, fewer bedrooms and lesser floor areas. On-site amenities and services are extensive in the industry, especially at the private residence club level. The majority have a private concierge, pre-arrival food and beverage stocking service, valet parking, transportation service, etc.
The average price for membership in the seven destination clubs is $300,000. The average residence in the clubs has a reported value of $2.6 million and contains 2,100 square feet. The average term is 30 years, and the average ratio of members per residence is 7.0. Approximately 5,500 members are in the seven clubs.
It is widely felt in the resort real estate industry that shared-ownership resort real estate will rebound more rapidly and more strongly than whole-ownership resort real estate as the country’s economy recovers. Reasons include being a concept that is based on: (1) personal use rather than speculation; (2) being able to purchase only the amount of time that have vacations to use and discretionary income to spend on; (3) lowering household spending habits and capabilities; (4) being hassle-free, i.e., “show up and enjoy;” and (5) the opportunity for flexibility and variety of use due to the external exchange process.
Based on over 35 years of experience in the resort real estate industry, Ragatz Associates fully expects the shared-ownership industry to once again be on a significant growth track as the national economy further stabilizes. Their extensive consumer research strongly suggests that the decline in the industry’s sales performance from the last quarter of 2008 through 2009 was much more due to external factors such as the economy and lack of financing and much less due to lack of consumer interest in the concept.
“I think in 2010 we’re going to see a gain from 2009, but it’s definitely not going to be up to the record year of 2007,” notes Ragatz. “We’ll probably be close to a billion dollars.” He expects a slow rebound to occur over the next few years. “It’s probably going to be a couple of years before people feel safe with the economy,” he adds.
Industry Application from Ragatz “The obvious thing to learn from any type of research on industry performance is that in today’s marketplace, it’s increasingly critical to do your proper homework, not to come in at the beginning with the wrong size of share and the wrong use plan, and especially not to overprice the offering,” Ragatz cautions.
“What’s happened in ’06, ’07 and the first part of ’08, when the market was so hot for everything, that a lot of the people in the industry, especially at the PRC level, were getting prices that were not rational – just as they weren’t in all forms of real estate,” he continues. “And then reality hit. The industry is still a very profitable industry, but there’s no need to have off-the-wall prices.”
The complete report is available for purchase from Ragatz Associates at www.ragatzassociates.com. A second survey
covering the first six months of 2010 is slated for release around October. [/member]