A Little Bit of Sunshine
Consumers’ unwillingness to give up their holidays and a greater need for family time continue to support cautious optimism for timeshare and fractional ownership.
By Mary Scoviak, Features Editor -- Hotels, 1/31/2003 11:00:00 PM
Timeshare is the one likely bright spot in the hotel industry this year. Although most developers and vacation ownership brands expect sales to soften somewhat in 2003, timeshare’s proven resilience during tough times should see sales growing 8% to 12% over the next 10 months. Based on the performance of the last two years, even moderate growth would make timeshare a revenue-generating star. Sales from this once little-respected sector could account for an estimated 10% of EBITDA for established players such as Hilton Hotels Corp. and 6% to 7% for more recent entrants such as Starwood Hotels & Resorts. This contribution will look exciting enough at a time when hotel performance is expected to be flat or decline slightly.
However, it is timeshare’s growth potential that spells real excitement. Howard Nusbaum, president and CEO of the American Resort Development Association (ARDA), Washington, estimates that barely 5% of the people who are financially qualified to buy the product actually own timeshare. That is about to change, he predicts. “Baby Boomers are reaching their most affluent years,” he says. “They are traveling with extended family and want their vacation in a condo setting. They are starting to realize that, for the cost of a Ford Taurus, they can buy a wonderful vacation for the rest of their lives. Timeshare is now a mainstream travel product.” Statistics from the Organization for Timeshare in Europe (OTE), Brussels, paint much the same picture. OTE projects timeshare revenues will grow twice as fast as global travel and tourism during the next decade.
How much timeshare can capitalize on its potential will be tested only when recovery takes hold. But, it is hardly stagnating in the interim. Consumers have validated timeshare by driving annual sales to nearly US$9 billion.
Equally important for an industry hungry for expansion is the legitimization of timeshare by headline deals such as Barry Diller’s USA Interactive’s acquisition of Interval International last September. “Established brands have given timeshare sufficient credibility. Now, we will see them diversifying their products more,” says Steve Miner, director of research, Ragatz Associates, Eugene, Oregon.
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| The Royal Sands, an Interval International affiliated resort, Cancún, Mexico |
Growth Targets
In development terms, diversification is taking timeshare into cities as well as new resort destinations. Pent-up demand for urban timeshare will result in more projects like the pioneering fractional 47 Park Street by Marriott Grand Residence, London, and Hilton Grand Vacations’ Hilton Club-New York City. “It would be hard to find enough rooms to meet demand for ownership concepts in London and Paris,” says Craig M. Nash, chairman and CEO, Interval International, Miami.
Most major brands are at least looking at urban timeshare, but high barriers to entry will limit timeshare’s urban growth pace. However, Nash sees opportunities emerging in markets weakened by poor performance. Hotels hampered by the last two years’ rate and occupancy declines may consider bolstering their bottom lines by converting some room inventory to timeshare or working more aggressively to attract business through exchanges. Solutions such as the Hilton Club-New York provide membership intervals priced from US$20,000 to US$250,000 worth of Hilton Grand Vacations’ CityPoints. “Whether for business or leisure, people’s travel patterns generally call for several visits to New York each year. Urban vacations have become extremely desirable. Leisure travelers want more cultural options, entertainment and the arts fine dining and shopping,” says Antoine Dagot, president and CEO, Hilton Grand Vacations Co. Jay Di Giulio, vice president, The Hilton Club-New York, adds that sales for the 78-unit club are exceeding projects.
Millennium Partners (MP), New York, already generates an average US$12 million annually from The Phillips Club, launched in 1999 as New York’s “first membership club residence.” MP is looking to expand this revenue stream with proposed ownership components for developments in San Francisco and Boston. “There will be demand for urban interval ownership concepts,” says Christopher M. Jeffries, principal and founding partner. “Whether timeshare or fractionals are the better investment depends upon the location. In either case, you need a dynamic urban environment with a balance between business and leisure use.” While interval ownership concepts do not provide return on investment as quickly as condominium sales, Jeffries adds that effectively marketed units have the advantage of generating revenues when used as transient or extended-stay hotel rooms during the sell out.
Some of the best prospects for urban timeshare may lie in Asia, according to David Clifton, managing director, Europe and Asia, Interval International. “The multi-faceted business and leisure demand for Asia’s cities makes them good targets for timeshare,” he says. “And, there are projects to do. The tremendous overbuilding in some Asian gateways, aggravated by the financial collapse of 1997 and 1998, should create interesting opportunities for interval ownership.”
The lion’s share of new projects will remain in timeshare’s core resort destinations. In the United States, Peter Yesawich, president and CEO, Yesawich, Pepperdine and Brown, says Hawaii, Florida, Colorado and Nevada’s Lake Tahoe/Las Vegas areas are where developers and buyers want to be. Nash predicts nominal growth across the board, but predicts the bulk of new projects will focus on the western United States and Hawaii. Interesting secondary markets such as Savannah, Georgia, San Antonio, Texas, and Charleston, South Carolina, are getting closer scrutiny, adds David Gilbert, senior vice president, resort sales and service, Interval International.
David Matheson, vice president, investor relations, Starwood Hotels & Resorts, White Plains, New York, calls Orlando “the heart and soul of timeshare,” but agrees that the western United States and Hawaii are the areas to watch. Westin’s vacation ownership portfolio is expanding with projects from Mission Hills, California, to Princeville, Hawaii. Starwood’s St. Regis brand is more likely to see applications in the fractional market than timeshare. “With 15 properties and 120,000 buyers we have barely scratched the surface,” Matheson says.
“Hawaii is the primary target for us,” says Franz Hanning, president and CEO, Fairfield Resorts, Orlando, Cendant Corp.’s vacation ownership subsidiary. “We see both new-build and conversion opportunities there.” Deals like Fairfield’s recent acquisition of 76 oceanfront condominium-style units at the Royal Sea Cliff resort on Hawaii’s Kona coast signal a new approach. This acquisition blends Fairfield’s skill set with the local market strengths of Outrigger Enterprises, which will continue on-site management as well as the existing rental program for whole ownership. An outgrowth of a strategic alliance signed last year between Fairfield and Outrigger, this acquisition opens up the tough Hawaiian beachfront market to development of co-branded timeshare products.
Other targets for more moderately priced timeshare range from Gatlinburg, Tennessee, to Branson, Missouri, and Daytona, Florida. Williamsburg, Virginia, is likely to draw some upscale interest. California continues to stir up developer attention for markets such as Palm Springs. Beyond New York and Florida, “the East Coast looks flat,” Gilbert says.
“Within the United States, drive-to markets will prove very successful in the near term,” says John Burlingame, executive vice president, Hyatt Vacation Ownership Inc. “However, there are far greater opportunities for us in this industry outside the domestic U.S. market. Looking long term, we would like to move Hyatt Vacation Ownership beyond the United States.”
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| Marriot Vacation Club International is expanding in Europe with projects like the Village d'lle-de-France at the Disney resort in Paris. |
The European Scene
Spain still dominates the European timeshare landscape. Though the mainland continues to attract developer attention, the Canary Islands’ development moratorium will force new entrants into other markets. That will benefit companies such as Germany’s TUI Hotels & Resorts. Its Anfi del Mar on Gran Canaria has posted the biggest turnover of any vacation ownership provider in Europe in recent years. Peter Seeger, Preussag AG’s divisional executive for the hotel group, says TUI has earmarked US$6 million annually for capital investment in new timeshare projects.
Jonathan Langston, joint managing director, TRI Hospitality, London, and Paul Dean, Dean & Associates, Mollington, Chester, UK, identify Cyprus as a market worth watching. New initiatives to extend the local holiday season and provide more charter flights beyond the high season are getting tourists’ attention. “There has also been expressions of interest for timeshare development in Egypt and the Gulf states, but current political concerns obviously will impact those decisions short term,” say Langston and Dean. Dominique Bourdais, associate director, HVS International, London, still sees room for more timeshare development in Spain, as well as the sea, sun and sand locations around the Mediterranean. He adds ski locations also are being sought, but developments are scarce.
Just as scarce are international brands. Marriott Vacation Club International (MVCI) is the only one to have secured a foothold in Europe thus far. Hyatt and Starwood are rumored to be getting close to entering the market, but nothing has emerged. “Locally, Sunterra’s Grand Vacation Company and TUI are starting to become more prominent,” Bourdais says.
Passage House Club Hotel, based on Newton Abbot, Devon, UK, is attacking the British market with new projects that mix hotel and timeshare. “Yes, the year will be tough, but we have a lot to look forward to with our new builds—namely, more sales,” says Roger Heywood, a developer of Passage House Club Hotels. “The UK is still a sought after destination and there is good demand for the timeshare product.” Flexibility will be key for projects like these, which are broadening their appeal with rentals, short breaks and the ability to split weekly stays.
Clifton suggests there are “some opportunities” in Eastern Europe, Hungary and the eastern Mediterranean, as well as strategic locations in Tunisia and the Middle East. In Asia, Thailand’s beaches and Australia have seen nascent timeshare growth in Asia/Pacific. The next wave of timeshare development may boost activity in China, Taiwan and Singapore. Regulatory reviews are under way in both Taiwan and China. “Timeshare exchange groups such as ours and the World Travel and Tourism Commission are helping to formulate tourism policies at this point. We believe in regulation and want to drive that process forward,” Clifton adds.
Hot Caribbean
Mexico and the Caribbean are being established as the hottest new markets for timeshare and fractionals. A study on Caribbean timeshare by the American Resort Development Association and HVS Timeshare Consulting Services shows nearly 8,500 new timeshare units planned for the Caribbean. Aruba is still the major target, with 2,357 units planned. St. Maarten, another established destination, continues to draw interest with 1,561 proposed units.
But, as with hotels, the Dominican Republic is the market of tomorrow in the Caribbean for timeshare. Improved air lift and the current development environment could see the Dominican Republic accounting for the vast majority of the nearly 2,900 units planned for islands other than Aruba, St. Maarten, Puerto Rico and the Bahamas. “Timeshare and fractionals expand the offer by getting people to stay longer. As with all-inclusives, they will help boost the income on the hotel side as well,” says Aristides Ramirez, vice president, Coral Vacation Club, based in the Dominican Republic. In October, Coral signed an agreement with Miami-based Hilton Caribbean, a division of Hilton International, London, to launch the newly created Coral by Hilton brand of all-inclusive hotels and resorts.
Jean Holder, secretary general, Caribbean Tourism Organization, St. Michael, Barbados, points out that while timeshare “generally will need a brand” to succeed, the Caribbean market still makes room for independents such as the Half Moon Clubs and St. James’ Clubs. “The Caribbean hotels charging US$1,000 a night generally are not branded. The same holds true for fractionals at this point,” Holder says. The biggest challenge the brands will face in capturing the Caribbean’s potential may lie with the governments, contends Jan Van Nes, general manager, Playa Linda Beach Resort, Oranjestad, Aruba, Dutch Caribbean. “Politics is a challenge to tourism. We need to develop legislation that is part of consumer protection,” he says. Taxation is another consideration, especially given the complexity of the tax structures on some islands. “Tax structures need to encourage companies to make a profit, not just incentivize them to start up,” Holder adds.
Citing increasing demand for 5-star beachfront resorts, Cleofé Rubi, president of Mora Development Corp., Puerto Rico, created Aquarius Vacation Club, Puerto Rico’s first multisite vacation club. The first site is at the Embassy Suites Dorado del Mar, a decided advantage since Embassy Suites extends its brand halo and management to the timeshare component. Sales increased 30% from 2001 to 2002, while the average sales price jumped more than 20%. Long term, Aquarius plans to expand throughout the Caribbean.
Increased Synergies
The expansion of points-based programs open yet another avenue for creating synergies between hotels and timeshares. However, the basis remains the cross-over expenditures of timeshare guests in the hotels and mini-vacation packages sold by timeshare sales and marketing teams. Since even a US$60 room night is better than an empty room, hotel general managers are beginning to feel the benefits of cooperative rather than competitive programs. “Mini vacations have to be viewed as part of the rate mix. They have to be annualized to realize the benefit,” says Simon Jongert, general manager of the Marriott Resort and Beach Club, Lihue, Hawaii, which combines 356 hotel rooms and 242 timeshare units. Jongert, who bought a week of timeshare at the resort long before being posted there in 2001, says timeshare can deliver hundreds of extra covers in the restaurants daily. Since timeshare is sold for the property, management has more options for energy conservation and for optimizing staff scheduling.
“Instead of using points only for timeshare properties, people can use them to travel to hotels or even cruise ships. That will affect hotels very positively,” says Mark Nuzzo, president, RCI, Cendant’s global provider of vacation exchange, rental and resort management, Parsippany, New Jersey. Nuzzo points out that chain-based timeshare can use its hotels to provide worldwide access, which enriches its timeshare offer as well as filling its hotels. “Everything we have seen shows that timeshare delivers a higher than average guest spend.”
Kathleen Conroy, president, HVS Timeshare Consulting Services, Miami, estimates the average spend of the timeshare buyer at 80%-90% of that of the average hotel guest. The best synergies, she says, are those that are planned from the beginning. That enables developers to leverage timeshare to cover infrastructural costs.
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| Watch for further incursions by high-end niche players such as Auberge Resorts. Auberge is targeting the top end of the market with a private, luxurious ownership options such as these lodges at Calistoga Ranch. Designed by SB Architects and Darrell Schmitt Design, the project's 47 guest lodges and 27 owner lodges will open this summer. |
Changes Ahead
Diversification is taking branded timeshare both up and down market, and further into the fractional concept. “Traditional branded timeshare has not addressed the moderate tier,” says MVCI’s Weisz. “It is not enough to just roll out a brand. Mid-tier timeshare has to have a different sales approach and a different product. We are just cutting our teeth with Horizons, and we are deliberately moving slowly.” MVCI is using Horizons to tap timeshare secondary opportunities in prime markets and prime targets in secondary destinations. Weisz sees concepts like these changing the profile of branded timeshare. “We used to be a one-trick pony with Marriott Vacation Club accounting for 80% of our annual sales. We saw opportunities for segmentation both in the mid-tier and at the very top of the market, with Ritz-Carlton Clubs.”
Other industry veterans also see room at the top for timeshare and fractionals. Larger units with upgraded amenities will broaden Fairfield Resorts’ offering. “We have thousands of members who own in excess of 1 million points,” Hanning says. “Over the last three years, we have seen them using those points to stay in our Presidential Suites. There is a market willing to pay for vastly upgraded furniture, fixtures and equipment.”
Four Seasons Hotels & Resorts’ and Ritz-Carlton Hotels’ ownership concepts already are rewriting buyers’ expectations at the top of the market with elegantly contemporary design and residential amenities. But, the bar is going to be raised further with the entry of niche competitors such as luxury resort specialist Auberge Resorts, Mill Valley, California. Tom Harmon, Auberge Resorts’ CEO, admits to having had a skeptical view of interval ownership.
“When (Denver-based developer) John Fair first suggested it, I could not see how the concept would match with our reputation,” Harmon says. “But, after he explained how it works now, it made sense. The days of owning the 10,000 sq. ft. (976 sq.m) second home in Sun Valley may still appeal to some people. But fewer and fewer can justify the cost and effort of maintaining a home that is empty most of the year. More people are looking for the amenities of a small luxury resort that extend to an ownership concept—and the flexibility of an exchange option.”
Other incursions in the ownership market will come from entrepreneurial efforts such as Miami-based ResidenSea Ltd. Headed by Robert Riley, former CEO of Hong Kong Mandarin Oriental Hotel Group, ResidenSea is the first resort community continuously at sea. Its 110 residences are owned, but many are available for rental.
The product itself is also changing to meet consumers’ demands. Richard Reep, director, architecture, in Wimberly Allison Tong & Goo’s Orlando office, says major brands “appear to be tinkering with the interior package,” upgrading them with flat-screen televisions “as a way to keep their product fresh.” Movement toward universal design, that is, design that meets all Americans with Disabilities’ Act requirements, is just talk at this point. “Developers are somewhat lukewarm, but sales and marketing people are quite keen on it,” Reep says.
He also sees more niche products coming into the market. Although developers have yet to obtain financing, developers are looking at projects as diverse as a high-end fractional resort anchored by a skin clinic to appeal to affluent Europeans with a nice insurance package to a new generation of luxurious private residence clubs in Hawaii. “We will not see major brands try anything dramatic,” Reep says. “But we will see more expansion of existing resorts with the addition of a timeshare component and more expansion of what brands are doing.”
The Gist
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Only 12% to 15% of timeshare is branded. That will change as major brands look for new ways to diversify their income stream and grow EBITDA.
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Urban timeshare is a hot concept. However, development costs are more likely to drive fractional development than pure timeshare. Fractionals are becoming important because of their high profit potential, but brands realize this is a thin market.
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Consolidation looks more likely outside the United States as branded players look for entry into Europe. The legislative environment appears fairly stable in the United States and Europe. Asia and the Caribbean are doing some fine-tuning on timeshare legislation.
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Distribution will move both up and down market. Generally, the timeshare product is evolving toward more sophisticated design with larger units and better amenities.
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