News
How to choose your vacation investment
Increased demand for leisure travel, property ownership and unique lifestyle experiences, has fuelled the growth of innovative leisure ownership opportunities. Anyone in the market for a vacation home, could find it difficult to make a decision, as the array of options can be confusing.
This article is intended to provide an overview, and will assist potential investors to better understand the various available models. Investors will then be able to make a better informed decision as to which model best suits their individual needs.
The various offerings can generally be classified into 2 distinct categories – 1) Time based & 2) Equity based ie. The right to use time (usage) only vs the right to usage as well as an ownership stake (equity.)
Time – based offerings: Include 1) rentals, 2) timeshare, 3) points clubs and 4) destination clubs.
Equity- based offerings: Include 5) sole-ownership, 6)co-ownership (syndication), 7) fractional ownership, 8)private residence clubs and 9) condo (hotel suite ) investments.
1) Rentals: Includes rental of hotel suites, villas and chalets. Offers unlimited options in all parts of the world. The major advantage is flexibility in terms of geographical area, desired activities, and price to suit. The major disadvantage is the fact that after your vacation, all you are left with is a hole in your wallet and happy memories to treasure in your photo album!
2) Timeshare: Offers investors the opportunity to buy time in fully furnished leisure resorts, usually in blocks of 1 week. The cost is usually reasonable, at an average of about $15 000, as well as annual levies. There is a choice to suit different needs, and most resorts offer affiliation to a worldwide exchange program, allowing investors to exchange into a variety of resorts all over the world. The downside is frequent frustration at not being able to get into chosen resorts at requested times, as demand in popular resorts and destinations exceed supply. Furthermore, the resale market for timeshare is poor, with investors usually receiving about 20%-30% of their investment back!
3) Points clubs: In this offering investors buy points into a club which owns accommodation in a variety of resorts. Each leisure break costs points, which vary according to type and size of unit, facilities, season and demand. There is an upfront cost based on how many points are purchased as well as annual levies. Some clubs also charge booking fees. Points clubs are presented as the offering with the most variety and flexibility. In practice however, there are many unhappy members, as the memberships are usually sold at a much faster rate than the clubs acquisition of stock, so many requests are not met. On resale investors are lucky to get back 10% of their original investment!
4) Destination clubs: Offer buyers access to a portfolio of luxury vacation homes on a similar basis as the points clubs, but with superior quality accommodation. The market is more affluent than than that of the timeshare and points clubs. Your investment consists of an upfront joining fee, as well as annual dues or levies. The average joining fee is about $350 000, with the average annual dues being $30 000. On exiting the club, members are usually refunded between 80% and 100% of their upfront joining fee.
As can be seen, all the above time-based options offer a wide range of choice, targeted from the lower to the upper end of the market. All however, are designed for lifestyle enjoyment, and do not offer capital growth opportunities!
5) Sole ownership: The advantages are 100% freedom of choice with regards location, design, furnishings and fittings and budget. The disadvantages are forking out 100% of the acquisition cost, and running costs, for something that will only be personally enjoyed a few weeks per year, as well as being responsible for all maintenance and upkeep personally. A further disadvantage is that boredom often sets in after the 1st few vacations!
6) Co-ownership (Syndication): Shared ownership with friends, family or invited investors. The advantages are in the shared initial cost and ongoing costs. The downside is that very often there is shareholder disputes over individual responsibilities, as well as over usage periods. Disagreements can often not be resolved, and causes frequent change in shareholding!
7) Fractional ownership: Has been the fastest growing sector in the leisure and property sectors in the last 5 years. Fractional ownership offers equity in property at a fraction of the cost, with all responsibility for maintenance and admin.taken care of by the fractional company. As the average vacation home buyer only uses the home for 3-4 weeks a year, fractional ownership makes financial sense, with capital outlay, and ongoing running costs in the form of levies being shared proportionately between shareholders. Most common shareholding is 13 shareholders each having 4 weeks usage per year. Many fractional schemes offer membership to an exchange company, entitling investors to exchange their usage into other resorts worldwide. Prices range from about $60 000 to about $200 000.
8) Private residence clubs: Usually operates on a similar basis as fractional, the main difference being that private residence clubs (P.R.C) are at the top end, being larger and more luxurious than most standard fractional units. They are often part of a 4* or 5* hotel, and therefore offer more facilities than your typical fractional. P.R.C’S also usually have exchangeability into other luxurious 4* or 5* resorts. The trend is to have 6-13 shareholders; each entitled to 4-8 weeks usage enjoyment per year. Investors pay an upfront purchase price, and share the ongoing costs in the form of an annual levy. As with many fractional products, many P.R.C.’s also offer membership to some exchange program, entitling owners to swop some or all of each years usage into other resorts in various locations. Prices range from about $200 000 to about $600 000.
The current trend has favoured Fractional ownership and Private Residence Clubs, as investors seem to prefer the reduced costs, with the benefits of capital growth.
Many European and American investors have purchased in offshore exotic locations, for example Beach and Bush resorts in Africa (that are affiliated to an international exchange program), as the costs are much lower.
Conclusion:
One needs to shop around to ensure that you purchase the best option to suit your personal needs. The first step is to decide whether you would rather have a purely time-based product (cheaper), or whether you would prefer investing into an equity based product offering capital growth potential. At the end of the day, your budget should guide you. The author believes Fractional or Private Residence Club’s offer a great alternative investment as part of your portfolio diversification. Furthermore, it will be the asset in your portfolio that provides you with the most enjoyment!
| 
