Own Or Lease? (Or Maybe Neither)
November 8, 2011
The snail's pace of the economic recovery has made the wealthy cautious about high-end purchases, suggesting that brokers of shared ownership plans might benefit in these tough times.
But it hasn't worked out that way.
The economy is apparently so dour that the rich are holding back on partial ownership, or fractional, purchase plans for big ticket items such as a Gulfstream jet, a Ferrari sports car or a ski chalet.
Companies involved in the fractional ownership industry say it was not until this year that they saw signs of recovery in their business. Before that, they were suffering with everyone else. Still, they say, it may take several years before business is back to pre-recession levels.
Businesses involved with the shared ownership of real estate, for example, were devastated by the economic crisis, says Nick Copley, president of the SherpaReport, which tracks the shared luxury property market.
"These types of products are bought as second or vacation homes, so it's not really surprising that sales dropped during the recession as people cut back on their vacations," he says.
North American sales totaled $530 million, less than a quarter of the 2007 peak of $2.3 billion, says Copley, citing statistics from Ragatz Associates.
"When I started Quintess, there were 20 destination clubs; today there are arguably four," says Ben Addoms, who co-founded the luxury residence club in 2004. "When Lehman collapsed, spending on most luxury leisure items went down. It really only started to recover in 2010 at the end of the year. ... The wealthy have recovered faster than the middle class from the recession."
Still, he expects Quintess Collection's annualized sales may not return to pre-recessionary levels until 2014.
Those companies that survived did so by changing their operations. Fred Reid, president of Flexjet, which specializes in fractional aircraft ownership, says the company returned to profitability in 2009 by acting fast.
"We did experience softening of our business, but we responded quickly by right-sizing our fleet of fractional program aircraft and staff while working very hard on our retention strategies," he says.
The Abercrombie and Kent Residence Club has used several promotions to weather the downturn, including offering trial memberships in 2009 that brought in several new equity members, says club spokeswoman Pamela Lassers. The club also began giving $10,000 in travel credits to customers who referred new members and, more recently, $20,000 in credits to those who sign up by the end of September.
Abercrombie and the Ritz Carlton Destination Club last year partnered in an exchange program to give their respective members even more options.
"As in any business, we have placed an additional emphasis on cost containment and trying to keep dues increases at a minimum," says Sally Spaulding of the Snowmass Club in Colorado.
She says the owners did not cut services, though, to "show the value proposition that Snowmass Club Residence fraction ownership brings as opposed to having to maintain and service a wholly owned product."
That has always been a major benefit of fractional ownership or shared use. Most people who own a second home will only spend a month at most there during any year, but they still pay the full cost, as well as the full maintenance for the residence, according to those in industry.
Likewise, drivers typically don't commute in a 1968 Firebird convertible, but instead drive it on summer weekends and vacations. Yachts usually sail for no more than a few weeks and weekend trips each year, and only the busiest executives need a jet available at a moment's notice.
But the concept of shared ownership or usage ranges beyond these commonly known products. For instance, art plans allow businesses to rotate a number of paintings and sculptures several times a year for a monthly fee. A company called Crushpad in California, meanwhile, lets people own a piece of a winery, make their own wines and even market their own micro-winery labels without a large investment and without having to pick or crush grapes themselves. And women don't have to spend thousands of dollars on a diamond cuff or a Marc Jacobs dress they'll only wear once when they can rent it by the week from businesses with names like "Bag Borrow or Steal" and "Wear Today Gone Tomorrow."
William Mirguet, the founder of Drake Yachtshares Inc. and a consultant to the shared yachting industry, says fractional ownership appeals to "practical-minded people who place value on saving money and avoiding common hassles."
Piers Brown, the founder of the Web site Fractional Life, which provides information and advice on 300 shared-use operators, says the lingering effects of the recession are now giving a boost to fractionals and clubs.
"The recession has obviously affected discretionary spending across all income brackets," he says. "Even the very wealthy are more cautious than they used to be, and they are increasingly turning to fractional ownership as they see what a logical purchase it is."
Copley agreed that interest in shared ownership seems to be perking up, noting that "some positive signs are beginning to emerge" that shared real estate is rebounding.
For instance, The Reefs club in Bermuda recently reported more than 40 new sales in two weeks as it relaunched with prices lower than a few years ago.
"Buyers appreciate the twofold advantage of only paying for what you use, and relieving themselves of the hassle of maintenance," Brown says. "The last couple of years have seen the launch of a new breed of destination club, which offers buyers an investment opportunity as well as a luxury vacation experience."
Lifestyle Assets, for instance, bills itself as the middle ground between a destination club, where a traveler chooses from among a number of locations to spend time but has no ownership interest, and a fractional, where one owns a percentage of a property. Owners in Lifestyle Assets make a one-time capital payment and pay an annual expense fee for the residences-currently in four locations, with additional sites planned-and a yearly "Lifestyle Plan" fee to cover the cost of spending between two and four weeks at a location. After seven years, the group will divest, sell the properties and distribute the proceeds among the owners, who will have the option to renew membership or take away a share.
In Abercrombie's model, a member's capital contribution and dues depend on the number of nights he plans to use the residence, ranging from 15 to 60.
"Our equity model is fundamental to the sustainability of the club in challenging economic times," Lassers says. "We have a very conservative business model with governance to protect our members."
The club has benefited from its relationship with Abercrombie and Kent's well-known travel arm, particularly given the resurgence in luxury travel, which is growing by as much as 30% for some destinations, Lassers says. "We anticipate a similar increase in interest in the Residence Club over the next 12 to 15 months," she says.
The Quintess Collection has expanded to include three clubs with more than 100 homes, most valued at between $2 million and $4 million, in 40 destinations. There are smaller annual fees and dues based on the number of nights one wants to travel, but no ownership.
"Our typical member spends 25 nights a year on travel," Addoms says. "About 70% already own another home or fractional.
"Our members own their own companies; they are private equity or fund managers; they are surgeons or lawyers with their own practices. They are very busy. They have money, but not necessarily the time to enjoy it. This is how they can without the burden of owning a second home."
The Snowmass Club has joined with the Registry Collection to allow owners to exchange into high-end properties around the world, Spaulding says. Celebrating its 10th anniversary, Snowmass continues to perform well, with fewer than 10% of its 290 fractionals for resale. Snowmass is considering a full renovation in 2013 to position it for the future "as Gen X expands into the resort real estate market looking for a second home primarily for use at a lower price point, with lower carrying costs than wholly owned properties," Spaulding adds.
Like real estate, the fractional jet market had to adapt. "The private jet market has been hammered during the recession, as politicians and the media made the sector a scapegoat and a symbol of corporate excess," Brown says. "Fractional operators are seeing an increase in demand, with several placing large aircraft orders in recent months, and introducing flexible hybrid fractional ownership and jet card offers."
The sale of jet cards, through which people buy private aircraft service by the hour, rose by half or more at two of the largest fractional jet operators in the nation, according to Bloomberg News.
Flexjet, whose fleet includes Bombardier aircraft and allows members to use a network of charter craft, reported that fractional share sales rose 64% in the first quarter of this year compared with 2010, Reid says.
"During the economic crisis, products that were more transactional in nature-such as jet cards and on-demand charter-held greater appeal to buyers across the industry as they didn't require a long-term commitment or a significant capital investment," he says. "As the economy continues to improve, fractional jet ownership-the core of our business-is garnering greater appeal."
Flexjet clients buy shares in a craft based on the amount of time they expect to fly each year, starting with 50 hours or 1/16th of a jet. Costs, which vary by the size and type of craft, include the purchase price, a management fee, hourly fees and fuel costs.
Like other products, fractional jet ownership provides all the benefits of owning a plane without having to deal with the hassles of managing, maintaining and insuring it, say those in the industry. In addition to the benefits of convenience and luxury, there are tax depreciation benefits. Between 65% and 70% of clients, who include entrepreneurs, corporate executives and retirees, purchase their shares for business use, Reid says.
By contrast, automobile fractionals and clubs are more about pleasure.
Classic Car Club, with locations in Manhattan and four European cities, offers fleet access to fast cars like Ferraris, Lamborghinis and Porsches, as well as classics: a 1975 Alfa Romeo GTV, a 1969 Jaguar E-Type and a 1965 Shelby Cobra. These are not for commuting, but for cruising on weekends and vacations, according to Zac Moseley, who directs the club's Manhattan location.
"We take away the hassle and logistics of owning cool cars," Moseley says. "We're also a real members club, with track days and a fully stocked bar."
Members purchase points based on the number of days they intend to drive and the type of car. But they also socialize at the club's lounge in SoHo, attend parties and road rally through the New York countryside.
Despite the benefits, Moseley says the club has had to change to thrive in the last few years. "We have had to adapt our messaging to be smarter through the economic waves," he says.
The club benefited in 2009 from the start of the recovery when Wall Street executives and others who had panicked a year earlier and sold their Porsche Turbos and other weekend pleasure cars at a big loss saw the club as the perfect way to indulge their yen for fast driving without the high costs, Moseley says.
"We were sort of a smart option, as opposed to going out and making the same mistake again," he says.
By the same token, as the economy improved, those who could afford it started buying expensive cars again, leading the club to reposition its message to emphasize "the most extreme driving experiences," Moseley says.
"We just have to adapt. We've always found a way to do that," he says.
Most have not. In the pre-recession years, dozens of Web sites advertised car clubs across the country, Moseley says, noting that few of those remain.
Fractional ownership makes perfect sense for supercars, Brown says.
"Buyers are increasingly aware of the logic in sharing the burden of a high-cost, low-use asset, especially one which rapidly depreciates in value," he says. "With both supercars and yachts, fractional ownership also negates the onerous maintenance burden."
The club model is more popular with boating because true fractional ownership never "fully blossomed with yachts," Mirguet says. Many operations, including his own, opened and closed during the last decade. He said the industry faces several challenges, some of them legal and practical.
"Yachting is an ego-driven lifestyle for many people, and the sharing aspects of fractional ownership just don't feed their egos," Mirguet says. "'I share a yacht with five other people' doesn't make for sexy cocktail party conversation."
Still, he says the market for shared yachting remains viable, with clubs and fractional offerings from businesses like Sailtime, Global Superyacht and Barton and Gray providing the opportunity to sail out of Florida, Massachusetts, California, the Mediterranean and the Caribbean for a lower cost. Mirguet also expects shared yacht clubs to gain favor with middle- and upper-middle-class boaters.
Reid sees the shared use jet industry growing as well, particularly if it moves to emerging markets like China and India, which have relatively few business aircraft for the size of their populations.
"It will be critical for aviation solutions providers to consistently evaluate and be knowledgeable of new planes coming into the market," Reid says, "to make sure their aircraft mix best serves the varied missions of their customers."