C&W The Spectrum of Leisure Real Estate Products in India

BUSINESSBRIEFING

The Spectrum of Leisure Real Estate Products in India

January 2009 | A C&W and group RCI publ icat ion

INDIAN HOSPITALITY

1India's share in world arrivals currently stands at 0.5% and its share of tourism revenue worldwide is 1.11% . India's

promotion as a tourist hub was a slow starter, but over the years the native tourism industry has been growing

consistently owing to the economic liberalization as well as initiatives undertaken by the Ministry of Tourism on a

central platform as well as individual state tourism bodies on a regional platform. The Planning Commission

recognized tourism as an industry in June 1982 and since then, the growth in tourism has been phased out. With

each subsequent Five Year Plan, the growth plan has been refined and the simultaneous infrastructure development

has aided this spurge. The National Tourism Policy brought out by the Ministry of Tourism in 2002, positioned

tourism development as a national priority, focussed on enhancing and maintaining the competitiveness of India as

a tourist destination. It stressed on improving India's existing products and expanding these to meet new market

requirements. The launch of the 'Incredible India' campaign (2002) was a major initiative by the Government of

India, to promote the country as a tourist destination and it started reaping positive results a couple of years post its

CONTENTS EXECUTIVE SUMMARY

INDIA REPORT | JANUARY 2009 1

1 Executive Summary

2 Indian Hospitality

3 Alternate Products

4 Relevance of Each Product to Key

Stakeholders

5 Focus on Timeshare

6 Focus on Fractional Ownership

7 Conclusion

There is no denying that the present global economic slow down will

impact the hotel development pipeline which is further likely to enable

absorption of supply into the market. However, the underlying demand

growth will be the true judge of this absorption rate as in the current age

of globalisation restoring economic equilibrium is the prime concern of

all countries. The growing popularity of the leisure industry in the

country today has also facilitated alternative hotel product offerings to

strengthen their foothold in the market, particularly those with an

ownership model that strongly focus on making 'holidaying' a habit.

Amongst these include the traditional timeshare, fractional ownership,

along with the condo hotels and private residence clubs products. The

paper discusses these holiday models in comparison to the pure hotel

product, exploring their relevance to key stake holders namely

developers, operators as well as consumers.

We hope to have been of substantial assistance to our readers.

1 World Tourism Organisation



A C & W A N D G R O U P R C I P U B L I C A T I O N

launch. These initiatives have paid off as India is considered as a popular destination on the world travel

map today. Seen as a cultural hub with its fairs & festivals all year round, it offers a variety of travel

destinations ranging from spiritual centres to wildlife sanctuaries, from snow capped mountains to

balmy beaches.

INTERNATIONALVISITOR TREND (IN MILLIONS)

0

1

2

3

4

5

6

2000 2001 2002 2003 2004 2005 2006 2007

Year

Vis

itors

(in

mill

ions)

Source: Ministry of Tourism

100

200

300

400

500

600

DOMESTICVISITOR TREND (IN MILLIONS)

0

2000 2001 2002 2003 2004 2005 2006 2007

Year

Vis

itors

(in

mill

ions)

Source: Ministry of Tourism

A rapidly growing middle class, the advent of corporate incentive travel and the multinational

companies into India boosted prospects for tourism. India's easy visa rules, public freedoms and its

many attractions as an ancient civilisation makes tourism promotion easier than in many other

countries. Further, the country has been seen as a viable investment destination by the developed

economies for some years now. The consistent growth rate has attracted foreign investments, leading to

tremendous rise in business travel. The growth in arrivals also contributed to a significant increase in the

incoming tourist receipts, leading to a growth in the tourist economy of the nation.

The recent robust growth experienced by the country has stimulated considerable growth in the Indian

hospitality industry, particularly in relation to Average Occupancy Rates and room rates to an extent

that rates quoted by hotels in some Indian destinations have resulted in deterring international and

domestic leisure demand.

With time, there has been a tremendous expansion in the type and quality of hotel products in the

market. New hotel brands have entered the country and existing players have either diversified their

portfolio or further established current operations, to suit market needs.

The hospitality market in India has witnessed positive growth in recent years, with the key cities of

Delhi, Mumbai, Chennai, Kolkata, Hyderabad, Bangalore, Pune and Goa experiencing considerable

increase in demand as well as supply of hotel rooms. ARRs in hotels across India have increased

remarkably over the past few years. In the face of the growing Indian economy and increasing business

travel there is an apparent shortage of quality hotel rooms which has pushed up the ARR, especially in

metro hotels where corporate travel accounts for 85-90 per cent of the hotels' total business. The steep

rise in room rates and strong occupancy level in city hotels are the prime drivers of investments in this

sector.

The major cities typically average approximately 75% occupancy across the country. Average

occupancy rates and the average room rates are relatively high for most tier 1 cities. This is a cumulative

outcome of the economical growth, improving infrastructure and emergence of more commercial

hubs (tier 2 cities). The industry will undergo metamorphosis with new brands coming in and the

segments being further distinguished.

The last two years have witnessed a number of plans on the hotel development front. However, our

research indicates that the proportion of announcements to plans proceeding and actual development

is not 100%. Key reasons for this include the inability to source land at the right price to make the

development formula feasible, delays in securing land in respect of land sourcing and transactions,

raising cost of debt, lower availability of funds for new projects and escalating construction cost to

name a few. These factors are likely to slow down, or in some cases cease hotel development.

There is no denying that the present global economic slow down will impact the hotel development

pipeline which is further likely to enable absorption of supply into the market. However, the underlying

demand growth will be the true judge of this absorption rate as in the current age of globalisation

restoring economic equilibrium is the prime concern of all countries.

The growing popularity of the leisure industry in the country today has also facilitated alternative hotel

product offerings to strengthen their foothold in the market, particularly those with an ownership

model that strongly focus on making 'holidaying' a habit. Amongst these include the traditional

timeshare and fractional ownership. These are popular holiday models internationally, along with the

condo hotels and private residence clubs products. These alternative models, in particular the timeshare

product, provides a degree of insulation to key stakeholders (including developers, operators and

consumers) compared to the pure hotel product. However, while the risk associated with the timeshare







product is lesser compared to the pure hotel product, the ability for the product to maximise returns

(from a developer's and operator's perspective) is relatively lower than the hotel product. Timeshare

found a place in the tourism policy of India in the year 2001 and the Ministry of Tourism, in the year

2006 introduced a scheme for classification of Timeshare Resorts, for which guidelines have already

been framed.

ALTERNATE PRODUCTS

How different are these alternative products from Traditional Hotels

The four alternative products discussed in this

paper are: Timeshare, Fractional Ownership,

Private Residences as well as Condo Hotels.

While timeshare, fractional ownership and

private residences are primarily driven by

utilisation of the product, a sense of ownership

and lifestyle motivations, the condo product is

primarily driven by a sense of ownership and a

return on investment.

Timeshare

Timeshare offers a period of use for a certain

accommodation each year in a managed resort

environment in desirable tourist destinations.

Timeshare offers flexibility and variety to vacation ownership by allowing owners to trade their vacation

weeks for a similar unit in the global network (subject to the resort being affiliated to a global timeshare

exchange company). This product is usually purchased in one-week increments and the use rights can

either be fixed or floating. The timeshare model was first introduced into the Indian market by Sterling

Hotels and Resorts with an increasing number of competitors.

Condo Hotels

These products offer the investor whole deeded ownership of a managed room or suite within a luxury

hotel development or a residential property development. Typically the owner has between 21 to 60

days annual use and the remaining time is used by the management company to generate revenue

through an organized rental programme. Proceeds are split between the owner and the management

company.

Fractional ownership

A Fractional property, which is deeded, is sold to buyers whose primary purchase motivation is to buy

and use a second home. The product is typically a condominium, attached townhouse or smaller stand

alone homes such as a cottage or villa. The most common share size is a quarter share which gives

Investment

Ow

nersh

ip

Lifestyle

Usa

ge

CondoHotels

Timeshare

FractionalInterest

PrivateResidenceClub




owners approximately 12 to 13 weeks use per year. These weeks can be used, gifted, rented or

exchanged though a third-party exchange company. The properties are mid to high end in forms of 2-

3 bedroom luxury apartments, condominiums or family houses in a secluded setting – urban, beach or

mountain location. They also often include a wider range of services like concierge service butler

service etc.

Private Residence Clubs

Offer owners luxurious, typically purpose-built properties in prime locations and longer share times as

well as a wide array of additional benefits. PRCs have emerged as a growing alternative to second home

ownership, where the ownership is deeded. The low member-to-property ratios simplify the

reservation process and ensure that the property remains exclusive. Private Residence Club

accommodations are spacious 3 to 5 bedroom units, luxurious and well-appointed with furnishings

comparable to a 5 star hotel, except that the member is an owner and pays annual HOA dues instead of

renting by the night.

The following tables provide a brief overview of each product offerings.

Traditional Timeshare Condo Hotels

• Outright deeded purchase or Right-to-use of holiday accommodation

• Often a week used for exchange or points-based currency for flexibility

• Ranges from studio to 2 bedroom accomodation

• Purchase price approximately INR 3 lacs

• Annual fees of ranging from INR 7,000 to 10,000 per week

• Commonly managed to operate as a hotel with individual units sold to consumers

• Hotel rooms put into a condominium legal structure and sold individually

• Owner receives personal use rights of between 21 and 60 days per year

• Purchasers join a rental pool and the property operates as a hotel

• Owners may receive upto 50% of the rental income proceeds from the unit

Traditional Fractional Private Residence Clubs

• Usually 2 to 3 bedrooms

• Average 6 to 7 weeks use with some rental activity

• Sold in a similar fashion to wholly owned homes

• Can have a rent back element

• Usually 3 to 4 bedroom with very high-end furnishings

• Guaranteed high season availability of 4 to 6 weeks

• Sold as an alternative to wholly-owned second homes

• Limited rental activity

INDIA REPORT | JANUARY 2009

• Product in establishment phase; limited supply; considerable potential demand

• On sale of 85 to 65% of the inventory depending on total cost.

• On completion of timeshare membership period or anytime during the term if total asset value is discounted by remaining membership value

• Typically over the life period of the membership

• Product in early establishment phase; limited supply; considerable potential demand

• On sale of 70% of the inventory

• This is a deeded product. Once sold out developer has very little involvement


• Product in a very nascent stage; demand likely to be from second home buyers seeking good investment returns

• Typically, prior to development or within the first few years of operation (typically on sale of 75% of the units)

• Upon sale of all units or at any point during the term of operation (depending on the terms within the lease agreements and management rights agreement)

• Optional, particularly if returns are guaranteed to unit owners

• Product not entered the market; typically requires considerable demand base and capital prior to development

• On sale of 70% of the inventory

• On completion of membership period or anytime during the term if total asset value is discounted by remaining membership value


Barriers to entry in India

DevelopmentCostRecovery

Relevance to the Developer

• Medium to high in most established cities, due to proposed new supply and existing competitors

• Long term payback

• At any point during the operation of the hotel

• OptionalExitStrategy

Long TermInvolvement

Return on Investment

StrategicResilience

Timeshare Fractional Ownership Condo Hotels Private Residence Hotels

Clubs

Source: Cushman & Wakefield Hospitality

Average Fair Good


RELEVANCE OF EACH PRODUCT TO KEY STAKEHOLDERS

With travel booming in the region and major development projects underway, shared ownership of real

estate, where multiple individuals own the right to use a common piece of real-estate for an agreed

upon amount of time, offers considerable potential for developers, operators and financial institutions.

The more affluent consumer market is still willing to spend money on second home real estate,

including higher end Private Residence Clubs, when they are convinced there is value for this real estate

and they find something they perceive as exceptional. Location has become an even more important

determinant of success for all hospitality related products.

The key stakeholders across all products may be largely classified into developers, operators and

consumers. The relevance of each product to each stakeholder group is detailed in the table below:

6


• Requirement of hotels in more than one location due to continued competitiveness in the market; relatively lower quantum of management fees on operation of a timeshare product

• Maintenance cost charged to the consumer

• On assignment of operational agreement or on completion of the term

• Operator may also be in the form of a facilities management company as ownership is linked to the asset



• Product not established in India; growing hotel and serviced apartment product in key Indian markets are likely to increase the barriers to entry

• Unit owners may wish to exit the pool limiting operational efficiencies to the operator, particularly if the operator is brought in after sale of all units and a minimal unit requirement is not explicit in the lease agreement

• Sale of management rights through assignment or on completion of term

• Product not established in India; nature of the product would require an experienced operator with exceptional capability





Relevance to the Operator

• Medium to high in most established cities, due to proposed new supply and existing competitors; entry of new operators and brands into India

• Operator is paid via management fees

• Assignment of Management Agreementor on completion of the term

ExitStrategy


Return on 2

Investment

StrategicResilience

Timeshare Fractional Ownership Condo Hotels Private Residence Hotels

Clubs


Average Fair Good

• Payment of full (or near full) membership upfront or in first few years

• Use maybe anytime during the year if it is points based product, at any resort if affiliated with an exchange company

• Typically associated with mid-market to first class quality, particularly if affiliated with a branded operation

• Typically within a limited period immediately after membership payment

• Payment of partial asset cost despite application of restricted use, with potential for a return

• Use restricted to period allocated as per agreement

• Good quality perception if property is managed by an operator

• Asset share may be on-sold, depending on the agreement terms

• Investment motive where an asset is purchased typically based on its return potential

• Use typically for 21 to 28 days but restricted to providing the operator with an opportunity to capitalise on peak seasonal demand

• Good quality perception as property is managed by an operator similar to a hotel

• Asset may be on-sold, depending on the agreement terms

• Perception of an exclusive private club with a shared ownership option

• Use restricted to period allocated as per agreement

• Exclusive and high end

• Asset share may be on-sold, depending on the agreement terms



Relevance to the Consumer

• Value perception is primarily based on cost, brand or market positioning of the hotel

• Use flexible throughout the year, but subject to rate variances due to seasonality

• Good quality perception as property is managed by an operator, particularly if affiliated with a branded operation

• Asset maybe on-sold at any time

ExitStrategy


Return on Investment

StrategicResilience

Timeshare Fractional Ownership Private Residence Hotels

Clubs

Condo Hotels


Average Fair Good


7

2Assuming all products are operated under a management contract and condominiums under a management rights agreements




FOCUS ONTIMESHARE

The Origin of Timeshare

An idea which had a lot in common with timeshare was put into practice in 1963 when, at a hotel in

Ticino, Switzerland, a German named Alexander Nette developed an innovative concept. His idea was

to sell shares in the business, each share giving its owner right-of-residence points. The timeshare

owners were therefore called shareholders or partners. By 1968 Hapimag, the company which arose

from this original idea had 8,000 shareholders. It now has more than 125,000 shareholders and 4,800

apartments at 53 locations in 15 countries.

By 1967, a similar concept was being introduced by one of the largest construction companies in

France, Les Grands Travaux de Marseille. It was the first classic holiday timeshare programme in the

world. Fixed units were sold for holiday purposes at a ski resort called Superdévoluy in the French Alps.

With its slogan 'Stop renting a room – buy the hotel, it's cheaper', it was an immediate success as the

purchase of the holiday weeks brought with it, the guarantee of reservations for those who wanted to

ski in the area.

The first timeshare plan was introduced in the US in 1968, with the conversion of a hotel in Hawaii, but

not much was really heard of timeshare there until the short-term collapse of the whole-ownership

condominium sector in 1974.

During the oil crisis in the mid-1970s, coming after a building boom in Florida, the idea of timeshare

was adopted as the answer to the fall in the property market. Lowering the prices of units by converting

them into weekly intervals meant that more people could afford them.

Some faltering condominium projects in St.

Thomas, Fort Lauderdale and Puerto Rico were

converted into timeshare projects but, in their

desperate haste to make a sale, many of the projects

failed due to poor legal structuring, financing and

marketing. Nevertheless, although at this point

timeshare projects were on a small scale, fragmented

and relatively unregulated, timeshare had started to

take off and by the end of the 1970s annual sales had

risen to $50 million.

Profile of the Timeshare Product in India

The timeshare industry globally comprises of over 5,425 resorts with approximately 6.7 million owners

representing approximately 10.7 million timeshare weeks across 200 countries.

The timeshare industry in India is at a nascent stage. The industry in India has grown from single resort

Typical Demographic Profile

Average Age: 42 yrs

Range of Age: 27 to 55 yrs

Avg. Household Size: 4 people

Avg. no of Children: 1.5 children

Membership Gender 89.8% Male

Profile: 10.2% Female

(Source: Club Mahindra)

hotel timeshare developments to chains of hotels

and resorts providing consumers with the

opportunity to buy vacation time at any of their

properties nationally. The exchange company

typically has service affiliations with a number of

timeshare resorts and hotel chains worldwide. This

enables the consumer to exchange time at any of the

resort affiliates through the exchange company for a

fee.

The advent of timeshare in India has also resulted in

the establishment of regulatory bodies which ensure

authenticity and safeguard consumer interests. The

All India Resort Development Association

(AIRDA) focuses on ensuring that there is no false

advertising, that each project is clearly designated as

a timeshare and that timeshares are run by licensed

operators.

Performance of the Timeshare Industry in

India

The timeshare industry in India comprises of

approximately 4,640 timeshare units and 146,450

members representing approximately 241,330

timeshare weeks.

The robust economy has facilitated considerable growth in per capita income, which in turn has

increased the discretionary spending of a large section of the population. Destinations such as Goa,

Kerala and Rajasthan, which were known to be hot spots for international visitors, have seen a change in

the visitor profile with more demand registered from the domestic markets. This has resulted in

considerable growth in room tariffs, some flattening out of seasonality as well as a situation of limited

hotel supply during the peak season. Timeshare has been credited for opening up new destinations like

Coorg and Munnar to tourists across India which were earlier known and visited by very region specific

tourists.

The timeshare concept has, to an extent, provided a solution by offering relatively affordable vacation

ownership packages for the same price at multiple locations. The perception of a 'paid holiday' (due to

the advance payment nature of the concept) has also been received favourably by consumers and is

likely to grow in popularity over the short term.

Based on our research, demand for timeshare hotel product in India is likely to grow at approximately




Exchange

Company

Timeshare

Report

Member

Maintenance

Fees

Sales&

Service

Mem

bers

hip

Exch

ange

Serv

ices

Affiliation

Services

Key Timeshare Transaction Facts

Growth in transaction bookings by Indian

members (YOY Jan 08 to Nov 08): + 28%

Growth in transaction bookings by

International members into India

• Month of Nov 08: + 39%

• Month of Dec 08: - 26%

• Month of Jan 09: + 51%

Note:Transaction bookings also reflect

memberships purchased in advance and do not

reflect the purchasing capacity of timeshare in

the current economic environment

(Source: Group RCI)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 (E) 2007 (E) 2008 (E) 2009 (P) 2010 (P) 2011 (P) 2012 (P) 2013 (P) 2014 (P) 2015 (P)

Year

1,000

2,000

3,000

4,000

5,000

6,000

Ave

rage

Est

imat

ed

Unit

Sal

e(%

)

Average Unit Cost Per DayAverage Unit Sale

(Source: RCI,We note the above estimates are indicative only and represent typical performance of a 1 bedroom

apartment. Please note that further research is necessary to understand the true potential of the timeshare industry in India)

Ave

rage

est

imat

ed

room

rate

(IN

R)




16% per annum from 2006 to 2015, facilitated by supply growth of approximately 12% per annum over

the same period. The average unit sales for a typical timeshare development (eg: 1 bedroom apartment

unit sale from a consumer perspective) is likely to grow at 3% per annum from 2006 to 2015.

Most timeshare products in India are typically positioned at the mid market to first class categories. We

understand that the market is likely to experience some growth in supply in the five-star to luxury hotel

categories. As per our research, the average unit cost per day for a consumer is likely to grow at

approximately 4% per annum from 2006 to 2015, compared to approximately 5% to 8% for a pure hotel3

product .

2006 (E) 2007 (E) 2008 (E) 2009 (P) 2010 (P) 2011 (P) 2012 (P) 2013 (P) 2014 (P) 2015 (P)

Year

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Average Unit SaleTotal Timeshare Supply Total Timeshare Demand

Num

ber

ofT

imesh

are

Units

(in

000s)

Source: RCI,We note the above estimates are indicative only and represent typical performance of a 1 bedroom

apartment. Please note that further research is necessary to understand the true potential of the timeshare industry in India)

Est

imat

ed

Ave

rage

Occ

upan

cyR

ate

3 Growth is based on average year on year increase in ARR for hotels




Impact of branded hospitality players and

reputed conglomerates is the need of the

hour. As in other international markets,

brands have made timeshare an important

part of their product portfolio, and thereby

created a huge impact by not only driving up

the average purchase price but also creating a

huge awareness. The credibility of a brand

plays an important part in the consumers'

psyche due to the conceptual nature of the

product. Potential consumers, while agreeing

to the benefits of the product, have often

cited the lack of branded players as their

reason for not purchasing timeshare, thus indicating a requirement for both credibility and glamour

in the product.

The timeshare industry in India weighted towards west India owing to considerable capture by

Mumbai, Pune, Ahmedabad, Surat, etc. The northern region includes NCR, Lucknow, Punjab,

Jaipur, etc and represents approximately 23% of the timeshare industry. East and south India

represent approximately 6% and 29% of total timeshare members.

Constraints and Pitfalls of the Timeshare Product

There are a number of constraints and pitfalls as well as opportunities and advantages associated

with the timeshare product.

Constraints and Pitfalls:

• Weak and inconsistent tour flow driving high marketing costs

• Old-fashioned sales tactics with inconsistent close rates

• Bad product design that leads to off-schedule refurbishment

• Ineffective property management which leads to high maintenance fees and/ or non-payment

by owners

• Generally lower rate achievability for resorts with partial timeshare product, compared to rates

achieved by pure hotel product

Opportunities and Advantages:

• Location of resort does not necessarily require a location-specific demand catchment area

• Product is based on a customer centric property management approach for holiday makers

• Global exchange affiliation with inventory where clients travel (subject to the resort being

affiliated to a global exchange company)

• Multi-location holidays for the consumer at relatively the same cost (excluding additional fees

associated with a national or international vacation transfer)

Timeshare Member in India

West North South East

5.98%41.78%

22.9%

29.35%

Source: Group RCI




• Opportunity for a pure hotel product to maximise on occupancy and capture demand by

incorporating a timeshare quota

• Opportunity for operators to link loyalty programs to vacation ownership management

companies to create a USP and differentiate themselves from competitive operators. This is also

likely to facilitate some growth in loyalty program members as well as facilitate some demand

for timeshare specific rooms within a resort or hotel

• Opportunity for the developer in retrieving a large portion of development cost either before

the resort is operational or within the first few years

FOCUS ON FRACTIONAL OWNERSHIP

While the timeshare product has experienced some growth in recent years in India, the fractional

ownership model is yet to be established in the organised sector.

Profile of the Fractional Ownership Product

The fractional ownership concept is defined as the selling of resort real estate in intervals of more

than one week but in less than whole ownership. Shares or 'fractions' typically range from two

weeks of ownership to a one-quarter (three months of ownership).

Fractional ownership is a form of a holiday ownership programme longer than the traditional one

or two-week timeshare product. They have been an increasingly important element in the holiday

ownership industry since the late 1990s in the USA where the fractional ownership model began to

attract interest after the Tax Reform of 1986 which reduced the utility of second homes as tax

shelters. Faced with increased costs resulting from unused holiday homes and the difficulty of

renting them out, the traditional second home buyer began looking for alternatives. The fractional

ownership model offered an appealing compromise; the right to occupy the unit for a portion of

the year tailored with their expected usage pattern – from four weeks to 13 weeks – at a price that

reflects the period used only, coupled with a second home interest deduction.

For developers too, the concept was attractive, providing an affluent, newly interested market.

Profit margins are likely to be higher in the fractional ownership model than in full-unit second

homes sales, closer to timeshare margins and with fewer units to sell, marketing costs are lower than

traditional timeshare programmes. Usually, the consumer obtains the right to occupy the unit on a

rotational basis, enabling each consumer to use the holiday home during each season of the year.

Typically, six purchasers buy specific calendar months so that owner number one, in year one would

have January and July, with owner number two having February and August, owner three having

March and September so on and so forth, but with the calendar revolving forward by one calendar

month each year, so that over a six year period, each of the owners would have had an entitlement

to utilisation of all calendar months.




The fractional interest concept has existed for a number of years internationally. For example,

individual friends or relatives collectively buy a holiday home and share in its use, in accordance

with a predetermined schedule. Over the years, developers in USA have sold fractions of whole

ownership and thereafter have provided management services to the owners.

Commonalities between High-End Fractional Ownership and PRCs

The high-end and luxury Fractional Ownership product shares a number of common

characteristics with Private Residence Clubs (PRC). The key features of a luxury fractional home set

it apart from traditional timeshare as well as those fractional interests positioned in the low or

moderate tiers of the market.

In addition to share size, other differentiators include higher product cost, higher price points and

lower marketing costs. The fractional product is further segmented with the PRC combining all the

benefits of fractional ownership but with a significant overlay of amenities and services such as

would typically be found within a five-star hotel, with related brand standards and assurances and

targeted only at the most affluent consumers.

PRODUCT CONCEPT

High disposable income is associated with more leisure time and a preference for luxurious

surroundings, what are often termed 'the money rich, time poor' segment. In the case of affluent

households with minimal leisure time, much of the promotional emphasis is placed on the well-

documented psychological and spiritual need for family vacations. In response to a desire for a high

quality alternative to a wholly owned second home, without the associated costs, hassles and

responsibilities, sales of fractional interests of luxury condominiums, townhouses and single family

cottages/ homes have demonstrated a market with considerable untapped demand in India as well

as internationally.

The coupling of the concept of a private club with shared ownership is a recent trend that adds

sophistication and a higher level of exclusivity to the product. Included are elements such as a

private clubhouse and a range of five star hotel services that are not available with wholly-owned

resort real estate. The club is structured to function like a private golf club where the members are

entertained with social events and form social relationships with other members. The PRC is

marketed as a real estate investment, not vacation time. The emphasis is on 'relationship selling'

rather than 'mass merchandising'.

The PRC concept strives to create exclusivity and a sense of belonging while catering to the

sophisticated wealthy buyer at the top of the social strata. The competition for PRCs arises from

wholly owned vacation homes and not timeshare, as access available to the general public detracts

from this exclusivity. Owners or members over time have shown a willingness to pay a premium for

the added security and social advantages afforded by a PRC.




Product characteristics

In general, three-bedroom units are the most common fractional unit type, followed by two

bedrooms. While the unit mix varies somewhat by location, three bedrooms typically account for

one-half to two-thirds of all units, while two bedrooms comprise roughly one third of the supply.

Four-bedroom homes have also been gaining in popularity. The market is expressing a preference

for larger units, particularly in the more elite resort locations. This follows the logic of buyer

motivation being an alternative to second home ownership.

A second home will generally provide two or more bedrooms and allow greater flexibility in terms

of use. The fractional and PRC buyer prefers to retain a certain degree of flexibility. Typical sizes

range from 1,800 to 2,000 square feet for two bedrooms and 2,200 to 2,600 square feet for three

bedrooms. Given that a luxury fractional home competes against whole ownership, the buyer is

more focused on the size, quality and use structure of the programme than the price, which

becomes secondary considering a cost per share at 20-25% of whole ownership for comparable size

and quality.

CONSTRAINTS AND PITFALLS OF THE FRACTIONAL OWNERSHIP PRODUCT

There are a number of constraints and pitfalls as well as opportunities and advantages associated

with the fractional ownership product.

Constraints and Pitfalls

• Location of the development is of importance as the consumer makes frequent trips to the

same location. Most often the cost associated with a premium location is relatively high

• Amenities provided are not always consistent with purchasers interest

• Excessive or under-utilised amenities which drive annual fees

• Product does not meet the target market (e.g. unit size)

• Product quality is inconsistent with location quality

• Uncertainty or lack of comfort of sharing a deeded property with others

Opportunities and Advantages

• Known usage patterns meet availability

• Friends and family participation or involvement

• Lifestyle fulfilment without the burden of whole ownership

• Financial capability which may limit purchasing full ownership of a second home

• Opportunity for developers to promote fractional ownership as an option to full ownership in

the current market scenario, particularly given the relatively high supply nature of the residential

market in some key cities in India.

CONCLUSION

The future of the timeshare and fractional ownership products in the Indian real estate market is

likely to be governed by several factors including price appreciation in the resale market, the degree

to which development financing is available in the future, which has been a major constraint to the

growth of the supply in the past and over the short to medium term given the current economic

environment, the rate at which consumer awareness of the product increases in the future, the

financial success of future projects as well as the extent of long-term return on investment that

each product is able to generate, particularly in the current economic environment. The fractional

ownership model is likely to become increasingly popular in the current market environment where

an asset may be purchased for a fraction of the cost with associated restricted use. The model

allows for easy exit and also provides an opportunity for capital gain. The Timeshare model is likely

to also gain considerable popularity in the domestic market, driven by the perception of a relatively

discounted cost of a holiday at the time of utilization compared to the hotel product. In the current

economic environment it is also likely that the timeshare utilization may experience more demand in

urban city hotels with some transference of business demand from traditional hotels to timeshare

hotels as a cost saving mechanism.

Due to the relative immaturity of the timeshare and fractional ownership industry, it is difficult to

forecast the degree to which the above factors will influence growth positively or adversely. As the

market gains experience and comfort with the product, it is likely that innovative strategic and

marketing initiatives will facilitate a means of meeting consumer needs through product design,

pricing and usage plans.

With a slow down in the US economy and its impact on Asian markets there is a lot of speculation

and uncertainty in the industry especially on absorption of planned hotel supply in the coming

years. A considerable amount of money is being invested and major alliances have been formed

which indicate a positive outlook and strengthens the market sentiment. An estimated 41,600 hotel

rooms across major 9 cities will be furnished over the next four to five years. Most of these hotel

rooms correspond to hotels with brand affiliations and are in various stages of planning and

development. With several proposed properties under construction, the markets are likely to see a

drop in the occupancy rates and rationalisation of average room rates in the long term. The current

global economic environment is likely to also impact the hotel industry in the medium term as it is

primarily driven by business and tourism; but as most businesses, there will only be a cyclical dip.

In the wake of the current economic environment, hotels and alternative commercial

accommodation products are likely to focus more on sustainability and implement performance

improvement and asset management strategies in an effort to combat short (e.g. Mumbai blasts),

medium (e.g. economic slowdown) and long term (e.g. considerable new supply pipeline) obstacles,

improving their resilience and reducing risk, to an extent, in the long term.







Bibliography:

Brochures / Information booklets

• World Economic Outlook, October 2008 – International Monetary Fund.

• The Global Competitiveness Reports 2008-09, October 2008 – World Economic Forum.

• “Made in India”, September 2005 - McKINSEY and Confederation of Indian Industries (CII).

• Industrial, Investment and Infrastructural Policy of Maharashtra – 2006,

Government of Maharashtra.

• Gujarat Industrial Policy – 2003, Government of Gujarat.

• Website: www.sezindia.nic.in

Cushman & Wakefield is the world's largest

privately held commercial real estate services firm.

Founded in 1917, it has 227 offices in 59 countries

and more than 15,000 employees.The firm

represents a diverse customer base ranging from

small businesses to Fortune 500 companies. It offers

a complete range of services within four primary

disciplines:Transaction Services, Capital Markets,

Client Solutions and Consulting Services.

Cushman & Wakefield Hospitality provides a wide

range of consulting services for hotels, resorts,

serviced apartments and mixed-use developments.

We specialise in operations analysis, market

research, demand analysis and have developed a

detailed understanding of the dynamics of the

accommodation industry.This allows us to complete

comprehensive market demand forecasts, which

form the base for market and business assessments,

financial projections and valuation services.Through

the integration of consulting and valuation services

with design management and project direction

services, we can provide our clients with a full suite

of services from site analysis and project

conception, through market analysis and financial

evaluation, to construction administration and

project delivery.

A recognised leader in global real estate research,

the firm publishes a broad array of proprietary

reports available on its online Knowledge Center at

cushmanwakefield.com/knowledge.

For more information:

Akshay Kulkarni

Director - South Asia

Cushman & Wakefield Hospitality

Tel: +91 22 6657 5555

E-mail: [email protected]

©2009 Cushman & Wakefield

All Rights Reserved

Disclaimer

This report has been prepared solely for information purposes. It does not purport to be a complete description of the markets or developments contained in this material.The

information on which this report is based has been obtained from sources we believe to be reliable, but we have not independently verified such information and we do not

guarantee that the information is accurate or complete.

Group RCI, part of the Wyndham Worldwide

family of companies, (NYSE:WYN) is the global

leader in non-hotel leisure accommodations with

exclusive access for specified periods to more than

67,000 vacation properties in nearly 100 countries.

Organizationally, Group RCI is comprised of

vacation exchange, including RCI®, the worldwide

leader in timeshare and vacation exchange and

provider of travel services to businesses and

consumers and The Registry CollectionÒ, the

world’s largest luxury exchange program; vacation

rentals, including Endless Vacation RentalsSM , Landal

Greenparks®, Novasol®, and more than 30 other

vacation rental brands, through which vacationers

can rent a wide variety of property types, from city

apartments to country cottages to unique villas; and

NorthCourse®, Leisure Real Estate Solutions, an

international leader in providing a full spectrum of

advisory, research, asset management and turnkey

solutions and services. Collectively, the company

delivers vacation experiences to leisure travellers

around the world and provides products and

services to business customers that support the

growth of the leisure real estate industry.Wyndham

Worldwide Corporation is one of the world’s

largest hospitality companies with leading brands in

lodging franchising, vacation ownership, vacation

rentals and vacation exchange. For additional

information visit www.grouprci.com or the media

centre of www.wyndhamworldwide.com

For more information:

Anin Bagchi

Director - Business Development

Group RCI

Board no: +91 80 41849207 / +91 98860 40505

Email: [email protected]

Authors of the report:

Sohaila M

Cushman & Wakefield

Hospitality

[email protected]

Juhie Tak

Cushman & Wakefield

Hospitality

[email protected]

ShailaVivek

Research & Business Analytics Group

Cushman & Wakefield

[email protected]

www.cushmanwakefield.com

©2009

Cush

man

&W

akefield

All

Rig

hts

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rved

www.grouprci.com

C&W The Spectrum of Leisure Real Estate Products in India

Documents

tourism development

ministry of tourism

native tourism industry

share of tourism revenue

national tourism policy

government of india

competitiveness of india

leisure industry