Credit Crisis Cripples Vacation Ownership

I wrote awhile back how it was interesting that timeshare sales seemed to be immune to what is happening elsewhere in the real estate economy. I guess that is no more. This article was featured in the February issue of Hotels magazine.

Would-be owners think twice about real estate investment, while timeshare companies are having difficulty monetizing consumer debt.

By Adam Kirby, Associate Editor

Just a few months ago, even as global travel was slowing dramatically and a U.S. recession loomed, leaders in the vacation ownership industry were upbeat and optimistic that the downturn would largely miss timeshare and vacation clubs. Even fractional and branded whole ownership were thought to be somewhat insulated from the recession thanks to their appeal to more affl uent consumers. HOTELS even went so far as to declare in its ill-timed October cover story that vacation ownership “defies the downturn.”

And then the sky fell.

The global credit markets collapsed, stifling an industry that had relied so heavily on loan liquidity from timeshare mortgages sold as assetbacked securities. The market for such “consumer paper,” as it is colloquially known, seized up almost completely—and for those companies entrenched in the asset-backed securities model, it matters little from a cash-flow perspective that consumer interest in timeshare remains relatively strong.

I was wondering about this. It was getting so crazy in the industry that some timeshare projects were able to have a new credit card issued, while the people were sitting at the table, for the purchase of their new timeshare, with the down payment conveniently already on it!

“We’ve never had a situation like this before, where we’ve been unable to monetize consumer paper,” says Howard Nussbaum, president of the American Resort Development Association. “There were timeshare developers who were still having robust sales, but there was no way to monetize the consumers’ debt, so those developers had to slow their sales down. That has been very problematic for the industry.”

Cash transactions are the preferred order of the day throughout the industry, as vacation ownership operators retool their sales strategies to become less dependent on securities monetization.

Marriott Vacation Club International (MVCI) and Starwood Vacation Ownership (SVO) have stopped offering incentives, like bulk loyalty points, for prospective owners to fi nance timeshare purchases. That said, both Orlando-based companies remain solvent enough to provide financing when needed to complete transactions.

“Starwood and Marriott are going to continue to make timeshare loans; they’re just not going to push them as hard,” says David Loeb, managing director of Robert W. Baird & Co. Inc., Milwaukee, Wisconsin, which is projecting sales revenue declines of 30% to 50% for the two companies this year.

In between 30% to 50% is 40%; a number I keep hearing and seeing all over the place for how far markets have dropped. But it seems this is going to be going ever further than 40%…

Wyndham Vacation Ownership, Orlando, was perhaps the major timeshare player hit the hardest by the credit crunch. In December, the company announced it would cut 4,000 sales and marketing jobs—a quarter of its total workforce—in a cost-saving measure tied to diffi cult fi nancial forecasts. The company expects to scale back vacation ownership interest sales by 40% this year, to US$1.2 billion, making the profit sheet less dependent on external credit markets. Westgate Resorts, Orlando, is facing a similar fate, with 3,000 workers already let go and another 1,000 on notice to ready their resumés.

Prospective Buyers Cautious

The credit crisis has affected nearly all facets of the economy, souring 2009 ownership companies that were not reliant on assetbacked securities for liquidity. Warnings that this recession may be longer and deeper than any in recent memory have made consumers, regardless of affluence, jittery about big-ticket spending. “The bursting of the housing bubble has really taken the bloom off the rose in terms of the consumer’s perception of owning timeshare real estate,” Loeb says.

The timeshare segment, while not hurting quite as badly as the travel industry overall, is nevertheless expected to post a decline in sales for the first time ever. Fractional and whole-ownership sales have slowed even more dramatically.

“The higher-end guy is sitting on his hands in all aspects of his life,” says Larry Shulman, senior vice president of sales and marketing for Florida-based Hyatt Vacation Ownership Inc. “They’re looking at the product and saying, ‘This is good, I’m very interested—just not now.’ They’re not saying, ‘No,’ they’re saying, ‘Not now.’ But I’ve never before seen that guy not buy what he wants to buy, when he wants to buy it.”

This is commonly heard in the full-time real estate market in Vallarta as well. The answer isn’t no, it’s just “not now”. 

Not all buyers are willing to wait for the economy to get better, however. Many vacation ownership companies are beginning to observe a definite trading-down effect, as wouldbe whole-ownership buyers are considering fractional as a more palatable purchase option, while the former fractional demographic is taking another look at timeshare.

Now this is interesting; people trading from full-time down to fractional and timeshare. Not that really is an interesting trend…

Ed Kinney, vice president of corporate affairs for MVCI, expects sales for his company to be buoyed somewhat in 2009 by the company’s 25th anniversary celebration. Being able to tout the longest track record in timeshare gives MVCI an edge in consumer confidence. Sales at the company’s newest timeshare development, Marriott’s Lakeshore Reserve at Grande Lakes, Orlando, are exceeding expectations. Next to open is the first phase of the 219-unit Marriott’s Crystal Shores on Marco Island, Florida, set to debut in March, and The Ritz-Carlton Club, Kapalua Bay, a 62-unit fractional and 84-unit whole ownership project slated for an April launch in Maui. 

U.S. Pipeline Stalls

A few months ago, the mantra was, “Good projects in good destinations are still getting done.” Those days are largely past, as high-profi le vacation ownership projects are getting cancelled left and right. Large-scale projects in secondary and tertiary leisure markets at this point are off the table almost entirely.

Projects well into the launch process will continue, but new starts are expected to be few, though there will be some. Expect mostly mixeduse projects with limited vacation ownership components, like The St. Regis Resort and Residences Bahía Beach, Puerto Rico, which broke ground in December and will include 25 wholeownership units.

Beyond North America, the vacation ownership pipeline is a mixed bag.

Fairmont Hotels & Resorts in December began construction and presales for a Fairmont Residences in Cairo, and previously announced residential projects in Mecca, Kuala Lumpur, Bali, Muscat and Abu Dhabi are moving forward—some more quickly than others.

“Not a lot of projects have been cancelled, but a lot of projects have been deferred—more so in Europe and the Caribbean, Central America and Mexico—but Asia is continuing to hold up,” says Greg Doman, Fairmont’s senior vice president of residential development. Indeed, Fairmont still sees much room for growth in Asia Pacific, where the company plans to lean heavily on its Raffles brand to drive prospects to future luxury ownership product in China and the Philippines.

The story is different in Dubai, where MVCI and Fairmont are slowing development of mixed-use projects due to soaring construction costs. “It’s less about the economic conditions of the purchasers as much as the inflationary costs of construction,” Kinney says. “It’s just spiraled out of control to the point where we have to pull back until it stabilizes.”

Condo-Hotels In Peril

The condo-hotel market, which was thriving just a few years ago, is now crippled by oversupply in key destinations like South Florida and Las Vegas. In Vegas, where the primary whole-ownership market has been devastated by oversupply and rampant foreclosures, the future of condo-hotels is uncertain. Even highly touted developments are struggling mightily to move condo inventory.

We are fortunate that for the most part, the condo-hotel concept never really got off the ground in Vallarta…

Just last month, MGM Mirage scrapped the 200-unit condo component of The Harmon Hotel & Spa within CityCenter. A major test for the condo-hotel market comes later this year when MGM Mirage opens its 1,543-unit Vdara Condo Hotel within CityCenter. The success of Vdara could determine when, or if, Fontainebleau Resorts follows through on plans to sell more than 1,000 condohotel units in its Las Vegas Strip project.

Brent Howie, president of Provident Hotels & Resorts, a Florida-based condo-hotel management and consulting firm, remains bullish on the long-term future for the condo-hotel concept, even as he admits the segment is probably looking at several years of hibernation.

“A lot of developers saw the condo-hotel concept as a great way of building and financing a hotel—offsetting cost of ownership by having a lot of buyers—and a lot of people jumped into it too quick without thinking it through,” Howie says. “It might be awhile before the market heats up again.”

If there is any silver lining to be found, it is that overall consumer interest in vacation ownership shows no sign of wavering, even if prospective buyers are apprehensive in the near term.

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