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Urban Timeshare...A New Wave in the Industry?

 
Why hasn't this market sector developed further?
Where might urban timeshare work?
Financing issues
Marketing and sales
Maintenance fees
New Developments
Conclusion
By Deborah S. Anthony - Summer 1998

Urban timeshare has inspired intense interest during the past two years with forecasts that it will be a new wave of product in a growing industry Yet the record speaks to a slow start for this sector. The timeshare industry at large has continued to thrive with growth posted at 16 percent annually in sales volume since 1980. Operators have found the industry resilient to both economic and lodging downturns. High returns and growth opportunities are forecast for both hotels and independent operators with the industry's credibility and opportunities on the rise as reputable developers join the sector. The latest high-profile entrant promises to aid consumers in evaluating alternative products. Thomas Cook, the giant travel company, has announced it will represent high-quality timeshare properties. The entry of this well known name offers a significant boost for all reputable timeshare businesses. 

Even with the strength of the timeshare industry generally, development of urban timeshare projects has lagged To date, just three urban developments are creating a standard   The Manhattan Club in New York, Marriott's Custom House resort in Boston; and The Edinburgh Residence in Scotland. Urban timeshare would appear to offer distinct advantages to the hospitality industry, but it has yet to be developed to any great degree by companies. A combination of market forces and industry challenges have created short-term hurdles. The long-term prognosis, however, may offer opportunities for developers in a niche sector attracting sophisticated, upscale buyers, who are interested in the urban experience. 

Why hasn't this market sector developed further?

One of the major advantages timeshare products offer hospitality groups is the resilience of the sector to economic downturn. With the exception of a small decline in sales volumes in 1985, American Resort Development Association (ARDA) statistics suggest that timeshare sales have survived the peaks and troughs characterising the hospitality industry Timeshare occupancy tends to be more predictable, and the manager of the timeshare units finds it far easier to manage variable costs, particularly labour, than his or her counterpart in the hotel business. Despite the undisputed interest of almost all major hospitality groups, however r, only Marriott has made a large-scale commitment to the concept outside the United States. 

The initial economics of urban timeshare look beguiling to a developer. The average cost of development of a five-star London hotel room can be anything up to £225,000 per room (when an existing property is converted). For a 300-room hotel, this brings the development price to £67.5 million. After adding 10 percent uplift for additional facilities to be offered, the total product cost would amount to approximately £74.25 million. Consider the economic return if that same project were developed as a timeshare. Assuming a sales price of approximately £17,500 per week, and 50 weeks of occupancy per year, total income would amount to £262.5 million. On this basis, sales of just 15 weeks of inventory would fully cover the product cost. Assuming administrative/overhead costs of 10% (i.e., approximately £26 million), our hypothetical urban timeshare would yield a staggering £162 million (62 percent of the total cost) to cover sales and marketing expenses, and profits. 

The "numbers" are clearly tantalizing. Two key reasons, however, have mitigated against urban timeshare;

  • the increased profile and attractiveness of timeshare has coincided with a property boom in the major cities; and
  • inability to control marketing costs.
In the London market, for example, many developers and botchers alike have considered the viability of timeshare, either on a stand - alone basis or as a mixed-use plan. Property prices have escalated over the past few years, however. At the same time, the return that can be generated from other options (such as serviced apartments) has been sufficiently high to discourage companies from developing an urban timeshare, particularly with the additional risk associated principally with the marketing costs. 

Where might urban timeshare work?

Resort timeshares have been successful, in part due to differential pricing and high occupancy rates achieved throughout the year as a result of an attractive climate and a variety of recreational amenities. Likewise, urban timeshare must also be based in locations that can attract visitors throughout the year. In the case of city sites, customers also include corporations. which may buy blocks of weeks. For these reasons, areas just outside New York, London and Paris have been regarded as the most attractive locations. 

The New York Manhattan Club is perhaps the best example of this type of development. Developed by the Eichner family, which builds and owns retail, commercial and residential properties, The Manhattan Club offers high specification suites with an average size of 650 square feet. The original sale price of $15,000 per week has climbed to $21,000. The site actually opened in August, 1997, and to date approximately 16 percent (i.e., 3,000 weeks) have been sold out of a total 18,000 weeks. The total site cost $60 million, of which half has been made available to timeshare, and the refurbishment of the timeshare element is estimated at $70 million. Approximate revenues to date based on 3,000 weeks sold at an average price of $15,000 amount to some $45 million, which provides very substantial cash flow to finance the continuing development. Multiple weeks have been sold to corporations for use by company employees. Surprisingly, sales to individuals are typically made to people living within a 90-minute radius of New York. Heavily used by owners, opportunities for exchanging into The Manhattan Club are fairly limited, although it is affiliated to the RCI exchange network. 

The Edinburgh Residence in Edinburgh, Scotland, represents one of the best examples of urban timeshare outside the United States. Three directors, all of whom had previously worked in the timeshare business, set up the Edinburgh Residence project. These individuals recognized the gap in the market for flexible urban timeshares, which could exploit the "short break" market. Edinburgh represents a fairly unusual location for European urban timeshares because it does not typically offer the corporate customer potential of cities such as New York, London or Boston. Occupancy is smoothed throughout the year using the RCI exchange, with approximately 10 percent of clients taking advantage of the exchange programme. 

Financing issues

Once a timeshare site is identified, financing becomes a major issue. particularly for companies that are not well established. There is still widespread institutional anxiety among finance providers for timeshare developments. Those developers able to obtain development finance generally have an existing relationship with the institution and a track record in timeshare / timeshare sales. In this regard, distribution capacity is regarded as key. The timeshare developer must have a sound business plan with a focus on, and substantiation of, the projected sales volumes. Extensive due diligence is carried out, usually both by the developer and the institution. Moreover, large projects ($50 million +) are preferred to smaller projects. Depending on the structure of the timeshare development, there may be additional security required. 

In the United States, only a few institutions will participate in timeshare financing. There are three or four specialist lenders, of which the most notable is Finova. Those lenders specialising in financing will provide the construction loan principally to secure the provision of consumer financing. In the United kingdom and Europe, banks and credit institutions generally lend only to timeshare on the back of existing relationships. Many of the high street banking names are reluctant to provide loans to the industry, although specialist finance providers are beginning to appear. Finova now has a European presence, for example. Construction finance for the new players is still very difficult. 

The Edinburgh Residence was an exception to this rule. One-third of the financing was provided by 3i (Glasgow) and Aberdeen Asset Managers (U.K. venture capitalists), while two-thirds came from the Royal Bank of Scotland. Agreeing the funding for the project is regarded as the biggest single achievement of the project directors and is largely attributed to finding the right people. The refurbishment of the Edinburgh Residence was done successfully, and confidence amongst the finance providers has accordingly grown. The first 10 suites of The Edinburgh Residence were opened on February 1, 1997.  Royal Bank of Scotland then accelerated the funding so that all 30 of the suites were opened by late July, 1997. 

Marketing and sales

In many respects, marketing and sales costs are the "great unknown" as regards timeshare in general, but more particularly urban timeshare. where there is far less experience on which accurate predictions can he made. The average active project reports marketing and sales costs of  38.5 percent, although 48.2 percent of projects have marketing and sales costs of more than 40 percent. Moreover, the three major urban timeshares have unique profiles. The marketing programme of Marriott's Custom house in Boston is highly developed, for example, as one of a number of timeshare developments owned by the hotel company. 

When a project is confined to a single site, the marketing of an urban timeshare development is a much more difficult problem. The key issue is balancing the need to generate leads and achieve a high conversion rate, whilst minimising marketing costs. The Manhattan Club, for example, sends targeted mailings through credit card companies, and advertises in publications such as theatre brochures and broadsheets. The timeshare achieves a 20-25 percent conversion rate with 400-500 families visiting the site a week. 

The Edinburgh Residence, on the other hand, uses a third-party company to do its marketing. Like The Manhattan Club, it relies on direct mail and displayed advertisements in the broadsheets. However, it also gains a substantial proportion of its customers through in-house affinity relationships in the form of promotional deals. Its total marketing costs amount to only 18 percent of the cost base, which is substantially lower than the industry as a whole. Conversion rates are approximately 30 percent, in contrast to the average market rare of approximately 15 percent. 

Maintenance fees

In the recent RCI consulting study on the resort timeshare industry in the United States, average maintenance fees ranged from $270 for a studio unit to $425 for a three bedroom unit with an overall weighted average of $360 per week. The maintenance fee for both The Manhattan Club and the Custom House development is $575 per week, or approximately $82 a night. This is clearly at the top end of the market. The Edinburgh Residence's annual maintenance fee, on the other hand, at £195 per week per annum is regarded as inexpensive by approximately 95 percent of the clients, according to management. At approximately £28 per day, this is certainly towards the lower end of expectations. As yet, maintenance fees in general do not seem to reflect the added advantage which timeshare providers should achieve from the ability to manage costs better. With the increased transparency in the market produced by initiatives such as the Thomas Cook entry, competition to keep down maintenance fees is expected to increase. 

New Developments

The Thomas Cook entry into the timeshare market is undoubtedly the most significant development in timeshare in recent years. The company announced at the beginning of June that a number of its sales outlets would represent four-star and above-quality properties built by reputable developers. Thomas Cook retail outlets are expected to offer a range of timeshare, although the company's role is understood to be one of marketing rather than closing sales. The advantage to the consumer should be the increased transparency of products offered by developers. Previously, potential customers have had to do their own research. 

From a developer's point of view, there are a number of attractions. A customer entering the process through Thomas Cook may be more favourably predisposed toward the product. This may improve conversion ratios compared to the typical customer who has responded to a direct marketing initiative. For those high quality developers that have only one or two sites, it should help to alleviate the need for an expensive marketing team whilst benefiting from the economies of scale which Thomas Cook can achieve by marketing several different projects. In addition, Thomas Cook obviously has the ability to arrange flights and rental cars to transport people to the Site without the need to involve an additional party. Overall, this should help reduce the administrative costs incurred by the developer. 

Conclusion

Urban timesharing may be slow to get off the ground, but it still offers great potential. Once property prices begin to soften in major cities, the industry can expect  more entrants into urban timeshare. For high -quality developments in Europe, Thomas Cook should have a positive impact on individual ownership of both resort and urban timeshare. It is likely, however, that the urban timeshare purchaser will be a more sophisticated upscale buyer. The surprising trend seen in the up-market developments to date is the attraction they have held for people within a relatively short radius of the metropolitan centre. Once more up-market urban timeshare becomes available, this trend is likely to be less marked. 

Notwithstanding the potential attractiveness of urban timeshare to individuals, the real breakthrough is likely to come as more corporations become buyers of timeshare weeks. This is likely to occur when the cost of acquiring and maintaining an urban timeshare compares more favourably with the cost of hotel rooms, when corporate discounts are taken into account. With increased transparency of costs and better yield management, which timeshare developers should be able to achieve, a gradual decline in the annual maintenance fee is anticipated. Once this occurs, and developers are able to provide satisfactory quality assurance, interest is likely to grow in the corporate market. As the resale market in such property develops, this should also enhance interest. particularly if the timeshare weeks hold their price. 

Deborah S. Anthony is a Partner in Arthur Andersen's Hospitality Practice. She is based in London.

©Arthur Andersen 


 
Also See
Year 2000: A Business Issue (Y2K) / Arthur Andersen / Summer 1998
Branding and Repositioning Food & Beverage / Arthur Andersen / Summer 1998
Back to Arthur Andersen Article Index
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