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Timeshare Tumult or Passing Pause

Timeshare is getting hit hard these last several months. Here’s the state of this business and where its headed.

Thursday, June 04, 2009
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The glut in timeshare inventory has owners and operators re-evaluating their business models, but they may find themselves benefiting from an economy in which people turn to timeshares when they cannot afford a second home.

“The aspirational-type buyer has been hammered," said Johann Murray, senior vice president of financial services for Hilton Grand Vacations. "Their retirement horizons have been lengthened. They might have dreamed of a condo on the beach. They can’t do that anymore. Timeshare is a different alternative. The traditional snowbird is a thing of the past.”

Murray and other timeshare executives discussed the impact of the economy on their industry during a panel at the 31st Annual New York University International Hospitality Industry Investment Conference at the Waldorf-Astoria hotel. In addition to tapping new pools of buyers, timeshare companies should make maintaining their properties a priority -- even if it means raising fees. But they advised cutting costs in other areas, including the mammoth marketing and advertising budgets.

This was the first year timeshare sales contracted in their roughly 35 year history, according to Gordon Gurnik, president, North America, for Group RCI, a subsidiary of Wyndham Worldwide Corp. He agreed that a new pool of buyers would be exploring timeshares as an alternative to a second home. Potential buyers will face more scrutiny, though, compared to recent years. Now, they will need down payments of between 25 and 30 percent.

“We’re getting back to the fundamentals of the industry,” he said.

Even in a difficult economic time, timeshare customers have continued to pay their HOA fees and assessments, the panel reported.

“People are paying their mortgage and HOA fees," said Christian Hempell, vice president of Holiday Inn Club Vacations. "People love this product and they’re protecting it.”

Stephen Cloobeck, chairman and CEO of Diamond Resorts International, said his company even went so far as to raise fees. He acknowledged "it's the year of the customer," but felt the hike was necessary to still provide the amenities and service that guests expect. Low fees could lead to lots of deferred maintenance and customer unrest.

“Will the consumer not pay the $800 and give up the $24,000 they have already spent?" he asked. "That’s the issue in a nutshell.”

Murray's advice is to get rid of some frills, such as daily linen service. But overall, time share companies should “insulate your owners. You don’t want them to experience cold swimming pools. You don’t want them to experience long check-in lines,” he said. “To harm your owner, potentially your best buyer, would be a bad idea.”

But he also expects new building — when it restarts — to feature smaller units with fewer frills such as granite-swathed kitchens and stainless-steel espresso machines that have driven up construction and repair costs. He compared the luxury build-up in timeshares to the suburban McMansion trend and said timeshares should not be trying to get on the cover of Architectural Digest.
“Every project was about being nicer than the past. Soon you find out what is just enough," he said. "You go back to a low-maintenance product that’s a good investment over time.”

Another option for new investment could be converting condo-hotels or condominium buildings into timeshares.

“I’ve had a lot of phone calls on this," Gurnik said. “It’s a great alternative.”

The first step in investigating this possibility is finding out what you are enabled to do. He advised looking at the condominium documents, because some properties have built-in windows that allow for timeshare conversion. Timeshare companies also would have to see how far along the building was sold.

Hempell was still bullish on mixed-use developments such as a hotel timeshare because of the cost efficiencies. Both entities would be supporting amenities such as golf courses and restaurants. It especially makes sense in resort communities where real estate is high, he said. Moderator John Melicharek Jr, a partner with Baker and Hostetler LLP asked panelists about the near and long-term future of the industry.

Hempell, of Holiday Inn, said the exorbitant costs of marketing timeshares — usually about 40 percent of costs — need to be reined in. Those costs are out of control, and he predicted that "marketing will get a laser focus on efficiency."

Murray said Hilton's focus is trying to sell what it already has, not running out to get capital. But he sees the industry bouncing back.

“We’ll be out of this downturn in five to six months. We’re already seeing signs of bottoming," he said. “There’s just too much money to be made in this industry.”
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