Interview with Brad Lincoln
Posted by David M. Disick, Esq.
As in most other locations in the world, the fractional second home market in the UK has had a fair share of ups and downs in the past decade.
When introduced into the UK, in the early and mid-2000s, fractionally owned leisure homes proved attractive to British buyers. This was particularly true of purchasers familiar with the costs and responsibilities of long-distance leisure home management.
What especially intrigued potential buyers was the fractional price: With whole ownership, holiday makers have about one month of leisure use and twelve months of bills. With fractional ownership, the cloth is cut according to the wallet: One pays only a fraction of the price for a leisure home used only a fraction of the year.
Pre-recession fractional buyer mentality
Prior to the recession, investors in leisure property were motivated primarily by “greed”—the desire for gain. Typically, buyers:
- Sought the lifestyle benefits and prestige that a holiday property offered.
- Chose very exclusive, expensive, one-of-a-kind properties—properties that most likely were not branded.
- Anticipated profiting from the property’s appreciated value at resale.
At the time, it made good financial sense to pay 20% of the whole ownership price in cash and carry a mortgage for the remaining 80%. Buyers could then profit from gains in market value based on the entire price of the property, not merely on the amount of cash actually invested. Such a “leveraged investment” could pay off four to one.
Post-recession fractional buyer mentality
The recession that began in 2007-2008 materially changed the way second home buyers now think about leisure property ownership. Prospective buyers now have a “fear-driven” mind-set. Therefore, they seek:
- Protection against potential downside losses resulting from their investment.
- Brand names such as Ritz-Carleton and Hilton.
- Assurance that their management company will still be in business in years to come and will maintain the property at its original level of quality.
Addressing the fears of post-recession buyers
A number of the properties that Best International has advised have developed ways of insulating purchasers from some of the risk aspects of their investment:
- Potentially rising management costs.
- To allay fears that management costs will escalate out of control, one property allows owners to have an input as to quality and cost, and they can veto the management company’s budget.
- The developer has also guaranteed the level of the management fee by subsidising it from its own operating revenues.
- In 2011, a developer client in St. Lucia developed a way whereby owners would not have to pay any maintenance whatsoever. This was achieved by having owners turn their rental inventory over to the management company to rent out.
- Lack of consumer financing. In a time of nearly non-existent credit, a creative way was created to provide consumer financing. The credit-worthy developer borrowed funds from a local bank at the resort. He, in turn, offered mortgage financing to the individual purchasers desiring it.
Some results of the recession.
- The “lost decade.” The past ten years have been called “the lost decade.” People who invested in shares of stock, pension funds and so on have found that any gains they had made were wiped out in the recession. As a result, they have experienced little to no significant increase in net worth.
A “retreat to cash.” Due to substantial losses in value that affected almost all investment types, there has been a “retreat to cash,” a desire of investors to remain liquid.
Nevertheless, the money supply from banks has remained limited, and consumer credit is virtually unavailable.
Paradoxically, the amount of interest banks pay on savings accounts is barely one percent—far less than the rate of inflation, which currently runs at three to four percent a year.
Impetus to invest in real estate. Current market conditions suggest that now is a good time for cash-rich private investors to return to the real estate market. And, acting sooner is better than later. The cash deposited in savings accounts is losing two or three percent a year of its value because the rate of inflation exceeds the amount of bank interest being paid on it.
Available cash, however, needs to be spent efficiently and wisely. Investors with discretionary funds need to invest in real estate—or in other tangibles—to hedge against inflation.
- The suitability of investing in fractional property. Fractionally owned leisure homes is proving a suitable investment—especially for cash buyers—due to a number of reasons:
- Fractional buyers have paid only a fraction of the property’s price and pay only a fraction of its upkeep.
- Cash buyers do not have to make costly mortgage payments each month.
- A fractional leisure property—where operating expenses are shared—makes lower demands on owners’ cash flow than would a comparable wholly owned property.
- A fractional leisure property ties up a much smaller portion of one’s wealth than would a comparable wholly owned property.
- Fractional owners may worry less about having to sell their fractional property because the costs attendant to it are far below those of a comparable whole ownership property.
Perspectives on the current UK fractional second home market
Prospects for a market rebound. The UK economy has followed a “bathtub” curve. It made a slow downward slide since 2007-08. In 2012, we are creeping along the bottom and heading toward a slow climb up the opposite side.
Our market will start coming back in 2013-14 when investors see that property prices are not being written down any more. There are now financially qualified cash buyers watching and waiting for this to happen.
- Good news from the banks.For buyers who want consumer financing, there are some positive developments from the banking side.
- The “bad” banks (those who made poor business decisions) have failed or merged.
- The “good” banks (who are still in business) have realized that it is in their best business interests to work with the remaining “good” (financially strong and competent) developers, rather than foreclosing on them.
- This has led to working arrangements whereby the banks lend to credit-worthy developers who are then able to offer consumer finance of $50,000 for 5 years to credit-worthy buyers.
- A recent fractional success story. A property our company is advising, Hilton Grand Vacations—Borgo alle Vigne, announced in May 2012 that it had sold €4.5 million in property in five months. Prices of the 1/12thinterests started at €30,000. Reasons for success include:
- The enduring appeal of the Tuscany region
- Buyer comfort with the Hilton brand
- Deliberately constrained supply (only one third of the residences are available initially)
Starting in 2013, the property will be offered in the United States by Hilton Grand Vacations as a timeshare and sold in one-week increments.
Fractional and timeshare in the UK
Mixing fractional and timeshare ownership in similar units in one property is something we are comfortable with in the UK because:
- In the UK, timeshare is defined as a right to use a property. Fractional is defined as ownership of the property and of the right to use it.
- We have little concern about blurring the distinction between these two types of shared ownership because our buyers don’t care about legal distinctions. They come in to a sales office and say, “I want this amount of holiday…”What can I get?” and “How much does it cost?”
To sum up, as the UK’s economy slowly turns upward, there is renewed interest in fractional second home ownership. The developers who succeed will need to be financially strong and able to create novel ways of structuring their fractional offering. They will need to provide buying incentives that respond to the motivations of the prospects in their particular market.
Have you (or a fractional professional you know) created new ways to make a fractional offering highly suitable to the buying motives of your prospects? Please share your ideas with our readers. Reply below.
Brad Lincoln is CEO of the multi-award winning Best International with interests in hotel and leisure property investment, car park asset management, international property consultancy, financial services, private equity, and global travel services.
Brad is a regular speaker at international property forums in the UK, Europe, USA, and the Middle East. Many regard him as one of Europe’s leading experts on shared property ownership. He is an MBA graduate of the Cranfield School of Management.
Best International group of companies was co-founded by Brad Lincoln and Jeff Hankin. The company offers specialist property consultancy and investment advice.
The founders set out with a vision to build a business that at its core was based on the premise of accessibility. The aim is to give people the opportunity to access products and services of a higher quality than would normally be available to them.
Best International is a leading international investment group. It specialises in a variety of products and services, in sectors ranging from retail investments, funds and wealth management, leisure and property, and travel all under one umbrella.
Contact Brad at his company’s website, www.bestinternational.co.uk.
David M. Disick, Esq. helps fractional real estate developers secure financing. His book, Fractional Vacation Homes: Marketing and Sales in Challenging Timescan be ordered from hiswebsite.You can also order his free Special Report, The Seven Crucial Ingredients in a Winning Financial Presentation.
Disick consults with developer clients in the US and abroad. Have Questions? Contact him at: http://www.TheFractionalConsultant.com.
Disick served as a Wall Street lawyer and subsequently became a hands-on real estate developer. In the mid-1990’s, he led the team that developed the renowned, multiple-award-winning Franz Klammer Lodge Private Residence Club, the world’s first PRC.
Disick is widely respected as a pioneer and thought leader in the fractional industry. He speaks at international meetings, and his articles have been published in several professional journals.