Sustaining profitability in a high-end, luxury lifestyle property requires a strict balancing act between cost efficiency and the maintenance of international five-star standards. As first-class hoteliers acknowledge, guaranteed room occupancy is a key issue. With this factor in mind, more hotels in the US and, to some extent, in Europe are considering fractional ownership models, which involves room inventory, often in the form of luxury suites, villas or residences, being set aside and allocated to an exclusive seasonal ownership club.

Pioneering such a scheme in Europe is international hotelier, Frank Pfaller, who has created the Lifestyle Ownership Concept, currently being showcased at Las Dunas Beach Hotel & Spa in Spain. “In addition to the nucleus of 75 hotel bedrooms and 68 ultra-luxurious freehold properties comprising Las Dunas Park, we are launching 34 detached Las Dunas Suites from March as a lifestyle product,” explains Pfaller. “In Europe there is a growing segment of financially independent travellers who want access to their own luxury property for periodic, recreational enjoyment only, for example, during the golf season. However, they are not prepared to tie up substantial capital in a second or third home. Our concept gives them ownership in fractions of one month, with at least three weeks guaranteed in high season. This is a flexible model so clients can reserve the weeks they want in the residence they require.” The cost of ownership, for example E150,000 for a two-bedroom, two-bathroom residence, provides clients with access to the hotel’s five-star facilities and services, as well as additional club benefits, such as access to fine cars and yachts.

The rewards for hoteliers are numerous, according to Pfaller. Aside from guaranteed high occupancy, higher revenues are likely to be generated by this captive audience in the hotel’s restaurant, spa, beach club and boutique. Also, an annual maintenance fee – part of the management contract – is applied weekly to each ownership fraction to cover the general upkeep of the property and agreed services. Pfaller adds: “The more occupancy opportunities we create, the more revenues we generate. Las Dunas Suites, in addition to Las Dunas Park, will create tremendous income for the hotel, attracting 400 lifestyle owners.”

“The more occupancy we create, the more revenues we generate”
Frank Pfaller, luxury hotelier

In the US, fractional ownership models have been in favour with luxury chains for some time. John Cullen, President of the Grand Heritage Hotel Group, points out that while fractional ownership often entails a client making a one-off initial payment, there are alternative models in action. “Ritz Carlton favours the fixed-season payment, which involves a client buying ownership in a specific season, putting down an initial 10-15% of the purchase price, say US$200,000, and then paying the remainder with cash or through home equity lines,” he outlines. “Meanwhile, the floating points system, as favoured by Four Seasons, allows clients to select whichever season and accommodation they choose from a choice of resorts in return for points, which they purchase in advance. We favour the flexibility of this model because consumers can downgrade or upgrade as they wish.”

Grand Heritage Hotels is in the process of converting five upscale, boutique properties to fractional ownership. The Bitter End Yacht Club in the British Virgin Islands represents a straightforward model, combining part luxury hotel, part fractional ownership. In contrast, the group’s country house hotel property in Newport, Rhode Island – Vanderbilt Hall Hotel – is being converted completely into 30 suites of two to three bedrooms. “Occupancy figures explain why this model is appropriate to this location, even though it requires more upfront risk,” comments Cullen. “As a hotel, the best year’s occupancy rate stood at 64%. We estimate that this will rise to 89% under the fractional model. In Newport, there are 200 nights per year, where there are more requests for rooms than are available. Fractional ownership will make better use of this demand, attracting more people to return to the property throughout the year.”

For any hotelier considering such a concept, it is worth remembering that location is a key priority. Clients will assess the property’s location in the same way they would as if buying a second home. Furthermore, serious commitment and investment is required upfront from hoteliers who must be prepared to provide a high-quality product – often in a detached development – alongside first-class services and facilities from the outset. Such properties must be free of mortgages, encumbrances and liabilities.

“One can not simply set up such a project and sell it from plan,” says Pfaller. “The main considerations for any project is the voluminous legal documentation, a management contract with an operator of international standing and the financial situation of the developer.” While agreeing that fractional ownership requires sizeable investment and dedication from hoteliers, Cullen points out that these models are less complex and difficult to finance than timeshare, for example. He adds that they can be financed from pre-sales, provided you bond the construction. Best of all, the main benefit of fractional ownership is highlighted by numbers. “Owning the hotel costs you US$200 per square foot and the renovations US$150 per square foot but selling that square foot in a fractional ownership model returns US$800,” concludes Cullen. “The financial reward is clear.”

If you wish to find out more about the potential of Fractional or Lifestyle Ownership models, please contact Peter Gould on pgould@ghorg.com