Timeshare or fractional ownership provides the most profitable business model available for property developers in Dubai, according to David R Clifton, Regional Managing Director of Interval International.
He thinks that Dubai will soon become the third most important city for timeshare property in the world after Orlando, Florida and Las Vegas and could become number one.
For the past three years, Clifton has been working in Dubai to establish fractional ownership, and his Fourth Vacation Ownership Investment Conference that will run on March 11-12 is a sell-out.
This industry veteran spoke to Emirates Business about how his vision of the future meshed with the expansion of the local tourism sector in general, and Dubailand in particular.
Timeshare is the sale of fractional ownership of apartments where the owner has the right to use that unit for one-week of the year.
Interval International acts as a consultant to developers on the condition that they use its timeshare exchange programme, which has more than two million members worldwide.
Clients include Marriott, Hyatt, Four Seasons, Disney, Starwood and Accord, which aside from being major hotel chains are also big managers of timeshare properties worldwide.
You are now up to your fourth conference on timeshare and there is still no local timeshare law, and only one small timeshare project on The Palm. Aren’t you getting fed up?
Well the conference this year is a two-day event, up from one day, and we are trying to get more space as it is sold-out. There is huge interest in developing fractional ownership in Dubai.
And I can only say that I am very optimistic that the timeshare law is just weeks and not months away now. All the major developers have been sitting on the sidelines to oversee the new regulations.
The Royal Club, launched on The Palm last year, and has sold out and they are about to launch the Royal Club in Downtown Dubai.
But developers know from other markets that the government needs to make the regulations right or somebody will do timeshare wrong and then there is a market reaction and over regulation. If done properly, this is an incredibly profitable business.
Is it really? Why is the timeshare business model so profitable?
Timeshare property developers make profit in four different ways: Selling the units, consumer finance, maintenance fees and renting out empty units. They also generally sell the right-to-use for thirty or forty years and then get the whole building back.
Normally selling the units and the consumer finance involved actually pays the full cost of the building. A PWC [PricewaterhouseCoopers] study showed that on a typical $17,800 (Dh65,326) one-week unit the developer made $2,700 on the sale and a further $3,800 from consumer finance.
This is generally built into the selling cost as ‘free’ finance, although these seven-year loans typically have a massive 6.9 per cent spread.
Then you have to look at maintenance fees on the units. Timeshare firms take 10-15 per cent of profit. Fees are, say a $500 a week and if you have 200 units in a building then that works out to $500,000 a year in profit.
Finally the rental market for vacant units is a big earner. The timeshare company usually markets these through its own newsletter to members, so there is no marketing cost, and as the company does not own the units it is running a hotel at no risk.
On the PWC study again, assuming a 25 per cent vacancy rate, then there are 12,500 room nights for say $150 which is $1.8 million in profit, usually split 50:50 with the unit owners.
But the real kicker for timeshare developers is that they get the building back after thirty or forty years. We reckon that a typical $47 million tower assuming zero inflation and three per cent real estate appreciation will be worth $112 million in thirty years.
Of course there is always inflation. This is why developers around the world love timeshare.
The timeshare business has a reputation for high-pressure sales and dodgy operators, is this fair?
It is certainly true that this business does involve a great deal of sales and marketing effort. Selling the same unit 52 times over clearly takes some work, although it is not as difficult as you might think.
People who buy one-week often buy a second, and they have friends and family who do the same.
This is a matter of selling holidays and quality time with those you love. It is not such a hard sell, and many people do buy after accepting a free dinner from a salesman. But there are millions of happy customers or we would not be in business.
What this market does require is the right kind of regulations to make it work successfully, and that is why we have been working very hard over the past few years with the Government of Dubai.
Timeshare fits exactly with Dubai’s ambitions to be a major tourism destination and the huge investment in Dubailand.
Doesn’t your product compete with hotels and threaten that investment?
Not at all, we have all the main hotel chains as clients. They realised many years ago that timeshare is complementary and not a competitor to hotels. Hotel rooms are not always what people want on a vacation, particularly with families.
In timeshare units you get a kitchen and living room and can feel more at home than in a hotel, and the cost is usually lower. So this market is not robbing the hotels of business, it is generating more revenue for the hotels.
In fact half the revenue of some of the biggest hotel chains comes from timeshare development.
If big hotel chains dominate this business does that leave room for independents?
Absolutely, I know countless examples of smaller developers who have operated in this very profitable business and sold out to larger groups. In fact, we always advise independents to get their business model straight from the start so that they can sell out to a bigger group if they want to later on.
The big groups are not as entrepreneurial as the smaller players and welcome the chance to buy developed businesses.
The advantage they have is being able to plug in their huge brand network from day one, and keep the units available for rent filled.
Timeshare occupancy rates are usually much higher than hotels, partly because when people have bought something they tend to use it.
Hotel chains also find that people staying in timeshares spend more money in restaurants, perhaps because they feel their accommodation is so cheap that they can afford to indulge elsewhere.
There is also an opportunity to market branded products to the members of a timeshare club, and that can be another great source of profits when you have 50,000 or even 300,000 members.
Why are you so convinced that this will work in Dubai?
First it is a matter of geographic location with 1.3 billion people living within a four hour flying distance. Then there is fabulous weather in a 12-month of the year resort, world-class shopping centres, outstanding beaches and wonderful restaurants.
The government is also focused on developing tourism and the Dubailand theme park is a huge part of that development. It will be like Disneyland in Florida as far as timeshare is concerned, and Orlando is the timeshare capital of the world – some properties there have 3,000 units.
And there is Emirates airline to fly people in, and the development of Dubai itself. It used to be like that when I sold units in Las Vegas.
People came back each year just to see the new buildings. You have the government and private sector focused on providing the right infrastructure for tourism.
OK, but what about the traffic congestion and expense?
If I have to be critical then construction, and with that the traffic congestion, and expense would be the points I would pick out. Of course, you cannot have development without construction activity, and the traffic does seem to be gradually improving.
It is true that hotels have become expensive and that is where timeshare comes in to provide an affordable alternative.
Do you think Dubai could ever be the world’s number one timeshare destination?
I am convinced that in a very short period of time Dubai will be able to overtake Orlando and Las Vegas and become No1 in the timeshare market. Dubai wants to get end-users into its new condominiums and visitors who come to Dubai often want to stay again and again.
It will not just be the first movers in this market that make large profit margins. This is a business with huge depth and high margins. And timeshare is also far more resistant to tough times than the hotel business.
For example in Hong Kong during the SARS [Severe Acute Respiratory Syndrome] crisis the hotels were down to single figure occupancy but timeshare units were still in demand. Buying a timeshare unit is like buying a car, and something that most people can still afford to do in tougher times.
What if the Dubai property market crashes, will that hit timeshare?
Could the property market correct?
Sure it could, but the market presently has such a large tailwind behind it I cannot see that happening anytime soon.
I think Dubai will be hugely popular for timeshare sales. It is when I go to the overcrowded Spanish resorts or the Algarve that I wonder why people are going there.
It is so crowded and down market. Dubai just has it all, and the market would bounce back from any downward blip, only stronger.
David R Clifton Regional Managing Director, Interval International
Three years ago Clifton set up operations in Dubai as he remains convinced the emirate will eventually become the global capital for timeshare ownership of property. He is now managing director, Europe, Middle East, Africa and Asia for Interval International.
The firm is one of the largest timeshare property exchange organisations in the world with more than two million members, 1,700 employees and annual revenues in excess of $500 million.
Clifton has worked with the Dubai Government on the framing of the new timeshare law, which is expected soon.
Interval specialises in advising developers on timeshare schemes.
Clifton has spent more than 17 years in the industry and once built and sold 24,000 weeks of timeshare units in Las Vegas. He holds a Master of Business degree from San Jose State University.