dooijp

I'm thinking of joining a DC, but i'm curious what happens if real estate prices fall 30% from here in high end homes (as they have in low end homes). I'm not asking for speculation as to whether home prices fall, more what happens IF they do. Question 1: Would members in clubs head for the exit if they see all those 3-4 million houses suddenly pricing 2-3 million? In other words, would you cash out to secure your deposit rather than risk being last in line to withdraw? If one assumes half of home price is borrowed / mortgaged to buy, a 30% decline would practically leave very small 20% cushion and cut true value of deposit in half. Question 2: would clubs lower their deposits for new members or keep buying 3-4 million dollar homes? 4 million would buy better homes and thus keep members whereas lower deposit would surely incent existing members to leave and join a new club at new lower deposit. Would lower prices at clubs like quintess which offer 80% of current deposit level, cause earlier members to cash out at a gain (i.e. you joined at 300K deposit is not 500 so you get 80% of 500 or 400 for a nice 100 gain)? Question 3: at what point would the DC then close down as the upside potential in real estate would have evaporated leaving the investors with no motivation to stay in?

Any thoughts appreciated. I like the concept of a DC but i feel as if joining today i'm paying the ALL TIME high in real estate.

Desties

Home prices have been falling for two years now and I can't think of a single example where clubs have lowered their new member deposits. In fact, Lusso, HCC, Ultimate Escapes, and Exclusive Resorts (and others) have actually RAISED their new member deposits in recent months.

Your concern of falling prices and the impact on a bolt for the exits -- the equivalent of a "short squeeze" in Wall Street terms -- is valid on paper, but that is why most clubs have exit strategies that require a departing member to be cashed out, only after 1-3 new members sign in.

Would a long redemption list infuriate those waiting to cash out? Yes, but that also gives the industry (both real estate and DC) time to turn around and make many reconsider.

The cover story in this past weekend's Barron's is actually a great read for anyone here, as it's about a 15% drop in luxury real estate prices.

DC4MS

Your concerns are valid, but represent a current and short term view of real estate values. I am sure you are familiar with the old saying - "location-location-location" as this indicates desirable properties will always maintain long term value.

Yes, real estate prices are falling in most (but not all areas) and you would be surprised to see dozens of examples of current Destination Club homes that have dramatically risen in value and seem to defy current market doom and gloom.

I am talking about certain areas like NYC, Ski-in/out homes, beachfront homes, and even private golfing communities. Of course areas like Las Vegas, Miami, parts of California have real estate prices falling like a rock.

I try to be objective towards all Destination Clubs, but the real issue is - "Does joining a Destination Club make more or less sense that buying or renting a second home." For most people on these forums, we have concluded, that joining a Destination Club and maintaining membership for 5-10 years is far superior in creating a vacation lifestyle (and not worry about future value or maintenance issues) than any other option.

One other observation that I have made about the Destination Club industry is the properties that the clubs are buying seem to be the best properties in the best locations for the best prices. This is NOT an accident, as every Destination Club has employees whose single job is to evaluate hundreds of properties all across the world and try to single out the best properties at the best prices.

The Destination Club industry is pretty young, yet one thing that remains constant is the membership prices increase each year.

LTTravel

At least for me, I joined a DC because I was thinking about buying a vacation home. If I had purchased a $3 million vacation home and the priced dropped 30%, I would have lost $900,000, far more than the membership price for a DC. Plus, DC's, as DC4MS has stated, are diversified and have purchased in some of the best places and in some cases get discount prices so are unlikely to fall as much as the general market. Seeing the Real Estate Market go down only confirms that I think I made the right decision.

dooijp

I appreciate the response, but I wonder if anyone has anything SPECIFIC to my questions. I want to ASSUME that real estate falls 30% regardless of everyone's views that high end homes might hold value. As such, i would love to hear what people's views are on what happens to clubs if there is a 30% collapse. Let's assume i love the concept, i think it's better value than a second home in terms of vacation dollars, etc. I'm trying to guess what happens when all these DC's start approaching negative equity in the homes---will they abandon the business since the investors have no way to monetize a gain? How soon do they start liquidating homes in best locations?

Desties

Why would they liquidate a home just because it fell in value? Redemptions are covered by new member deposits, so there is no urgency in selling into a fire sale for that, be it selling domestic homes at a loss or taking advantage of the weak dollar by cashing out on overseas properties at a gain. Homes with negative equity still have the same mortgage payments, covered, in part, by the annual dues.

DC4MS

I understand your question, I am just not sure if it will have any effect at all on the current Destination Clubs. I am not aware of any club that is looking to sell any of their properties, just because the market may dip 30% or more. In fact, many clubs are looking for bargains to buy.

Destination Clubs are more like Warren Buffett (buy low, hold for a long time, sell high) than like hedge or mutual funds (constant turnover).

That said, I am not privy to any inside information on any particular club and think the current real estate price correction will have little to no impact on clubs that adopt a long term view. Most clubs use a certain percentage of the membership fee to acquire properties and the annual dues to maintain the properties and run the business. Thus, if a club has a healthy business model, they should be able to weather any storm out there.

I would mainly be concerned if any clubs were buying overpriced properties with minimal deposits and short term adjustable loans. Fortunately, there is no evidence of any club doing that.

TarheelTraveler

Like most others, I think the DC industry is still in its infancy. Certain clubs like DHH and A&K are just starting up and don't have huge real estate portfolios yet. I suspect that even ER with a portfolio of homes over $1B will have a portfolio over several billion dollars in 5 - 10 years. Accordingly, you will have some significant dollar cost averaging going on even with the most established clubs in this period if luxury real estate prices do in fact decline significantly.

I suppose theoretically some upstart DC could start buying houses in a few years, time the bottom and offer a lower deposit than the established players. However, the barriers of entry into the industry keep getting higher. We have seen a significant decrease in the number of new entrants, particularly in the U.S.

I guess what I would be worried about is a DC with very high debt to equity ratios in their homes. In that case, the DC could get in a bind where the value has decreased, eating up the equity, and preventing a later refinance or continued financing of the overall portfolio.

dooijp

that's a good point that they buy without excessive leverage or structure finance which is a good thing for sure. However, as people waiting to get out increase, they stop paying dues in anger, club goes cash flow negative and no one joins. That means they have to sell properties to stay alive--once members hear that it's "oh no" and everyone bails so that no members join. At what point does club give up? employees quit for sure when they see a massive wait list. I'm curious not that clubs are selling homes i guess, but that equity investors in the club (not the members, the backers) just bail on the thing figuring they won't make money unless real estate makes a massive recovery.

The comment that the constant in membership fees is that they are increasing is rather absurd. The good news is it's not a lot of money to lose. That said, i don't want to join and 3 years from now have a worthless investment that i can's sell and that i'm paying 25K a year to maintain.

Is anyone tracking the increasing size of all these waiting lists at dc's?

dooijp

as prices fall, virtually all the clubs would have high debt to equity levels right?

TarheelTraveler

I think the debt to equity levels vary pretty dramatically from club to club. As an example, A&K carries no debt. That's part of the model, but it does mean that the membership deposits have to be higher in order to purchase equivalent property debt free. The benefit is you get lower dues, particularly on a long-term time horizon, and dues that actually cover the expenses, without using new deposits, meaning more goes into buying real estate again long term. I should note that there are plenty on this forum that disagree with this conservative approach. Essentially, if you have higher leverage, you have better houses for smaller membership deposits and may get more members as a result, and if the appreciation in fact beats the cost of financing on a risk adjusted basis (say 9%), then leveraging is probably the better choice. On the other end of the spectrum from the debt-free model, it's my understanding that some clubs might have 80% financing as a general course of business.

The great thing about the DC industry is that you do have these various models, and you can pick the one that fits your risk and travel profile. Now that I've experienced it, I would never go back to traveling outside a DC for vacations. I can't help but tell other people about it, because it is such a great idea. It kind of reminds me of when I got my first DVR/Tivo. I thought this is a fantastic idea and really improves my quality of life, and DCs are a life changer on a much bigger scale.

Desties

That is a pretty bleak doomsday scenario. Most clubs -- if not every club -- allows you to continue to use your alotted nights until you are cashed out while you are on a resignation list. Why would someone stop paying the annual dues? Knowing that it will only come out of their initial deposit refund (I would think), without getting the nights in return?

I can always imagine a member or two doing that in extreme cases, but not a total capitulation. DC members aren't the type to let something like that wreck their credit ratings.

As for resignation lists, few clubs divulge that to non-members, though Halogen Guides includes that data for the clubs that offer up the information. The number is probably pretty low across the board. Real estate prices fell in 2007, yet memberships shot through the roof at nearly every club (allowing quick processing of any redemptions).

If you have narrowed down your search to a certain club or two, your best bet is to call them ask. I mean, market leader Exclusive Resorts actually had a waiting list TO GET IN, until recently.

TarheelTraveler

That is my understanding as well. Certain clubs have had no resignations, particularly before the finance and real estate markets started hitting some pretty hard. My understanding is that most that have resigned have resigned for financial or personal reasons (i.e., divorce) or to join another club, but the numbers are pretty minimal for a typical DC. Obviously, if a club has a resignation waiting list, I would take that to be a bad sign.

Kagehitokiri

you cannot just say "assume 30% decrease in value of all properties."

if you are concerned about decreasing value, you need to look at what/where the club is buying. because that affects how likely ANY decrease is. another variable is ER's buying in bulk at a discount.

OTOH the question of investors is valid. the role of investors would make for a very interesting DC comparison...

3DH

As another alternative, dooijp, have you seen prices dropping at 5-star resorts that reflect the real estate trends? (I have not...) Thus, the assumption that there is a 30% drop in ALL markets in which a club would invest is highly unlikely... homes are chosen in particular locales and in highly desirable locations, as are resorts.

...just another thought

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Kagehitokiri

id personally specify these chains - amanresorts, four seasons, mandarin oriental, ritz carlton. (peninsula doesnt have any resorts.) all of those chains have had DC properties at one point, but ER no longer has its four seasons costa rica residences.