Wednesday, February 08, 2006
Risky Business In Timeshare Real Estate
Global players in the timeshare industry have moved into China, despite its rocky legal system, and wait patiently to strike it rich. Zach Coleman investigates
T he sales pitch hit Mr Zhu as he made his way down the aisles of a Shanghai houseware store: If he filled out the survey, his name would be entered into a big prize draw.
A few days later, a caller asked him to go to an office building downtown. When he and his wife arrived, the staff welcomed them as winners of the draw and invited them to watch a video. It described a resort in Yunnan province where they could buy long-term rights to stay for a week each year, or accumulate credit toward longer stays. As the Zhus puzzled over the arrangement, staff pressed them to secure usage rights for 15 years for 30,000 yuan (HK$28,825).
The Zhus' debit card allowed them to pay only 3,000 yuan on the spot, so a staffer offered to escort them home for more cash. Suddenly, wary because night had fallen and their home was far away, Mrs Zhu declined.
Two days later, the Zhus began asking for their money back. They didn't get it, so they took their story to a local newspaper as a warning to other naive consumers.
Timesharing, an industry whose high-pressure sales tactics and sometimes dubious schemes has generated more than its share of complaints and lawsuits in countries from Singapore to Australia to the United States, has arrived in China.
Timeshares, like insurance, come under scrutiny because consumers pay up front on the promise they will reap substantial benefits far into the future. Industry veterans say trouble usually appears most rapidly in new markets, which lack proper regulations to govern sales practices and assure buyers that properties will be both maintained and available.
China meets this description and more. The timeshare industry's advance on the mainland comes against the backdrop of an inadequate legal system that tends to favor local business interests and an incomplete transition from communist state control to private land ownership.
The constitution explicitly acknowledged the general principle of the sanctity of private property only in 2004. Timesharing depends on highly refined notions of fractional ownership yet to be anchored in Chinese law.
These hazards aren't putting off Resorts Condominium International (RCI) or Interval International. The two, dominant players in the global timeshare business and both units of US-based travel conglomerates, run membership clubs that allow timeshare owners to trade usage rights bought at one resort for stays at others around the world.
RCI and Interval are out to make China timesharing safe in order to better present mainland resorts to their international members and, more importantly, bring Chinese travelers into the companies' worldwide network of holiday destinations.
RCI has a total of about 3.2 million members. About 10,000 of them are in China, but John Paul Nichols, who runs the company's international operations from dual offices in Beijing and Mexico City, believes the domestic tally could eventually grow to match RCI's entire global roll in size. Since 1999, RCI has sunk millions of dollars into various programs to build the foundation for Chinese timesharing.
"We're taking risks in China that we wouldn't take elsewhere," he says, sounding like many another pioneering mainland investor.
Interval has so far been more cautious about investing, but has just opened its first representative office in the country and next month will put on a conference for resort developers in Beijing.
"Timeshare [in China] is at its absolutely infancy," says Asia Pacific executive director Joe Hickman.
Many Chinese travel companies are looking for a piece of the timeshare business too. At least two, Teda Resort Alliance Development and China Anda, part-owned by China Travel Service, each lay claim to being the biggest player in the country. Another, China National Real Estate Development Group, made headlines when it proposed buying 20,000 vacant apartments in Hong Kong - built as part of the SAR's aborted Home Ownership Scheme public housing program - and offering them to mainland timeshare users.
Profit is the motivation. Margins for timeshare resort unit operations often run double to triple those of conventional hotels and are relatively resistant to the effects of crises such as SARS and terror attacks, since customers buy ahead.
As a result, many major international hotel groups have been moving into the business, particularly in the US. In Asia, Marriott International operates a timeshare resort in Phuket, and Accor, owner of the Sofitel and Novotel brands, recently announced it will set one up in Bali.
In China, hotel developers are showing interest in allocating portions of their projects for timeshare sales to raise funds to finish construction, says Godfrey Hui, a director and 25 percent owner of Teda Resort.
"China is building [resorts] fast and furiously," Hickman says. "The reality is they will quickly overbuild." He believes too many ordinary hotel rooms on the market will spur developers to consider other ways to market their properties.
Hui says their interest should dovetail with those of middle-class Chinese looking for new investment opportunities given sagging domestic stock markets. He sees an openness to timesharing despite several years of press accounts in Shanghai and other cities of traps and pitfalls much deeper than the one that ensnared the Zhus.
Trouble started around 1998, Hui says, as marketers arrived in Shanghai targeting residents with newly gained freedom and funds to travel. Some sellers were sincere but underestimated the legal obstacles to timesharing. Others were just serial scam artists, reminiscent of the kind of hucksters who once sold swamp land in Florida to New Yorkers a generation ago.
"They took advantage of the innocent people in China," he says.
Tianjin Teda International Hotel Development, linked to the Tianjin city government, formed Teda Resort at about the same time through a joint venture with a company experienced in Australian timeshares. The partners enlisted a British trust company to provide in-house finance services but ran into difficulties in the absence of relevant regulatory backing.
Teda Resort eventually found a way forward with the help of its parent. Tianjin Teda assigned about 30 rooms in hotels it owned in Beijing, Shanghai and Tianjin to Teda Resort to sell weekly usage rights to consumers. Teda Resort now has about 4,000 members and 10 resorts and took in about US$1.8 million (HK$14.04 million) in revenue in 2004.
RCI began enlisting Chinese resorts in its exchange network in 1999 then opened an office in Beijing two years later. It now has 40 Chinese resort members along with an office in Shanghai and another opening shortly in Guangzhou. It is also setting up a Chinese call center.
To give customers more choice, RCI has a deal with Gulliver Travel, a fellow subsidiary of travel conglomerate Cendant, to allow RCI members to stay at an additional 80 Chinese hotels. Nichols says Gulliver buys about 500,000 room nights in Chinese hotels each year for its wholesale travel agency operations and many in turn can be tapped by RCI.
Nichols believes RCI can have 700 resort members in China within five years, but only if it grows by leaps. "We don't believe the way to go into China is to tie up with 50 little resorts," he says.
Instead, RCI has formed links with local travel companies, including Teda Resort, which says it is RCI's largest Chinese partner.
RCI announced in late 2004 that it had reached an agreement with China Anda to add its 10 timeshare resorts to RCI's network, but RCI spokeswoman Ranjana Biswas says the tie-up did not go forward. RCI also had talks with China Real Estate and last year announced agreements with HNA Group, parent of Hainan Airlines, and China Youth Travel Service to help each develop travel clubs in which members can exchange points for hotel stays and other services.
The travel clubs stem from another RCI strategy in China's immature hospitality market - providing consulting advice to resort developers. RCI in 2004 set up two consulting subsidiaries on the mainland to help hotel owners with marketing, back-office operations and other functions.
On the consumer end, RCI is bankrolling a US$1.5 million program to educate residents of major cities about timesharing. "Most Chinese consumers don't know what timesharing or vacation ownership is," says Nichols. "It's generally a blank slate."
The company is also financing a nationwide consumer hotline to receive complaints about timeshare practices.
To head off complaints about resorts in RCI's network, Nichols has a staff of 38 people screening all sales and marketing companies that promote units in member resorts, a task RCI leaves entirely to the developers themselves in other markets.
Teda Resort conducts additional checks and Hui says several sales agencies have been dropped for not abiding by standards.
RCI's goal is for the government to establish a baseline of proper conduct. Nichols budgets about US$15,000 a month for lobbying and has provided thousands of pages of documents on foreign experience regulating timeshares to the China National Tourism Administration (CNTA), Chinese Academy of Social Sciences and other government institutions. He has had indications a draft law may be published this year.
Interval is also preparing to visit CNTA and provincial government agencies to promote regulation. Says Hickman: "The business works best with some kind of legislation in place."
Regulation may just be the catalyst needed to take timesharing to the big time in China. Given the current murky environment, the newly well-off have shown a preference for spending on fancy cars and other pursuits while older folks are still put off by the idea of sharing their property with strangers, Hui says.
While his company calls itself the biggest player in the Chinese timeshare market, Teda Resort was valued at just US$702,182 in an aborted deal last year in which a New York-listed affiliate of Tianjin Teda was to take a 55 percent stake.
RCI isn't getting rich in China yet either. "We lost a few million last year, we will lose few million this year and we'll lose a few million next year," Nichols said late last year.
T he sales pitch hit Mr Zhu as he made his way down the aisles of a Shanghai houseware store: If he filled out the survey, his name would be entered into a big prize draw.
A few days later, a caller asked him to go to an office building downtown. When he and his wife arrived, the staff welcomed them as winners of the draw and invited them to watch a video. It described a resort in Yunnan province where they could buy long-term rights to stay for a week each year, or accumulate credit toward longer stays. As the Zhus puzzled over the arrangement, staff pressed them to secure usage rights for 15 years for 30,000 yuan (HK$28,825).
The Zhus' debit card allowed them to pay only 3,000 yuan on the spot, so a staffer offered to escort them home for more cash. Suddenly, wary because night had fallen and their home was far away, Mrs Zhu declined.
Two days later, the Zhus began asking for their money back. They didn't get it, so they took their story to a local newspaper as a warning to other naive consumers.
Timesharing, an industry whose high-pressure sales tactics and sometimes dubious schemes has generated more than its share of complaints and lawsuits in countries from Singapore to Australia to the United States, has arrived in China.
Timeshares, like insurance, come under scrutiny because consumers pay up front on the promise they will reap substantial benefits far into the future. Industry veterans say trouble usually appears most rapidly in new markets, which lack proper regulations to govern sales practices and assure buyers that properties will be both maintained and available.
China meets this description and more. The timeshare industry's advance on the mainland comes against the backdrop of an inadequate legal system that tends to favor local business interests and an incomplete transition from communist state control to private land ownership.
The constitution explicitly acknowledged the general principle of the sanctity of private property only in 2004. Timesharing depends on highly refined notions of fractional ownership yet to be anchored in Chinese law.
These hazards aren't putting off Resorts Condominium International (RCI) or Interval International. The two, dominant players in the global timeshare business and both units of US-based travel conglomerates, run membership clubs that allow timeshare owners to trade usage rights bought at one resort for stays at others around the world.
RCI and Interval are out to make China timesharing safe in order to better present mainland resorts to their international members and, more importantly, bring Chinese travelers into the companies' worldwide network of holiday destinations.
RCI has a total of about 3.2 million members. About 10,000 of them are in China, but John Paul Nichols, who runs the company's international operations from dual offices in Beijing and Mexico City, believes the domestic tally could eventually grow to match RCI's entire global roll in size. Since 1999, RCI has sunk millions of dollars into various programs to build the foundation for Chinese timesharing.
"We're taking risks in China that we wouldn't take elsewhere," he says, sounding like many another pioneering mainland investor.
Interval has so far been more cautious about investing, but has just opened its first representative office in the country and next month will put on a conference for resort developers in Beijing.
"Timeshare [in China] is at its absolutely infancy," says Asia Pacific executive director Joe Hickman.
Many Chinese travel companies are looking for a piece of the timeshare business too. At least two, Teda Resort Alliance Development and China Anda, part-owned by China Travel Service, each lay claim to being the biggest player in the country. Another, China National Real Estate Development Group, made headlines when it proposed buying 20,000 vacant apartments in Hong Kong - built as part of the SAR's aborted Home Ownership Scheme public housing program - and offering them to mainland timeshare users.
Profit is the motivation. Margins for timeshare resort unit operations often run double to triple those of conventional hotels and are relatively resistant to the effects of crises such as SARS and terror attacks, since customers buy ahead.
As a result, many major international hotel groups have been moving into the business, particularly in the US. In Asia, Marriott International operates a timeshare resort in Phuket, and Accor, owner of the Sofitel and Novotel brands, recently announced it will set one up in Bali.
In China, hotel developers are showing interest in allocating portions of their projects for timeshare sales to raise funds to finish construction, says Godfrey Hui, a director and 25 percent owner of Teda Resort.
"China is building [resorts] fast and furiously," Hickman says. "The reality is they will quickly overbuild." He believes too many ordinary hotel rooms on the market will spur developers to consider other ways to market their properties.
Hui says their interest should dovetail with those of middle-class Chinese looking for new investment opportunities given sagging domestic stock markets. He sees an openness to timesharing despite several years of press accounts in Shanghai and other cities of traps and pitfalls much deeper than the one that ensnared the Zhus.
Trouble started around 1998, Hui says, as marketers arrived in Shanghai targeting residents with newly gained freedom and funds to travel. Some sellers were sincere but underestimated the legal obstacles to timesharing. Others were just serial scam artists, reminiscent of the kind of hucksters who once sold swamp land in Florida to New Yorkers a generation ago.
"They took advantage of the innocent people in China," he says.
Tianjin Teda International Hotel Development, linked to the Tianjin city government, formed Teda Resort at about the same time through a joint venture with a company experienced in Australian timeshares. The partners enlisted a British trust company to provide in-house finance services but ran into difficulties in the absence of relevant regulatory backing.
Teda Resort eventually found a way forward with the help of its parent. Tianjin Teda assigned about 30 rooms in hotels it owned in Beijing, Shanghai and Tianjin to Teda Resort to sell weekly usage rights to consumers. Teda Resort now has about 4,000 members and 10 resorts and took in about US$1.8 million (HK$14.04 million) in revenue in 2004.
RCI began enlisting Chinese resorts in its exchange network in 1999 then opened an office in Beijing two years later. It now has 40 Chinese resort members along with an office in Shanghai and another opening shortly in Guangzhou. It is also setting up a Chinese call center.
To give customers more choice, RCI has a deal with Gulliver Travel, a fellow subsidiary of travel conglomerate Cendant, to allow RCI members to stay at an additional 80 Chinese hotels. Nichols says Gulliver buys about 500,000 room nights in Chinese hotels each year for its wholesale travel agency operations and many in turn can be tapped by RCI.
Nichols believes RCI can have 700 resort members in China within five years, but only if it grows by leaps. "We don't believe the way to go into China is to tie up with 50 little resorts," he says.
Instead, RCI has formed links with local travel companies, including Teda Resort, which says it is RCI's largest Chinese partner.
RCI announced in late 2004 that it had reached an agreement with China Anda to add its 10 timeshare resorts to RCI's network, but RCI spokeswoman Ranjana Biswas says the tie-up did not go forward. RCI also had talks with China Real Estate and last year announced agreements with HNA Group, parent of Hainan Airlines, and China Youth Travel Service to help each develop travel clubs in which members can exchange points for hotel stays and other services.
The travel clubs stem from another RCI strategy in China's immature hospitality market - providing consulting advice to resort developers. RCI in 2004 set up two consulting subsidiaries on the mainland to help hotel owners with marketing, back-office operations and other functions.
On the consumer end, RCI is bankrolling a US$1.5 million program to educate residents of major cities about timesharing. "Most Chinese consumers don't know what timesharing or vacation ownership is," says Nichols. "It's generally a blank slate."
The company is also financing a nationwide consumer hotline to receive complaints about timeshare practices.
To head off complaints about resorts in RCI's network, Nichols has a staff of 38 people screening all sales and marketing companies that promote units in member resorts, a task RCI leaves entirely to the developers themselves in other markets.
Teda Resort conducts additional checks and Hui says several sales agencies have been dropped for not abiding by standards.
RCI's goal is for the government to establish a baseline of proper conduct. Nichols budgets about US$15,000 a month for lobbying and has provided thousands of pages of documents on foreign experience regulating timeshares to the China National Tourism Administration (CNTA), Chinese Academy of Social Sciences and other government institutions. He has had indications a draft law may be published this year.
Interval is also preparing to visit CNTA and provincial government agencies to promote regulation. Says Hickman: "The business works best with some kind of legislation in place."
Regulation may just be the catalyst needed to take timesharing to the big time in China. Given the current murky environment, the newly well-off have shown a preference for spending on fancy cars and other pursuits while older folks are still put off by the idea of sharing their property with strangers, Hui says.
While his company calls itself the biggest player in the Chinese timeshare market, Teda Resort was valued at just US$702,182 in an aborted deal last year in which a New York-listed affiliate of Tianjin Teda was to take a 55 percent stake.
RCI isn't getting rich in China yet either. "We lost a few million last year, we will lose few million this year and we'll lose a few million next year," Nichols said late last year.
# posted by John @ 5:18 AM 
