The growth of private residence clubs has mirrored the explosion of second home real estate communities. As affluent buyers turned towards vacation home real estate, developers responded with luxury communities and newer shared ownership options that put a high-end spin on the staid timeshare. Fractional developments promised buyers a greater number of weeks of use each year in residences that were larger, stocked with luxury touches, and had ready access to an on-site concierge. But with the slowdown in the real estate sales market, have private residence clubs lost their shine? We sat down with Jamie Cheng, Helium Report’s co-founder and chief analyst, to talk about what’s in store for the fractional real estate market and private residence club developments in 2008.

How will private residence club developments be impacted by the slowdown in the real estate market and a looming recession?

Jamie Cheng: Private residence clubs aren’t immune to the larger forces in the real estate market. These developments are undoubtedly impacted by the overall sales slowdown. In markets like Las Vegas, we have already seen projects like the W Hotel and Residences stall over the last few year, given the overflow of condo inventory in the market. Now, given the larger economic picture, there is the potential for other projects to face slow sales or never even get off the ground, especially in markets where real estate has taken the biggest hits and where there are a glut of projects.

The good news is that the higher end of the market is holding up better than the overall sales market. Over the past year, there have been some wildly successful ultra-high end fractional projects such at the Residences at the Little Nell that have continued to attract buyers at increasingly higher prices. The Little Nell completely sold out its $3 million fractional four-bedroom units. Buyers were paying millions for just a one-eighth share of a home. In that case, a trusted hotel name combined with a prime ski-in, ski-out location made the project attractive regardless of the price.

The lesson for fractional buyers now is to be even more diligent than ever. For buyers eyeing fractionals still in pre-construction, grill the developer on their sales plan, how many units they need to sell to start construction and, in the worse case scenario, how your deposit is refunded if the project in doesn’t fact get built. For existing fractionals, even ones where the developer is still selling inventory, buyers should look at the resale market.

Where will we see new developments spring up?

Cheng: The trend for this year is exotic and urban. Cabo San Lucas is saturated with development. Ski towns in Colorado have plenty of high-end offerings. Developers are eyeing both urban locations and more international options, from towns outside of the mainstream tourism haunts to far flung locations, signaling that the fractional concept has a global appeal.

We’re seeing a greater push from hoteliers, and that is fueling the worldwide spread. Fairmont is expanding its fractional brand, Fairmont Heritage Place into San Francisco, South Africa and Dubai. Banyan Tree has an Asia-based shared ownership option. We’ve even come across of fractionals in New Zealand. Closer to home, the Shangri-La is opening its first North American hotel properties this year and some of those have residential components. Interestingly the company opted for their first U.S. fractional in Miami, a market that currently has literally tens of thousands of condos on the market.

Private Residence Clubs often tout their membership in fractional exchange networks that, in theory, allow owners to swap their week at a beach fractional for a week at a fractional in the mountains. Are these exchange networks the future of the industry?

Cheng: Exchange networks are without a doubt a great idea for the fractional industry, but their execution hasn’t been without problems. They’ve often utilized complicated points or clunky reservation systems that frustrated some users. Some networks simply suffer from a lack of variety. This year we expect to see the emergence of stronger exchange networks, which is good news for fractional owners. Preferred Residences, an alliance between shared ownership group Interval International, with some 2,200 properties, and Preferred Resorts recently launched. In fact, with these exchange programs, private residence clubs may start looking and feeling more like destination clubs with their mix of property locations.

Are timeshares a dying breed?

Cheng: Timeshares still exist, but those developers are responding to market demand in terms of more luxury. To survive and thrive, timeshare developments will get larger, with more two- and three-bedroom units and a higher level of finishes. Starwood Vacation Ownership has two- and three-bedroom villas at its Westin St. John Resort. The two-bedroom villas at its Palm Desert project, now in the works, are more than 1,400 square feet. These aren’t your typical timeshares. Some Marriott Vacation Club units have two and three bedrooms. All those amenities will appeal to affluent families, which is good news for developers as we enter a recession.