Cleaning Up The Timeshare Mess

As developers go berserk in the absence of clear guidelines, legal changes may be the only solution

Two-and-a-half lakh members of the Indian middle class have invested an average of Rs 50,000 each in a business that is attracting entrepreneurs and adventurers by the dozen timeshare resorts. That works out to a market size of Rs 1,250 crore. In the last eight years, the number of resorts, operational and non-operational, has grown from six to over 80 20 have been added in just the last year. But what could rival the size and spread of the business is the extent and depth of customer distress.

Take the leader of the pack in the time share business, Sterling Holiday Resorts, which now has 70,000 timeshare members on its rolls. In February 1995, it started marketing timeshares for its low-cost, 3-night-4-day vacations project with the promise that 12 Heritage India resorts on the temple circuit of South India will be ready within a year. Industry sources say, They were selling 3,000 weeks a month which is like creating a resort a month! In March 1996, Sterling sold a record 5,700 timeshare units in India the highest by a timeshare company that month anywhere in the world. More than two-and-a-half years later, the resorts are not operational and Sterlings 70,000 timeshare members are being squeezed into existing properties. I was selling one ownership week to several families. The reasoning was that all of them will not decide to go to the same place in the same week. Besides, as per the terms of contract, if the purchaser does not get her holiday, the worst that can happen to the company is

that it will have to pay her an interest of 18 per cent, says a sales executive.

Ravi Warriar, vice-president, sales and marketing, Sterling Holiday Resorts (India) Ltd, does not deny there is overbooking, but holds the general economic slowdown responsible for Sterlings woes. The recession in the economy has affected most businesses and the timeshare business is no exception. Industry sources, however, say that the company made a mistake by spreading itself too thin. In 1995-96, it reported a sales turnover of Rs 145.33 crore and took to expansion with a vengeance. It has sunk Rs 70 crore in Sterling Grand, a 437-acre sports-cum resort complex with a Greg Norman signature golf course in Greater Noida; it is investing over Rs 50 crore in two railway luxury trains on the Delhi-Agra-Jaipur and the Bangalore-Madras-Cochin-Trivandrum circuits; and it has allocated Rs 1,500 crore for setting up 23 hotels in the country. None of these projects has taken off. Sterlings turnover for 1996-97 dropped to Rs 80.61 crore and only 500 weeks were sold in March 1997. A Sterling employee says, We were moving at a breakneck speed and we ended up breaking our necks.

Sterlings troubles may have got more attention, but others too are facing problems. Harihar Patra, promoter of Toshali Resorts International, which has 7,000 timeshare members, says that sales were growing at a rate of 7-10 per cent annually till 1995. They have now come down to 2-3 per cent a year. There is a slowdown in the market because the same customer is being attacked again and again by different developers. There is now an increased resistance to pressure selling.

But Shukla Bose, managing director, Resort Condominium International (RCI), India, is confident that things will change for the better: In the initial years entrepreneurs like Sterling and the Dalmias pioneered the timeshare industry in the country. But it is slowly reaching a stage where big players like the Mahindras and Oberois have launched their timeshare products and are surely going to make a difference to the industry. RCI is the worlds largest timeshare exchange company, with 3,700 resorts as affiliates, including 71 in India. The idea is to facilitate exchange of timeshare units so that the pool of holiday options for a customer increases many-fold.

But RCI has a problem in India: though it has 71 Indian affiliates, only 24 are operational. As a result, RCI ends up giving exchanges to all members whose resorts are not ready and a protective cover to all developers whose projects are delayed. India is the only country where we give an exchange to members of non-operational resorts as a goodwill gesture, says Bose, adding: It is actually a bonus vacation for the customer. She believes that the exchange system will actually become operational with more resorts getting ready in 1998. Once you have made a bad investment, the easiest thing to do is to affiliate yourself, says Gaurav Mishra, deputy sales manager, Suman Motels Ltd.

The industry now seems to be waking up to its own image problem. It has become a necessity for us to regulate ourselves, says Naresh Khatter, chairman and managing director, Avalon Resorts Private Ltd, at a meeting in New Delhis Taj Mahal Hotel. Half a dozen property developers nod in agreement. The occasion is the release of a manual prepared by the Resort Developers Association of Northern India (RDANI) that spells out a code of conduct for developers and marketers of timeshares. The objective is to protect the interest of the consumer and to ensure that nothing goes wrong with the deal which the consumer has made with the developer. This realisation for self-regulation has come not a moment too soon, and RDANI will not have to travel far to begin the operation. Mahesh Belwar, secretary of the association, says that he has sold 300 timeshares for his property, Corbett Heritage, with only 40 per cent of the construction complete. I have promised that the resort will be ready by June 1998, but I dont

think thats possible, he says with startling candour.

Selling properties before they become operational has become an accepted practice. Mahindra Holidays, for example, has sold 3,500 timeshares since February this year for six resorts in the country none of which are operational. The holidays begin in March 1998 and the company has so far finalised properties at only two destinations. The salesman for Mahindra Holidays offers a solution: The members can go to any RCI-affiliated resort.

Obviously, there are limits to self-regulation. What about legal regulation then? Can customers find a legal remedy for breach of contract by developers? There is bad news for those thinking along those lines. On January 6, 1997, the apex consumer court, the National Consumer Redressal Forum, washed its hands off timeshare disputes. In the case of Punjab Tourism Development Corporation versus Kirit P Doshi, the Commission ruled that timeshare was beyond the purview of consumer courts since the transaction between parties was only one of purchase of timeshares in immovable property, and did not involve the promise of fulfilling a service. However, Rosy Kumar, editor, Consumer Protection and Trade Practices Journal says: The reasoning of the Commission does not sound well especially when the Supreme Court has upheld that the sale of properties to be made available at a later stage amounts to rendering of service. Not providing the same is tantamount to deficiency in service. (See Consumer courts shuts its

doors.)

Forget about deficiency of service, what happens if a timeshare company goes under? What rights do customers have on the property? In India, no one really knows. Abroad, the rights of the unitholders are codified and well-accepted. For example, timeshare legislation in the United States ensures that in case a timeshare company goes bankrupt, the members form a consortium to take over the operations of the property. The timeshare contract clearly specifies ownership of weeks and a customers right to use it. This implies that a members right of usage is protected beyond the present.

What happens in India? We are not going into liquidation, is the curt response of Sterlings Warriar. An industry analyst says: The ownership of the timeshare resort rests with the developer. So, if the company goes bust, the timeshare purchaser loses her money. Shukla Bose of RCI confirms this: In India, the timeshare purchaser does not own the property. In the US, they are the owners. In fact, the legislation in states such as Florida is so stringent that a developer cannot sell timeshares until the property is ready.

There are other mechanisms to protect the interests of unitholders. In Europe the trustee system is popular, though not legally binding. In this system, timeshare apartments are placed in a trust for the period of the timeshare. The trustee company takes an enforceable hold over the property, so that whatever may happen to the developer or the marketer, the timeshare apartments are protected. In the UK, recently, dissatisfied timeshare owners took over a resort in Walton Hall by buying the public areas such as swimming pools and assuming management responsibilities their ownership rights were protected because the timeshare apartments were already with the trust.

Timeshare companies, in fact, regard the trustee system as a marketing tool since it lends credibility to the product. Susan Chandrasekar, CEO, Hutchinson & Co (India) Pvt Ltd, a wholly-owned subsidiary of the British trustee company Hutchinson & Co, explains: Our trust laws are based on the British trust laws, so there is a lot of similarity. Placing a property in trust is similar to placing it in an equitable mortgage. In effect, no lien can be placed on a property in trust.

But the idea does not appeal to the Indian developer. Hutchinson began its operations in October 1995 and only two companies, the Royal Goan Beach Club and Gemavat Resorts have so far signed up with it. What will a trustee do. Police us? How much can they police? The real problem arises because of over commitments made by marketers. Everything is communicated wrong its not what they say, but how they say it that misleads the customer, says Ritu Kohli, general manager, sales, The Resort Country Club. Bose agrees: Fly-by-night operations are not necessarily done by developers but by their marketers who promise more than can be delivered. They have little stake in the operation itself, and therefore no loyalties to the customer or to the resort.

This argument makes marketers see red. Raghuvar Singh, director, Dream Vistas Pvt Ltd, says: Marketing companies have been selling timeshares for the Greenfield Resort promoted by an NRI. The project has been delayed by three years and the developer has fled the country. Now we have to face his customers. Demands another marketer: How can we explain to a customer that the resort in Canary Islands gives free laundry service while the one in Kodaikanal does not? RCI has 3,000 affiliations in the world they should have a single set of terms and conditions for all.

But the developers and marketers are unanimous that the industry is going through a bad patch. The whole system requires an overhaul. Convincing the customer is more difficult now because of the negative perception of timeshares, says Khatter, who has sold only 600 out of 4,000 weeks in his four-year-old Mussourie property built at a cost of Rs 15 crore. I was hoping to sell at least 1,000 units by now, he says.

Strangely enough, the slowdown in the market has been accompanied by a mushrooming of timeshare resorts. Analysts say that two kinds of developers have come into the market the small builder who could not sell his property and the big hotelier who sees timeshares as a source of funding. Khatter, for instance, is selling timeshares for cottages in Delhi and Mussourie, which were originally meant to be service apartments. And Sadhana Rai, president, Orphic Resorts Ltd, an Usha Group company, is marketing timeshares for the groups hotels in Bhimtal and Kosi. Internationally, the timeshare-cum-hotel business is gaining in popularity. The capital income for building projects comes from the timeshares and the revenue income, from hotels, she explains. However, the deficit right now is neither in the capital account nor in the revenue account: it is in the credibility account.