In the late 1990s, as real-estate prices soared, an arcane business popped up, funds that were half luxury vacation timeshares and half REITs. Real-estate firms offered investors equity in funds owning a pool of beautiful properties, allowing them to have personal access to the private vacation homes, usually for two to six weeks at a time. How the hybrid concept differed from the classic timeshares was that the properties were also sold over time, so that the fund investors had the potential to recoup their costs and maybe some more. Of course, this niche vacation-investment product was knocked down during the recession, abruptly falling from a $610 million market high to $181 million by 2010, but it’s showing some life again. The industry recovered to $299 million industry last year, according to a report by real-estate consultancy Ragatz Associates.
Rocksure Property is a U.K.-based firm founded in 2006 that builds funds with high-end apartments and villas located in major cities. Let’s say you invest the typical $100,000 in one of their funds for a 10-year period. Rocksure will charge $3,600 in annual fees and a $235 fee per visit to service the property. So, if you visit two cities a year, you’re at $40,700 spent on top of your $100,000 investments. Assuming you’re staying for the typical two weeks granted for a $100,000 investment, and adding in the few hundred dollars you’ll be charged to wrap up the fund, you wind up paying $1,050 per night.
Not cheap, in other words, but your net costs will be lower if you factor back the returns you can potentially make from your position, once the 10-year lock-in period is over and the proceeds from the sold properties are returned to the investors. Rocksure does not charge any hidden load, but its management grabs 17.5% of the capital gains, and claims that 2006’s Alpha Fund investors could wind up just breaking even, net of fees, due to buying in at real-estate market highs, just before the recession. Capital Fund investors piling into its newest offering, claims the company, could wind up in 2028 with an estimated return of 20%—also net of fees.
That’ a tall claim to make—we’re similarly nearing the end of a bull cycle and investors who come in at this late stage have a good chance, as investors did in 2007 and 2008, of seeing the value of their properties tank for years, before bouncing back. There is no way Rocksure can give investors a credible estimate of returns in 2028.
Rocksure’s Capital Portfolio, which is the latest European-centric fund, has properties in Vienna, Paris, Rome, Venice, Barcelona, and Prague. That’s while its Crystal Portfolio offers a more diverse set of locations, including Spain and Antigua, in the Caribbean. The properties are 2,000-plus square feet and fully stocked with the basic necessities of a home, plus a home study in case you need to work. Rocksure claims it will arrange for a butler, multilingual tour guide, and personal shopper, if you want, but you’ll have to pay extra of course. If you skip your time slot in the pool of properties one year, you can roll over your allotted weeks to the following year.
Rocksure runs funds with set 10-year periods. Its competitor, The Hideaways Club, also based in the U.K., doesn’t have these set time limits, allowing it to buy and sell properties based on opportunities in the underlying property market, says spokesperson Gerry Gross. This curbs the risk of a fund’s term ending during a market downturn, and the possibility of losing money. Hideaways’ offer also differs in that it focuses on less urban properties, like a chalet on the outskirts of Chamonix, France, Gross says. The Classic Collection has private residences in Bali, Ibiza, Côte d’Azur, Kitsutsuki, and the Cayman Islands. That’s while the City Collection offers a more fast-paced feel, having homes in Bangkok, Berlin, Istanbul, and New York City.
Say you make the same $100,000 investment in a Hideaways fund. The annual management fee is $4,500 and you will be charged a one-time $5,000 placement fee. Total this up and the cost to stay per night for a two-week period annually is $1,714. But again, if you are shelling out $140,700, you could end up with your fair share back at the end of the investment. But Hideaways extracts its pound of flesh in the back end. The management creams 15% off of the capital gains and charge investors an additional $10,050 exit fee. It claims its shares went from $246,000 to $278,000, or 13% over a decade. That’s a pretty poor return.
These vacation funds appear to us as excessively clever and complex and offer mediocre returns at best. You’re probably better off taking your vacations and investing in real estate—separately.