Day two of Superyacht Investor London proved to be as informative as the first. Alasdair Milroy, Sarnia’s Group CEO reports back with this summary…
Session 1: Building Yachts in 2018
During the first session of the second day of the Superyacht Investor conference, the audience and panel looked at building superyachts in 2018; asking:
- Is this the year the demand returns?
- Can yachts keep getting bigger?
- Should yards concentrate more on after-sales?
Panel members opined that 2018 has already started optimistically. The presence of two new shipyards on the panel is a positive indication of demand.
Rosetti Superyachts and Centierre del Marche are both relatively new yards in the 20-metre to 40-metre yacht range reflecting growth at that end of the market.
The shipbuilding market at the larger end is consolidating. There is now a choice of good shipyards available for new customers, so it is likely to be tough for new builders to compete with market leaders.
The panel noted some thoughts about ethics and sanctions on vetting new customers:
- It is critical to conduct your best investigation at the time of onboarding and be prepared to continue if there are unproven sanctions
- Most shipyards have ‘Know Your Customer’ (KYC) procedures in place. This is positive news and reassuring for fiduciaries who can be assured that shipyards are vetting the clients before entering into build contracts
- Discussions referenced the Panama and Paradise Papers. Shipyards have to consider the reputation of the builder and the industry by following anti-money laundering (AML) and banking/payment rules
- Yards are vetting the funding of builds, which is reassuring for compliance teams
Vasco Buonspensiere from Centierre del Marche noted that they had one instance where they have declined business (out of five or six builds per annum). Declining even one build is a big percentage of a yard’s book. This risk evaluation action is impressive, and clearly, no builder would want to risk closing the yard for one contract.
Session 2: The Rise of Billionaires in 2008-2018 Versus the Fall in New Yacht Buyers.
The second panel session of the day briefly explored these questions:
- Where did all the buyers go?
- Is China the issue?
- Can you forecast yacht sales?
Panel members stated that China is a slow growth market but, regarding GDP, the USA and Europe are still by far the largest market, with Americans being the most active buyers. It was also noted that it is the younger generation that can identify with yachting through European education etc whereas the older generation cannot relate to such a depreciating asset
Superyachts are seen as ‘Veblen goods’ – an extreme form of luxury goods, for which the quantity demanded increases as the price increases. This contradicts the law of demand.
US$ billionaires (identified) dipped in 2016 but are now increasing again, with a lot of people move above and below of the billionaire threshold.
Session 3: Is the US driving the global market?
The panel focused on the differences between the American and European markets and the impact of American customers on the global superyacht market.
Has There Been a Trump Bump?
The panel agreed that many US companies have vast offshore profits to repatriate, which they are expected to invest in US manufacturing. No real tax changes have trickled through yet, and there is an optimism that the future will be pro-business. It was also felt that the current healthy economy was more of a result of the legacy of Obama, rather than anything that Trump had instigated.
The USA Domestic Market
The Florida and North West coast superyacht markets are seeing a surge; Pacific, Vancouver and Seattle, in particular, are booming. Florida and the Caribbean are still the largest markets for the United States domestic market.
Depreciation of yacht value is shallower than in the past due to a lack of supply in the refit market which can help flatten the depreciation curve, so it is a popular market with financiers. Typically, the lending term is a loan of 15 years amortising with a balloon payment. Collateral and resale are key for financing and LTV calculations on finance deals.
How Can We Get More Young and New American UHNW into Yachting?
The panel asked how the industry can get more young and new American UHNW into yachting. It was agreed that the emphasis should be on buying an experience and rather than a liquid asset. Yachts are different from other expensive items. An aeroplane is an asset for travel; helicopters and planes can often be the mode of transport to get to the yacht, whereas the yacht is a ‘fifth home’.
The panel noted that they see more boating but less ownership of yachts. Day charter is popular, and
The Monaco Yacht Show backers have bought the Florida Boat Show and expect to see a resurgence in yacht shows. The question is, how do you identify non-boat owners who might enter the market?
What Could Europe Learn from the US Market?
A third of US charterers want to do the Mediterranean ‘Milk Run’; a colloquial term given to the much-loved path that sees yachts cruising the waters from St Tropez to Monaco. However, the more adventurous destinations and expedition yacht charters are increasingly popular.
The US market is simpler than Europe from a fiscal perspective and very different culturally.
Flag and Crew Considerations
It is crucial that yacht owners have good advice on flag state, crew regulations and employment. The flag state is important for financiers as it has an impact on how they can repossess yachts.
The crew is vital to financing, and the captain will be named in the loan documents. Banks will want you to use the same crew for both owner and non-owner charters.
Restrictions on the sale of foreign flag vessels are something the industry wants to see simplified.
Bitcoin Sales and Social Media
We are starting to see real yacht sales and also charters in Bitcoin. While the value of Bitcoin is down 50%, it is still up five times last year.
Social media channels are important to yacht sales. However, they are not important for clients of the bank or owners who want to be distanced from the ownership for security and confidentiality reasons. Everyone acknowledged that yachts are an asset that will give these owners privacy and discretion, both of which are very important.
Session 3: When Bad Things Happen to Good Yachts
The panel of insurance brokers and underwriters discussed:
- The best ways to protect your yacht from natural disaster
- Do hurricane clauses work?
- How to protect your toys on board? Art, helicopters, submersibles
The panel started by acknowledging that reality is coming back to the pricing of yacht insurance. There has to be a correction in premiums with current premiums being 43% less than five years ago. The industry should expect to see an increase in premiums of 10% this year.
The path of Hurricane Urma didn’t impact the domestic US market so likely to have less impact there. However, 67% of the US domestic market is reinsured in the Lloyds market.
Other points of note included:
- It is important that yacht owners have an insurance plan which they revisit on each renewal date
- Smaller yacht premiums are more likely to be impacted than larger ones
- The panel advised that it is best to have a professional full-time crew and to check for hurricane clauses included in the contract
- Yachts over 24m with full-time crew should not have hurricane clauses in the policy
- Yachts are often safer at sea than in dock due to debris, but taking precautionary measures is important
Tenders, Toys and Submersibles
There has been an increase in additional yacht assets, particularly submersibles but there is a knowledge gap in the insurance industry that needs to be bridged.
There are 20 – 25 in operation currently which is a five-fold increase on five to 10 years ago, but tracking data is difficult.
There are concerns about whether these assets are used regularly and properly serviced. Are the various drills etc. being undertaken and are proper safety procedures for entry and exit being adhered to? Public liability is an area of most concern for these accessories.
More and more yachts want to explore rather than sit at anchor in the Cote D’Azur and this has implications for insurance.
The industry, including insurance brokers, captains, yacht managers and yacht owners need to work to reduce risk. It was reiterated that insurance premiums are down 43% on five years ago. IPT and the global financial crisis have kept premiums flat for 10 years.
Session 4: Financing Yachting Companies
The Superyacht Investor panel said that the charter market is highly fragmented, making it attractive to potential investors. However, yachts are eating into leisure and hospitality markets. Other topics under discussion included:
- Are most individual investors buying a brand rather than returns?
- Attracting private equity
- Floating yachting companies
Market Disruption
Investors are more and more interested in the leisure industry. Investors have bought into the industry on the basis of passion initially but have then utilised their teams to convert them into profit centres. These investors have had the multiples to negotiate bulk discounts and the expertise to maximise utilisation,
Momentum Superyacht Group (MSG) plans to be a disruptive company in the industry by owning, chartering and managing its own boats. They believe in vertical integration with standard packages. These yachts will be workhorses with, for example, people renting rooms on yachts for major events such as the Monaco Grand Prix.
Princess Yachts is also keen to disrupt the yacht building industry. They wish to focus on the younger market by stepping away from the traditional niche. They will do this by broadening their marketing strategy and tapping into the emotion behind yachting. Panel members noted that there is a disconnect in the way we communicate about the industry, we need to celebrate the passion in the industry and not focus on the preconceptions about superyachts.
ROI and PE
Return on investment targets stands at around 20%. MSG would like to tap into the financial markets and leverage on its power for luxury branding. A greater understanding of the components in the industry will open it up to a wider audience. MSG is in fundraising for expansion capital and to purchase yachts; they are looking at pre-owned yachts GBP 5 – 10million with a good charter record.
LVMH Feadship (the world’s largest luxury goods group) and Princess show that there is private equity interest in the sector. The key is sharing the passion.
Session 6: Yachting in the EU
- Does anyone know what is going on?
- How will it affect the Isle of Man?
- Who will be the winners?
- Latest jurisdiction updates
- What will happen to VAT?
- Are seizures rising?
One of the panel clarified that EU questions over VAT are not just focused on Malta but on all the leasing schemes in operation across Europe.
The EU is keen to promote shipping and flags within the EU in an environmentally sustainable way to benefit the region.
Industry Reputation
The recent Panama and Paradise Papers increased yacht owners’ awareness of reputational risk and provided evidence that there is going to be more transparency for owners and investors in general. It is a challenge for the industry to work on, the key will be that it self-regulates and acts correctly.
Private clients are thinking in much more detail when it comes to their documentation. Some family offices are recognising that aircraft and yacht assets are likely to attract more scrutiny so are reviewing all documentation on the management of these assets.
Spotlight on Europe
Malta Shipping is very focused on the health of the EU yacht industry. Malta is pushing for commercial yachts to be included in the Tonnage Tax, and this includes the full technical management of yacht.
Yachting currently is not currently featuring in the VAT and Customs regime Brexit discussions.
The UK’s departure from the EU opens up new opportunities such as Temporary Admission (TA) which applies to non-EU residents, however TA can be quite complicated for globally mobile UHNW.
Yachts engaged in trade such as the Cayman and the Marshall Islands have programmes that the UK might also look into.
The panel noted that French Social Security is an ongoing problem and no one has the answers; this continues to create uncertainty.
Read our insights into the question of social security for French crew.
There will be a shift to other jurisdictions, for example, Malta and UK where you can pay social security for qualifying crew. People want certainty and at the moment this is not the case, which is also one of the reasons for the exodus of yachts from the French Riviera. The industry hopes that the social security obligations in France will gain clarity over the coming weeks and months.