The first day of the Superyacht Investor London conference had a packed schedule and the sessions proved to be insightful and topical.
Three of Sarnia Yachts’ directors, Alasdair Milroy, Bruce Maltwood and Patrick Spiteri, attended the conference and reported back with this summary:
Session 1. Selling Yachts in 2018
The first session saw some yacht brokers share their opinions of the market; here is a round-up of their views.
- The superyacht new builds book is improving
- Tight product supply on used market
- In this market, the yachts selling are those marketed at a realistic price
The industry is seeing most interest from buyers from the US, Great Britain, Switzerland, Germany and increasingly from Australia, while customers in the Middle East and the Far East are less active.
The commercial charter market is currently more buoyant than the private yacht market.
Positive news on yacht finance is that, because the superyacht is a luxury asset, a lack of finance is not holding the market back, with buyers funding 50% to 100% of the purchase price themselves. The days of seeing 90% debt funding have definitely receded.
Buyers should view a yacht purchase as buying an experience and not an investment. It is unlocking a unique lifestyle experience, so buyers need to be comfortable that they will not need to worry about the capital or running costs. Always remember a superyacht is a depreciating asset and is unlikely to deliver a return on the investment.
Know Your Customer and Customer Due Diligence
Since the Panama Papers, there has been an increase in client scrutiny. Brokers, along with law firms and yacht fiduciaries with experience in client vetting, are finding owners are more willing to provide the information required. Owners in the superyacht market know what is expected to meet AML regulations and understand the requirements for KYC, having experience in other areas of their lives, e.g. banking.
Throughout the day fractional ownership was identified as a means to attract new owners to the market. It remains to be seen how successful it is because of the nature of yacht ownership. The personal and emotional nature of owning a yacht is different from other assets such as business jets. Both fractional ownership and the evolution of the charter market, with potential new competition from entrants in the cruise industry, are considerations as the industry evolves.
New Buyers often Charter First
Chartering a yacht is often the first experience that potential owners enjoy. The industry is selling an aspirational dream, an experience. Charterers will find it difficult to replicate the combination of service, dining, privacy and ocean experience that leads onwards to yacht ownership.
Sarnia Yachts has written several articles about yacht chartering. Read them here.
Session 2. Making Buying Simpler
The second session opened by asking: could standard contracts work with new builds?
It was acknowledged that this would be much simpler than similar-sized construction contracts.
There is a lot of industry discussion around the positioning of a standard build contract for yards, or at least provide a framework. Production yachts would not be affected by this, rather just custom and semi-custom vessels.
However, it is important to have a proper paper trail and to have gone through the negotiating process on the contract to avoid misunderstandings or problems later.
Regulating the delivery process includes managing expectations, and recognising that it’s a fact of life that snagging issues will occur post-delivery; placing a framework is critical to resolving these. It is important to get the yacht into service and work through the snagging issues, and early attention to technical dispute clauses in the contract is vital.
As Sarnia advises, the panel noted that it is important to consider the ownership structure as early as possible in the build process, although in long builds it is often not considered in the early stages.
What is often not known by the lawyers and brokers are the details of the client’s wealth structures and tax affairs, which will impact upon the ownership structure. A good corporate fiduciary will need to understand this to ensure the structure is established and administered to meet the owner’s requirements, and having a direct communication line with the owner, family office and advisors is advisable at an early stage.
It was suggested that discussing VAT before a yacht is built might be putting the cart before the horse. Whilst it is certainly not the norm, some clients are now considering the VAT payment and are moving forward on the commercial terms.
Considering local law in the build phase is also critical as it will always govern ownership during the build.
It was agreed that as an industry, it looks professional to have a standard framework of questions that should be covered before and during the build process. However, many builders favour their own contracts which can lead to inconsistencies.
A question was raised by a Maltese advocate as to whether a Letter of Intent is binding. The panel noted that it is important to make clear which provisions are binding, which are not and what is trying to be achieved. It should be noted that confidentiality clauses will be binding.
Session 3. Yacht Management in 2018
This session asked the following questions:
- Do owners appreciate what yacht managers do for them?
- Are we facing a crew shortage?
- Do bigger managers get economies of scale?
It is critical to instil a strong safety culture on board, and yacht managers need to support captains and officers so they can do their job well.
The panel agreed that good, effective yacht management is the ‘cheapest insurance policy you can get’ to look after the operation and safety on yachts. It also brings value and comfort for family offices and owners.
At the heart of good yacht management are trust and first-class service; the teams in the office and onboard must work closely together.
Whilst the industry used to be reactive, that is now changing with more proactivity needed to manage the industry regulations, notably MLC and ISM.
A good yacht manager should:
- Safeguard the asset and passengers, who are often family and friends of the yacht owner
- Provide shore-based support for safety matters and in the event of a crisis
- Provide support to the captain from shore and allow him or her to focus on matters on board.
Sarnia Yachts supports yacht management with the following services:
- Accounting and Administration Services
- Crew employment and payroll
Safety should not be governed by whether the vessel is for private or commercial use, nor should the size of the yacht be relevant. It is the yacht manager’s responsibility, alongside the captain, to encourage a positive safety culture on board the yacht. The panel warned that alarm bells should ring on any yacht where the captain is not leading with a safety culture on board.
Educating owners about the importance of developing a safety culture is also essential and the captain and officers often need to proactively engage with owners to demonstrate the benefits of this.
Adherence to the MLC, monitoring crew qualifications, their training, the hours of rest they receive, and proper usage of a crew handbook and its procedures are cornerstones of a safety culture.
Learn more about Sarnia’s crew employment and payroll services.
The Value of Yacht Management
The panel recognised that yacht management is an expensive division with professionally qualified employees, which has low margins but keeps the client close to the yacht broker.
However, low pricing is devaluing the industry and clients rarely value something provided for free, despite some big brokerage houses sometimes taking this path. Richard Masters of Master Yachts noted that he inserts a Squawk Clause whereby the yacht manager keeps a timesheet for the first two months to demonstrate the time it takes to manage the yacht and, if needs be, revisits any agreed fee to adjust the scope.
It is up to the industry to demonstrate to family offices and lawyers the benefits of professional and specialist yacht management.
It is clear that a strong industry voice is important to promote yachting and hold off the threat from the cruise industry, which is packaging up a higher-margin product for UHNW clients. A transparent and professional industry is critical, with open and honest pricing and first-class services.
Key takeaways from this session include:
- Manage client expectations (which can sometimes be unrealistic)
- Voluntary compliance does add (resale) value to yachts and offsets some of the costs
- Supporting captains and crew improves safety on board and ensures a smoother-running yacht
- Developing an onboard safety culture is critical
- Transparent pricing and placing a value on the service are essential for the long-term health of the profession
Session 6. Yacht Charter and the Sharing Economy
This panel session sought to answer these questions:
- Is charter the future for yachting?
- Is yachting still cool?
- Can you make money owning yachts for charter?
The panel opened by reassuring the audience that the charter market is buoyant, with good referrals. New customers are coming from varied sources such as online and social media marketing.
Growth is coming from more affluent young charterers, particularly US charterers who love the Mediterranean. Adventure chartering in locations such as the Antarctic and the Maldives is growing in popularity. The diversity of experiences and culture available in the Med ensures this area has maintained its popularity.
The panel discussed the Air BnB-style approach for static charters as well as fractional ownership. These are useful incremental revenue streams in the shoulder and low seasons. However, the panel noted that it is early days and difficult to gauge whether this will develop into a viable and profitable extension on the current market. Owners still prefer to know who is on board and are resisting largescale cabin rentals.
Competition from the cruise market was raised again in this session, with the panel anticipating that cruise companies will attack this model, but that the yacht industry must be open to innovation and change.
Session 8. The Refit Market
Requests for new and different on-yacht toys, including helicopters, submersibles and all-terrain vehicles, are pushing the boundaries of the refit market.
Refit customers are coming from all the usual sources of businesses, with US and European clients being the major players.
Trends driving the market include equipping yachts for more extreme experiences such as ice-breaking as well as AV and fast broadband upgrades.
The panel also answered questions on recycling and environmental concerns, with the conclusion of: ‘why build a new yacht when you can reuse an existing hull?’
A conference poll closed the session with positive news: 85% of delegates think that 2018 will be a strong year for refit.
Session 9. Don’t Panic – Crisis Management
Emergency response plans, social media policies and skilful communication will help to manage a crisis in the right way. Are you ready?
The most common crisis faced by superyachts is fire (33%) followed by grounding (11%). Bad weather and cyber breaches are other issues captains and management need to be prepared for.
Typically the cycle of a crisis will follow these phases:
- Surprise – denial, shock, disbelief
Insufficient information on what has happened – collecting information quickly is important
- The flow and speed of events escalates
- Scrutiny on the issue increases – media and social media management is critical
Siege mentality – often a high volume of contact from concerned industry colleagues, press, suppliers and salvagers
- A short-term focus dominates
The basics of crisis management:
- First, take steps to mitigate any losses and immediate dangers
- Communication is the key skill in a crisis. Use social media carefully – it can be very harmful
- Inform the broker of the issue
- Preserve the evidence
- Cooperate fully with authorities
- Update stakeholders and keep them informed
- Check liabilities
Emergency Response Plans should be in place, and they should have been pressure tested. The panel also advised the audience to use external resources to support ERP.
Cyber threats are recognised as a big concern, along with fire, collision and the impact of bad weather.
Cybercrime is a new threat facing yachts – personal data breaches and engine management platform hacking are just two potential threats. Social media policies should be monitored on board and restricting the posting of location and sailing plans is just one of the basic steps that captains need to take to minimise risk.
AIS can be very useful to replay routes, but the panel recognised that this data is widely available and can be obstructive.
Join us on Twitter @sarniayachts for updates throughout tomorrow’s Superyacht Investor London.
Alasdair Milroy, Bruce Maltwood and Patrick Spiteri are attending day two of the conference on 1st February. If you would like to make an appointment, please get in touch.