Among the must-have accoutrements for high net worth individuals, super yachts, private jets, coveted art collections, intricate watches, expansive wine cellars, classic cars, rare handbags, bespoke jewellery, and even the occasional exclusive pair of trainers hold a special allure. The ways these luxury assets come into their possession vary significantly, ranging from inheritance to speculative investments, “passion” acquisitions, or simply fulfilling business requirements.
It has long been recognised that some of these “luxury assets” perform remarkably well when juxtaposed with traditional forms of investment, often outperforming stocks and shares. This performance has led to increased awareness of the potential to unlock the value of these assets, providing additional liquidity to their owners, either through individual asset financing arrangements or as part of a broader banking setup.
Understanding Luxury Asset Finance
Luxury asset finance refers to loans where an asset is offered as security or collateral. These loans typically carry a lower interest rate due to the lender’s ability to enforce its rights by seizing and, in most cases, selling the secured asset to recover the outstanding debt. This approach mirrors the function of a mortgage against property. Still, some lenders accept other forms of assets, including “luxury assets” such as business jets, fine art, watches, collectible cars, or even assets more relevant to maritime leisure like super yachts—a popular option for those seeking boat finance.
The Constraints of Luxury Asset Financing
Unfortunately, not all luxury assets can be financed. Lenders primarily aim to ensure that they will be adequately compensated in case of an enforcement, lending only a fraction of the asset’s value being offered as security. This percentage can vary significantly among lenders and different asset classes.
For instance, loans secured against “safer” assets like real estate, where the title can be definitively established, and the asset can be protected against disposal while secured, may reach as much as 90 or 100 per cent of the property’s value. Conversely, loans secured by unique movable assets such as art or wine are typically offered at lower loan-to-value percentages. This is because these items’ title can be challenging to establish, they can be moved easily, and their value is often subjective, intrinsically linked to their provenance and authenticity, or comparative values exist in a small pool of depreciating assets.
Furthermore, the values of certain luxury assets, such as superyachts with flashy interiors or watches with faulty mechanisms, can fluctuate unpredictably, mainly based on market appetite and the individual asset’s quality. Such uncertainties often make lenders more cautious about the loan-to-value they offer against some asset types.
Assessing Luxury Assets for Financing
If you consider luxury asset financing, there are some considerations to keep in mind to help ensure the lender will lend against the asset. First, consider the asset’s location, its usage, and your access to it. The lender may need to protect their security by housing the secured asset in a specialist warehouse with restricted access. If you wish to continue using the asset—be it wearing your precious watch or storing your wine in your cellar—this could prevent those items from being offered as collateral. This also applies to business essentials like planes, cars, and yachts.
Ownership and title are another critical aspect. It’s essential that the individual offering the asset as collateral truly owns that asset. With non-registered assets such as art, wine, watches, or handbags, it is vital to have robust evidence of ownership—invoices, auction records, receipts, and catalogues.
Moreover, the authenticity, provenance, maintenance, and insurance of the asset are crucial. Lenders require assurance that the asset offered as collateral is genuine and has been well-cared for. They may ask for certifications and documents verifying the asset’s frequent maintenance, servicing, and insurance.
Establishing an asset’s value can be tricky since comparators are often rare, and sales are frequently private. However, lenders will always conduct their own valuations. For unique assets, lenders may require a diverse security pool to hedge against changing market tastes.
The type of lender also matters. Some specialist lenders focus purely on the secured asset, while others will only lend against an asset slated for sale within a particular period. Private banks typically only lend against these types of assets as part of a broader relationship.
Lastly, confidentiality is crucial as it may be necessary to register certain securities on public registries. The valuation process should be handled sensitively and only with legitimate lenders familiar with lending against such asset types.
In conclusion, luxury asset financing offers a potential means for high net worth individuals to leverage their assets for additional liquidity. However, the complexities involved in this process require due diligence, proper preparation, and a thorough understanding of the inherent risks and benefits. Luxury asset financing may be a navigable sea, but like any journey, it demands proper charting to arrive safely at your financial destination.
