“You only live once” by HSBC Global Private Banking
November 14, 2022
Even during a “rollercoaster” couple of years post Covid, the superyacht market in Asia has remained lively and HSBC Global Private Banking continues to help clients realise their dreams.
Jyrki Rauhio, Regional Head of Credit Advisory, Asia Pacific, HSBC Global Private Banking
Asia may not be the world’s most developed superyacht region, but it does have a dynamic new generation of owners, many of whom have been inspired to purchase in the Covid era. In fact, a superyacht as a first boat is more common in this region than in the rest of the world, where owners typically upgrade through a series of increasingly large yachts before taking the plunge and buying above 80ft or 100ft.
HSBC Global Private Banking, which has a long history of helping finance and structure superyacht purchases around Asia, revealed that earlier this year it helped a client buy a 100ft-plus yacht valued in the region of US$10 million – impressive for a first boat.
“In Asia, someone’s first yacht may be a 100-footer and our client’s first was above that length. It’s a very nice vessel,” says Jyrki Rauhio, HSBC Global Private Banking’s Regional Head of Credit Advisory, Asia Pacific. “Usually, most buyers would have had several boats before buying a superyacht, but the fact he’s spending US$10 million on his first shows the difference in the market here.”
Stressing how Covid has inspired a strong feeling of carpe diem, he cites a Hong Kong-based tycoon who has been involved in a lengthier purchase of what could be termed a megayacht. Built in Italy, it should be delivered in 2023 and has a value close to US$100 million.
“He wanted to realise a dream,” Rauhio says. “His yacht is of a serious size, but it’s a great example of a project that has been built during Covid for somebody who wanted to realise their dream. Once he gets it, he can enjoy using it far more widely than just cruising around Hong Kong.”
Rauhio, whose job scope covers Asia Pacific, says the mindset of people in the region has been influenced by a reaction to the Covid era’s restrictions, much as it has elsewhere in the world.
“Everybody’s world view has changed in the last couple of years. People have altered the way they approach life, family, work, holidays and so on. There has been a feeling of ‘you live only once’,” he says. “As such, many yacht dealers have done very good business and it has also been evident in the supercar market”.
For all the upsides in the ‘trophy assets’ sector, Rauhio admits that the overall superyacht financing market spanning the various countries and regions across Asia “has been a very interesting rollercoaster, with ups and downs”.
“We’ve closed deals and we’re working on more, but it has been an interesting two or three years and the gyrations have been huge, as have the regional discrepancies.”
In Hong Kong, the yachting market picked up quickly in 2020 after the initial fear of Covid waned, leading to record yacht sales for many dealers and brokers. However, Rauhio says the post-Covid boom in the yachting market has slowed a little, coinciding with more restrictions at the start of the year and a more unsettled business climate.
“Soon after Covid began, people started getting interested in boats and many were sold in the secondary market. This was when [interest] rates were still low. Our clients came to us for funding and there was a lot of activity; we issued plenty of term sheets and closed quite a few deals,” he says.
“People getting on their boats and cruising around Sai Kung or elsewhere was the closest they had to a mini-holiday for the first couple of years of Covid.
“However, that euphoria has cooled a little. Coming into 2022, we moved into higher rates and more uncertainty, with people wondering whether buying a yacht was a good idea. Quite a lot of the people looking at these large yachts had their businesses face headwinds and had better use for their cash, although we’re still working on multiple transactions in Hong Kong.”
Rauhio says his recent travels around Southeast Asia have given him cause for optimism and gives examples of how overall wealth in Asia and around the world continues to grow.
“I’ve recently been in Jakarta, Singapore and Manila, and business prospects look pretty good, people are enjoying themselves, so I think the superyacht sector will continue doing reasonably well, although it’s subject to the market,” he says.
“The number of people holding US$250,000 in Vietnam, the Philippines and India will more than double by 2030, according to HSBC research. It’s an example of how wealth in this region will continue to grow, despite how the markets perform and geopolitical happenings. It’s an unstoppable trend and with it comes a desire for assets like yachts and other items.”
CGI c/o Fraser
In Hong Kong late last year, HSBC Global Private Banking invited clients to visit and tour three motor yachts up to about 120ft in Deep Water Bay in an event organised with a local dealer. Rauhio was happy to see the reaction of clients, but believes potential owners should think long and hard before committing to such a purchase.
“The clients loved it, having champagne and canapes, and spending a day on a very nice yacht. It can potentially stir an impulse purchase, but clients should ask whether it makes sense for them on more than just an emotional level.”
He also cautions potential owners who may have first enjoyed yachting in the Mediterranean or Caribbean, especially if they assume a similar infrastructure for superyachts exists in Asia.
“If their first experience was on a holiday or charter in the Med or the Caribbean, they may have thought owning a yacht is a great idea,” he says. “It is a great idea in the Med, where you can easily go from port to port, but in Asia, you need to think realistically about how you can and want to use your yacht and where you want to go.”
A yacht is also very different from most other trophy assets, especially passive ones such as art or luxury watches. A superyacht is in a different cost bracket to supercars and is only partly comparable to a private jet. The rule of thumb for annual running costs of a superyacht is up to 10 per cent of the purchase price, once you include crew, insurance, berthing, fuel, maintenance and more.
“A yacht is a very complex asset to own, even more complex than a plane. You must keep a plane airworthy, but it’s highly regimented and regulated, and can be overseen by a management company. In the boat industry, certainly in Asia, it’s not plug and play, and it can be a complex process to find the right people, suppliers and support,” he says.
“The running costs are quite a large cash outflow, which is fine if you have enormous cashflow coming in, as many of our clients do. For most of our clients, it’s not a question of whether you’re rich enough but whether you really want to spend this kind of money on this asset. Do you want to get involved in all the costs and hassles of ownership?”
However, once a buyer has committed to purchase, HSBC Global Private Banking works with clients on how best to structure any purchase and how to set up ownership, and even – if needed – to help discuss the type of yacht they wish to buy.
Choosing a yacht can involve discussions about pre-owned, new or custom build, special features and size, which can be a personal choice or based on the owner’s plans, such as whether it will be used for long journeys and ocean crossings. The choices are far more varied and complicated than when choosing a private jet, when it’s far clearer how the client is likely use it.
“For a plane, a client may typically fly within Asia or to Europe or New York, and estimate that they fly 20 or so times a year, for example. Based on usage, you determine the size and narrow it down to a few options,” he says.
“Planes are more limited than yachts, where we have more of an advisory relationship. A yacht purchase is more emotional and the options for design and customisation are endless.”
He also cites a client in Australia as an example of someone who knew what he was looking for and how he was going to use it. Rauhio visited the client’s house in Sydney and was amazed at the personal involvement in the design of his upcoming yacht.
“He had a beautiful house and one of the rooms was full of blueprints of the yacht, which measures a couple of hundred feet. He had all these blueprints taped around the walls, so that was like his design room. He got very deeply involved in the actual customisation of his yacht.
“When you get to that level of involvement, you know all the questions have been answered. He then used this yacht to travel between continents, cross oceans, going up the coast from the Panama Canal to Alaska.”
CGI c/o Fraser
STRUCTURING AN ACQUISITION
Once a yacht has been identified, discussions revolve around how to structure a purchase. For starters, HSBC’s yacht financing is not about enabling purchase. Clients typically can afford the outlay and the yacht sits within a large portfolio of hard and soft assets.
“The important question for the client is, ‘Do you really want to tie up your capital for the full value of the yacht? Then you get into what we do, and this is where the financing angle comes in,” says Rauhio, who admits such discussions are a little more complex now than even just a year ago, when rates were lower.
“If you’re a successful businessperson, tying up US$50 million in an asset that yields a negative cashflow is not necessarily a smart thing. You’d rather release some liquidity from that and invest it in something that brings you a positive cashflow to help offset the cost of ownership.
“As we stress, our yacht financing is not about enabling purchase but about making your money and equity sweat harder. If you earn a 10 per cent yield on your capital in your primary activity, then even with these rates, financing makes a lot of sense while using your hard-earned cash possibly doesn’t.”
The structures of yacht financing and ownership can vary widely. Rauhio says the tycoon who ordered a yacht valued at close to US$100 million was looking how to best finance it and structure the acquisition. HSBC Global Private Banking arranged pre-delivery financing, approving a facility against the project, and has separately arranged delivery financing.
“He’s a very good client of ours and has substantial assets. We enabled him to finance the entire construction period so when the project is realised, he will take delivery, but he has been mostly using our money to build it. He then effectively puts in the equity at the end,” Rauhio says.
“We take a fair amount of risk, but because of our deep and long-term relationship with this HSBC Group connected client, we were happy to take that risk.”
Otherwise, financing structures can be more straightforward, with options including placing the boat in a trust, depending on the client and family estate. Rauhio says the financing for the first-time buyer of a US$10 million yacht was about 50 per cent LTV (loan to value).
“Basically, we need a borrower and a guarantor. Typically, you establish an SPV (special purpose vehicle) to hold and own the boat. The SPV becomes the borrower and there’s a personal guarantee by the client,” he says.
“It can make sense for a family estate to hold it in an SPV, especially if you charter the yacht. All the running costs and assets are in one place, and it can be run as a mini company, which can be used to hire the crew and make and receive all other payments.”
HSBC has also, with prior approval, put clients in touch with other clients who have been through the process, for advice and learnings.
“We can connect you with others going through the same thing,” Rauhio says. “Maybe you want to have a discussion with a like-minded millionaire locally in Asia to discuss how they did this, as opposed to having a Zoom call with somebody offshore, for example. That’s an advantage.”
Ultimately, HSBC Global Private Banking has the on-ground expertise and experience across Asia to help clients make their money work for them, offsetting some of the large costs of what’s often seen as the ultimate trophy asset but also one that can be used as a working ‘home away from home’ when required.
“As a wealth partner, we’re here to help enable our clients to do it. We even had one client who had both a yacht and a plane, and if you want to go down the trophy asset lane, we can even finance the art you want to put in your yacht,” Rauhio smiles.
“It’s all part of your wealth and we want to accompany you on your wealth journey, whether it’s hard or soft assets, commercial or leisure. If you’re thinking about a yacht, I’d encourage you to engage with us. It’s worth a discussion.”
Disclaimer: Investments in emerging markets may be extremely volatile and subject to sudden fluctuations of varying magnitude due to a wide range of direct and indirect influences. Such characteristics can lead to considerable losses being incurred by those exposed to such markets. This article is not a personalised communication from HSBC to you and does not constitute and should not be construed as legal, tax or investment advice or a solicitation of the sale or recommendation of any product or service. You should not make any investment decisions based mainly or solely on this article. All investments involve risks and may experience upward or downward movements and may even become valueless.
Issued by The Hongkong and Shanghai Banking Corporation Limited