For asset-rich but cash-strapped individuals, luxury asset lending is growing. Whether the collateral is a watch, yacht, fine art, a luxury handbag, or classic car, many high-net-worth individuals are using luxury assets as security.
Luxury asset lending is not a new phenomenon – in fact, much has been written about the intertwined history of banking and Renaissance art. Some of the greatest patrons of art, the Medici family, were among the architects of the modern economy. Later, the Dutch Golden Age saw Rembrandt and Jan Leivens pledging their stunning artworks as collateral to Herman Becker, a Baltic merchant and one of the first people in history to lend against fine art.
Between 2007 and 2017, the value of luxury assets has risen by an estimated 171%. As a result, a number of people have been looking to use their luxury assets as security.
For entrepreneurs and high-net-worth individuals whose wealth is contained in luxury assets which they are reluctant to liquidate, luxury asset finance provides a way to access a short-term loan quickly and securely.
One of the biggest asset classes to increase in value is classic cars, particularly those from the 1970s and 80s. According to Knight Frank’s Luxury Investment Index, classic cars have gone up a remarkable 334% in value over ten years.
The art investment market is also growing; with art auction turnover increasing by 5.3% compared with the same period in 2016. Overall, the global luxury market hit nearly €1.2 trillion last year, driven mainly by wealth creation across Asia.
Despite their often steep interest rates, luxury asset lenders provide numerous advantages to those seeking a short-term loan, including:
- Quick approval – because valuing luxury assets is usually a swift process, especially if you are using a lender who specialises in luxury asset lending, approval for a loan is generally quick. This is in stark contrast to traditional banks and is one of the reasons that entrepreneurs are particularly attracted to luxury asset lending: as one property developer told The Times, “They [the banks] are too slow. It would take six to eight weeks to get a facility from a bank. By the time you’ve got it, you could have had the money, spent it and got the money back. You could have bought and sold in that time.”
- Discretion – The credit approval process can be dealt with in a manner that respects the privacy of the individual, which can be helpful to entrepreneurs and high-net-worth individuals, who may not want investors or the media to jump to conclusions as to the reasons for the lending. However, this does not mean lenders do not conduct thorough due diligence. Checks will be made to see if potential borrowers have been made bankrupt, have a criminal record or have previously been disqualified from being a company director.
- It makes long-term financial sense – Although it may seem easier to sell a classic car rather than use it as security in order to liquidate some cash, such a move could go against your long-term best interests. As mentioned above, the value of luxury assets is on an upwards trend. This means that the longer you can hold on to your investment, the greater return you can possibly receive. Therefore, if an opportunity to purchase another asset arises, and you do not have immediate access to cash for the deposit, borrowing against, rather than liquidating, your luxury asset is a strategic move which protects your long-term capital and can expand your portfolio.
How luxury assets are valued and secured by a lender
Most loans made against luxury assets are short term.
Therefore, correct valuation is essential, because if the value of the asset drops, it is the lender who is affected and will seek to enforce any contingency provisions relating to the loan-to-value ratio. Depending on the loan agreement terms, the lender could seek an early repayment to bring the loan-to-value ratio into balance.
Luxury asset lenders therefore invest heavily in specialist teams to handle valuation. For example, luxury asset lender Borro has ten million lines of auction house data and data scientists that study price trends, as well as an in-house team of appraisers.
If you wish to have your asset valued independently before applying for a loan, it would be worthwhile finding an expert who is experienced in valuing high-net-worth items such as classic cars, jewellery, or yachts. Memberships of professional associations such as The Royal Institute of Chartered Surveyors and The Society of Jewellery Historians can provide an indication as to the standards and experience of the valuer.
To secure the assets, lenders may either hold them in storage or place restrictions on you over their use. For instance, one lender told The Times that when providing an £80,000 loan where a private jet was offered as security, as the borrower owned three planes, the lender simply placed a restriction whereby one plane could be used at a time but all three of them could not leave the hangar at once.
For entrepreneurs and high-net-worth individuals, luxury asset lending continues to provide a way of obtaining cash without having to liquidate capital.
Note: The views expressed in this article are not to be constituted as financial or investment advice and are provided for general information only. For advice on the financial viability of lending a luxury asset, please seek professional advice from an asset manager, followed by legal advice on the lending and security terms.
Saracens Solicitors is a multi-service law firm based in London’s West End. We have dedicated and highly experienced luxury market solicitors who can advise on all legal matters relating to luxury asset lending. For more information, please call our office on 020 3588 3500.