Yacht Depreciation: Is Mitigation Even Possible?
Implying in the title of this piece that we believe that there are effective strategies to combat the depreciation of a yacht is a brave choice for a professional services firm. It may be an understatement to say that yachts are depreciating assets. Indeed, in our client engagements, we often see raised eyebrows when we refer to the yacht as an ‘asset’ at all. One look at the depreciation curves that we plot as part of the diligence process can challenge the spirit of the most enthusiastic client. The fact is, though, that there are effective strategies and tactics to mitigate depreciation during your period of ownership
Owning The Yacht At The Right Time
The most effective (and least understood) strategy is to own the yacht on the right part of the depreciation curve. A yacht’s depreciation curve is non-linear, and at various points will be steeper than at others. Understanding the curve for a specific yacht is critical to executing this well because there is a high degree of variance between builders and sometimes models within a builder’s portfolio. Plotting depreciation curves is a complex multivariate problem to solve, so much so that we rely heavily on our internal artificial intelligence systems to do so accurately.
Looking Around Corners
Once satisfied that the candidate yacht is well placed on the depreciation curve, the next strategic imperative is to de-risk foreseeable future events that may change the shape of that curve. One of the most impactful forces can be new regulations that impose anything from where the yacht can operate due to emission concerns, how much crew space must be increased, or whether the propulsion system must be changed. These can either drive actual depreciation by reducing the demand function or can be constructive depreciation by mandating expenditure to make the yacht saleable.
Controlling Your Own Destiny
Having avoided owning the yacht at the wrong point on the curve, and having surfaced the negative impact of foreseeable regulation, more tactical approaches to mitigating depreciation are available. These tactical opportunities are geared toward improving liquidity when it is time to exit the yacht.
MRO not MR-Woe
Chief of these tactics is creating a digital record proving the yacht has been properly maintained and operated. This digitised information can positively impact where the yacht will clear in the market. Given the high costs of unplanned maintenance events, a well-documented and proven maintenance and repair history is vital. Such a record is key to a buyer gaining confidence during due diligence and, ultimately, neutralising a potential price negotiation point.
Charter As An Asset
Another tactical opportunity for yachts that are available to charter is to create an asset out of the charter operation, establishing what is essentially a standalone charter business (either notionally or as an operating company). Creating a performing asset alongside the yacht can constructively mitigate depreciation. Moreover, giving better transparency to reduce the friction from the usual asymmetrical information with which the buyer contends can improve the sell-side’s position.
Forays into Forex
Lastly, another tactical opportunity to ultimately mitigate net depreciation is currency arbitrage. Owners with yachts that have meaningful demand profiles in multiple geographies can choose to focus on promoting their yacht in a market with a favourable currency exchange rate. The principal currencies that offer arbitrage potential are the Euro, Sterling and the US dollar. Admittedly, in a structurally illiquid yacht market, positive arbitrage requires the market equivalence of fair winds and following seas. Still, arbitrage can offer a significant offset if the right buyer is attracted.
The treatment of these strategies and tactics here is necessarily limited, so if you’d like to know more about any of the issues covered here, please don’t hesitate to reach out.