Allowing luxury items such as fine art or yachts to be used as security for a loan is a growing trend, but the due diligence process involved has to be rigorous.
Private banks are increasingly focusing on luxury lending to differentiate themselves from rival players.
This niche market caters to the financial needs of wealthy individuals who seek to leverage their passion investments — assets such as rare artwork, yachts, and other high-value collectibles — for liquidity and growth.
Put simply, a lender will offer lower interest on loans when a borrower provides an asset as security or collateral. If the borrower fails to make payments, the lender can enforce its rights by taking and, in most cases, selling the secured asset to cover the outstanding debt.
“It is important to note there is an emotional attachment that clients have to luxury assets, considering them as passion investments,” says Steven Hawkins, managing director, at JP Morgan Private Bank. “Unlike traditional financial portfolios, luxury assets hold unique value, and borrowers will need to be comfortable with the lender having security over these emotionally significant assets.”
According to UBS, an expected $5.2tn will be transferred between generations within the next 30 years, significantly influencing the luxury lending market. According to Bain and Co, by 2030, Gen Z individuals will contribute to 25-30 per cent of luxury market purchases, while millennials will make up 50-55 per cent.
The banks are keen to emphasise the specialist nature of their operations and that managing emotionally significant assets necessitates a rigorous due diligence process. “First, we scrutinise the client's overall financial health and balance sheet, generally requiring personal, corporate, or trust guarantees to secure the loan,” says JP Morgan’s Mr Hawkins. “Second, we collaborate with industry experts, such as appraisers from reputable professional firms, to identify the unique value drivers of each asset.” This method, he says. allows the bank to tailor loan terms to reflect each client's unique requirements.
New environment
The art market is one of the most important in this sector. In 2023, sales were down significantly and prices also fell, after a healthier period in 2021 and 2022. “Over the last few years, we have experienced first-hand the tremendous strength of the art market in particular, with significant activity among our clients for purchases and sales, primarily in the blue-chip arena,” he says.
“Retrenchment” to a new environment in the art market is largely attributed to the “significant uncertainty” across most major economies due to “soaring inflation”.
Demand for other assets, including private aircraft, yachts, and museum-quality art, is continuing to grow worldwide, and Mr Hawkins expects this to continue. “We believe this trend provides a significant opportunity to grow our lending business as we continue to support our clients and their objectives,” he says.
“After Covid started, we had a lot of these clients, that love to spend time on a yacht with their family because it meant they could actually get together on the yacht,” says Ruben Mangold, financing manager at UBS Global Wealth Management. “I see that the market is holding up over the past few years, it has grown in terms of values of these assets and stabilised a bit since the interest rate increase.”
UBS deals with shipping, aircraft, and real estate financing for ultra-high net worth individuals (UHNWIs) but not art financing. Mr Mangold stresses the importance of building “long-term relationships” when it comes to luxury lending. “These are usually very sophisticated clients, so they would really like to have experts on the table from our side as well,” he says.
He claims the whole process can be a “one-stop shop benefit” as they are able to cover clients on the financing side and the investment side on a “broader scale”.
Real estate
Luxury property prices climbed 3.1 per cent on average in 2023, according to the Knight Frank Wealth Report. Manila (26 per cent increase) and Dubai (16 per cent increase), are leading the way when it comes to prices.
“The motivation for borrowers in the luxury lending market tends to be different to that of traditional homebuyers,” says Laura Siguine, director at Coutts. “Often, it is less about getting a foothold onto the property ladder, and more about taking advantage of an opportunity. For example, they may be driven by the potential financial upside of a transaction or the opportunity to acquire a property due to its unique location, features, or heritage,” she adds.
More and more of Coutts’ borrowers are interested in improving the eco-credentials of their properties, says Ms Siguine.
According to the Knight Frank Wealth Report, 65 per cent of UHNWIs are actively trying to reduce their carbon footprint. Super luxury homes are in high demand in Florence, Italy, amid an increase in wealthy families, and in Dubai, where green space is a key stipulation for this group.
