Experts say customers use the money to close property deals, make a quick investment or pay tax.
Have you found your dream house but are struggling to raise the money to purchase it quickly? Not to worry. If you happen to have a Ferrari or a Rembrandt lying around then you could join the world’s super-rich and finance the purchase using your luxury asset as a security.
So-called luxury asset lending — against valuable items, such as classic cars, fine wines, jewellery, artworks and yachts — is growing, particularly among business owners and asset-rich but cash-poor individuals.
NHW Lending, a high-end pawnbroking service, says the number of people enquiring about securing loans against their classic cars rose 35 per cent between October and March, compared with the previous six months and 27 per cent compared with the same period a year before.
Since its launch earlier this year, the company has lent £1m against classic cars, with one customer securing a loan of £150,000 against a 1939 Lincoln Zephyr, a Porsche 911 and a 1957 VW Samba Bus. Another client took out a loan of £120,000 against a 1962 Bentley S2 Convertible.
Ashley Maddox, co-founder of AG Classic Automobiles, which sources specific classic cars for clients, attributes the increase in demand for these loans to the rising values of classic cars. The Knight Frank Luxury Index of classic cars rose by 467 per cent over a decade to March 2016.
There are three main factors driving valuations of classic cars, Maddox explains: “Rarity, the story behind a particular make of car and its overall ‘wow factor’.”
Racing cars are particularly attractive and a 1967 Ferrari 275 Spider (identical to one driven by Steve McQueen in the film The Thomas Crown Affair) recently went for $27.5m. Earlier this year, Bonhams, the auctioneer, sold an original 1963 Jaguar E-Type Lightweight Competition for $7.4m, making it the most valuable E-Type to sell at auction.
“We are very happy to lend against classic cars because they are easier to validate as genuine when compared to other valuable assets and because they have been rising in value,” says Ben Shaw, founder and director of HNW Lending. “This means any potential risk we face in terms of repayment defaults is lower than in other areas.”
Wealthy individuals like luxury asset lenders because they promise discretion, expert valuations and a tailored service, and claim to be able to offer high-end loans within hours. They also tend not to run credit checks and so leave no credit footprint. Traditionally, the main players in this market have been small businesses focused on one particular asset, such as art or cars, but more companies are entering the market and are widening their business models. Experts say customers use the money to close property deals, make a quick investment or pay tax. It tends to be clients with irregular cash flow who have access to bank debt and this luxury asset lending is the top-up, flexible portion of their debt.
Hugh Wade-Jones, managing director of Enness, a high-end mortgage broker, says clients are asking for more imaginative ways to help them buy a property by borrowing against existing assets. “Everything from a Rembrandt to a Jeff Koons can be considered when securing a mortgage,” he explains. “An artwork’s value will be carefully investigated in terms of the artist, its uniqueness, the demand for such a piece, sale records and any data gleaned from galleries and auctions.”
He says some lenders will require physical security of the piece or collection, but Enness works with a lender that will allow individuals to keep possession of the asset throughout the loan terms. The company also lends against jewellery, watches, luxury handbags, gold and fine wine.
Loans are usually short term and the owner can redeem the goods at any time by paying off the loan plus interest. If the asset has fallen in value, the lender usually takes the hit, which makes it crucial that assets are valued correctly in the first place. Interest rates are steep compared with typical bank credit. Luxury asset lenders either store the assets themselves or place restrictions on their use. So, if it is in a museum already there is usually an agreement drawn up that stipulates the work cannot leave without the lender’s permission.
An alternative way to invest in this market is via Omnia, which has entered the UK investor market with the launch of a new bond, the Omnia Corporate Bond, which works by creating an income for owners of art and other assets. Omnia pays people an income in return for taking security over the asset and have packaged this within a corporate bond.
“We have been offering finance secured against passion investments such as fine art for some time, but now we have made it possible for asset owners to have their cake and eat it” to earn a residual cash flow off the value of their assets without having to sell them,” says Daniel Hansen, chief executive and founder of Omnia.
However, despite lending against luxury assets becoming more popular, most experts do not recommend this type of loan to ordinary clients.
Charles Boulton, UK market head of HSBC Private Banking, says: “We’re experienced in lending against assets like planes, yachts and art, but for many clients, especially the ultra-high-net worths, borrowing against that kind of asset to fund property purchases probably won’t be the… most cost-effective option available to them.”