Our Old Friend Currency

16-our-old-friend-currencyLike a well-loved yet elderly uncle, currency is a factor ever present in the yachting market. For yacht brokers he is an ever present part of the fabric of the business.

Just in the same way that a favourite uncle will come up with the BEST Christmas presents (normally involving Berry Brothers or Fortnam & Mason), currency is able to smooth out the bumps in a transaction as the seller can be magnanimous in the face of survey defects and other difficulties, as the currency in which his yacht is selling strengthens in his favour. Likewise with a new yacht, new yacht dealers will often price in the currency of their territory, and as the currency in which the builder is invoicing weakens, the client’s wish list for his new yacht becomes less of a challenge to realise at a friendly price point, and the deal becomes smoother.

Of course, currency can catch us all out and a small correction can make a significant difference and can turn an otherwise magnanimous owner into an unhappy one. This can also make heavy weather of a new yacht build specification with resultant unhappiness on all sides and a worried broker.

When I originally wrote this the market was buoyant, and I wrote (presciently as it turns out!) it may be a little too buoyant!! There is plenty of confidence out there and in this market. Both yachtsman and agents are inclined not to worry too much about hedging currency or putting complicated legal mechanisms into place as things look stable and buying a yacht should be a joy. This is a great position, until the currency markets come off and buyers, sellers and new yacht brokers are left with a changed landscape that is outside their control. Obviously, this is still true with markets in turmoil and very unstable.

This is not cool. If you are buying a preowned yacht in a currency that you don’t regularly use, it is important that you make the ground rules clear and that everyone is agreed on what is going to happen. It is a good idea to agree that the 10% that you pay just prior to contracts being exchanged is remitted in the currency in which you normally trade, and in which you hold the purchase funds. All reputable yacht brokers will have client accounts for Sterling, US$ and Euros as a minimum so this is normally straight forward to handle. This means that, if after the survey and sea trial you decide that you are now willing to move forward, your Berthon broker will exchange the deposit into the seller’s currency and suggest a forward purchase to comply with the contract terms; alternatively, if a compromise between yourselves and the owner of the yacht is not forthcoming, you can get your deposit back intact in your preferred currency – less deductions for the survey costs. However, the deposit in the latter scenario is also not subject to currency loss.

Hopefully you will wish to move forward to a purchase. This is not the moment to find that the currency has moved significantly and that the purchase price that you negotiated hard to get agreed, is now, because of our old friend currency, 10% greater than you are prepared to pay. Everyone thinks in the currency or currencies that they use where they live, and whilst the price has not technically changed, the value of the yacht to you most certainly has.

To avoid this eventuality, it is a good idea to have a clause in the MOA (Memorandum of Agreement) for purchase that states that up until acceptance – this is when you have carried out all your inspections on the yacht and your surveyor has carried out his survey and remitted his report, which you are happy with – if there is a significant currency shift of say more than 5%, you have the option to withdraw from the sale and your deposit will be returned less the costs of survey and sea trial. Of course the owner has to agree and if he will not do so, you need to think carefully about your options and whether to forward buy currency hoping that the sale will go through, or if the yacht is sufficient of a must have, that you simply take the risk. If you elect to do either, it is a good idea to take advice from your accountant on how best to manage this risk. Whatever the outcome, Berthon has client accounts in the three most important currencies.

Assuming that the owner is happy with the process of a get out clause in the event of significant currency shift prior to acceptance, the price and currency are virtually locked. This is definitely the time to buy the currency and to convert your deposit into the denomination of currency that will be used at completion. At Berthon we buy direct from the Lloyds Bank trading floor with a commercial sensible spread and whilst we can’t tell you what the currency is going to do (we are humble yacht brokers) we will make the trade. Often we have our clients on the phone so that the actual trade is advised as it is available on the screen. If the trade is at an acceptable price, we hit the yes button. As the currency floor is offering trades in real time, there is only a few seconds to make up your mind, but we always prefer that it is the client’s decision. It takes 48 hours to receive value for the funds and once available, they are deposited in the Berthon client account ready for completion. This is part of the service that we offer and there is no charge or commission paid to Berthon to do this.

New yachts are sold in a variety of differing ways. Very often a new yacht dealer will take the risk on the currency and will advertise the yacht in the currency used in their territory. In this case, they have normally forward bought currency to enable them to buy from the shipyard, without risk, at the advertised price. This is something that you need to check when signing an order form and sending funds, to be sure that the price that you agree is backed by the correct amount of currency in the correct denomination to bring your new yacht to reality.

Currency then sits on our shoulder once again when this new yacht comes onto the market. Although she is now in free circulation in the international market place, she is of course compared against other yachts in her brokerage segment. However, I am afraid that the value of currency used in the area in which she was built has an impact on her residual value with buyers calculating new build cost and then winding off value in depreciation but doing so using the currency rate today to do so. If the currency has depreciated between build and sale, then at least a portion of this will be seen in the resultant offer for purchase providing, of course, new boats are readily available.

The other obvious trend that is always apparent in the brokerage market place is where a yacht is priced in her owner’s currency of choice and that falls. If she is a series yacht, like for example a Nautor Swan, as the yacht search portals like YachtWorld calculate differing currency as part of their functionality, the price falls against other sisters priced in stronger currencies. This immediately drops the value of the sisters’ priced in strong currency and the value of the class, unless they are super desirable, tends to fall across the board. This means that other yachts in the segment suffer the same fate and if this cycle continues, we end up with a price correction across the board. Yachts are very vulnerable to this because they are so portable.

All markets are about supply and demand and things will settle down in most cases after a period and prices will recover a little if the segment has a good following and relatively ready buyers. However, prices will rarely return to original levels and if the segment has a small following, the value drop may remain relatively permanent.

The main trading currency for international yacht sales is the US$. American buyers are confident with a buoyant economy and offshore money now onshore with some friendly tax breaks instigated by the current administration. Sadly we have no crystal ball, but if Mr Trump proves to be a 2 term president, we expect that our American clients will remain confident buyers provided that economic confidence returns to optimistic (even if not to the original pre Coronavirus levels) and the US$ continues to be relatively strong against other currencies – particularly European currencies.

Confidence in the USA market makes buyers in other areas confident also. And this helps the whole market. Over the past 12 months we have seen a number of transactions taking place in Europe in US$s. This is also the case in New Zealand and Australia. People know what to expect of it and a broker without a US$ client account and good representation in the USA, is clearly not selling very much just now.

With Brexit and all that (more of this in another article I’m afraid) we have seen some trading as the Euro has strengthened against Sterling and then again as that situation has reversed – twice now. In fact the thing which has been most interesting is how little permanent movement we are really seeing. A very good reason not to take a risk on currency when you are buying a yacht, which of course, is something that you do for fun.

As other areas yachting areas develop, maybe we can think of a future where other currencies like the Yuan the NZ$, AUD and Indian Rupee are players in the brokerage and new yacht market. The writer is old enough to remember the days before the Euro, where yachts being sold in Europe were traded in a myriad of different currencies – Pesetas, Marks, Punts, Drachma and the rest. In those older days, a large sheet of the currency conversions were circulated daily so that the Berthon brokers could keep up. Things are rather more pedestrian today where the currency aspect of our market is dominated by the US$, with Sterling and the Euro in second place!

So our old friend continues to be ever present in the yachting market, and is something to be considered in your yacht purchase. Understanding him and the way that he influences price is yet another piece of the yacht purchase jigsaw puzzle.

As the world gets smaller, we are travelling further (despite the likely 3-4 month imposed sojourn on land and selling yachts that are in ever more far flung areas. Berthon are already selling new yachts built in China, Italy, Poland, Sweden, the UK, and France and to make it even more complex British brand Moody is built in Europe, Pearl in China, Norwegian brand Windy in Sweden and Poland! As far as our brokerage offering is concerned, we are listing and selling yachts in the northern and southern hemisphere with owners from all corners of the planet. Because of the international nature of the business, our clients, both buyers and sellers, have differing requirements as far as currency is concerned and the strength of their local currency is intrinsic to any deal that we are able to do.

Understanding and managing the needs of our clients in terms of the currency that they wish to accept for their yacht or indeed offer for her is key. Clients sometimes ask us how they should price their yacht. Where a currency is particularly weak, perhaps they should price in a different currency that is more solid. Your answer is to price in a currency that you know, understand and use, but more importantly, it should be in a currency the potential buyers are more comfortable with. The elaborate use of currency to market yachts does not work and buyers are far too savvy to be taken in by it. Try it by all means, but you are likely to receive a bid in another currency! Likewise, if you are really not comfortable with buying a yacht in a currency that you do not trust or know, make your offer in the currency that you do know, and the seller will decide whether to accept it or not.

Buying a yacht is a leisure activity, so in your interactions with our old friend currency, remain open minded but do not take unnecessary risks that will be heavy on the wallet and will impact the joy of buying your new yacht.

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