Banking the passion

For most people their homes are their most valued possession. But when you look at the prices being paid – tens, even hundreds, of millions of dollars - for some of the assets tracked by the Knight Frank Luxury Investment Index, it’s clear that certainly isn’t the case for many wealthy collectors.

I’m not that surprised, therefore, to be receiving a growing number of enquiries from clients looking to borrow against assets such as art and cars to fund acquisitions of other assets ahead of planned liquidity events. But before you jump to any conclusions, I should make it very clear that I’m not on the verge of starting a new career as pawnbroker to the ultra-high-net-worth community.

What I am talking about here is not short-term debt to cover some kind of liquidity crisis, but structured borrowing used as part of a defined investment or cashflow strategy. This could be connected to the client’s business or possibly to fund new acquisitions for their collections. To match this rising demand, an increasing number of the lenders that I work with at Knight Frank Finance are now prepared to discuss with us credit lines using things like art, classic cars, wine or jewellery as collateral.

Such loans offer lenders the opportunity to build relationships with wealthy clients and grow their books with loans offering higher yields than their more traditional business streams. Wealthy borrowers are able to find new forms of liquidity when debt is becoming scarcer and in a manner that avoids expensive penalties, not to mention much higher interest rates, for prematurely refinancing other assets.

Terms vary widely depending on a given lender and the asset that the loan is being secured against. Capital is often issued in the range of 50% to 60% loan-to-value, and the associated fees are generally higher than for more conventional real estate backed borrowing.

Lenders will require granular information, dependent on the specific asset. Borrowing against a car collection, for example, will prompt requests for the mileage, year of manufacture, the service history, condition, details of storage, whether the borrower is based offshore – even colour can impact the lender’s appetite.

There will be other aspects to consider, depending on the asset type. Fine art, for instance, can often no longer be hung on the owner’s walls according to the terms of many lenders. Others will allow it, but it will incur costs.

Lending of this type has a foundation in art and has expanded into other asset classes. Wine and watches are generating a lot of interest among lenders now, but some institutions are growing comfortable with even more esoteric asset classes.

Intellectual property, such as the rights to a singer’s back catalogue, can be a suitable source of collateral for some lenders as it produces royalties and acts much like a bond. As a broad rule, if the asset can be properly appraised and the market is liquid enough, lenders will consider issuing capital secured against it. Growth could accelerate as lenders become more comfortable with new appraisal tools using artificial intelligence, which is becoming an instrument in the luxury asset space.

Unsurprisingly, given the often less predictable nature of the asset class, borrowers can expect to pay higher rates than for the loans they are used to when raising funds against real estate or securities, but many clients think it makes sense in current conditions.

Borrowing against an object or collection that could rise in value spectacularly sometime in the future, makes more sense to many than selling to release cash at a time when, as the latest Knight Frank Luxury Investments Index figures show, the market for many tangible assets is slowing.”

Alex leads Knight Frank Finance's Private Office team. Contact him at alex.ogario@knightfrankfinance.com