Special Report: Super Yachts

As a way of measuring the global economy, this has got to be the coolest. From Abramovich’s Eclipse to a simple $250,000 a week charter, let’s have a look to the superyacht industry.

Azure shoots are bubbling up in the yachting industry. Just in the past few weeks, Brazilian shipyard MCP, Turkey’s Sunrise Yachts, and Italy’s Benetti have all announced orders for boats above 40 meters.

Even better, Christensen Yachts in Vancouver announced the first North America contract signed since the financial crisis – for a pair of identical 50-meter yachts, each costing roughly $30 million. Why two? Apparently, for the anonymous buyer, one was not enough. This is not the first time an owner has treated himself to two identical boats; after all, when you jet from the Caribbean to the Mediterranean you don’t want the stress of having to learn a whole new deck plan. What if you’re taking a romantic moonlight walk? You certainly don’t want to bark your shin on an unexpected outcropping.

It’s easy to poke fun at the excesses built into the luxury yacht trade. There is perhaps no market on earth where men compete more aggressively in measuring their… equipment. (I actually have never heard of a woman ordering a super-yacht. These days, in America, women who have shattered the glass ceiling seem content to spend their fortunes on more humdrum opportunities like campaigning for the Senate.) Like skyscrapers, yachts continue to grow in size, with the newly affluent happily pushing the envelope.

Recently, the envelope soared from letter to legal size, as the latest, greatest super-yacht ever built steamed out of the Blohm and Voss shipyard in Germany. The Eclipse, commissioned by Chelsea Football Club’s owner Roman Abramovich, is all of 557 feet long, surpassing by 36 feet the record previously held by the 532-foot Dubai, owned by Sheikh Mohammed Bin Rashid Al Maktoum. Because the Eclipse project has been carried out under the strictest security, descriptions of the boat (ship?) have bordered on the incredible, or possibly the ludicrous. The cost had been originally estimated by Huffington Post at between $400 million and $1.2 billion; even to a former stock analyst, that seems like a large range. The current betting is $486 million.

The vessel is said to contain a missile defense system, a submarine, bullet-proof glass, swimming pools and hot tubs (of course), not one but two helipads (handy for large parties), gazillions of flat-screen TVs, 600 doors, and – my favorite – an “anti-paparazzi laser shield.” The shield can apparently detect and deflect the kinds of light impulses that stem from an intrusive camera. No yacht should be without one. The truth is, no one really knows what is aboard the Eclipse; the level of secrecy surrounding the project makes the Stealth Bomber look like one of those planes towing advertisements above overcrowded beaches. Recent press accounts that the owner has gotten into a row with the builder over whether the reptile and leopard skins in the massage room were ethically sourced may or may not be true.

It is remarkable, perhaps, that the super-yacht industry is already recovering. After all, even our wealthiest global citizens took a beating during the financial crisis, and other sectors, such as fine jewelry, are still struggling. And yet the signs are unmistakable. Miriam Cain of the British broker Camper and Nicholson says that industry-wide there were 33 sales of existing yachts in April, up from 24 in March, for a rise of 65 percent. Sales were up 36 percent from a year ago, based on asking prices. Demand, she says, is particularly strong for the cream of the crop vessels – those made in Italy or Northern Europe. Buyers are Americans or English, as well as Asian and Middle Eastern. Kenny Wooten, the American editor of the Yacht Report, says orders tend to pick up when the Dow Jones Industrial Average moves above 10,000.

One would think that there is no more discretionary purchase than a yacht. On the other hand, just a couple of years ago, those craving the ultimate status symbol were stymied by the flood of purchasing, which led to long waits and rising prices for new craft. According to Boat International, between 2005 and 2007, some 250 yachts measuring above 40 meters were delivered, up from a more normal 30-40 boats per year. Imagine wanting to spend hundreds of millions on a new toy and having to stand in line – Xbox fanciers had it easy by comparison.

Wooten says that “the over-100-foot market was on a rage through the first quarter of 2008.” Cain confirms the froth. “Some buyers were ordering and then selling their contract halfway through the build period,” she reports. “Most builders globally had full order books, with wait periods of up to three years.” Wooten says that in the third quarter of 2008 – after Lehman failed – the market turned “squirrely” and then three months later “went vertical,” with orders simply disappearing off the page. Boat International reports that some 100 new orders were placed in the first three quarters of 2008 alone; in the final three months of the year, only two. In 2009, there were fewer that a dozen new commissions. Because of healthy backlogs, builders were busy through most of 2009, but then the downturn began to force layoffs and closings. Cain says that the industry produced 77 new custom super-yachts in 2008, but the number tumbled to 66 in 2009.

For builders, new orders are arriving in the nick of time. When the largest yards quickly sold out, new entrants emerged; many have since gone under. Backlogs have been sinking, thanks to a dearth of buying and rising cancellations. Some yards had begun to build hulls on spec during the heady buying spree, and so were stuck with un-bought inventory, as well as falling workloads.

Buyers today can count on quicker deliveries, but are unlikely to find that prices have receded much. Wooten says that yards have chased cheap labor around the world, but that most of the costs of a new vessel are fixed. A good portion of the total cost of a mega-yacht is focused on the interiors; flat screen TVs and Wolf ranges haven’t gotten any cheaper. This is not true for existing boats, where prices have fallen as much as 40 percent from their highs. Boat International reports that while 21 existing yachts over 24 meters were sold in May, 36 boats went on the market, and 33 price reductions took place.

Tom Perkins, a venture capitalist who got in early on the phenomenal success of Google, unloaded a super-yacht last year called the Maltese Falcon – the largest sailing craft in the world, and considered by some the best designed. His asking price was $165 million; the sale took place at $100 million. This discount is extreme, but since boats in this category are typically highly personalized, they can be tough to unload.

They are also tough to keep, if your fortunes have taken a turn for the worse. Wooten says that a rough rule of thumb is that it costs 10 to 15 percent of the build cost per year to operate a vessel. So, if you plan to spend $100 million on your dream boat, you should count on laying out $10 million or so each year just to keep it afloat. And that’s only the tab for crew, dock fees, insurance, and other necessities. In other words, you pay $10 million to sit still. If you actually decide to travel, the price tag soars. Add in fuel (these vessels are not exactly fuel efficient) and food (five-star chefs are considered essential), and you start to talk real money. This brings us to the legendary banker J.P. Morgan’s oft-repeated quote that if you have to ask how much one costs, you can’t afford one.

Although that advice seemed to have fallen on deaf ears a couple of years ago, it may have played a role in the sudden collapse in new orders. After all, there are other ways to enjoy a yachting vacation. For instance, you can always charter. Though most of the biggest and most renowned vessels are not available to the hoi poloi, there are hundreds of boats available from reputable yacht brokers like Edmiston, Camper and Nicholson’s, Burgess, and others. Cain says that charters are strong. “The charter business fell 30 percent off the boom years, but since has come right back.”

Chartering isn’t exactly cheap, but there is a variety of boats available at different price points. Figure on spending as much as $1 million a week for the very largest and most luxurious craft. More reasonable (funny how quickly you can lose your bearings in this sort of analysis) are the boats measuring between 100 and 200 feet, built in the past 10 years, that cost around $250,000 to $350,000 per week. For example, a week on the Christensen-built, 162-foot Remember When costs around $225,000. The boat may be chartered anywhere in the world – including the Caribbean or the Mediterranean, can accommodate up to 12 guests, and has a crew of 10. That fee probably does not include tip for the crew, and other oddments. The boat is gorgeous, and has a number of luxury features, including heated marble floors in the baths. In other words, you may never want to return home.

While practical issues such as finance have impacted the super-yacht market over the past few years, the allure of sailing the world’s oceans in a customized super-yacht has not faded. In fast-growing parts of the world like Asia and the Middle East, appetites for all sorts of luxury goods are soaring. The recent Dubai International Boat Show attracted tens of thousands of visitors and 700 companies. The sale of a 72-meter Sunseeker boat on the show’s first day set the tone. Participants noted that demand for yachts was stronger in the Middle East than in the Mediterranean or Caribbean. Similarly, orders are beginning to flow from Asia, which has in recent years accounted for less than 5 percent of demand. While Taiwan and China have emerged as credible suppliers, producing boats for one-third to one-half off the going rate in Western Europe (and reportedly some reduced quality in the bargain), they have recently begun to produce buyers.

The current oversupply of luxury craft will eventually recede, and the industry will stabilize. Wooten, though, remains cautious. “I have the feeling the market will never get back to the overheated level of 2007,” he says. If indeed the Dow Jones is the best indicator of demand, let’s hope his caution is misplaced.

Source: KIPP Report

Tags: Superyacht Industry

Category: Industry