Diversification like a pro: institutional investors rediscover ships as asset class

Diversification like a pro: institutional investors rediscover ships as asset class

March 2021 | After a long lull, ships are once again moving into the focus of institutional investors. No wonder: the tangible asset ship is a promising asset class that does not correlate with the stock market. This makes it an excellent way to bring diversification into the portfolio. And not only for professionals!

Just like the stock markets, the shipping markets are ahead of the real economic development. However, for different reasons: Taking the example of bulkers, which transport raw materials, rising freight volumes indicate an improving global economy. We have compiled who is currently investing in ships in Germany and internationally. Read why the asset class ship is particularly interesting now.

The financing of ships has changed massively in recent years. Years ago billions were pumped in over the years by banks and private investors in search of tax-saving models. Then it became difficult for shipowners to get hold of funds at first. This is now changing, because institutional investors are now entering the market again. This, in turn, is a positive signal for private investors as well. 

Institutional investors beware: Ships are worthwhile again!

This is what Christian Speer and Jens Dose, shipping experts at M.M.Warburg & CO, say. In their article on Institutional Money on 11 February 2021 they emphasise: Ship loans have become an attractive asset class again. “Today, private shipping debt in particular can offer an attractive risk-return profile. […] Based on significantly lower market values compared to the years before 2007, ships today are financed at a maximum of 50 to 60 percent of market value, maturities are much shorter at around five years, and the downside is clearly limited.” The professional handling of the loan conditions (risk management, covenants, redemption structures, etc.) is well practised. 

That’s what the involvement of Berenberg Bank also shows. The Hamburg-based private bank announced in September 2020 that it would launch a closed-end credit fund for senior secured ship financing together with the fund platform Universal Investment. The aim is to close the financing gap that has arisen following the withdrawal of many ship-financing banks.  “Due to the first-ranking collateralisation and low loan-to-value ratios, ship mortgage loans also have a conservative risk profile for mortgage loans in this asset class, while at the same time offering above-average credit margins,” Philipp Wünschmann, head of Berenberg’s Shipping division, told Private Banking Magazin. The Shipping Debt Fund currently finances around 90 ships by means of senior secured ship mortgages. Sophia Harrschar, Head of Alternative Investments at Universal-Investment, sees such credit funds as a trend: “Demand is growing not only from large insurance groups, but also from pension funds. They see in credit funds an alternative to bonds, with which the portfolio can be diversified and regular returns can be achieved in the low interest rate environment.”

Growth also in the traditional credit sector

Ostfriesische Volksbank (OVB), headquartered in Leer (Ems, Germany), also reports growing loan volumes.  In 2020, its own loan book for seagoing vessels grew by 17 per cent to 360 million euros, and that for inland vessels by 15 per cent to 290 million euros. Through cooperation with partners, the total volumes are even higher: CEO Holger Franz speaks of 800 million US dollars in seagoing ship financing and 350 million euros in inland navigation. Around 280 seagoing vessels are currently being financed. In view of the still relatively low ship values and good hedging of the loans, OVB is making good profits in this area, Franz explained to the Deutsche Verkehrs-Zeitung.

International deals on the rise

 The international market is also gaining momentum, well seen in these two deals announced in the last two months alone: 

  • British fund Tufton Oceanic Assets Limited acquired two container ships and a tanker in January 2021. The total investment is 28.95 million US dollars. This brings the fleet to 21 vessels. 

Tufton Investment Management Ltd. is an investment manager specialising in the shipping industry. The company manages a volume of 1.1 billion US dollars in several funds. Tufton Oceanic Assets Limited alone has a net asset value (NAV) of over 250 million US dollars at the end of 2020.

Above mentioned two container ships are chartered out for at least three years. Returns during the charter even exceeds the targets stated in the company’s prospectus, according to the investment house. The ship’s share of the expected fuel cost savings from the scrubber increases the return to a value that is far above the company’s targets.

  • In February, Japanese ship financier Anchor Ship Partners announced the launch of a 600 billion yen (US$5.65 billion) fund to build a tanker fleet. It will be chartered out to the country’s three largest shipping companies, Nippon Yusen Kaisha, Mitsui OSK Lines and Kawasaki Kisen Kaisha.

The fund is to run for 15 years and generate annual returns in the double-digit range. This is the fourth fund launched by Anchor Ship Partners since 2007. 

Trade in second-hand ships is on the move

Increasing activity can also be seen in the markets directly. The monthly market report of Golden Destiny – like the Hamburg-based shipping company Vogemann Panel Member on the Baltic Exchange – shows a buoyant January 2021. 171 ships were sold, just under half of them bulkers with an average age of eleven years and a total volume of more than 832 million US dollars. This compares with a total of 120 vessels in December 2020 and just 117 in January 2020. 

Demand from China, Greece and the United Arab Emirates is particularly high. 

Ranking of top Buyers_January 2021S&P Activity per vessel type_January 2021

A look at the data on demolition shows: Bangladesh is the country that has been scrapping most. Half of the 36 ships demolished in January 2021 come from here. However, this is also overdue; the average age of all demolished ships is 29 years, in the container ship sector it is even 38 years. These ships would not meet IMO requirements anyway.

Demolition by countries_January 2021Demolition by Vessel_January 2021

Newbuilding prices at historically low level

Not only the prices for used bulkers, also those for newbuildings are currently low and therefore very attractive. 

Before the financial crisis in 2008, around 40 million US dollars had to be budgeted for newbuildings. Currently the construction costs of a Green Dolphin with a deadweight tonnage of 40,000 dwt are around 23 million US dollars. That is already close to the production price. Especially since the Green Dolphin is currently the world’s most environmentally friendly ship in the bulker segment.

 

Newbuilding prices Bulker since 2008

Jens-Michael Arndt, managing partner of Reederei Vogemann, says: “For that price in 2007 we could just buy a ten-year-old Handysize bulker with only 24,000 dwt deadweight.”  The shipping company is therefore now taking advantage of the low prices to fill the order books. Four new Green Dolphins have already been ordered in Japan. 

The expertise of the Hamburg shipping company is also evident in the way the story with the 24,000-tonne vessel continues. It has been acquired in 2007. And it was sold just one year later, in summer 2008, for almost 40 million US dollars.

Active fleet management ensures high returns

This example shows how important good market knowledge and networking are. After all, active management of a fleet by experts is indispensable for its success and thus for high returns. To be able to classify the opportunities in today’s shipping markets, let’s take a look at the past:

Between 2003 and 2009, Vogemann invested around €47,906,000 in investor capital.

The audited performance record shows: On average, Vogemann was able to generate a surplus of 82.14% and an IRR of 46.97% with an average term of 1.9 years.

Audited performance record Vogemann fleet 2003-2009

Why are these figures so important? 

Because we are currently in a very similar market cycle to 2003. The rest is pure mathematics. 

A clear sign to enter the market as an investment! Whether as a direct investment in one or more ships or even in a new form accessible to a broader investor base. 

Thanks to the conception of the Green Ship Token as a digital security, this is not only reserved for institutional investors in this case. You too can participate in this unique success story with an investment starting at just 1,000 US dollars.

Come on board! Please do not hesitate to contact us for further details.