Long-term investment in shipping - Is it worth it? (2024)

Long-term investments in shipping

In times of persistently low interest rates, a long-term investment is a real rarity. According to current forecasts, interest rate increases are not to be expected in the coming years.

On the contrary, interest rates could fall even further, making time deposits, overnight money and life insurance less attractive. The same applies to the full extent to privately concluded annuity insurance policies, unless they have even higher guaranteed interest rates from earlier years.

What to do? One answer is provided by the shipping industry, where interesting returns are on offer.

What is a long-term investment anyway?

A long-term investment is generally referred to as a financial investment with a time horizon of at least ten years. Of course, from an individual perspective a shorter period may seem “long”, but it must be clear that a long-term investment ties up capital for several years.

In other words, the money works in this time, but cannot be converted into liquidity. For this reason it is to be recommended to make a long-term investment always if it concerns the age precaution or the acquisition planned in the long term for example of a house or another high-priced object. In addition, liquid capital should always be available in order to be able to react to short-term financial challenges.

Classic long-term investments are real estate or shares and – as already mentioned – ship investments, the latter being one of the oldest and most traditional forms of investment.

Mind you: if necessary, long-term investments can also be sold in the short term. It is only the case that the expected return is calculated over a longer period of time and “nervousness” is a bad advisor. Shifting is only recommended if no more opportunities are seen or more attractive opportunities exist elsewhere.

In principle, a long-term investment should always be accompanied by risk diversification. It is never advisable to invest all available money in a single project or a single form of investment – especially not if a total loss is theoretically possible. The same applies, of course, to ship investments, which on the one hand represent an exciting form of investment, but on the other should not be regarded as the basis of retirement provision.

How does a long-term investment work in the shipping industry?

The shipping industry is perfect for a long-term investment. Experience has shown that the returns are five to ten percent per year, so that a long-term investment can even be doubled. The price is, of course, a somewhat higher risk, but this can be noticeably reduced by clever products.

It should also be borne in mind that shipowners and shipping companies also have a vital interest in profits and that they have often been active in the industry for years and can therefore assess opportunities and risks well.

As a long-term financial investment, the shipping industry is possible, for example, in the form of direct investments in ships or in the form of crowdfinancing. A major advantage of crowdinvestment is that even small amounts of 500 euros can be invested and no fees or hidden costs arise.

Basically, the principle can also be explained in colloquial terms: one invests in a ship that makes profits through transport orders and these are distributed at regular intervals by the shipping company. In the crowdinvestment, both the required volume and the term and interest are fixed and a distinction is made between repayment at the end of the term or a quarterly distribution.

Long-term investments in shipping thus have a flexible element that can make individual financial planning noticeably easier.

Alternatively, ship funds are also conceivable, which are closed-end funds and make it possible to invest as a limited partner in a limited partnership. Also here it concerns a long-term investment with terms of up to 25 years and a before fixed object and/or ship.

In the case of a ship fund, there is no claim to a fixed interest rate and the sale of the investment is not always secured. In the case of ship funds, any profits must be recognised as “income from business operations” according to the current tax situation and are taxed individually.

The major advantage at present is the tonnage tax for the ship, which is levied in advance and ensures that the profits are only taxed at a few tenths of a percent. In this context, those registered in the commercial register benefit from tax advantages through direct participation.

Legal and tax aspects

If you are looking for a long-term investment, you should always take a look at the legal and tax aspects. There are considerable differences between a classic fixed investment or life insurance policy and an investment in ships. The latter are to be regarded as subordinated loans in which the investor acts as lender.

The loans are only disbursed if this would not lead to the insolvency of the borrower (i.e. the shipping company), which must naturally be regarded as an entrepreneurial risk of the investment. In addition, there may be other creditors whose claims must be serviced with priority.

From a tax point of view, the interest earned as of 2019 is investment income which can be used in the KAP Annex. In general, a flat-rate final withholding tax of 25 percent plus solidarity surcharge and possibly church taxes applies. Conversely, losses can also be claimed for tax purposes.

However, it should be noted that both the legal and the tax framework can change at any time and other regulations can apply accordingly. In view of the long-term nature of an investment in the shipping industry, this aspect must always be taken into account.

Why invest in ships?

Ships are also suitable as long-term financial investments because they have a long service life. A cargo ship put into service today can earn money in around 30 years.

Of course, shipping companies are continually launching new ships, so there is always the possibility of an investment. Especially when it comes to used ships, the purchase pays for itself after a short time. The proceeds from charter often exceed the purchase price after just one to two years, so that the investment has paid off.

History of shipping as a long-term financial investment

Shipping was already used in antiquity as an opportunity for long-term financial investment. Without investors, explorers such as Christopher Columbus and Ferdinand Magellan would simply not have received the funds to equip their expeditions. In return, the knowledge gained and the gold mined were largely left to the investors (mostly royal families).

In the long run, this investment was due to the duration of the voyages, which lasted several years.

In general, financing was one of the central topics in shipping in the past as it is today. Ships were and are expensive and can only be paid by a few companies from liquid funds.

At Columbus, it was initially a foundation that provided the majority of the nearly 2,500 ducats for the first voyage. After this was successful, the sailor and entrepreneur promised future investors “as much gold as they need” and “as many slaves as they demand”. Such promises would certainly no longer be made today and originated from the mood of optimism at the time.

In the 21st century, however, the difference to those times lies in the lower risk of a ship investment. In contrast to Columbus, today there is no longer any sailing in unknown waters and the risk of a total loss is significantly lower. In addition, the sailing ships of that time usually had virtually no insurance.

Today, only the steel value is to be seen alongside the market value of the ships and, as a rule, is still rising. There is therefore a good “backup” against possible risks.

Long-term investment thanks to stable global economy

The stable situation in world trade is the main factor responsible for the opportunities as a long-term investment. Today’s world merchant fleet (as of 2018) has almost 17,000 general cargo ships, including crates, sacks, bales, barrels and cartons. Bulk carriers are involved in world trade with 11,379 ships, crude oil and chemical tankers follow with 7,388 and 5,609 ships respectively, and container ships are 5,152 times represented.

In recent decades, the numbers have increased significantly and world trade is flourishing, and ships are also growing in size. The most important routes for world trade at sea are those between Europe and Asia and transpacific transport, while transatlantic transport only ranks third.

The importance of shipping is enormous, however, and as much as 90 per cent of global trade is conducted by sea. It is thus a backbone of the global economy, which is unlikely to change in the coming decades.

A special feature of the current situation lies in the shortage of transport capacities at sea combined with rising demand. The reason for this is the stricter environmental regulations, which are particularly troublesome for the owners of older ships.

The new emission guidelines of the International Maritime Organisation (IMO) have been in force since the beginning of 2020 and the new regulation in the area of “Ballast Water Treatment, BWT” will follow in 2022.

Older ships must be retrofitted, which will lead to investments in newer ships or sensible conversions.