Shipping containers are one of the least understood alternative investment opportunities. Because of this, and because of the loose regulations surrounding it, many people believe it’s a scam. However, investing in shipping containers can be very profitable.
What Is a Shipping Container Investment?
A shipping container investment is an alternative investment where an investor (you) invests in shipping containers. You purchase a container, and then turn around and lease them to shipping companies. Every month that your shipping container is used, you make money.
Because shipping is big business, many investors see this as an investment opportunity with significant return potential.
However, there are also many investors who view this as a confusing and somewhat unapproachable investment. To assuage these fears, and to make the market more accessible, brokers fill the role of acting as a “middleman” between you and the shipping companies and manufacturers for shipping containers.
Brokers are paid a fee for their service, and then they help you locate and contract with shipping companies.
The broker’s job is to help you locate shipping companies which, unless you’re familiar with the shipping business, can be difficult. Then, you’d have to contract with them, get in with a sales rep at the shipping company, talk to the purchasing agent, and possibly accounting to negotiate a personal contract for leasing containers to the company – and that’s just one company.
You want to diversify your holdings, so you’d have to renegotiate with each company. The broker simplifies this process by building an economy of scale for you, negotiating with various shipping companies, and then letting you “plug in” to the system of pre-negotiated rates.
The shipping container industry is a sort of mock bond industry in the sense that shipping container demand is so high that many brokers offer multiple investment options, including fixed interest options in excess of 10 percent.
The high returns make some investors skeptical, but it’s the demand that’s driving these high fixed percentages.
Shipping companies must fulfil shipping contracts, and without shipping containers, they cannot ship their goods. Unfortunately, demand for containers outstrips supply (and it has been that way for years).
Investors provide container liquidity for shippers and, in the process, drive up lease rates due to the demand not being able to match supply.
Like any other market where supply is choked off, returns favor investors.
Most brokers have low buy-in thresholds of less than $100,000, making it accessible to many, but not all, investors with reasonable net worth and savings.
Advantages Of Investing In Shipping Containers
There are many advantages to investing in shipping containers. The most obvious is that it’s an underserved market so the returns are high. For fixed-yield contracts, the return on investment can be in excess of 10 percent annually. This is an effective interest rate based on lease rates for shippers.
Non-fixed rates can be in excess of 20 percent annually, paid monthly (because lease payments by shippers are paid monthly). Compared to the stock market’s long-term return of between 7 and 11 percent annually, depending on the starting point one uses, this is an excellent opportunity.
Like the stock market, returns in shipping aren’t guaranteed (unless the contract specifically states a fixed lease payment).
Another thing that investors benefit from is the sustained global demand for shipping. The world shipping container market is growing at twice the rate of world GDP and current projections. Add to this the fact that the trend is expected to continue, thanks in part to developing nations like India and China, many believe that investing in shipping containers is a solid investment for the long-term.
It’s a monthly cash-flow and, as long as companies are shipping goods internationally, shipping containers will have intrinsic value meaning that you won’t lose money on the cost of the container.
International division of labor, and liberalization of the world markets, is contributing to the high demand for containers, coupled with the preferred method for shipping – container ships. These ships have shorter loading and unloading times, which results in a shorter turnaround time for shippers which means they pay lower shipping costs, which means they love the idea of paying you 10 percent annually for the use of your container.
Compared to the alternatives, they’re making out pretty good – everyone wins.
If you live outside the U.S., this is an excellent way to hedge against the euro as lease payments are typically in U.S. dollars. Many countries will naturally give you a tax break for capital allowances or other offsets against lease income (this is not traditional income or capital gains – they’re lease payments).
Shipping containers have a long life span in excess of 20 years, they’re low maintenance and low technology so there’s little or nothing to break on them and, when it’s time to sell or unload then, they have strong residual value due their high nickel content. Finally, investors can start with just one container and purchase more later, so it scales nicely.
Risks Of Investing In Shipping Containers
Like any investment, there are risks. The shipping container brokers love to tout the high returns, but they rarely tell you about the liquidity of the containers. Unless your broker specifically provides for resale of the container, it’s tough to sell off those things.
Returns are not guaranteed, and depend highly on the shipping industry. Even when shippers sign multi-year lease contracts, companies can and do go bankrupt and there is no recourse if a company cannot pay its bills.
Finally, the broker itself can be a disadvantage. While most brokers are honest, some in this industry are not. You must be able to verify that your broker is actually acquiring shipping containers for you.
Ideally, you want to see the container, verify that it exists, and then know that your containers are being used in lease arrangements. Otherwise, a broker could hypothetically draw up phony paperwork and sell you a bill of goods, so to speak.
Verifying containers isn’t always easy if you’re unable or unwilling to visually inspect them yourself or have a third-party audit them for you.