Vin­tage in­vest­ment

Tra­di­tion­ally, in­vest­ing in wine was, dare one say, fairly straight­for­ward fun. A per­son would buy as many cases of fine wine fu­tures as budget al­lowed, and wait eight to 10 years for it to reach ma­tu­rity. Once ready to drink, they’d take de­liv­ery of half

RISKSA Magazine - - CONTENTS - Sarah Bas­sett

Things have changed dra­mat­i­cally in the last few years, with col­lec­tors and en­thu­si­asts spec­u­lat­ing on the mar­ket and buy­ing in large vol­umes. Over the past 20 years, a bas­ket of fine wines will have out­per­formed global eq­ui­ties, bonds, property and, un­til re­cently, even gold, in terms of cap­i­tal ap­pre­ci­a­tion. New wealth across boom­ing emerg­ing mar­kets, led by China, has seen the in­ter­na­tional mar­ket for fine wine ex­plode in re­cent years, with prices for pre­mium wines, par­tic­u­larly from France, ris­ing at as­tro­nomic rates. Had you in­vested in a bot­tle of French Bordeaux Château Lafite Roth­schild in 2007 for around $ 100, it could have been sold in 2011 for $ 550. These ris­ing val­ues, cou­pled with the ease of ac­cess to data and in­for­ma­tion through the In­ter­net, has in­creased the me­dia at­ten­tion about wine as an in­vest­ment as­set. But only a frac­tion of the wines pro­duced world­wide in­crease in value at a rate that would jus­tify the risk and the ex­pense and, while a fas­ci­nat­ing and en­joy­able mar­ket, it is highly spec­u­la­tive and as a purely fi­nan­cial in­vest­ment, it would be wise to be wary.

Chal­lenges in the SA mar­ket

From the South African van­tage in par­tic­u­lar, there are a num­ber of chal­lenges to in­vest­ing in wine purely for fi­nan­cial re­turn. South Africa does not have the trade plat­forms that ex­ist in mar­ket such as the UK, Hong Kong and New York. There are no spe­cific wine auc­tions and there are very few fine wine deal­ers. A ma­jor bar­rier, ex­plains Roland Peens, di­rec­tor at fine wine bro­ker­age and cel­lar, Wine Cel­lar, are the lim­i­ta­tions for keep­ing wine in bond in South Africa.

“While some­thing is in bond, it is ex­empt from du­ties and value added tax ( VAT). In South Africa, it can­not re­main in bond for more than a year, where over­seas wine can be traded in bond and in­vestors won’t pay duty or VAT un­til the point that the wine is ready for con­sump­tion,” he ex­plains. “With VAT at 19 per cent, if you keep trad­ing that wine, it loses a con­sid­er­able por­tion of its value each time it is traded.” Be­cause of the lack of a sec­ondary mar­ket, wines tend to be traded over­seas in Eu­ros, Pounds or Dol­lars, mean­ing that our volatile ex­change rate be­comes a fur­ther chal­lenge to in­vest­ment for fi­nan­cial re­turn. “Our ex­change rate is ex­tremely vul­ner­a­ble and of course in­vestors re­ally want to be in­vest­ing in the as­set not the ex­change rate,” Peens ex­plains. Thirdly, South African wine is not yet classed as an in­vest­ment cat­e­gory. “Apartheid pushed us to our own cor­ner, we didn’t travel enough, we made wine by for­mula and we didn’t pro­duce great wines in the ‘ 80s and ‘ 90s. We don’t have the his­tory, the icon sta­tus and the sen­ti­ment. And our wines are too cheap. The most ex­pen­sive South African wines are R3 000, while the most ex­pen­sive French wine is around R150 000. The most ex­pen­sive Aus­tralian and Amer­i­can wines are also far more ex­pen­sive than South African wines. Once you have a bar­gain, it’s not a col­lec­tor’s item any­more. With­out ex­pen­sive, rare wines, our wines sim­ply aren’t taken se­ri­ously. Pricey wines in­di­cate to the rest of the mar­ket that these are the wines to have at the ta­ble to im­press. We need ex­pen­sive rare, sought- af­ter wines, and that takes time.” A very suc­cess­ful new world fine wine is the Aus­tralian Pen­fold’s Grange, sell­ing at around R10 000 a bot­tle. That wine has been in pro­duc­tion since the 1950s. We don’t have that track record on any wine, so it’s un­der­stand­able that we don’t have fine wine that is ex­pen­sive.

A finer vin­tage to come

Over time this will change, says Peens. A few South African brands are al­ready mov­ing to­wards the iconic sta­tus re­quired to see sig­nif­i­cant growth in value. “What’s ex­cit­ing is that in the last five to 10 years wine qual­ity in South Africa has im­proved, bring­ing in­creas­ing in­ter­na­tional in­ter­est. I would be sur­prised if there aren’t wines in the next five or 10 years that make it into that class. But at this stage, there are no wines that I can firmly rec­om­mend to my cus­tomers for sig­nif­i­cant ap­pre­ci­a­tion.” Ac­cord­ing to Peens, Klein Con­stan­tia’s Vin de Con­stance is cur­rently the leading icon brand in South Africa. It is our only wine with a long his­tory. “It was Napoleon’s favourite wine 300 years ago, and the name dates back to 1690. It’s been through a rocky pe­riod. The first mod­ern- day vin­tage was 1987. Klein Con­stan­tia sells those vin­tage bot­tles off the farm for R40 000 or R50 000 a bot­tle, though I don’t think it’s worth quite that. The cur­rent vin­tage is around R550 and we’re sell­ing the old vin­tage for around R2 500.”

Wine fu­tures through the Lon­don mar­ket

It is pos­si­ble to buy wine at the en primeur stage – wine fu­tures – through the Lon­don mar­ket, but this can also be a lit­tle tricky to do from a South African van­tage. At this stage, the wine is still in the bar­rel, un­der­go­ing the age­ing process be­fore be­ing bot­tled and re­leased on the open mar­ket, and the wine is bought in ad­vance at a fixed price.

“Clients can buy wine through us while it’s still in bar­rel in France. It could then be im­ported in two years when it is bot­tled, or it could be kept in Europe in bond for an­other 10 years. This makes it a dif­fi­cult trans­ac­tion for the South African Rev­enue Ser­vices to un­der­stand,” says Peens. “We do have cus­tomers who have bought and sold wines in the UK and have made good money. We’ve also had some cus­tomers who have bought such wines through us, and we’ve im­ported the wine and sold it on for them here. With in­creas­ing lo­cal in­ter­est in fine wines over the last 10 years, com­bined with the weak­en­ing Rand, most French wines have gone up four or five fold in the last 10 years when sold here. But if the Rand ap­pre­ci­ates again, it won’t re­ally mat­ter what the value of the wine does,” he adds.

In­vest­ing for value growth

“When people say they are in­vest­ing in wine, I sug­gest that they look at it as in­vest­ing in their own drink­ing, their fu­ture plea­sure. If you buy top French wines while still in bar­rel, they will need 10 to 15 years to reach full ma­tu­rity. If you bought them at ma­tu­rity, you would likely pay a huge pre­mium and the wine would be harder to find. Un­doubt­edly, you can sell them at this stage, and we have cus­tomers who do. If you choose the right wine you can make a huge amount, but the mar­ket is spec­u­la­tive and un­pre­dictable and no one re­ally knows which wines are go­ing to ap­pre­ci­ate the most,” says Peens. As with any in­vest­ment, the driv­ing forces be­hind a wine’s value are rar­ity and de­mand. The de­mand side is largely dic­tated by brand and sen­ti­ment com­bined with the spe­cific rat­ings and clas­si­fi­ca­tion of each wine. En primeur pre- re­lease tast­ings take place ev­ery year in Bordeaux ei­ther at the end of March or the first week in April. Though many crit­ics taste and rate the wines, US critic Robert Parker’s rat­ings are the most in­flu­en­tial across the mar­ket. “At this stage, as the wine is still young, he will give each wine an es­ti­mate rat­ing, say be­tween

95 and 97. Then, two years later, it is bot­tled and tasted again and given its fi­nal rat­ing; and if it gets 97 it will do bet­ter in value than if it gets 95. Some­times how­ever, that 95 to 97 gets pushed to 100 and that’s when val­ues dou­ble or even triple overnight,” he ex­plains. The best wines in France are clas­si­fied as first growths. If a wine is a sec­ond growth from a very old clas­si­fi­ca­tion and the French reg­u­la­tor re­clas­si­fies it as a first growth, the value can also shoot up. Cur­rently, the great­est de­mand is for Bur­gundy wines. “There’s huge de­mand for it, the Chi­nese went af­ter Bordeaux first and have now moved on to Bur­gundy and the prices have sky­rock­eted. The top Bur­gundy is Ro­ma­nee- Conti with a cur­rent vin­tage go­ing at around R200 000 a bot­tle. They make only 400 cases a year, and when you’ve got a mil­lion mil­lion­aires in China, 400 cases doesn’t go very far,” Peens adds.

On a prac­ti­cal note

Whether you or your clients plan to buy to drink or to sell, be cau­tious of the mer­chants you use, par­tic­u­larly when buy­ing a fu­ture that will be de­liv­ered only in some years. A mer­chant could be long gone be­fore you re­alise the wine was never pur­chased. Trad­ing since 2000, the Cape Town- based Wine Cel­lar im­ports and sources fine wines from around the world, of­fers ship­ping and bro­ker­age ser­vices, and for those with­out the space to store wine for the eight to 10 years re­quired, pro­fes­sional cel­lar­ing. With its 150 000 bot­tle ca­pac­ity nearly full, the cellars may soon ex­pand, fur­ther proof of the grow­ing in­ter­est in fine wines within the lo­cal mar­ket. Cor­rect stor­age is also crit­i­cal to main­tain the qual­ity of the wine. “I get of­fers all the time from the man on the street look­ing to sell his old Rood­e­berg which has been ly­ing on top of the fridge for years and he thinks is worth thou­sands. I sug­gest they try it in a stew,” says Peens. Some wines need to ma­ture and some don’t, and those that do, re­quire cor­rect tem­per­a­ture and stor­age con­di­tions. Clearly, any­one ven­tur­ing into the world of fine wine in­vest­ment re­quires some specialist knowl­edge and a will­ing­ness to play its trends and sen­ti­ment- driven spec­u­la­tion; but at least, as the old adage goes, it’s an in­vest­ment you can al­ways liq­ui­date.

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