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
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.