Fine wine has long been a palatable investment. But as wealth shifts from west to east, there is even more reason for investors to hold it in their portfolio.
While wine consumption in the west is declining amid recent global economic woes, wine sales in China have been experiencing an impressive 15 per cent annual increase in the past several years, according to US-based consultants AT Kearney.
Thanks to a rise in affluence in China, fine wine now represents an additional opportunity for investors who are looking to get more diversified exposure to the country’s economic growth.
“Wine has become a symbol of a desirable urban lifestyle, which shows sophistication, vitality and social status,” observes Howard Abe, a specialist in consumer goods and retail at AT Kearney.
Between 2009 and 2010, as its booming economic growth continued, China saw a 34 per cent increase in imports of wine to 125.1m cases, according to International Wine and Spirit Research (IWSR). This represents a phenomenal increase of roughly 32m cases in just one year.
Richard Harvey, global head of wine at auction house Bonhams, says: “It’s the west that’s investing and the Chinese that are buying in the fine wine market at present.
“There’s obviously an increasing number of wealthy people who are looking to buy the trappings of wealth, of which fine wine is one. I think it’s fair to say that more fine wine is drunk in China as a percentage than in the west,” he says.
According to William Grey, investment manager at The Wine Investment Fund, approximately 50 per cent of the fine wine sold in the UK is exported to Asia.
“It tends to be the billionaires who are drinking bottles of wine which are worth £3,000 each at the very top end. Our average is about £300 a bottle. The fine wine market goes to the highest bidder, and they have the highest concentration of wealthy individuals.”
But why is fine wine such an attractive investment proposition?
According to Mr Grey, because of its physical qualities, fine wine keeps its value.
“If the pound depreciates massively, you’ve still got a case of Château Lafite Rothschild, which will still be worth the same amount to a Chinese investor if they’re paying in yuan,” he says.
Not only that, but since 1988, fine wine has on average returned investors 13 per cent a year, with a lower volatility than equities.
“People who don’t know wine very well think it’s [just] something that you drink [and wonder] how that can be low risk,” Mr Grey says.
“If you just hold the very best wine, it’s actually very low risk (compared with the stockmarket). In the massive crisis in 2008, wine went down by 20 per cent, whereas oil when down to a quarter of its price and equities dropped by 50 per cent.
“If you put your last 5 or 10 per cent in wine, you can do very well out of it. And there’s no capital gains tax to pay on it.”
However, Mr Grey acknowledges that wine is a long-term investment, and on average, investors have to be prepared to hold it for 5-10 years in order to get a good return.
“We’ve been investing in wine for more than eight years now and our average paid-out return is 14.5 per cent. But it has been a very good time in those years, probably higher than the average. In the future, we’re looking on average double digits, which over five years if you compounded up is 60-65 per cent,” he says.
“Recent figures suggested that global consumption is going to go up on average by 1.67 per cent from an estimated 24bn litres today. Fine wine makes up approximately £6bn worth of this total consumption.
“We only pick wine from Bordeaux, where there’s a limited supply. It’s not like in Australia, where you can plant a vineyard next door and call it the same thing. Once the supply goes down, with the same demand the price goes up.”
Nevertheless, Mr Harvey points out that these price rises can take a while to come through – even for Chinese investors buying the finest French wine.
“It’s fickle as an investment. I think it’ll be very hard to make any money from wine in the next two or three years. Prices have gone up significantly and there will be a period of correction now and instability,” he says.
“We sold a case of Château Lafite Rothschild –one of the wines that’s particularly sought after by the Chinese – for £39,000 in February 2011.
“The value of that wine fell to less than £29,000 in December 2011 – so if you’d have bought at the wrong time you could have lost a lot of money on it.”
Simona Stankovska is features writer at Investment Adviser
