Wine Wins Again, Retaining Place As World’s Top Performing Luxury Investment

Wine And Whisky

Wine Wins Again, Retaining Place As World’s Top Performing Luxury Investment

Wine held on to the top spot in the Knight Frank Luxury Investment Index. Here we speak to a wine specialist to find out why wine continues to shine as a luxury asset.

Published on 24 October 2017

Knight Frank’s Luxury Investment Index (KFLII) recently published its second quarter findings and unsurprisingly there’s been a further push away from cars, which previously led the pack in terms of luxury asset price growth. Wine continues to lead the list having dethroned classic cars as the top performing luxury asset at the beginning of 2017. As it currently stands, wine had a 25% gain year-on-year from Q2 2016, while art swept in to take the second spot at 7%. The final three of the top five – coins, jewellery and watches – all increased by 4%. If you’re wondering where classic cars were, well they came in 6th place with a mere 2% growth rate.

Throughout the past decade, wine has held onto second place in the KFLII rankings, having grown by 231%. This is a far more impressive rate than its five-year, 61% return. However the strong growth over the past 12 months in particular has been down to wine from the Northern Italy, Bordeaux, and Burgundy regions all performing well.

How does all of this compare to the performance of the KFLII as a whole? The index grew by 5% over the past 12 months and 42% over the past five years.

Here we speak with Joe Alim, General Manager of Cult Wines in Hong Kong, to get his insights into the wine industry and why it continues to show strong growth.

Joe Alim, General Manager of Cult Wines in Hong Kong

WEALTH (W): Why do you think wine has become the best performing luxury investment asset?

Joe Alim (JA): There is a combination of factors that have led to fine wine establishing itself as the best performing luxury asset class. Firstly, the proliferation of wealth in emerging economies, particularly in China and Southeast Asia, has resulted in a significant increase in the demand for the top investment grade wines. By law, and appellation regulation, these top wineries around the world are not permitted to produce more than the specified maximum yield of grapes per hectare, therefore the significant rise in market participants has impacted on this very acute supply and demand imbalance, pushing prices higher. Added to this, has been the demand from investors for diversification, and for assets that provide a shelter for capital away from traditional market volatility and record low interest rates.  The fundamental characteristics of wine as an asset class, allow for it to be the ideal investment class of this nature, not to mention the added enjoyment that collectors and investors gain from owning a collection of fine wine.

W: Do you see this trend continuing for the foreseeable future?

JA: In short, yes. With the volume of new market participants increasing year-on-year and the quality of the product improving at a similar pace, it is difficult to argue against an increase in prices for the world’s most sought-after wines over the next five to ten years. Interestingly, the European Commission says that this year’s regional harvest is expected to be the worst since 1982. Europe is set to produce 14.5 billion litres of wine this year, a drop of 14% from 2016. The laws of supply and demand have stood the test of time in all markets, and for our market, these laws appear to be as strained as they’ve ever been.

W: What advice would you give a first-time investor?

JA: The wine market is relatively complex and can be quite a daunting prospect, particularly for new investors. When investing, it is vitally important to work with the right advice, ensuring that your portfolio or collection reflects the current key wine market trends. Like most forms of investment, diversification is important, and therefore building a portfolio with exposure to the key regions of Bordeaux and Burgundy, alongside wines from the US, Champagne, Italy and Spain amongst others, will provide a stable foundation for the investment and mitigate against risk. Like any other investment, we advise clients to undertake due diligence on the potential pitfalls such as ownership, pricing and liquidity expectations.

Like most forms of investment, diversification is important in a wine portfolio

W: Wines to look out for in 2018?

JA: The release of the latest Bordeaux vintage during the en primeur campaign every spring is traditionally the key market event each year and captures the most attention. Early signs for the 2017 vintage (released in spring 2018) are positive from a quality perspective; somewhere between 2008 and 2012, however, some adverse weather conditions may lead to reduced yields. Some key estates that we will be keeping a close eye on in 2018 will be a selection of the lower capital Bordeaux estates that are producing very good wines, trading at a level lower than they should be; estates such as Chateau d’Issan, Lascombes and Carmes Haut Brion. The second labels of the Bordeaux First Growths have proved to be extremely popular with brand conscious buyers over the past five years, however Clarence Haut Brion appears to be exceptionally undervalued in comparison to the other four wines, and we expect this gap in price to close over the coming years. St Emilion estates Figeac and Canon continue to receive a lot of attention off the back of two exceptional vintages, and the development of these brands is going to be interesting in 2018. Away from Bordeaux, we are advising our clients to increase their exposure to US wines, more specifically in the Napa Valley. With a hat-trick of back-to-back great vintages, Napa is now producing some of the most thought-provoking and inspiring wines the world over.

W:  What steps do investors need to take to ensure their wines retain their value?

JA: The investment market is underpinned by wines that are in original wooden case format (OWC). Buying wine in this format, and then storing them in the correct conditions will ensure that when it comes around to selling the case the value achieved will be at the full market value.  We advise our clients to store their wines in London, under perfect cellar conditions.  At the point of liquidation, these cases can then be sold to any global market at their full value, as the purchaser knows the wines will be in optimum condition.

W:  Which countries in the coming years do you expect to emerge in the global wine market?

JA: Like many markets, China continues to play a very important role in the overall growth of the wine market. The number of collectors and consumers is continuing to rise, and the potential for this market over the next five to ten years is huge. Encouragingly, it is the younger generations that are driving this growth, which is certainly a positive sign for the sustainability of the demand over the long term. Often overshadowed by China when discussing key markets for wine is the rest of Southeast Asia, however the demand is growing rapidly in countries like Thailand, Indonesia, the Philippines, and Malaysia, and we expect this to accelerate over the next five to ten years. India is also a very interesting market, with obvious potential as their economy grows and matures.

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