Valued at US$1.2 billion per annum, the wine investment industry only comprises the top 40 or so labels in the world. Since wine tax was abolished in Hong Kong in 2008, the city has established itself as the epicentre for the trade, principally feeding the extraordinary thirst from the Mainland for First Growth wines. Poignantly, Hong Kong and Mainland China account for 40% (US$500 million) of the global industry – a staggering percentage – and that’s set to double to US$1 billion by 2014.
The scale of the market is massive and it’s growing fast. Between 2005 and 2009 Chinese wine consumption increased 104% but the Chinese are still significantly behind western levels. The average person in Hong Kong and Mainland China drinks about 3 litres per year. To put that in perspective, in the UK (admittedly the binge drinking capital of the world) the figure is closer to 27 litres, and in France it’s 50 litres. Largely thanks to soaring demand, returns over the last two decades have been startling. Since the 1990s investors have seen 15% compound annual growth which is exceptional performance for any asset class. There are few investments that have come close.
Investing in fine wine requires a medium to long term approach because it’s not a commodity that lends itself to frequent trading. The costs of transport and the risk of damage are are high so you don't want to ferry it this way and that. For instance to ship a case of wine from the UK to Hong Kong you’ll have to stump up roughly HK$250-700. Add to that the aging process and you’ll see the necessity of long termism. It takes years for the best wines to reach their peak. The 2009 and 2010 vintages for instance – which generated the highest prices ever seen – will last upwards of 50 to 60 years.
According to Rickesh Kishnani, Managing Director of Platinum Wines, the basic business theory behind wine investment is its unique supply and demand dynamic. “The most important thing to understand is the simplicity of supply and demand,” he said. “If people can understand that this is a very high-end, luxury product with limited supply and on the other side you have an ever growing base of demand from high-net worth individuals – they’ll realize this imbalance will make prices go up.”
There are only so many bottles of Lafite that can be made each year. What’s more, as corks get pulled the supply of each vintage diminishes further. Unlike most other high end products, you can’t produce more to meet demand. Once a bottle is finished, it’s gone. Combine that ever decreasing supply with the surging demand from high-net worth individuals in Mainland China, parts of South East Asia, India, Russia and Brazil and you have the basis for a very solid investment.
Of course there are various pitfalls to watch out for. Chief among them according to Rodney Lloyd, founder of The Wine Deal, is finding a reputable company. Rodney set up the business after looking at wine investment in Hong Kong himself. He was struck by the surplus of companies offering wine investment in the city and says you have to find one with a proven track record. “A lot of them paint very rosy pictures of potential returns,” he explained. “Even worse, one of them I was looking at took their clients’ money and ran off. Your money will be gone for at least two to three years so you need to be sure who’s managing it.”
Apart from that, as with any portfolio - it’s critical to diversify. Each year you should try to buy some wine en primeur (essentially wine futures) as well as some back vintages that have already been bottled and seen some trading. With the latter you’ll know what you’re getting yourself into whereas with the former you’ll see greater potential appreciation but it will take longer to see a return and the risks are higher.
To generate a worthwhile cash return, meanwhile, you need to invest a decent amount of money to start with. Of course there’s no set minimum but the average client in Hong Kong begins with HK$200,000 – 500,000. It comes back to the costs of trading and the time invested – you simply need a healthy base level to make it worthwhile.
Investing sufficient capital is important, but perhaps the most compelling argument for investing in the first place is the industry’s apparent lack of correlation with other markets. With another global recession around the corner, the industry’s performance in 2008 is telling. The credit crunch naturally effected wine investment (prices dropped about 20% in the aftermath) but the industry recovered within 18 months and prices in 2009 and 2010 - albeit with stellar vintages - hit record levels.
The key reason for the market’s resilience has been demand from Mainland China. We asked the Bordeaux Index's Geraint Carter if a global recession in the next 12 months including China would hurt the fine wine industry. He suggested the market’s performance over the last two decades has been abnormal and would re-calibrate. “When the wine market goes up as it has done in recent years at 20% annualized, that rings certain alarm bells,” he explained. “It’s not normal for markets to increase at that kind of rate for sustained periods and it’d reasonable to think there’ll be a period of adjustment in the near future. That said, it has to be seen in the context of the very positive long term supply and demand curve.”
His comments were evidenced by a recent Sotheby's auction in Hong Kong which failed to sell out for the first time since its inception two years ago. Rodney and Rickesh agree the situation will get a little worse before it gets better. “Wine investment is an asset class and in the last couple of months prices have softened because of the crisis in Europe and America,” explained Rickesh. “The thing is though, Mainland China has been driving the industry and we’re still very much at the beginning of at least a decade long wine boom in Mainland China.”
Prices are expected to drop by 10-15% over the next 12 months (not least because we have it on good sources the 2011 vintage will not be an exceptional year) but a brief blip would be great news for the market. Prices have been growing unsustainably for a few years and a little downturn will allow other players - particularly European and American collectors – back into the market.
What’s more, the first signs Chinese wine buyers are beginning to diversify should provide another boost for the market. Stories of Chinese drinkers knocking back Margaux like Moutai and mixing top Bordeaux with Coca-Cola are rife; however Chinese wine culture is starting to evolve. Debbie Yeung, Senior Wine Consultant for Berry Bros & Rudd told us “There are of course still a number of Mainland customers who’d rush in for Lafite but there has definitely been an increase of interest in other fine wines.”
This cultural evolution will further strengthen the market because recent demand for the top five (Lafite, Latour, Mouton, Haut Brion, and Margaux) has meant other labels haven’t been selling as well. In the long run, the broadening of Chinese taste will benefit the market as a whole. In point of fact, Robert Parker is coming to Hong Kong next month for the WineFuture conference where he will unveil his Magical 20. They comprise the 20 bottles he thinks are First Growth quality without the First Growth prices.
Market experts widely agree the outlook for the industry is extremely positive and the next 12 months looks like the ideal time to invest. Equity markets are suffering, the Hong Kong dollar has strengthened against the Euro and those who bought wisely during the 2008 financial crisis saw exceptional returns. There’s only a finite amount of this very high-end commodity and there’s ever increasing demand from emerging markets. Commentators expect there will be a little volatility in the short term but that supply and demand picture will continue to drive up prices in the medium to long term.
Experts suggest potential investors should wait to see the prices of the next round of en primeur and not to pile into the top five. Instead they recommend diversifying, working with one of the local dealers to look for second tier wines both en primeur and already trading – as well as perhaps some truly stellar numbers. The best part is if you get impatient or don’t think you’ll see a good enough return – you can always start drinking.