What is Wine Investment?
There are several ways to invest in wine. The most traditional is to buy cases from a vineyard, store them and then sell them for a profit when the wine matures. If you have a lot of patience, time and a few million dollars you can invest in setting up a vineyard. Another option is to choose one of the various wine investment funds.
Halfway between storing wine and buying shares in a wine fund sits the specialist wine investment company. It selects wines, stores them for you in a credited environment and then gives advice on the best time to sell. This way you can have your profit and drink it too.
Whichever route you choose, wine is always a long-term investment (minimum five years).
Given that as many as 50 wine investment companies were liquidated in the UK over the last four years you can be forgiven for wanting to give wine a wide berth. The days of making soaring profits on old vintages are numbered. This is largely due to the fact that speculators, who massively inflated Bordeaux prices, have not only saturated the market but have now suffered huge losses because of the Eurozone debt crisis.
Sabrina Belkadi, founder and director of ENO Lifestyle, says, “Over the past 10 years, before the start of the financial crisis, the wine market had been one-way. It registered phenomenal gains and was the asset class that delivered the most superior return over 10 years, up to 2009. The forerunner wines were Bordeaux First Growths from Château Lafite Rothschild and Château Mouton Rothschild and these contributed to the bulk of the growth in the wine market.”
Belkadi explains that one of the reasons wine investment companies have failed is because they only backed the inflated brands and didn’t diversify. They consequently had massive losses when the top end of the market took a sharp dive. By July of this year the Liv-ex 100 Index (which represents the price movement of 100 of the most sought-after fine wines) had registered a fall of 10 per cent YTD and a worrying 28.2 per cent drop YOY. Wine professionals are desperately hoping the market has now begun to stabilise.
Historically, it also hasn’t helped that wine investment is largely unregulated, but this is currently being reassessed by the FSA in the UK.
But what about China?
Earlier this year, China became the fifth largest wine-consuming nation in the world. “Due to its population size, development of a sizeable middle-class and affluent coastal areas, the country is gradually developing a wine culture and is seen as a ‘new frontier’ for investment,” says Belkadi. “But it’s important to note that roughly 90 per cent of Chinese consumption is of local wines.”
China has a long history of fermentation and distillation of wine but has traditionally focused on high yield and not necessarily quality. But this could be about to change. “Many expert oenologists and winemakers from Europe have exported themselves and their knowledge to counsel new wineries,” reports Carolyn Etherington from ewineasia.com.
“But as Europe knows well, it takes time – a lot of time – to fully understand your terroir, your climate, your vines. I believe China will get to it in time, because it has the means and the knowledge. And I also believe that Chinese vineyards suffer from critics treating them with disregard; the same way Chilean and Australian wines were in the past.”
Two of the country’s most promising regions are Ningxia and Shadong, where French wine estate Château Lafite Rothschild has begun to establish a vineyard. ChangYu Pioneer Wine (the tenth largest wine producer in the world) recently announced plans to build a six billion yuan Wine City in Shadong. The 43-hectare plot will include a research institute and trading centre as well as vineyards, and is slated to be open by 2016.
Supermarkets in Europe have begun to stock wine from Ningxia and Shadong largely thanks to Decanter magazine awarding 18 medals to Chinese wines. “We are just beginning to see a glimpse of [China’s] potential,” says Sarah Kemp, Decanter’s publishing director.
Other emerging markets
Somewhat surprisingly, there are lesser-known regions of Europe that have great potential but, until now, have been over-shadowed by their very profitable and famous neighbours. Countries behind the Iron Curtain or that have suffered political instability are starting to produce great wines with native grapes. Western Spain, Georgia, Hungary and Croatia are all garnering attention. “Their wines are of fantastic quality and are getting hot on the market,” says Etherington. “Prices are still affordable but are rapidly rising due to awards and the growing reputation of the wines.”
India’s increasingly prosperous and westernised middle-class is also encouraging the development of the wine industry, comments Belkadi. “Most of India’s wine ventures are concentrated in the state of Maharashtra but other areas (such as Himachal in the north) also have potential for quality winemaking.”
How much should you risk?
This will always depend on your personal investment strategy. The general rule is that investors should dedicate up to 10 per cent of their entire portfolio to wine.
If you’re looking to buy and store the wine independently you’ll need to ensure the storage is certified which, if you’re building your own cellar, can be an expensive up-front cost. However, “It is not unrealistic, based on historical data and the strong fundamentals of the wine market, to expect an annual return of up to 10 per cent for a wine strategy,” says Belkadi.
“To optimise the resale potential, invest in sets of wines that are considered of standard size (ie by case of three, six or 12 bottles of 75cl or six or 12 bottles of 37.5cl) rather than individual bottles.”
The silver lining with a wine investment is that if you’re unlucky enough to make a loss you can always drink the wine instead, which is something you can’t do with stocks or bonds.
Trivia: An 1811 Château d’Yquem is the world’s most expensive bottle of wine ever sold at an auction; it was bought by a private wine collector for £75,000 in 2011. Australian winery Penfolds is currently selling 12 glass ampoules of 2004 Kalimna Block 42 Cabernet Sauvignon for AU$168,000 and is the most expensive wine sold directly from a winery.