Opinionista Michael Fridjhon 3 March 2014

Investing in the wine market: No guaranteed highway to easy money

There's always someone willing to talk about wine as an “investment.” Even the big insurers are happy to describe it as an asset class to their clients – an act of considerable generosity, given that they cannot earn commissions on wine sales. A real estate magazine recently ran a whole section on the charms of investing in wine – assuming, no doubt, that anyone rich enough to buy the properties offered for sale in glossy publications would want to believe that houses with wine cellars were ideally suited for this kind of home industry.

I like to think that anyone smart enough to make the money required to buy a house in the R10m+ price range is not gullible enough to fall for this seductive (but largely – at least in South Africa) improbable proposition. The situation in some overseas markets is vastly different, and many of the investment models offered to local punters use these stats to support their position. For example, the UK has a well-developed secondary market – one that has had its ups and downs, but certainly one big enough and well enough tuned for this to be considered a legitimate investment avenue.

It is perhaps worth reflecting on what makes the UK wine market work for speculators. Firstly, most of the blue chip stocks there have an established trading history. They are primarily classed growth Bordeaux and the wines have been sold as futures from time immemorial. Precisely because consumers have been buying and selling these wines – from within a few months of the vintage and until the same wine is in its dotage – there is a structured secondary market. Obviously the major auction houses all handle investment grade wine, but so too do the brokers, traders and middlemen. Buyers and sellers are thick on the ground, so is the kind of wine they like to buy. You have to be seeking out genuine rarity (small production or ancient vintages) before a particular item is unobtainable. If you’re looking for Lafite Rothschild between ten and twenty years old, there are literally so many cases available that, in the words of the Domaines Barons de Rothschild CEO, it’s become a commodity.

Precisely because of this, there’s a real sense of what the market will pay for every wine – and now the Liv-Ex has been operating for several years, you can establish what this is as easily as tracking a share price. By the same token, when it comes to selling your booty, you can argue with the potential buyer from a position of strength (just as he will be negotiating with you). There is also a well-established wine storage business, and although many merchants offer to cellar your wines for you, their costs are based on those of the big warehousemen – who are wine storage professionals, rather than the companies which will hold anything from your late grandmother’s furniture to the household goods of families on foreign assignments.

At the apex of the wine storage business is a company which has taken over a disused mine and converted the underground space into massive (and massively efficient) cellars. Many of the wines traded in the UK’s secondary market never leave Octavian Vaults: all that is registered is the change of ownership. Once again, the pricing is fairly transparent and the arrangements understood and evenly applied by everyone.

Despite this, wine investment in the UK is not a guaranteed highway to easy money. Not all vintages rise inexorably in price (notwithstanding the promises made by the merchants) nor do they hold onto their gains. Sometimes even the most gilt-edged of stocks can drop 30% – 50%. The reputations of vintages are not set in granite, and the “vintage of the century” of 15 years ago has been superseded at least three times, by my count. If you think you don’t have the expertise to be playing in this game, you can always give your money to the wine investment funds – as long as you’re not expecting to need it for at least five years (the normal minimum time for their ‘debentures.’)

All this shows is that in a market where trades are achieved with relative transparency all is not plain sailing – though if it were, no one would invest in the the equity market and everyone would put all their money into wine. They don’t, because it still takes expertise, supplies are finite, and there are more amateurs than professionals in the game.

Once you move this scenario to South Africa, the parameters shift dramatically. We don’t have a shortlist of investment grade stocks, we don’t have a developed secondary market, we don’t have quality wine storage offered at competitive prices, we don’t even have buyers or sellers with the expertise or the trading history to make a go of it. Licensing regulations – allowing the disposal of wine by private collectors – only changed about 30 years ago and for ten years or so after that Sotheby’s (now Stephan Welz & Co) tried to run sales of wines from private collectors. I was the auction house’s consultant at the time, so I have a reasonable sense of the arithmetic. There were never enough sellers, and hardly ever enough buyers. To do the job properly every bottle in every lot needed to be inspected, the level of the wine below the cork (the ullage) accurately measured and all this had to be catalogued in detail.

On a really big sale there might have been 500 cases – which in those days would have averaged R500 per dozen. Today these would have been the equivalent of R2,000 – R3,000 per case – a sales value of R1m+ at most. In other words you need to examine, catalogue, sell and despatch +- 6,000 bottles to achieve the same turnover as one moderately good painting. No auction house with enough business sense to be in the game in the first place would take on wine sales on a regular basis – which is why the auctioneers with a reputation worth protecting have walked away from it (and why a Cape Town auction house a few years back sold off some of South Africa’s most precious old wines for substantially less than R50 per bottle). They didn’t know better and they didn’t care.

So, the next time you see an article in a freebie rag trumpeting the joys of wine investment, ask yourself why the market hasn’t taken off: we were all optimistic once, we all believed that the trade would grow, and would finally deliver the same prospects available to punters in the UK. Those of us who have been paying attention now know better. If you think differently, perhaps you’re just looking for an excuse to persuade your spouse that this is a business opportunity, rather than pure self-indulgence. Which is absolutely fine, as long as you can manage your marriage, and your liver can manage the best way I know to liquidate your investment. DM

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