Can you make money from wine?

Johannesburg - There has been a lot of hype about wine as an investment class over the past decade.

A great thirst for the stuff out of the East (Hong Kong, which recently abolished tax on wine, is now the world's second-biggest wine auction market) has pushed up some French wine prices by 900% over the past decade, adding to the excitement.

Investment in wines, which is now estimated to be worth $3bn a year, was formalised in 1999 when the London International Vintners Exchange (Liv-ex) was established as a trading platform.

A number of wine investment funds have been created, which allow investors to buy into a portfolio of wines (although almost all trading is still in Bordeaux wines). The wines are stored in warehouses and insured.

According to a Financial Times report, the prices of the very best wines have risen by an average 15% a year over the past 25 years. Some 1% of all wine produced is seen as investment grade.

Although the fine wine market initially looked resilient during the financial crisis, prices started weakening towards the end of last year.

Since then, however, strength has returned. According to one of the most prominent wine asset managers, the Wine Investment Fund, its fine wine index should gain 18% this year. Record prices are expected for the 2009 vintage from Bordeaux.

The attraction of wine as an investment is that prices are usually relatively stable. Also, it offers diversification - prices do not directly track those of shares and bonds.

And while there are growing numbers of emerging market investors, particular from China, supplies remain limited.

For investors in wine investment funds - usually registered in the UK - all returns are also free from capital gains tax, as it is seen as a "wasting asset" by the UK tax authorities.

Local may be lekker

In South Africa, the establishment of a secondary market in wine has seen a number of stop-start efforts, with attempts to create investment funds faltering due to a lack of investor support. Last week, however, potentially saw a breakthrough.

Kanonkop made history by selling 600 bottles of Kanonkop Black Label Pinotage 2006 for R1 000 each within three hours before it was released on the market.

Fiona Phillips of online wine merchant Cybercellar.com, who together with Wade Bales Wine Society managed the Kanonkop release, said it could be the first step to establish an en primeur market in South Africa.

En primeur refers to selling wine before it is bottled.

Usually, investors buy the wine two or three years before it is released.

The advantages for wine producers are that they receive cash upfront and don't have to go through the effort of selling to supermarkets and retailers.

Phillips expects that by 2012, Kanonkop will release its wine before it is bottled. While most buyers now want to get their hands on the wines for drinking purposes, she anticipates that in future there will be more investors who will hang on to wines for four to five years - hoping to sell it for a profit.

Other wine producers may follow Kanonkop, whose reputation (one of its winemakers recently received the International Winemaker of the Year award) makes it the ideal first en primeur candidate.

How to go about it

In the absence of a formal market for wine in South Africa, can you make money from investing in it?

Through research and visiting winemakers, you can potentially obtain wines early after release to sell for a profit as it matures.

Some of the current wine estates that could offer good longer-term potential investments are the Sadie Family Winery (under Eben Sadie), Vergelegen and Waterford, said Phillips.

However, the main problem with investing in wines is storage. Wines have to be stored at constant temperatures, otherwise quality can be affected. Buyers may be wary about lone sellers' storage guarantees.

Some wine investment clubs, like Cybercellar.com's, offer investors a portfolio of wines, stored professionally.

Alternatively, you can use your foreign exchange allowance to invest in overseas listed wine companies or wine investment funds.

This will require a lot of homework, particularly in looking at the underlying investments.

While there have been some convincing data from international investment funds, once analysed the evidence suggests that the strong compound growth figures relate primarily to select icon French estates and appellations, said South African wine critic and consultant Michael Fridjhon.

Even these took something of a pounding in the global financial crisis - although recovery has been remarkably buoyant, said Fridjhon.

"But many of the funds compel investors to stay in them for at least five years. It's not certain what will happen when investors who may have suffered from the global finance crisis seek to exit as soon as they can.

"The oriental market has been chasing purchases of the same wines - but this assumes that going forward they will be able to replace the Western investors who may have to exit.

"In short, it's not nearly as certain an investment as it appeared two years ago," he said.

Issues such as management fees for funds should also be taken into consideration, as should storage and other expenses - and how much it will cost to sell the wine.

Remember also that the wine investment market is not regulated by the authorities, so trade with reputable firms only.

- Fin24.com

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