Plonk Down Readies for Top Investment: Wine Investments
August 26, 2009
Drinking Australian fine wine can give some relief from the stock market woes, but so can investing in it, with wine values significantly outstripping the performance of equities in the past two years.
Since mid-2007, Langton's Classification of Australian Wine Index, a key indicator for the secondary wine market, has risen more than 60 per cent, compared to a decline of about 30 per cent on the S&P/ASX 200 sharemarket index.
One of the better performers was the 1990 Penfolds Bin 389 Cabernet Shiraz, South Australia, which was valued at $73 mid-2007 and is now $115, an increase of 60 per cent.
A standout has been the 2007 Clonakilla Shiraz Viognier, which skyrocketed a massive 340 per cent from $75 in 2006 to $255.
The highest price paid for a bottle of Australian wine was $53,936 in August last year for a 1951 Penfolds Bin 1 Grange Hermitage, SA. It is enough to make any wine lover consider adding premium wines to their investment portfolio or self-managed super fund.
However investing in wine is a highly specialised area that carries substantial risks, with novices advised to do it because they love it, not just for the return. That is because fine wine is a relatively small market and the opportunities to make huge amounts of money are actually quite slim, according to Langton's fine-wine principal Andrew Caillard. It is also the reason why he doesn't recommend investors borrow money to buy wine.
"The truth is that there really aren't a huge amount of wines where there is an upswing in value; it's not like going into real estate where it is a much bigger genre," Caillard, a wine critic, says.
But before he turns budding wine collectors off their new hobby, he adds that "collecting and cellaring wine is one of the great pleasures in life".
"The best strategy for wine investment is to treat it like a small project, and that's the reason why I say it is always good to know something and to love it because if worse comes to worse at least you know you were well-informed and can say it was fun along the way," he says.
Like all investments, Caillard says the key to investing in wine is to "buy earliest, lowest, cheapest". "This means buying wine at release, negotiating the lowest price possible from a retailer or buying in what is essentially a wholesale wine auction market," he says.
But there is more to making a bottle of wine work as an investment than timing. Investors also need to ensure that the wine has a good reputation, as there is no testing before buying.
"There is a risk attached to fine wine simply because it is a living, breathing beast and like ourselves it ages; some age really beautifully and some age more shabbily," Caillard says. "This is why things like reputation and track record are very important when you are looking at buying and putting down wines for a return."
Caillard says years of strong, consistent demand on the secondary market are a good indication of a trusted reputation and there are about 30 Australian wines, mostly reds, that fill this bill.
Penfolds Grange, Henschke Hill of Grace and Mount Mary Cabernet are good examples of wines that have real traction in the local market. In fact, the Penfolds' range represents about 30 per cent of the secondary market -- where wine is re-sold/auctioned -- by value.
There are only about 30-40 wines worldwide that can stand alone on reputation, according to wine collector David Doyle, who has a $40 million collection, and a lot of them are wines of Bordeaux.
"It is actually the best investment of all. It is from France and it by far is the best investment wine, because they make a lot of it and it is very easy to sell at auction," he says. But Langton's warns investors that unlike Australian prices, the international fine wine investment market has fallen by about 20 per cent in the past two years.
Doyle, who co-owns Rockpool Bar and Grill in Sydney and Melbourne and Spice Temple in Sydney, says other than reputation, it is all about the score. "In investing the No.1 thing is watching the scores from the wine critics, because high -scoring wines tend to appreciate much more rapidly than lower-scoring wines," he says.
"If it is not very well known and it doesn't get a good score, it tends to languish forever and it will never appreciate in value." But not just any critic will do. Doyle says two of the most powerful in the international market are US wine critic Robert Parker and fellow American Allen Meadows, or "Burghound". Respected critics in Australia include James Halliday and Jeremy Oliver.
The other thing wine investors must consider before making a purchase is whether they can store the bottles correctly, especially if the wine has some maturity. Wine needs to be cellared at 14C to 18C with 65 to 75 per cent humidity.
For those not lucky enough to have a downstairs cellar, purpose built cabinets can be bought fairly cheaply or there is always the option of public storage. However after the costs are factored in it could reduce any return substantially.
Insurance is another one of those costs that will eat away at returns, but Caillard considers it important for larger collections.
"The problem with wine is you have theft, fire and cellars damaged by heat," he says.
For SMSF trustees who want to include a bottle of fine wine in their investment portfolio, SMSF Strategies principal Grant Abbott says there are a few things they need to do first, including ensuring that the fund's trust deed specifically allows for collectibles.
"Superannuation is for long-term investment purposes so the trustee must research the long-term investment quality of the wine to be acquired; casks not allowed!" He says.
The arm's length rule also applies, so investors can't transfer wine that they or a related party such as a family trust already own into the fund.
And Abbott says the wine should be valued on an annual basis, according to the Taxation Commissioner.
"If you are over 60 and want to pull a bottle out for your mates, tell your accountant or send them the bottle so that your accounts can be adjusted to determine the market value of a liquid tax-free withdrawal," he adds.
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