Fine Time to Invest in Wine?

It is often said that the market for wines is the last to feel the impact of any economic upheaval and the first to show recovery. In the wake of the financial meltdown wine has started to figure more prominently in investment portfolios and is no longer regarded a niche market today as it was a few years ago. Over the past 2 decades wine has shown consistent returns and is continuing to out perform the FTSE 100. According to Liv-ex (the Fine Wine Index) the Index is now only 14% off its all time high, set in June 2008. Prices fell by up to 25% after the collapse of Lehman brothers, but have since partially rebounded. In the past 5 years the index has increased 133%, a performance bettered by none of the major share indices or gold. What's more prices for the world's top wines rose by 4.6% in August - the biggest monthly increase for more than 2 years.

So what is keeping the fine wine market buoyant? In short, Asia - particularly Hong Kong and China. Hong Kong has established itself as the world's second largest market (behind New York) for the sales of fine wines since all wine duties were abolished early in 2008 Hong Kong is increasingly the place to buy (and sell) expensive wine. One American wine merchant, the firm Acker Merral & Condit, told Reuters that Hong Kong was arguably the fine wine world's most important market. According to Serena Sutcliffe, Sotheby's wine director, Asian buyers represented 99% at their recent auction. In addition to the Hong Kong government's pro-active decision to scrap duties the market really began to boom with the government also scrapping most of the paperwork related to wine imports- importers were allowed to have customs inspection inside the wine warehouses.

The balance of power in the wine world is now shifting from West to East - this seems to be the common refrain and not only in Hong Kong which pipped Singapore, another financial centre in the South East Asia that did not give enough thought to the impact of duty waiver and still has a duty structure that does not find favour with the locals.

Hong Kong collectors have been buying fine wine earlier too but they were storing it outside the country due to heavy (80%!!) taxation. Now, they have been buying and bringing back their stocks to the temperature controlled cellars. Hong Kong being a part of China but with free administrative powers, is also attracting unprecedented interest in the parent market, along with many other smaller Asian nations; over 98% of the bids at the Sotheby's are reported to be from Asians.

The Hong Kong Tourism Board (HKTB) is expecting big things over the remainder of 2009 too with the inaugural three-day Hong Kong Wine and Dine Festival leading the way October 30th - November 1st and the 2009 Hong Kong International Wine and Spirits Fair opens 4th-6th November. Visitor numbers have already risen 12% this month, year on year, thanks mainly to China's extended, eight-day National Day holidays and the HKTB is still predicting 29 million visitors for the Hong Kong Food and Wine Year.

If you are interested in diversifying your investments and are considering wine as a potential asset then I would strongly recommend you seek professional advice. There are the 3 traditional ways of investing in wine: a) Use a wine merchant and buy it yourself. b) Buy through a Wine Merchant with a Private Cellar Plan and c). Invest in a Wine Fund. There is also a new route into Fine Wine investment which offers qualifying UK tax payers a advantageous and tax efficient opportunity – invest in an EIS company (Enterprise Investment Scheme). An EIS can benefit the investor from exemptions of Capital Gains, Income Tax and Inheritance Tax. Investors can also qualify for GCT refunds if they invest in this scheme as it has been created under EIS which is designed to support enterprise. EIS provides income tax relief of 20% if you hold the investment for at least 3 years. In addition if you have previously crystallised capital gains attracting a tax rate of 40%, the gain can be deferred if you invest into an EIS company within 3 years of creating the gain. You still have to pay capital gains tax on the deferred gain but only when you sell the shares in an EIS company. However under current rules this is at a reduced rate of 18% resulting in a further saving of 22% on past gains.

If you would like to learn more about wine investment click here for a comprehensive guide and if you would like to learn more about the EIS wine investment scheme visit The 1855 Club here.