Knight Frank recently published their 2017 wealth report, ranking the top performing luxury investment assets.
Whilst being a property organisation, Knight Frank made an attractive case for investing in alternatives such as Classic Cars (growing 334% in 10 years) and Fine Wine (growing 192% in 10 years).
According to Lloyds Bank, property prices have been down (-7%) in the 10 years from 2006-2016. So why does property remain, by far, the most popular investment asset?
Fine Wine: 192% in 10 years:
The fine wine market is a simple market to understand. Wine investment only works with the best quality wines in the world, which have a limited supply – the Bordeaux first growths are limited to 15,000 cases a year.
Wine has outperformed the property market in the last 10 years
If an investor bought a case of wine, such as ‘Lafite Rothschild 2000’ when it was released, the majority of the 15,000 cases produced that year will have been drunk by the high net worth’s that can afford them. Throughout that period, the quality will have also increased, as the wine matures with age.
18 years later, in 2018, the available supply of the wine has dropped drastically as its been consumed (lowering supply), and the quality increases as it matures (increasing demand). Supply goes down, demand goes up, which naturally increases the price.
Classic Cars, 334% in 10 years:
Classic Cars, is an even simpler market to understand – it’s about predicting which cars will turn into ‘classics’. The FT use an example – in 1996 you could by a flat in Clapham Common for £200,000, which you could now sell for over £1m (5x+ return), however if you bought an Aston Martin DB4 Zagato from the nearby garage on the same day for £500,000, you could have seen it sell at a Sotheby’s auction in New York for $14.3m (20x+ return).
The return of investment in classic cars can often outperform property, however the exit route tends to be harder
Property: -7% in 10 years:
The property investment market is the most widely understood investment market. Instead of explaining how to suck eggs, let’s talk about why, despite the property market going through its worst performance in recent history, investors are still flocking towards the asset over seemingly ‘too good to be true’ investments, such as Fine Wine and Classic Cars.
Exit Routes:
Exiting the property market is easy. Everyone needs property and everyone buys property. When you need to sell your property investment, you will likely find a buyer with relative ease.
Wine can be a fantastic investment, although the market is far more likely to fluctuate compared to property
Fine Wine trades on the Liv-ex exchange. Wine is bought and sold frequently by restaurants, hotels, bars, collectors, drinkers etc. giving it a valid exit route, but it is not as consistent as property, as there are not as many people that spend £5000+ on drinking wine as do buy property.
Classic Cars has a much more difficult exit route. The Classic Car market has moved by 334% in 10 years, but in order to monetise your investment; you need to find a buyer. Finding someone who has $14.3m to spend on an Aston Martin is not easy.
Consistent Income
The main advantage property has over wine and cars are that you can generate income through rental yields whilst holding your property.
Whilst driving a classic car and showing friends your wine cellar is enjoyable (and why they are called passion assets), you are solely relying on the sale price of your asset being higher than your buying price in order to monetise your investment. Considering this, there is an added risk to this type of investment, if the market drops in value, you will lose capital.
This also makes passion assets less accessible as you have to be willing to part with your money for a minimum of 3-5 years with no guarantees that it will increase in value.
Tax Relief
Classic Cars and Fine Wine are classed as ‘Wasting Assets’. This means, by definition, that they have a limited life and will lose value over time (as wine turns to vinegar and cars rust and break).
Because of this, they are exempt from Capital Gains Tax, meaning any returns on investments in these asset classes are immediately given a 10%-28% advantage over other investments such as property.
Investments in Fine Wine can also be exempt from VAT and Duty provided the wine is stored in bond.
Below Market Value in property
Many experts are able to source property at below market value, typically, up to 30%. As the property market is regulated (unlike Fine Wine and Classic Cars), these opportunities are easier to verify.
Property is generally considered a safe investment due to permanent demand
Typically, these opportunities come via off plan connections, properties in the construction phase, repossessed property (https://www.repossessedhousesforsale.com/), through buying agents, auctions etc.
This is a valid method to create instant equity when investing in property and in a safer way.
Safety
Property investment has always been considered a safe investment, as people will always need a house. This is an extremely valid point as all markets can fluctuate and values can go up or down but there will always be property.
This is also reflected in the banking industry. Mortgages (loans using property as collateral) are one of the most common forms of loans. Banks consider the property market secure, so if someone cannot pay back their loan, their property should hold its value and therefore repossessing the property will cover the loan.
Fine Wine was first used as collateral for a loan in 2013, reported by business, which made headlines as the banks had never considered wine to be a stable enough asset for collateral before
This clearly demonstrates the belief in property over other assets, which makes the market more stable.
Conclusion
Luxury and passion assets are more likely to achieve much higher returns over a longer period, but are far more difficult to enter and exit.
The average investor needs more certainty when investing their capital, and relying on a buyer for a classic car or continual growth in the wine market is a risk, which is amplified as there is no income to be had whilst holding the asset, only further costs.
The reason they are called luxury assets is, quite simply, because they are a luxury. You should never invest more than 20% of your overall portfolio in luxury assets and you should only invest what you can afford to lose.
Property may not provide the flashy returns of 190%+, but it is stable, it generates consistent income and it’s backed by the banks. Also, provided there is not an economic crash, typically, property provides a good return on investment.
