Getting an alternative take on wine investing

There seems to be an increasing level of interest in wine investment on the part of both private and institutional investors. It is interest that is being driven partly by the search for non-correlated asset classes which can still provide a respectable rate of return, and partly by the increasing consumption of wine by the general public, around the world.

This year we have already seen the launch of wine indices by the London International Vintners Exchange (Liv-ex), in conjunction with Cantor Spreadfair, the spread betting exchange. Three indices were launched, to cater for the unprecedented level of interest in the Bordeaux 2005 vintage.

The main index, the Liv-ex Bordeaux 2005, consists of a basket of 10 of the best known Chateaux, including Margaux, Leoville-Barton, and Latour. Also available are markets for individual wines, including Haut Brion and Lafite-Rothschild. Further wines are expected to be introduced shortly. According to James Miles, founding director of Liv-ex, the indices represent an opportunity to bet on the closing level of the index in September. The wine will be valued in sterling on Liv-ex at the in bond mid-price per 12 bottle case. The index and Spreadfair prices are derived from adding the value of each case together, and dividing by 100. Thus, if the cumulative total of the wines is £26,500, the index price would be 265.

Liv-ex itself is an electronic marketplace for fine wine - it runs a trading platform for a global network of professional traders and merchants. It was originally established in 1999 by a pair of former stockbrokers, Miles and his partner Justin Gibbs.

On 18 July, the exchange rebalanced its fine wine benchmark, to reflect the availability of each fine wine constituent  in the index. The re-weighted index posted a 9.5% increase in June, bringing the 12-month gain to 53%, a very respectable non-correlated return indeed. According to Liv-ex, the June numbers were fuelled by the very high prices being paid for the widely acclaimed Bordeaux 2005, and the already strong demand for the best wines in circulation.

"Due to the increased sophistication of fine wine investors, we felt it important to re-weight the index to better reflect some of the challenges inherent in constructing a portfolio of fine wine," said Miles.

In addition to price, the index also takes into account the production and scarcity of each wine represented. Miles says the re-weighting will reduce the weighting of wines that trade at high prices, but are only produced in small quantities, making it easier for investors to replicate the index in their portfolios.

At the end of July, the Liv-ex 100 was composed of 91.7% Bordeaux wines. Other regions represented included Champagne (4%), Burgundy (2.6%), Italy (1.1%), and Rhone (0.6%). Some 67.5% of the index is made up of the best wines from the last 10 vintages and the balance from wines between 11 and 25 years old.

The top five Chateaux in the index are:

• Lafite Rothschild (16.5%)
• Latour (13.7%)
• Margaux (13.6%)
• Mouton Rothschild (10.1%)
• Petrus (7.7%)

The index does not include any wines that are trading en primeur (namely 2004 and 2005 Bordeaux vintages).

Getting back to the roots

For those investors interesting in combining the dynamics of the wine market with that of real estate, it might be worth taking a look at the Vintage Wine Trust, a real estate investment trust focused on the wine and vineyard industry, which recently announced it had signed a 10 year lease on its Huichica Hills vineyard with Jackson Family Investments LLC, an affiliate of Kendall Jackson Wine Estates.

Vintage Wine Trust is the first REIT in the US to focus solely on vineyards, wineries, and other wine-related assets. Acquiring properties and net leasing them to either the sellers or third parties allows the wineries, producers, and grape growers the potential to increase profitability and returns by providing access to capital previously locked into the real estate, while at the same time permitting them to maintain or obtain operational control of the asset. As an investment, it is really exposed to the dynamics and relative profitability of the US wine industry, as it does not currently pursue a global mandate.

The VWT currently owns eight properties, consisting of two winery facilities, and six vineyards totally 4618 acres, located in various Californian wine regions. Taking the recent Huichica Hills deal as an example, the VWT originally purchased the vineyard, which is located in the Carneros region of both Napa and Sonoma counties, for $30 million, and leased the property back to Constellation Wines for a term of two years. The new lease, effective 1 July, has a base vineyard value of $31 million, a 2% annual rent escalator, and options to purchase for the lessee effectively midway through the initial lease term, and each year thereafter.

The VWT mortgaged the Huichica Hills property with Rabobank International. Under the terms of the loan, the VWT borrowed $21 million, at a rate of interest equal to the three month LIBOR rate plus 1.5%. Concurrent with this borrowing, it executed an interest rate swap, fixing the rate at 7.1% over the term of the loan, which matures on 1 October 2016. Joseph Ciatti, chairman and CEO of the VWT, said he thought the Huichica deal was indicative of the trust's ability to enhance its growth strategy through improved leasing opportunities.

Those looking to diversify beyond the confines of California do have other options: for example, the Challenger Wine Trust (formerly known as the Challenger Beston Wine Trust), listed on the Australian Stock Exchange, follows a similar strategy to that espoused by the VWT, but concentrating on properties in Australia and New Zealand. It owns a broad portfolio of properties, built up since it launched in 1999, including three in New Zealand's Hawkes Bay region, and six in Australia's Hunter Valley. However, enthusiastic wine investors need to tread carefully: over the last 12 months, the trust was down 17.4% in local currency terms. It has also lost money over the three year timeframe, in direct contrast with the bonanza that Australia-listed property trusts have been experiencing since 2004.