Wealth of knowledge

Wealth of knowledge

Luxury investments are more enjoyable than equities, bonds and cash, but are they astute? By Silke Colquhoun

For the owners of Whisky Baron, winner of this year’s R5 million Met, investing in a racehorse was a smart move. The four-year-old gelding cost about R490 000 as a yearling and thundered to his fifth victory in a row at Kenilworth Racecourse.

Despite his earnings (R3.37 million to date), the 2017 Wealth Report by Knight Frank rained on Whisky Baron’s parade. ‘Some horses are incredibly successful, but racehorse ownership should not be seen as an investment,’ says the report, now in its eleventh year. Buying a share in a racehorse is ‘perhaps the ultimate example of luxury assets,’ it continues, but the owner’s goal should be creating a sense of community and shared exhilaration rather than purely financial rewards.

LUXURY PURCHASE VS INVESTMENT

So what makes for a good luxury investment? Does splashing out on a vintage watch or pink diamond count? What about quirky artwork or the classic car in the showroom? The answer is: Ja, well, no, maybe.

Spending a wad of money on luxury items does not automatically qualify as an investment; sometimes it’s simply a luxury purchase.

‘Quality, rarity, desirability and uniqueness become significant criteria which come into play when a luxury item evolves into an investment,’ says Stefan Hundt, who heads up Sanlam Private Wealth’s (SPW) Art Advisory Service. ‘They are often acquired during a process of lifestyle improvement and the investment return only becomes of serious interest later on.

‘Collecting these items can be pursued with the objective of expanding and diversifying an existing investment portfolio; in this case the purchase becomes a “luxury investment”.’

Asked whether there’s a ballpark figure that turns a collectable, for instance visual art, into an investment, Craig Mark, director of The Melrose Gallery, which specialises in contemporary African art, says: ‘I don’t really believe that there’s a cost threshold that determines whether an artwork is an investment or not. We were selling wonderful Irma Sterns for R30 000 two decades ago and one could expect to pay several million for the same works today.’

Philip Faure, global head of wealth advisory at Standard Bank Group, makes a slight distinction between ‘passion investments’ (collectables including cars, wine, art, stamps, coins, rare jewellery and antique furniture) and ‘luxury investments’ (private jets, yachts, horses and even sports teams). He says: ‘The primary motivator for buying is in most cases personal enjoyment, before capital appreciation and status.’

However, a basic rule of thumb goes like this: WealthInsight’s 2020 Foresight Report: A luxury investment considers all those investments that ‘can be seen as “luxury” in that they can be admired, worn, displayed, consumed or driven, while their value rises’.

AFRICAN RICHES

One third of Africa’s ultra high-net-worth individuals (UHNWI) – whose wealth is at least US$30 million excluding their primary residences – already collect investments of passion. This is on par with their counterparts in the Middle East and slightly below the global average of 35%, but behind Latin America (46%), North America (44%) and Europe (39%).

The portfolio of the average UHNWI currently looks like this: 25% Investments (equities, bond, cash and precious metals), 24% real estate (excluding primary and second homes), 23% primary residences and second homes, 16% personal business, 6% collectables (art, cars, wine, etc) and 6% other.

When it comes to spending patterns, there are some dramatic geographical differences. The 2016 Luxury Spending Index by Wealth-X shows, for instance, that Africa’s UHNWIs are twice more likely than the global average to own a private jet and 1.55 times more likely to own a luxury car (worth more than US$100 000).

Yet yachting, the ultimate sanctuary for privacy and quality time, is tremendously popular in the Pacific region, but below global average in Africa, Asia and North America. UHNWIs in Europe – who tend to have inherited ‘old money’, along with high-brow cultural values – display quite a strong affinity for fine wine, antiques, art, jewellery and watches.

Wealth-X explains Africa’s high demand for private jets with the continent’s poor commercial travel infrastructure and vast distances between business hubs. It goes on to state: ‘Although wealth in Africa is extremely concentrated in certain countries, we see growing potential for luxury brands including high-end auto marques. Despite ongoing difficult economic conditions in many emerging markets, the appetite of wealthy collectors hasn’t diminished.’

KNOWLEDGE IS KEY

Before you decide to invest in luxury assets, research the market and pay for quality independent advice. Unregulated markets remain a ‘breeding ground for scoundrels,’ says Hundt.

‘The art market is very different to the financial markets. There is no exchange or supermarket where artworks can be picked off the shelf.

‘Auctioneers and art dealers may provide good advice, but this may not be independent of their investment in stock.

‘If an art dealer is not prepared to buy back or sell the artworks you purchased from them a few years ago for at least the price you paid, they are honestly not worth dealing with. Most professional dealerships are eager and willing to resell items for valued clients.’

Sanlam’s advisory service does not actively source or trade in artworks for investment purposes. Meanwhile, Standard Bank has formed partnerships to facilitate any client requests: With Knight Frank for property, Henley and Partners for offshore residence and Berry Brothers for wine.

It’s worth noting that investment-grade wine has surged to the top of the 2016 Knight Frank Luxury Investment Index, with an annual increase of 24%, compared to just 9% growth for the winner of 2015, classic cars.

The value of vintage cars has steadily increased over the past two decades. Leon Strümpher, portfolio manager at SPW’s Knysna branch, suggests looking at the younger classics (1970s, 1980s and early 1990s): ‘The key is to get a vehicle from a good marque, such as the German, British and American brands, before there is great demand for that model.’

For vintage watches, the 1960s and ’70s are among the most collectable, according to Philip Zetler, owner of Philip Zetler Jewellers. Also, antique pocket watches and vintage wristwatches are often more sought-after than modern pieces. ‘It’s always nice if it comes in the box with papers of authenticity, certified by a dealer or agent, and it should also still have all its original dials and hands. Collectors often prefer a watch just as it is – without it even being polished up or repaired.’

RISK FACTOR

Luxury investments can be a growth asset and hedge against inflation, but there is still risk attached.

‘The value of a luxury item is often difficult to determine (how much is a rare watch really worth and is it genuine?) and is frequently driven by emotion, passion and current sentiment,’ says Faure.

‘Certain assets are definitely safer than others to invest in, especially when they are able to generate a return of some kind, or it’s reasonably easy to establish a market value. A private jet, for instance, is probably one of the better investments out there, being a dollar-based asset and able to generate a return even when not being used.’

It is also worth bearing in mind that luxury investments are primarily for your personal enjoyment, with money you will most likely never need.

Or as Faure puts it, ‘The bottom line is: If you can afford it, then by all means, enjoy it. Aim to get your money back after you have lost interest in the item or moved on, but consider a return to be a bonus.’

Photography: Gallo/GettyImages

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