Top chateaux offer great value as Chinese get a taste for fine wines

Far-Eastern interest is changing the market for investors, say Chiara Cavaglieri and Julian Knight

It may only be 2010 but it looks like the 21st century will belong to China. With its economy set to outpace the United States as early as 2030 and nearly a quarter of the world's population speaking Chinese, signs of China's new status as a world superpower are everywhere.

Wealthy Chinese buyers are ever present in the world's auction houses, but it's in the world of fine wine where one of the quieter Chinese invasions is taking place.

Just as American and European buyers have become thin on the ground the Chinese have stepped in, accounting for 57 per cent of purchasers of the very top vintages, according to figures from wine price-tracking service Bordeaux Index. This compares to about a third of buyers coming from China prior to the global financial crisis.

"Massive wealth is being generated in China and they've caught the wine bug in a very big way," says Gary Boom, the founder of the BI. "They have both money and desire but no stock so all the great wines in the world are migrating over to Asia."

At a recent Sotheby's auction in Hong Kong Chinese investors bid for three bottles of 1869 Chateau Lafite Rothschild that went for £147,000 each, becoming the most expensive wine sold at auction. Only last month news that bottles of Lafite 2008 will be adorned with a red Chinese symbol for the figure 8 sparked an immediate price hike. In just nine days prices per case rose from £8,500 to £12,500 on the London International Vintners Exchange (Liv-ex) as investors bought by the caseload, hoping to cash in on demand from a growing number of wine aficionados in Asia. Rumours that Mouton Rothschild will commission a Chinese artist to design the label of its 2008 vintage have had a similar effect and prices rose from £4,770 to £6,370 between 3 and 15 November.

With growing interest in fine wines from new markets in the Far East and wine's historic success as an asset class, the attraction for investors is clear. In the past few years wine has easily surpassed more traditional investments – the BI is up 35 per cent since January 2008, second only to gold's increase of 69 per cent, while UK property is down 10 per cent and the FTSE 100 is down 4 per cent.

For new investors the top 20 or so Bordeaux chateaux are a good place to start. These are the equivalent to the FTSE 100 companies for stock market investors and have exhibited the best performances.

The problem for investors in the West is that with prices being pushed up so high, many of the finest wines hitting the headlines are out of reach for all but the super rich. However, experts predict that as the Chinese love affair strengthens others look cheap in comparison and represent a potential investment opportunity.

"Demand in China is brand-driven but there is also a genuine thirst for knowledge and a growing number of connoisseurs so other first growths are also moving. They may not be as strong as Lafite but they could get there," says Joss Fowler, of the merchant Berry Bros & Rudd.

"If you take the 2008 Latour, which I believe to be better wine, it will set you back around £8,500 a case, compared to over £15,000 for the Lafite 2008," he adds. "That discrepancy is too wide and I think the gaps will close in the long term."

Some experts advise against buying into wine investment funds, many of which are not under FSA regulation, as they have high initial investments and steep fees, and may offer no more expertise than a decent wine broker. Investing in the bottles themselves is the best route: a case of wine can cost as little as £500, although investors should be prepared to part with about £10,000 spread across several chateaux and vintages to create a more balanced portfolio.

For those willing to speculate, wines are usually bought at their cheapest en primeur before they are bottled and sold to the mass market, but this carries considerable risk. First, there is no guarantee that it will turn out to be a good vintage and reach the market at a higher price. It may well be that an older vintage has been overlooked by the market and because these also have greater bottle age investors could see better returns here, rather than from potentially overhyped en primeur prices.

A greater concern is the lack of regulation in the wine industry. Those forking out thousands of pounds for wine that hasn't made it to this country could be out of pocket if the merchant goes bust. The safest route, therefore, is to stick with established, reputable wine brokers such as Berry Bros & Rudd, Farr Vintners and Dunbar Fine Wine, which will typically take a 10 per cent commission when it's time to sell. Without proper temperature and humidity controls fine wines can be ruined, so merchants can arrange for the wine to be kept in a bonded warehouse, which costs around £10 a case, per year. This also enables investors to avoid paying duty and VAT on the purchase price until the wine is withdrawn.

As with any investment, the key for investors is to do their research, taking note of wine critics such as Robert Parker Jnr, who scores wines out of 100 and has considerable influence in the industry. Above all, investors must recognise that as with the stock market, wine prices can fall as well as rise and vintages may fall in and out of favour so they should never rely on a quick return.

Expert View

Gary Boom, Founder of Bordeaux Index

"The Chinese market is not going to fall out of love with fine wine; from an investment point of view this

is one the easiest investment stories going. They have both the money and the desire, but no stock so all the great wines in the world are migrating over."