Investing in South African wine

There's been a lot of talk of late about the potential of buying South Africa's fine wines as investments. This is a completely new development, and it's not without its sceptics. But many think the fact that it is being talked about suggests that South Africa's top wines have come of age.

Wine investment is nothing new. The classic well-to-do English wine connoisseur would typically buy more Bordeaux en primeur (the process by which the top wines are offered in the spring following the vintage as futures, before they are even bottled) than he or she needed. Typically, between buying the wines and drinking them, the value of the wines would have increased, so they would sell off some of their wine and, if they were lucky, drink for free.

Over the years, investment in the top wines of Bordeaux, and latterly Burgundy and selected top examples from California, Australia and Tuscany, has grown to the point that people with no intention of drinking the wines will use them as an investment vehicle. The wines are typically sold en primeur or on release, and then are kept in temperature controlled storage 'in bond' (without duty having been paid), and then traded on. It's big business, and wine is regularly auctioned in Europe, the USA and increasingly the far east for eye-watering sums.

Because of the increased global interest in fine wine, and the fact that supply is naturally limited, prices have kept climbing. Initially, wine investment was confined to just the top wines of Bordeaux: a select group of classed-growth Châteaux from the left bank and the top properties from Pomerol and Saint-Emilion on the right bank. But with growing interest, wines from other top regions of France, such as Champagne, Burgundy and the Rhône, have also joined the party, along with the top wines of Italy (super-Tuscans and Barolos), and selected celebrity wines from Australia, California and Spain.

So what constitutes an investment wine? The first requirement is that the wine can actually age, and by this I mean it can improve with cellaring, and not just survive. The wine has to have the potential of developing not just only over a decade, but over a prolonged period of, say, 50 years. The top wines of Bordeaux have traditionally been 50 year wines, at least. If all that expensive Bordeaux hanging around in warehouses was not ageing nicely, then there would be a problem: if people start popping corks on wines that are 15 years old and they are beginning to look a bit tired, then the whole venture is called into question.

Secondly, there must be strong demand for the wine. There are lots of wines that can age 50 years that simply don't have strong enough collector demand, and they will never be in short supply. Ultimately, it's the imbalance between demand and supply that causes prices to rise. And for a wine to be worthy of investment attention, it must have a track record of price rises. After all, once you have bought your wine, you have to pay to have it stored professionally, and there's also inflation to take into account. You have sunk money into this investment, so profit will only come after you've paid of the capital appreciation and the storage charges, plus any auction or merchant fees when you resell.

Third, the wine must be liquid. By this, I'm not referring to what's in the bottle. The wine must be traded enough that people have a strong idea of what it is worth, and there must be a marketplace through which you can resell the wine when you want to realise your profits.

And, fourthly, the wine must have provenance. It's important that you can account for its history, and particularly its authenticity and where it has been stored. The auction market hasn't always taken this as seriously as it should have, and there are lots of questionable fine wines on the market both in terms of storage history and, these days more importantly, authenticity. There are a lot of fakes of famous wines out there.

So, what about investing in South African wine? In the past, South Africa didn't really have any wines that could claim to be a sound bet for investment, but this seems to be changing, at least according to some key figures in the Cape wine scene. Mike Ratcliffe of Vilafonte has seen the potential importance of the overseas luxury market in promoting his wines, and believes that the top South African wines are undervalued. He has a business model where he keeps back extensive stock of the Vilafonte wines, and then offers library releases at much higher prices that the current release. These have typically sold very well, suggesting that there is a market out there for prestige South African wine.

There is no doubt that the top South African wines from the 1950s and 1960s can age beautifully. On a number of occasions, I've been lucky to drink bottles from 40 or 50 years ago that have matured fantastically, and would belong in the same peer group as similarly aged wines from just about anywhere. A 1957 Château Libertas drunk in September was one of my wines of the year. Or maybe the decade!

Through the 1990s a lot changed in the South African wine scene. Winemaking changed, and there was an increasing tendency to make riper wines with more obvious oak character. As a result, much of the historic continuity was lost, and so it's not so easy to say that the wines that were celebrated in the 1990s and 2000s have the proven ability to age: to an extent, the clock was switched back to zero. But now we have enough wines with a more recent track record for ageability, plus growing demand, and people are thinking seriously about the investment potential of top bottles. Well known UK-based critic Tim Atkin also recently anointed the Kanonkop Paul Sauer 2015 with a 100 point score, and this has already caused the market price of this new release wine to jump significantly. This is the first stage in creating an investment scene: a gap between new release and secondary market prices.

Roland Peens, of premium South African wine merchant Wine Cellar, has recently launched an investment service for collectors. Initially, he is focusing on the handful of wines that he thinks fit investment criteria. In addition to Kanonkop's Paul Sauer, and also its Pinotage, he adds the likes of Boekenhoutskloof Syrah, Sadie Columella and Klein Constantia Vin de Constance. There are many others that potentially could join this list, when they have established a track record for ageing, and also significant demand.

It is vital, though, that any wines bought with resale in mind, are professionally stored in temperature controlled conditions. As with any investment, there is risk. If the investment world wakes up to South Africa's top wines, prices could go up significantly. But the risk is that if release prices from wineries rise too much, then there will be little upside for investors. This is already becoming an issue with top Bordeaux: each year there is a dance between Châteaux and potential purchasers when it comes to setting the release price, and its not uncommon now to see market price below release price a few years after the initial offer.

So if you are thinking of getting in early and investing in South Africa's top wines, my last piece of advice is this: only buy wines that you are happy to drink, should your investment strategy not work out!

- Jamie Goode