Rich South Africans are spending big money on this luxury item

 ·20 Aug 2023

Despite the challenging economic environment, rich South Africans are spending more on luxury wines.

According to the latest Knight Frank Luxury Investment report, luxury investments continued to show strong year-on-year growth, despite the difficult economic environment.

The Knight Frank Luxury Investment Index (KFLII), which tracks a weighted basket of 10 collectables across the world, claimed by 7% in the year ending June 2023.

Although the KFLII outperformed the FTSE 100 index’s 5% rise and gold’s 1% growth, it was still the weakest annual increase since Q2 2021. Knight Frank said that tangible assets are thus not immune to market uncertainty.

A slowdown in the wine and classic car markets where a key reason for the index’s weakened performance.

“Burgundy has been the big success story of the past decade, with prices having escalated 367% by the early autumn of 2022,” Nick Martin of Wine Owners, which compiles the Knight Frank Fine Wine Icons Index (KFFWII), said.

“However, the top of the Burgundy market peaked around that time and has since fallen by at least 9%. Published prices tend to lag realised sales, indicating that there is further to fall.”

“Whereas Burgundy is scarcity-led, Champagne is a high-volume market, with certain prestige brands’ production running into the several million of bottles per vintage release. Prices of some of those prestige cuvées have been testing price elasticity of demand and seen sales stagnate as a result.”

Martin noted that the KFFWIII only rose by 5% in the past year and is flat to date. However, he said that the heightened cost of capital may drag on the fine wine market for the rest of 2023.

“When interest rates have risen sharply to around 6%, new releases in particular, according to market economics, should be offered at a bigger discount to future value in order to convince consumers to spend on wine instead of holding cash. If wine markets are looking toppy with limited obvious upside for new releases, there’ll continue to be downward pressure exerted on secondary market prices more widely,” he said.

However, the wine market in South Africa is proving to be an exception by showing strong growth.

As measured by the KFFWIII, wealthy South Africans are spending 11% more on wine.

Australia was the only other nation to be noted for its strong growth at 8%.

Luxury market thriving in South Africa

Amidst the current economic environment, characterised by high interest rates and a weak rand, returns on traditional investments have come under greater threat. Luxury items, on the other hand, are experiencing phenomenal growth.

“Investors stand to benefit from the robust demand for luxury items locally and globally as evidenced by double-digit growth from the likes of Richemont and LVMH Moët Hennessy Louis Vuitton over the past financial year,” said Michael Zahariev of Luxity, a pre-owned luxury reseller.

“The luxury market is resilient to economic turbulence and is even outshining the majority of mainstream investment classes.”

“For example, while gold has typically been a popular investment in trying economic conditions, personal luxury goods like the Louis Vuitton Favorite handbag has outperformed this commodity over the past five years with an annual return of 263%. Gold, on the other hand, only returned 67% within the same period.”

He added that luxury items are not affected by the performance of financial markets, making them more resilient to economic fluctuations – unlike stocks and bonds.

He also noted that selling luxury goods can be a good investment, as items from renowned brands can appreciate in value.

“If the 75% increase in pre-owned luxury sales locally is anything to go by, the market is ripe for investment amongst South Africans looking for tangible value, long-term growth potential and a hedge against market volatility.”

“Not only could the low risk and high returns of luxury investments help to secure their financial futures, this could also equip them with a safety net for navigating the current economic climate.”

This is how the ten items in the KFLII have performed over the last decade:

Colour diamonds4%13%
Rare Whisky-4%322%

Read: The best wine farms in South Africa

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