Luxury spending on the rise
According to The Wealth Report 2014, Knight Frank’s annual commentary on global investment sentiments, luxury spending continues to gather pace.
Global Luxury Spending
Across the world, ultra high-net-worth individual (UHNWI) spending is predicted to increase in 2014, according to the results of The Wealth Report 2014’s ‘Attitudes Survey’, which provides a detailed insight into the attitudes of the world’s UHNWIs, from portfolio allocation to favoured investments of passion. Over a third of the survey’s respondents say they expect their clients’ spending on luxury goods to rise this year, while only 7% are predicting a fall in expenditure. European UHNWIs are likely to be the most cautious spenders – just over 30% of advisors expect their clients to spend more, compared with 41% in Latin America and 39% in Asia. The percentage of respondents expecting a dip in European UHNWI spending was also slightly higher than the global average.
‘Over 60% of respondents to the “Attitudes Survey” said pleasure was their client’s main motive for spending on collectable, or “investments of passion”’ — The Wealth Report 2014 on global luxury spending
An African Perspective
It is in Africa where we can expect to see the greatest growth, with almost half of respondents anticipating higher levels of luxury purchasing activity. A study by consultant Bain & Co. points to an 11% increase in the level of spending on luxury goods there during 2013, while the new ‘Luxury Opportunity Index’, compiled by luxury market analyst Ledbury Research for The Wealth Report, highlights the continent’s growth potential. Of the top 10 locations identified in the index, five are in Africa.
Luxury Spending in Asia
However, it is the Middle East that occupies the top three spots in the index, which tracks those countries with the fastest-growing luxury spending potential in the short and medium term by measuring growth in four areas – number of luxury retail outlets; premium air travel traffic; wealth creation; and economic growth. The US is the only developed nation to make it into the top 10, with Mexico the sole Latin American representative. Interestingly, despite the region’s economic growth, no Asian countries feature. ‘A lot of brands expanded too quickly in China,’ says James Lawson, director at Ledbury Research. ‘What they have now realised is that many Chinese consumers like to shop abroad. Prices are cheaper and there is more cachet attached to buying, say, a Gucci handbag in Milan than in Shanghai.’
According to the Boston Consulting Group’s State of Luxury 2013 report, 25% of Chinese luxury spending occurs overseas, while the findings of the Hurun Report’s ‘Chinese Luxury Consumer Survey’ indicates that 94 million Chinese tourists were likely to travel outside the country in 2013 – an increase of 15% on 2012. Almost 65% of Chinese UHNWIs say travel is their preferred leisure activity, the survey adds. ‘In absolute terms, Asia still has the largest proportion of the world’s luxury-brand outlets (see “The Luxury Opportunity Index”), but growth is slowing. Many CEOs of global luxury brands are pointing to North America as the most important market for growth over the next five years,’ says Lawson. Bain & Co. expected luxury spending to increase by 2,5% in China during 2013, compared with 4% in the US.
US and Europe’s Drivers
However, as Lawson points out, a significant proportion of luxury spending in the US, as in Europe, is now being driven by the growing number of Chinese tourists visiting the country. African UHNWIs are also helping to drive luxury markets abroad. ‘Speaking to luxury retailers, some have Nigerians as the third-highest non-EU spenders in London during 2012,’ he says.
Africa on the Horizon
Although Africa’s luxury industry is still only embryonic, with most major brands restricting themselves to South Africa for now, the sector is keeping a close eye on the continent’s increasing number of UHNWIs, says Lawson. ‘Porsche is set to enter the Kenyan market this year and there is likely to be a 50% increase in millionaire numbers in Ghana by 2016. Although we certainly aren’t predicting that the major brands will open in places like Zimbabwe any time soon, there are positive signs emerging from the country.’ Overall, Lawson expects high single-digit growth in luxury spending around the world in 2014.
Luxury Spending with Passion
One of the most fascinating areas of luxury spending is on collectible items, such as art and classic cars, which some buyers also consider investments. In the wake of the credit crunch, the media’s focus on these ‘investments of passion’ as an alternative to more mainstream asset classes like equities has grown significantly. The 175% capital growth recorded to the end of the third quarter of 2012 by the ‘Knight Frank Luxury Investment Index’ (KFLII), which tracks the performance of investments of passion in nine asset classes, outperformed the majority of more mainstream asset classes over a 10-year period. Several classes came close to, or even exceeded, gold’s stratospheric +400% increase. One year later and KFLII had grown by a further 8%, while gold had lost a quarter of its value.
Best-in-class examples continue to set auction records across most of KFLII’s categories (see ‘Record Breakers’ below), but there is a wide variation across the index. Classic cars once again posted the largest gains, with values up 28% over12 months, according to the Historic Automobile Group’s (HAGI) Top index, which tracks ‘exceptional historic automobiles’. What’s more, HAGI’s Dietrich Hatlapa says it isn’t just the most famous marques that have performed strongly.‘One of the biggest movers in our index last year was Japan’s first supercar, a Toyota 2000 GT from the late 1960s.’
Outside the world of supercars, there is growing interest from collectors in Group B rally cars like early model Aidu Quattros, especially those with a race pedigree, Hatlapa points out.
Despite being one of the least widely collected investments of passion, according to the ‘Attitudes Survey’, coins continue to perform strongly, up 10% year on year. Ian Goldbart, MD of leading auctioneer Baldwins, says the market is attracting investors. ‘Because it is not actually a very big market, a small amount of extra money can make a large difference. You only need a few keen bidders at an auction and you are likely to see new world records being set.’ The coin market has probably also been undervalued in some parts of the world, compared with other asset classes. ‘There has always been strong demand for large denomination coins in the US,’ says Goldbart, ‘but we are seeing growing interest in China, where the market has boomed over the past five years, and also India and Russia.’ Globally, there is also a very strong market for gold Roman coins. ‘They are pieces of art in their own right,’ he says.
Rare stamp values are also rising, particularly in China, India and key Commonwealth markets. The Stanley Gibbons China 200 rare stamp index rose 36% between 2011 and 2012. The British market continues to grow, albeit more slowly, says Keith Heddle, investment director at Stanley Gibbons. ‘There was a huge amount of trading in 2011 and 2012; following such a bull run, it’s not surprising that things have slowed down slightly.’
Investment demand remains strong, particularly from Hong Kong and Singaporean-based investors, but also from Australia, where investors can add collectables to their pensions via Self- Managed Super Funds (SMSFs). There is also increased interest from potential collectors in Russia, says Heddle.
Despite falling gold prices, the last 12 months have been remarkably strong for many facets of the jewellery market, says Roland Arkell, jewellery columnist for the Antiques Trade Gazette. ‘Record sums for the best untreated stones, particularly “fancy” diamonds and other coloured stones, underpin the market,’ he says, ‘but natural saltwater pearls, amber, coral and jade are equally buoyant.’
Although the art market is slightly down from its 2011 peak, according to figures from Art Market Research, contemporary and post-war works achieved record auction results last year, proving that buyers are still prepared to pay a premium for the most desirable works. The sheer range of buyers is helping to drive up prices, says Edward Shipton of art advisory firm 1858 Ltd. ‘Interest is coming from South America and new markets like Korea. In the first quarter of 2013, Christie’s reported registered buyers from 128 countries.’
Furniture is the only element to have lost ground over 10 years. Although key 20th-century pieces are rising in value, changing tastes and a move towards smaller houses have meant less demand for traditional English and French furniture, according to Will Richards, deputy chairman at Bloomsbury Auctions. But this may be changing, he says. ‘The market has reached a price point where younger collectors are getting interested in the mid-market again. And the Chinese are beginning to look at English 19th-century furniture.’
Despite the performance of KFLII, most ‘Attitudes Survey’ respondents said investment was not the prime driver for their clients. Over 60% reported personal pleasure as the main motive. However, at 22%, the proportion who said investment – for capital growth or as a ‘safe haven’ – was the driver was still significant and well above the 15% collecting for status and the 1% driven by fashion. Asian UKNWIs have the sharpest eye on investment potential, with a quarter primarily concerned with capital growth. But even those who start collecting purely for investment can often end up becoming passionate. And no-one wants to see the value of their collections fall. As Goldbart puts it, ‘There is always the hope that things will go up.’
- The Wealth Report: www.thewealthreport.net
- Bain & Co: www.bain.com
- Ledbury Research: www.ledburyresearch.com
- The Boston Consulting Group: www.bcg.com
- Hurun Report: www.hurun.net
- Historic Automobiles Group: www.historicautogroup.com
- Baldwin’s: www.baldwin.co.uk
- Stanley Gibbons: www.stanleygibbons.com
- Antique Trade Gazette: www.antiquestradegazette.com
- Art Market Research: www.artmarketresearch.com
- Bloomsbury Auctions: www.dreweatts.com
Text: Andrew Shirley