According to the Knight Frank Luxury Investment Index, rare whisky was the best-performing luxury asset between Q2 2010 and Q2 2020. Its value climbed a staggering 535%, outpacing the second best-performing luxury item, cars, more than two-fold.
With such an eye-catching track record, Scotch whisky is becoming a serious consideration for investors. UKV International, a Swiss based Fine Wine and Whisky company, agree values have seen a dramatic increase, but suggest more conservative uplifts of 10-20% pa to collectors. They go on to state since 2021 they have witnessed unprecedented demand for the spirit, and a noticeable swing from Fine Wine sales to single malt cask whisky that accounted for a 97.3% increase on UKV’s 2020 turnover.
Oliver O’Donovan, European Sales Director for the company said, “we believe this is largely due to greater awareness through media articles and government announcements of new post Brexit trade deals that highlight the size and potential of the market.” UKV find that new clients who wish to develop whisky collections usually want to diversify and help hedge mainstream positions. “In our opinion, whisky shows consistency as an alternative investment vehicle as there is a lack of direct correlation to financials that can offer greater stability particularly for serious collectors and private investors.” They go on to say, “medium term performance together with HMRC tax treatment of cask whisky make it an attractive proposition for sophisticated investors and individuals in higher rate tax brackets as whisky provides a good shelter that combines stability whilst quietly making respectable tax free profits over time.”
Recent events on the UK political landscape and the Ukrainian conflict have escalated fears within many traditional markets and demonstrate the effect a grip on supply chains of consumables and utilities throughout Europe can have on markets, exchange rates and generally create a high degree of uncertainty within the financial sectors both locally and internationally. This in turn can cause an element of speculation and anxiety, particularly from private investors in regard to where to put funds at the moment.
O’Donovan added, “from the uptake we have received from new clients, which accounted for 47% of our sales to the end of Q2 this year, we believe tangible assets that are internationally tradable are becoming more popular within today’s investment world. The recent hike in interest rates and the sheer mention of the word recession will undoubtedly impact assets based on a single market as they appear more adversely affected by domestic social events and government policies. Savvy investors, it would seem, now appreciate they need to remain flexible or liquid so they can move quickly should a market show signs of a downturn or stagnation. We are therefore confident more funds are likely to enter alternative markets like whisky during the next 12-18 months as investors look to move funds further from the UK or European based markets and into emerging international arenas that are now beginning to look more attractive and less correlated to the mainstream financials.”
The reduction or removal of many tariffs by the largest international whisky consumer markets, highlights the size of the market and demand placed on existing stocks from a small number of distilleries. Currently there are only 138 distilleries operating across Scotland and a number of these are already struggling to meet optimum production due to shortages in quality raw materials and key components like barrels, cork and unbelievably bottles. This is a result of red-tape restrictions on the movement of European goods post Brexit and more recently the conflict in Ukraine which is a major contributor of wheat, barley and other grain and considered the food basket to Europe.
It is not solely about the potential returns, though. There are other, more sentimental reasons why many are considering Scotch whisky. The history, culture and highland mystery of Scotland’s finest global export draws huge interest every year by visitors from around the globe who are intrigued to see how and where the industry’s iconic brands are made.
According to the Scotch Whisky Association, in 2019, Scotland’s whisky distilleries were visited 2.2 million times, making it the country’s third most popular tourist industry. Websites selling tours and experience days are awash with Scotch whisky distillery and tasting tours. Consumers not only wish to sample fine whiskies but are intrigued to learn about the care, attention and time that goes into making their favourite brands.
How to invest
In short, there are two options: casks or bottles. Investing in bottles is the easiest option, but one should understand that this is investment into the secondary market and carries a premium, so any uplift on a percentage basis will be greatly reduced. Investment into casks is generally the better option, although this requires the assistance of a whisky broker or agent. As cask whisky is held under bond, one needs an agent, distillery or bonded facility to arrange storage and to maintain your casks until they reach maturity, when the whisky becomes suitable for bottling. Bottling however is not essential to sell on, as a large proportion of casks are sold and traded in the barrel to other investors or back to the originating distillery. A distiller, agent or broker will be able to give you the knowledge and expertise on how the process works that may prove invaluable. By using a brokerage such as UKV International, investors receive a helping hand selecting and acquiring superior rare whisky through their extensive independent network of industry contracts that includes storage providers and Duty Representatives.
Who should consider investing in the whisky market?
Being partial to a dram is not a prerequisite to becoming a Scotch whisky investor. In much the same vein as conventional investment assets such as equities and bonds, it is suitable for anyone with a long investment horizon who is prepared to accept an element of risk to their capital with the prospect of good returns. As with any investment there is an element of speculation attached, but nature of whisky and the catalyst that drives it is time and supply and demand, so the dynamics of the market are not the same as daily traded markets that see rapid movements or high volumes of sporadic activity that create unpredictable volatility.
What determines the price?
There are two key factors that determine the price of Scotch: rarity and time. As a rule of thumb, the rarer and older the product, the higher the value. Time is crucial. To be legitimately sold as Scotch whisky, new make spirit (the clear, aromatic liquid that comes off the still during the production process) must develop in a wooden barrel, in Scotland, for at least three years. It should then take around a decade to mature into a single malt. And despite each cask suffering 2% evaporation every year, Scotch whiskies tend to get better and more expensive with age, underscoring the long-term investment opportunity here.
The Scotch whisky market is far from just a domestic affair. Scotch Whisky Association data shows it is the world’s number one internationally traded spirit with exports worth almost £4bn annually. In addition, some 40 bottles of Scotch whisky are shipped from Scotland to 180 markets around the world each second, totalling over 1.1 billion every year.
A recent political development could prove a major tailwind for the market. Since January 2022, the UK government has entered talks with India to discuss slashing duties of up to 150% on whisky exports. This was further advanced by a visit by the Prime Minister in April when free trade agreements were a key topic with Indian PM Narendra Modi. If the desired deal is struck, this will boost exports of the spirit by £1 billion (US$1.2bn) over five years and provide a seismic boost to both distilleries and the wider spirits industry, opening opportunities for niche brands to broaden their global footprint. In a press release about the talks, the government stated: “A deal has the potential to almost double UK exports to India, boost our total trade by as much as £28 billion a year by 2035, and increase wages across the UK by up to £3 billion. Investment from Indian companies already supports 95,000 jobs across the UK.”
While investing for tax reasons alone is rarely advisable, sheltering investment growth from HMRC can provide a welcome boost to an investor’s ultimate proceeds. Whisky is defined as a ‘wasting asset’ for tax purposes, one with a predictable life of 50 years or less, meaning any gain is free from capital gains tax (CGT). Given the top rate of CGT for investments is 20%, this can make a marked difference to what an investor sees in returns and gets back.
Conventional assets are going through a tough time of late. Inflation is rising, interest rates – despite starting to uptick – remain low, and equity markets are volatile. Inflation-beating yields are not easy to find.
This is increasing the attraction of alternative assets, particularly those uncorrelated with traditional investments which at the very least can offer much-treasured diversification to existing portfolios.
Scotch whisky just might be the addition investors are looking for.