The institutionalisation of terroir
Adam Feil sends the following report on the influx of institutional capital into the world’s vineyards, based on his graduate work at Columbia University, which garnered the thesis award. Prior to graduate school, Adam attended Lehigh University and worked in the financial services arena. He has also received certifications from the American Sommelier Association, WSET, and worked crush in the Russian River Valley.
The Kimmeridgian clay of Chablis. The alluvial benchlands of Napa. The gravelly loam along the Gironde and Garonne in Bordeaux. Replete with rolling hectares of vines and grand estates, they have long conjured mysticism, capturing the souls of idealistic visionaries the world over. With an unrelenting passion and entrepreneurial mindset, a fresh set of eyes have now cast their sights on these prized locales, albeit with slightly different intentions. While many have sought these sublime terroirs in pursuit of producing the pinnacle of libations, others have begun to position themselves from a capitalistic vantage point, trading the rent rolls of office buildings for the tonnage of Cabernet.
When engaging a glass of Lascombes, it’s easy to envision the vignerons of Bordeaux tilling the soil, yet few probably know the well-heeled institution behind the bottle and recent resurgence in quality. The landscape has changed over the past decade, as an influx of capital into the sector has brought about an air of legitimacy and credibility from an investment standpoint. Ranging from opportunistic and distressed players to Real Estate Investment Trusts (REITs) and entrepreneurs, investors have managed to deploy capital to the sector with increasing success.
Strategies, much like the regions and varietals pursued, run the gamut. Companies such as AXA Millésimes, the vineyard investment arm of the insurance conglomerate, seek to revitalize historic properties with a focus on premium terroir, whereas Premier Pacific Vineyards pursues “ground-up” developments in the high-end regions across the west coast of the United States. While some firms preach cash flow and portfolio diversification, returning yields in the 10-20% range, others seek to promote a longer-term capital approach, repositioning individual assets and adding value to the properties (via varietal replanting, improved viticultural/vinification techniques, etc); capturing the value inherent in premium vineyard land and seeking to generate returns in the 20-25% realm. It is difficult to assign a preference to one strategy over another, simply because it is dependent on the specific investor’s ultimate goals; inclusive of risk tolerance, time horizon, return projections, cash flow objectives, etc.
Not surprisingly, efforts to gain a foothold and competitive advantage have brought investors to every corner of the globe; from the south of France and Portugal, to California, New Zealand and Australia, the premium regions of Sonoma and Coonawarra, to lesser known areas such as Lodi and the Languedoc.
- Premier Pacific Vineyards, a Napa based firm, has raised two funds, totalling approximately $200 million (mostly from CalPERS). Currently they are in the process of raising a third fund for an additional $250 million to develop premium vineyards (development time frame is generally 4-6 years) throughout California, Oregon and Washington. Thus far, they have concentrated on the high-end varietals (Pinot Noir, Cabernet Sauvignon, Cabernet Franc, Merlot, Chardonnay), seeking to maximize quality and expression of terroir. On average, they look to generate returns in the 14%-20%+ range.
- AXA Millésimes, headed by Christian Seely, controls Grand Cru quality properties throughout France, Portugal and Hungary. Names include Pichon Longueville (Baron), Quinta do Noval, Château Suduiraut, among others. They expound the mantra of quality over quantity; diversifying their properties geographically as well as stylistically, while taking a long-term approach. Currently AXA is looking to expand their holdings, possibly extending to Spain, New Zealand, or locales that fit within their dedicated philosophy.
- Silverado Premium Properties, located in Napa, controls a portfolio of vineyard properties across California and its various AVAs, totalling approximately $350 - $400 million (spanning roughly 7000 acres). They seek to blend cash-flow yield with underlying capital appreciation of the vineyards. One of the early investors was Colony Capital (owner of Château Lascombes), and subsequently the firm has attracted capital from the likes of Harvard Management Corporation and financial services company John Hancock.
- The European Wine Investment Fund, spearheaded by a triumvirate including Michel Rolland, has recently been established to purchase premium properties (as well as pursue other wine related strategies) throughout Europe; primarily focusing on France, Italy, Portugal and Spain.
- Vintage Wine Trust, the first US vineyard dedicated REIT has deployed approximately $141 million as of September 2006, seeking returns of 7-11% through sale-leasebacks for their investors.
- Challenger Wine Trust, (originally known as Beston Wine Industry Trust) currently has properties staggered throughout Australia and New Zealand, diversified across varietals, regions (warm and cool climates,) and tenants. Total assets are approaching $300 Million, have they have sought to return 10%+ to their investors since inception.
- Société Générale was one of the first firms to recognize the appeal of vineyards as investments, establishing investment vehicles in the 1980s with an eye towards longer term growth.
- Fortress Investments Group, a $26 billion investment group, commenced their involvement in the sector by purchasing the Baritelle vineyard in Napa last year. They view this as a long term hold, with a potential time horizon of 10-15 years, if not longer, seeking to maintain and improve the property while capturing the
- And the list goes on to include the likes ofCrédit Agricole, SAIAGRICOLA, LVHM, Crédit Foncier, Great Southern Plantations, MAIF, Assurances Générales de France (AGF), etc, etc
As glamorous and “sexy” as the sector may appear to some, vineyard investment is far from stable and secure and does not fit everyone’s risk/return profile. Despite the success of numerous ventures in the sector, the space is wrought with peril for those who fail to ascertain the risks involved. At its core, the business is grounded in an agricultural foundation, beholden to factors that many investors are unaccustomed to dealing with. As Christian Seely eloquently put it, “You are always looking towards the heavens”, dealing with weather related phenomena, intensive capital outlay, long lag-time in cash flow from ground-up projects, varietal cyclicality and rapidly shifting consumption trends can all bring about changes that are at times difficult to prepare for.
- The average Napa vineyard value has appreciated at an approximate annual growth rate of 12% since 1967, far outpacing many of the stock indices over the same time frame.
- Burgundy vineyards have averaged approximately 5% growth over the past 30 years.
- Top properties in Bordeaux, depending on specific commune, site and classification, have increased at an average of approximately 10 -15% over the past 25 years, though many of the generic sites in lesser appellations have not fared nearly as well.
The value of good terroir is undeniable, especially in the institutional space. The properties with the ability to fully express a variety’s potential, (characteristics in a noteworthy and consistent fashion), will always in be demand, generally commanding the highest prices. Different locations have the ability to define a varietal and express its location with better success than others.
Premium land is finite, it’s that simple. The primary difficulty with this investment angle, and it is a significant one, is that the majority of quality land in many of the worlds most sought-after regions has already been fully developed. That’s not to say there aren’t pockets still available, or perhaps land that has been “misappropriated” to the wrong variety or varieties, but this is a critical barrier to entry. Additionally, there is generally a natural resistance to selling the top properties, as they are perceived by many as “the family jewels.”
A GLOBAL PERSPECTIVE
- A March 2005 study by MKF Research on California vineyards concluded that high-end wine producers in California will need to plant as many as 18,000 additional acres of top-quality vineyards by 2010 to keep up with demand.
- An estimated $13.7 billion aggregate value of California vineyards and $14.1
billion of wineries represents a potentially significant untapped investment opportunity.
- Average cost of vineyard land in Napa, already planted, is approximately $180,000 per acre (though some can be much higher), and unplanted is approximately $90,000 (though again, there is a vast range). Development costs range from $25,000-$40,000 per acre, and operating expenses add an additional $4,500 per acre to the price tag. In Maipo, Chile on the other hand, unplanted land can cost in the $5,000 per acre range, and Lujan de Cayo, Argentina, is roughly $4,000 per acre.
- Many of the vineyard prices across France have fallen precipitously in recent years. The price of a generic Bordeaux property has essentially been cut in half, from approximately $22,000 an acre in the late 1990s to $11,000 in recent years; potentially presenting clusters of opportunity for a knowledgeable and discerning investor.
- Within Bordeaux, many of the communes, such St Emilion, St Estephe , and Entre-Deux-Mers (in addition to others) have been hit particularly hard. Within the past year, a St Emilion Grand Cru Classé could be had for roughly $240,000 per acre – down around 40% in just a few years. However, the Classified Growths of Bordeaux have been able to maintain their pricing power during this difficult time, commanding upwards of several hundred thousand dollars per acre, (potentially higher) depending on the property.
- Institutional investors, such as Credit Agricole, in addition to some international firms, have begun to look at potential investment opportunities to expand their portfolios, yet at the same time are being extremely cautious and selective in their approach.
- Over the past decade, there has been an 88% increase in total vineyard acreage planted, leading to oversupply of grapes and a depression in many of the property values.
- On a per acre basis, Australian vineyard values are for the most part lower than those in the US, Europe and New Zealand, presenting opportunities for those with the patience and capital to wait through the current grape glut.
California’s premium regions, such as Napa and Sonoma, despite their apparent lofty valuations, are comparatively inexpensive, (as least on a per acre basis, not necessarily from a cap rate perspective), when compared with some of their peers around the world. Inevitably, global land values should converge. On the international front, it does not appear that the values of the Grand Crus of Burgundy or the Classified Growths of Bordeaux will enter a recession at any point soon, despite the collapse of many of the generic Bordeaux properties and other wine regions throughout France. These areas possess a history and mystique (partially forged by the classification systems employed by each region respectively) that the New World regions cannot yet possibly match, yet on a quality level, are on equal footing. Over time, in addition to a superior product, branding and marketing techniques such as single vineyard designations will play a critical role in leveling the playing field.
Caution, though, as with any investment, is needed. This niche combines a unique and challenging skill set: knowledge of the wine industry and its markets, an operational team well honed and dedicated to agriculture and marketing, and, of course, real estate and financial savvy. The field is becoming increasingly more crowded, and with available land diminishing quickly, Darwinism will ultimately prevail.
A remarkable facet of this sector is the passion and genuine interest that the participants have demonstrated in creating a better product and promoting an environmentally sustainable situation for generations to come. The introduction of outside capital to a relatively guarded space such as the vineyard segment is always viewed with a degree of hesitation, though in many it has been a welcome addition thus far. Under the careful watch of the industry’s old guard, it should remain that way, enhancing the overall global vineyard landscape for years to come.
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