An investment to mull over

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One of the New Zealand success stories of the 1990s has been the strong performance of the wine industry. Should you own part of it?

Tuesday, January 13th 1998, 12:00AM

by Philip Macalister

One of the New Zealand success stories of the 1990s has been the strong performance of the wine industry.
It's best illustrated by two measures. One is the number of international awards the industry has won for the quality of its beverages, and the other is the massive growth in exports.
Since 1987 the volume of exports has risen from just 1 million litres to 13.1 million litres in 1997, and during the same period the export value has ballooned from $4.5 million to nearly $76 million.
The other significant trend in New Zealand has been the shift from beer and spirit drinking to wine. Since 1987 beer consumption has fallen 20.2 per cent in volume terms and spirit sales have declined by nearly 28 per cent.
These trends, plus a growing demand for premium New Zealand wines in offshore markets such as the United Kingdom are all positive factors for the industry. That's borne out in Wine Institute statistics which show the number of winemakers has doubled in seven years, and production vineyard area has increased 41 per cent to 7300 ha over that period. What's more another 900ha is expected to be added to the national estate over the next two years.
Investing in vineyards is something that tends to appeal to high net-worth individuals. Besides the pleasant associations of quaffing one's own vintage, there is often the ability to use such an investment to minimise tax liabilities and to help build up a retirement asset that will produce substantial income in future years.
There are various options for investors to consider when looking at vineyards. One is to take the corporate route and buy shares on the Stock Exchange in either Corporate Investments (CIL) which owns the country's biggest winemaker Montana, or DB Group which owns Corbans Wines the second biggest producer.
Montana accounts for 77 per cent of CIL's assets, and it has been the main driver of the group's strong share price recovery. Montana has about 43 per cent of the domestic market share and is upbeat on export prospects in the UK, Australia and the United States.
It has budgeted for capital expenditure of $15 million in the current year and the overall expansion programme is anticipated to see exports rise in the next five years.
Corbans is harder to get a handle on as DB does not itemise the winemaker's contribution to group earnings. However, Corbans has about 28 per cent of the domestic market and it accounts for just under a third of DB's total earnings.
While Corbans is thought to be less profitable than Montana, DB has adopted an aggressive growth strategy for the business and is nurturing it along after the group spent a period under the control of Brierley Investments.
Besides the listed share route investors are also presented, from time to time, with the opportunity of joint ventures or partnerships.
These allow investors to get closer to the asset and have some say in their running, and generally relate to just a vineyard, rather than a winery.
The latest offering is the 63ha Brackenfield Estate vineyard in Marlborough's Awatere Valley that is being promoted by Farmers Mutual Group.
The vineyard has been divided into 265 units, priced at $8430 paid over three years, and is projected to have an internal rate of return of 8.81 per cent over the first 15 years, after accounting for tax at 33 per cent.
FMG earlier promoted the Medway vineyard, further up the Awatere Valley, which was sold as 90 units at $27,000 each.
An feature of both FMG's vineyards is just that. They are vineyards and will produce grapes for someone else to convert into wine.
At some stage FMG may look to putting together a winery to process the grapes from both properties, but that is sometime in the future.
Since it takes three years until the vines start producing grapes, investors can use the early vineyard losses to reduce their personal tax liabilities.
Buying listed shares doesn't provide an investor with the tax credits a partnership may offer, however they do offer investors liquidity and the ability to exit their holdings easily at a price determined by the market on the day.
Partnerships can be more difficult to get out of and the exit price may be at a discount to the vineyard's underlying value.
Bell Gully partner David McGregor says in the latest BOMA news that there are four crucial issues for prospective vineyard investors to consider before ploughing their money into the ground in the hope of making juicy profits. The venture should have:

• A sound grape supply contract with minimum pricing for a fixed term with a major company. The financial substance of the grape purchase underpins the yield of a credible project
• The manager must be reputable and have appropriate viticultural expertise, although a consultancy in respect of the latter could suffice.
• Land in a premium or very promising area with the right soil profile supported by a viticultural report and a reputable viticulturist. Although investors will always prefer a freehold interest in land, many viticulture projects are only available on a leasehold basis.
• A good environment regime. For example there should be access to water and a regulatory requirement that encourages grape growing.
• It is important to ensure the premium grapes are the right varieties for the area.

Owning a vineyard or a winery has a romantic appeal, but like many romances there can be bad times. People considering such an investment should be realistic about the financial returns and remember some vintages never reach their full potential, while others can exceed expectations.
Investing in a wine should be, like a good romance and last for a long-time.

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