What are luxury investments? Where do the rich invest their money?

Art, watches, jewellery and coins have emerged as the best performing passive luxury investments in the twelve months ended June 2023, as per Knight Frank's luxury investment Index. 

What are luxury investments or, as they are also often referred to, investments of passion? 

Passion Investing is about collecting your object of desire or investing in them to turn your passion into profits.  For instance, sporting a Hermes handbag or a Patek Phillippe wristwatch. In the process, they sometimes also gain from the appreciation of its market value.

"There needs to be similar elements to any other investment market – liquidity (a community of likeminded collectors really helps); accessible trading platforms to allow you to buy and sell; the potential for values to rise over the long term (that’s why we don’t put private jets or superyachts in this category); and, preferably, some element of data that allows market performance to be tracked. Second, and crucially, collecting the asset class in question must be enjoyable regardless of any change in value. If no passion is involved, if the joy of ownership doesn’t make up for any potential drop in value, then it’s just another investment," said Andrew Shirley, head of research, Knight Frank India. 

 

The luxury investment index

The property consultancy’s Luxury Investment Index, which tracked a weighted basket of 10 luxury goods  was driven by growth in the art market. The art portion of the basket saw growth of 30 per cent, while other luxury goods saw more modest increases,  with watches and jewellery each growing by 10 per cent in value, and investments in cars and wine both rising by five per cent. Only rare whisky investments fell in the index, by 4 per cent, while investments in furniture remained flat.

Cars have a mixed performance
Despite the car market being up 5% on an annual basis, it has fallen 7% so far this year.

“The performance of classic cars has been mixed,” said Dietrich Hatlapa of data provider HAGI. “After a strong performance in 2022 when the value of the most investable classic cars rose by 25%, this year has seen the market slip into reverse gear due to macro-economic factors.”

. Ferrari saw the biggest drop slipping by just over 15%. However, not all cars are skidding off the track. HAGI’s Lamborghini Index is up 9% so far this year, as is its new BMW index. “These cars tend to be a bit newer and offer low price points for collectors,” says Dietrich. “

Among bags, Hermès remains the most popular brand at auction, with smaller examples (such as the Kelly 25 and Birkin 25) proving particularly popular with buyers over larger designs. . Chanel, too, remains popular, particularly as Chanel has in place a handbag quota, meaning that they are limiting the supply of handbags available on the primary market, so people are looking to auction for luxury purchases.

Rare whisley sees negative growth

Rare bottles of whisky, the strongest 10-year performer in the Knight Frank Luxury Investment Index, are the only asset class to see a negative annual performance, according to the index.
 

Bottles of rare whisky have had a far more sedate time from a performance perspective over the past hree years, as per  Andy Simpson of industry consultant Simpson Reserved.

“Higher value (over £5,000) bottles have re-traced recently due to a myriad of geo-political, social and economic reasons. Certain brands have still performed well, while the market leader (from a sheer volume of market perspective), Macallan, has

seen particularly punishing losses with its index re-tracing almost 12% over the past twelve months,” said Simpson.

Coloured diamonds come in eighth place in the index, up 4% in the year to the end of Q2 2023 as coloured diamonds enjoy a rise in interest. 

 

Overall, the luxury goods basket grew seven per cent, providing ‘credible’ returns for ultra high net worth individuals, the firm said. Gains were higher than the FTSE 100 equities index, which rose by five per cent, and house prices in prime central London, which grew by only one per cent.

Proportion of investable wealth allocated to various asset classes by Indian ultra-rich individuals

In India, only 4 per cent of ultra high net worth Indians are expected to purchase assets which are passion driven rather than monetary gains. Art, watches, and luxury handbags remain the most sought-after investment of passion in 2023 with 53% of UHNWIs likely to make a purchase in them. Classic cars, wine and furniture are the second most sought passion led investments for 2023.

Passion investments likely to be purchased in 2023

Should you invest? 

"Passion investing cannot be linked to your life goals. Otherwise, it might affect your progress towards the goal. Contrary to popular opinion, prices of passion assets are strongly correlated to primary assets like stocks and bonds," according to Scripbox.

With the onslaught of the pandemic, the art market took a dip along with equity markets while sales dipped for coins and coloured diamonds. 

So, buy passion assets for the sheer joy of owning it and not for gaining returns. Ensure you have considerable knowledge about it while doing homework to determine its authenticity, provenance and legal ownership.