Storage with style

Fine wine storage in Hong Kong is becoming increasingly sophisticated and this in keeping with the need for provenance at auction.

ON THE face of it, with its premium on space and often sweltering temperatures, Hong Kong must be a nightmare place for collecting, storing and distributing fine wines and yet it is now one of the biggest international hubs (though Singapore may be catching up fast, see box out). Since the abolition of wine VAT and general sales tax in February 2008, Hong Kong has shot up in terms of importance in the fine wine world.

According to the Hong Kong Commerce and Economic Development Bureau, between 2008 and 2013 wine imports by value went up from HK$2.8 billion to $8bn (though the peak was $9.7bn in 2011), while volume went up from 30.4m litres to 50.1m over the same period. However, re-exports don’t take up quite as much of the value, $1.6bn in 2013 but they do rather more of the volume, 19.1m litres, so around 20% and 38% of their respective totals.

As Hong Kong has abolished tax the concept of “bonded” warehouses is no longer relevant there but that does not mean that reliable storage isn’t, in fact it’s as important as ever. There’s no doubt that the recent austerity drive in China has hit the wine and luxury drinks market hard and it has affected Hong Kong too.

As Carol Wing, managing director of Golden Vintage International, points out: “Hong Kong was one of the key suppliers of fine wine to China in the past through different distribution channels. Indirectly, HK’s fine wine market was always influenced.”

However, Hong Kong is not completely dependent on China or even Hong Kongers. Hubert Li, managing director of Hong Kong Wine Vault, points out the reality: “Demand is strong for quality wine storage, and this demand is not just from locals, but also private clients from China, Taiwan, Thailand and other surrounding countries.”

Not everything is so rosy though, Jeremy Pearson of London City Bond reports: “Bonded warehousing has changed as the trade has become more competitive.”

Bonded warehouses in the UK now need several hubs to deal with clients across the sovereign state as well as installing systems that can deal with everything from a single bottle to hundreds of pallets at a time. “LCB handles 17 million cases a year,” he says. “That gives us critical mass.”

Those who don’t have this or who failed to adapt have closed down and in Hong Kong the story is much the same. Li comments: “Today, there are still new people opening storage companies, but I also see storage companies closing down.

After all, the capital investment is high and not many of them had the reputation, economies of scale and customer base to make it a sustainable business.”

Fine wine is now so valuable that fine wine storage and warehouse operators cannot afford to be slow off the mark. Despite many forecasting a contraction in the Hong Kong market (and expansion elsewhere in Asia) Asian collectors want good storage and many have exacting standards.

Li explains: “Fine wine storage is very important to private collectors in Hong Kong, so we now operate three storage facilities in the city to serve them (the third was opened in October last year). Wine lovers will eventually drink the wines they bought, so they often ship back the ready-to-drink wines to Hong Kong.” Li states: “What customers value most are of course the storage environment and security.”

CONTROLLED ENVIRONMENT

As a result the Hong Kong Quality Assurance Agency (HKQAA) was quick to adopt a Wine Storage Management Systems Certification Scheme (WSMSCS) in late 2009 (see box out), to which the vast majority of Hong Kong’s leading wine companies are signed up to, and which effectively guarantees storage and transportation conditions.

Conditions are strict too, controlling average temperatures, humidity, the accuracy of the sensors, how regularly the sensors need to be calibrated as well as the usual requirements for avoidance of equipment that might cause unnecessary vibration and light. Li points out: “I have had guests from wineries visiting and they find our facilities to be even cooler than their own cellars.”

The transportation requirements also extend across national borders so cover all reexports out of Hong Kong as well (see box out). With space at such a premium a few cellars catering to private clients in Hong Kong also fulfil a role unheard of in the UK, doubling up as tasting and dining rooms and even hosting wine education seminars too.

Crown Wine Cellars, for example, is a private club as well as one of the region’s leading cellars. In fact the WSMSCS covers restaurants, tasting rooms, shops, showrooms and hotels as any of those establishments can hold as much stock as they like now they are freed of the obligation to pay tax on their stock.

Referring back to Li’s comment about collectors shipping read-to-drink wines back to Hong Kong, LCB’s Pearson makes the interesting point that a great many Asian collectors still store their wines in the UK. “If they want to trade it, they’re better off keeping it in London,” he says. “We have more than 600 clients in Hong Kong and Asia all holding stock in the UK. If you’re a pure investor there’s no harm in keeping it in the UK and trading it with no tax or VAT liabilities.”

Li backs up Pearson’s assertion: “For collectors who buy wines for investment, many do simply store in UK because facilities like the Octavian and Vinotheque have very good reputation for maintaining the perfect environment for ageing. Also, it is half the price to store a case of wine in UK than say in Hong Kong, simply because land is more expensive here.”

Very true, but since 2008 many collectors have apparently been bringing their previously London or Geneva-stored wines back to Hong Kong. Dick Chan of Collezione Wine Cellars reports:“Since wine duties were abolished in Hong Kong, many collectors who are buying for investment prefer to store their wines in Hong Kong instead of the UK.

One of the contributing factors is the enormous growth in the number of buyers from Mainland China.” Another factor to take into account is the “pleasure of ownership”. Trading wine is different to steel or pig iron. Even if many wines or collections are destined to be sold, their owners may still feel a thrill of pleasure at being able to see their investment.

A huge wine warehouse is currently under construction in Singapore and it is expected that many of its eventual clients will be Malaysian and Indonesian collectors who want their wines closer to home.

DEEP SPACE

As the fine wine storage scene in Hong Kong and indeed across Asia becomes increasingly sophisticated, there’s arguably less of a need to store in the UK.

Wing adds: “Prior to the establishment of Hong Kong as a wine hub and the abolishment of tax, most of the fine wine collectors and investors would store their wine in UK. However, this phenomenon had changed due to the increase number of qualified wine cellars in Hong Kong.”

Most important of all though, as Li adds: “More investors choose to ship and sell their wines in Hong Kong, as they can often get the highest selling prices.” Last year, for the fourth year in a row, Hong Kong was again the biggest auction market, beating off competition from New York and London (the US is larger overall if cities such as Chicago and LA are factored in). No surprise, therefore, that the former manager of Manchester United Alex Ferguson is auctioning his £3m cellar there.

SALES PITCH

Of course, the dominant issue in auctions at the moment is provenance, something that wine stored in a properly run and accredited warehouse or cellar can offer. A recent survey by fine wine storage providers Octavian pointed out that 88% of collectors “pay more for wine with good provenance”.

So even if the issue of storing in bond is no longer a concern to either a collector or merchant in Hong Kong, the importance of provenance and traceability means that good storage in itself has become a significant issue.

Warehouse operators around the world can look at Hong Kong and take comfort in the fact that in the parallel universe where tax on wine is abolished on a global scale, there’s still a crucial need for the services they provide.