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Why Chinese investors are snapping up Bordeaux vineyards

14-Jun-2017


Isabelle Fraser, The Telegraph

In a small city in eastern China, a new $900m theme park has just opened. Set over 1,000 acres and built with the help of the designers of Disneyland, it has an Italian-style castle at its centre, transporting you to straight to Tuscany.

This is not meant to evoke a fairytale, but instead to celebrate and educate visitors on China’s newest obsession: welcome to Wine City.

Set up by China’s oldest winemaker, Changyu, it is surely a contender for the world’s most surreal day out. At peak capacity it will produce 450,000 tons of wine a year; it also has a research institute designed to appear like an oak barrel surrounded by towering champagne flutes.

It’s the latest in a rush to accommodate the changing tastes of the burgeoning middle class. In 2014, China overtook France as the biggest consumer of red wine, and it is on on track to become the second biggest consumer of wine in the world by 2020, drinking 6.1bn litres, worth $21.7 bn, which is up 39.8pc from 2016, according to International Wine & Spirit Research.

Much of this wine is made in China by companies such as Changyu, which produces brands such as ‘Great Wall’ and ‘Dynasty’. Such is the demand that China is setting up its own answer to Bordeaux in Ningxia Hui Autonomous Region, 600 miles west of Beijing. There, entrepreneurial vintners, some of whom have trained in oenology in France, have set up chateaux on the edge of a desert where temperatures fall to -25 degrees.

But the share of imports is growing, up by 37pc last year, as tastes become more refined. Last year, China imported 642m bottles of wine, worth $2bn; 40pc of that comes from France. Earlier this year, a train carried 14,000 bottles of Bordeaux wine straight from Lyon to Wuhan, as part of its ‘New Silk Road’ strategy.

This unquenchable thirst for wine has had a surprising effect in France. Chinese buyers purchased three of the five highest-priced vineyards in Bordeaux last year, according to Christie’s International Realty. They now make up 40pc of all the buyers currently snapping up vineyards in the region, according to Michael Baynes, founder of the agent Maxwell-Storrie-Baynes.

This is still a small part of the overall ownership – just 2pc of the 7,500 chateaux in Bordeaux are Chinese-owned, but “it’s a big story,” says Baynes. Tuscany also saw a big influx of international buyers last year, fuelled by Chinese wine lovers reaping rewards of tax breaks. There have also been a few high profile buyers, such as Jack Ma, the billionaire founder of Alibaba, who now owns three vineyards in Bordeaux.

Chinese buyers purchased three of the five highest-priced vineyards in Bordeaux last year and they now make up 40pc of all the buyers currently snapping up vineyards in the region

The investors started coming in 2009-10, when the Chinese wine market exploded, says Suzanne Mustacich, author of the book ‘Thirsty Dragon: China’s Lust for Bordeaux and the Threat to the World’s Best Wines’. “There were initially a lot of problems and misunderstandings with cultural differences in negotiations,” she says, adding that there weren’t any translators to help dealmakers. Baynes has hired Chinese nationals to cater to the buyers, and also has affiliates in China and Hong Kong to help capture any potential sales there.

“We are inundated with inquiries from Asia,” he says. “We have to weed out the tourists from the investors. In the last three years, the seriousness of the investors has increased.”

These vineyards are being snapped up primarily as a commercial asset, he adds. “We haven’t sold one that has been bought just as a hobby.” Hotel chains and drinks companies are among those buying these Bordeaux vineyards, owning the whole means of production and cutting out the French middleman. “If you are a hotelier and have luxury hotels across China, you can produce wine for four to five euros per bottle, add shipping and pay taxes which brings it to €12, and then sell it for maybe €50. It’s a no-brainer.”

The vast majority of these Chinese-owned vineyards are not in the high-profile appellations such as Pomerol, Pauillac and Margaux, but in areas producing the more generic wines. Here, the buyers are helpfully investing money in chateaux which have languished for years on the market.

These vineyards are far cheaper – often under €2m, compared to the €100m chateaux in the Medoc with the comparably valuable vines, which come on the market barely once every two years, according to Baynes. “When we are dealing with an Asian buyer, they are often very interested in the more exclusive ones like Margaux or Pauillac, but they recognise the market they are selling to is relatively ignorant of those nuances.”

“Any mature market consumers know what those wines should cost, whereas in China they don’t,” adds Mustacich. “The Chinese investor can sell the wine for more than it’s worth in any other market,” easily making back their investment.

This is down to Bordeaux’s canny long-term work, establishing itself as a luxury brand in China. “They convinced them to drink something they had never seen before,” says Mustacich, comparing its brand to Rolex. Bordeaux’s biggest export market is now China, but the French were surprised that after becoming hooked on the wine, investors came back to buy up real estate.

Other major wine-producing areas of France, such as Burgundy and Champagne, are inward-looking and unwelcoming to foreign buyers. This is especially stark compared to Bordeaux which has welcomed international investors for centuries and many of the biggest brands have foreign names, such as Château Smith Haut Lafitte.

Besides the investment upside, there is the trophy home element. “There’s a major bling factor. They can say ‘I own a Bordeaux chateau’ – and if it’s only €2m what does that get you in Hong Kong?” They also love the history behind these houses, being able to own something dating back to the French Revolution, she adds.

France – and in particular Bordeaux with its brand recognition – is also seen as a safe place to invest, particularly for those negotiating China’s cash economy. “This way, they don’t have to worry about the government taking it away,” says Mustacich.

In 2013, France’s money-laundering investigators Tracfin warned that foreign buyers, such as those from Russia and China, were using French vineyards to hide their money. The party may soon be over, however: last November, China announced it was cracking down on residents moving money out of the country, forcing them to pledge in writing that they will not invest in foreign property.

As a result, Joe Zhou, JLL’s head of research in China, has predicted a big drop in foreign investment this year. The effect of the controls is already showing, with foreign property investment by Chinese companies down by 84pc in January after soaring the previous year.

“We expect this Chinese vineyard investment trend to slow down by 2018,” says David Branch of Christie’s International Real Estate. But it won’t grind to a halt just yet. “There has been a huge evolution between the original buyers from China and the ones now – they have companies and bank accounts outside the country,” says Mustacich. “They already have the money abroad.”

The law is more likely to hit middle-class buyers, perhaps looking for a trophy home. “There’s a group of people that are less multinational, and it’s affecting them,” says Baynes. “A closer look at the law is revealing, as it says if the international investment is strategic for China or for the business, they will let you take your money out.”

He’s optimistic: the price of a hectare of generic Bordeaux vineyard, the type that Chinese buyers are snapping up, is €16,000, half of where it was 25 years ago. “It’s not a stretch to think we can be back to €50,000 in the next 10 years,” says Baynes. “And it wouldn’t surprise me if Chinese investors were a major factor in that.”


A vineyard in Bordeaux, on the market for €3.7m with Christie's
A vineyard in AOC Côtes de Blaye, for sale through Christie's for €5.83m
The Telegraph
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