The Chinese – not the only game in town

The following is a guest post I wrote for Jane Anson’s New Bordeaux web site:

Last week I received another call from a journalist asking me about the number of Bordeaux chateaux now under Chinese ownership and how the locals were reacting to this. There has been a lot written about how many Bordeaux estates have been sold to Chinese investors in the last few years. Only last week Michel Rolland’s family created a stir when they sold three estates, including Le Bon Pasteur in Pomerol, to a Hong Kong investor. While Chinese investors have indeed bought a relatively large number of Bordeaux estates in the past few years they are by no means “the only game in town”.

Let’s look at some figures. According to the Safer Aquitaine Atlantique, there were 712 vineyard sales in the Gironde in 2012, with almost 3,500 hectares changing hands, for a total sum of 533 million Euros. However, it is worth noting that just five transactions accounted for almost 500 hectares at a value of 332 million Euros so it is difficult to read too much into these figures. According to the Safer Chinese buyers purchased 27 properties in 2012, representing 15% of the total surface area, so approximately 525 hectares. This was in addition to 20 properties acquired in 2010 and 2011. These are certainly impressive figures when you consider that the first purchase of a Bordeaux estate by a Chinese investor was as recently as 2008, when Longhai International acquired Château Latour Laguens. However, despite the number of purchases, this only represents 15% of the total surface area that changed hands in 2012. So who bought the remaining 85% ? Perhaps not surprisingly the French are still by far the largest buyers of Bordeaux vineyards and, more than ever, the market is dominated by families and institutions who already own properties in the region. In order to illustrate the continuing importance of French buyers, and in particular well-established local producers, I have listed below some of the major purchases by French investors in 2012 and 2013 to date.

Estate Buyer Existing / former chateaux
Château Godeau, Saint-Emilion Florisoone family Château Calon-Ségur
Château Côte de Baleau, Château Les Grandes Murailles and Clos Saint-Martin, Saint-Emilion Cuvelier family Château Clos Fourtet, Château Poujeaux
Château de Seguin,Bordeaux Supérieur Mottet family Château La France
Chateau d’Issan, Margaux (50% stake) Jacky Lorenzetti Château Pédesclaux, Château Lilian Ladouys
Château Béhèré, Pauillac Jacky Lorenzetti Château Pédesclaux, Château Lilian Ladouys
Château L’Arosée, Saint-Emilion Dillon family Château Haut-Brion, Château La Mission Haut-Brion, Château Quintus etc
Château Saint-Barbe, Bordeaux Supérieur Gaye family Château Grand Corbin Manuel, Château La Création
Château Le Thil, Pessac-Léognan Cathiard family /

Patrice Pichet

Château Smith Haut Lafitte / Château Les Carmes Haut-Brion
Château Calon Ségur, Saint-Estèphe Credit Mutuel Arkea n/a
Château Malescasse, Haut-Médoc Philippe Austruy n/a
Château Clos Haut-Peyraguey, Sauternes Bernard Magrez Château Pape Clement, Château La Tour Carnet etc
Château Greysac, Médoc Jean Guyon Château Rollan de By

According to my very rough calculations, French buyers invested approximately 2.5 times as much in Bordeaux vineyards in 2012 and so far in 2013 as Chinese buyers. So, while the Chinese are making the headlines for the number of properties they are buying this does not tell the whole story.

One of the key differences between French and Chinese investors is the type of property they are buying. With the exception of Château Bellefont-Belcier in Saint-Emilion, most Chinese purchases have been of relatively low-key estates, primarily in the Bordeaux, Bordeaux Supérieur and Côtes de Bordeaux appellations. Although French buyers are also active in this sector (see the recent sales of Château de Seguin and Château Sainte-Barbe), their activity is concentrated on well-established estates, typically in the more prestigious appellations. In fact, French buyers tend to fall into one of the following categories:

  1. Grand Cru Classé estates looking to increase production of their second and third label wines by buying small parcels and estates in strategic locations. Examples include Château Pedesclaux’s purchase of Château Béhèré in Pauillac, Château Latour’s purchase of Château La Bécasse, also in Pauillac, and Château Canon’s purchase of Château Matras in Saint-Emilion.
  2. Leading Bordeaux producers developing a portfolio of assets. Examples include Bernard Magrez’s purchase of Château Clos Haut Peyraguey in Sauternes; the Cuvelier family’s purchase of three Grand Cru Classé estates in Saint-Emilion – Château Côte de Baleau, Château Les Grandes Murailles and Clos Saint-Martin; Domaine Clarence Dillon’s purchases of Château Tertre Daugay and Château L’Arosée in Saint-Emilion; the Barton family’s purchase of Château Mauvesin in Moulis.
  3. Major French financial institutions seeking a secure long-term investment. For example the purchase of Château Lascombes by the MACSF insurance group and the purchase of Château Phelan Segur by Credit Mutuel Arkea insurance group.

So why are Chinese and French buyers pursuing such different strategies and are there any other significant groups of investors active in the market ?

Some commentators insist that Chinese investors are buying less high profile and therefore generally lower priced estates as part of a strategy to “familiarize” themselves with the industry and the region and that they will now start to acquire better-known properties in the more prestigious appellations. This remains to be seen. Château Grand Moueys, Château de Lugagnac and Château Lézongars, which have all sold to Chinese buyers within the last three years, are all examples of relatively large estates, between 40 and 60 hectares, producing between 300,000 and 400,000 bottles per year. They had all been on the market for several years and had difficulty attracting buyers, many of whom would have been put off by the challenges of operating in a segment of the market where margins are very tight and competition is fierce. However, this sort of property is much more appealing to a Chinese buyer who intends to sell most or all of the production in China at a significant premium to traditional markets. They have the potential to make a good margin, on high volumes and for a relatively modest capital cost. Buying estates in the more prestigious appellations will require significantly higher investment and will not necessarily guarantee an equivalent return on capital. According to the Safer Aquitaine Atlantique, the average price per hectare in Saint-Emilion in 2012 was 200,000 Euros, ten times the cost of an AOC Bordeaux vineyard, where the average price per hectare was 15,000 Euros. A hectare of vines in AOC Margaux costs 65 times as much, at 1 million Euros. At these sorts of prices only a Grand Cru Classé estate can make a sensible return on investment given their ability to increase their vineyard holdings without any risk to their status, even if the grapes from most of these more recent purchases are destined for their second or third wines. On the very rare occasions that an entire 1855 Grand Cru Classé estate comes up for sale several other factors come into play and it is not necessarily the highest bidder who wins.

Although there are certainly Chinese investors with the appetite and the resources to acquire a top Bordeaux estate they continue to face stiff competition from equally well resourced and, arguably, better placed investors, so I do not expect to see a radical shift away from their current hunting ground. Of more interest is whether the Chinese market can continue to support the business model on which many of these acquisitions seems to have been premised i.e. ongoing demand for generic Bordeaux wines at a significant premium to traditional markets and whether all of these transactions have indeed been driven by purely commercial considerations or whether some buyers have simply succumbed to the allure and prestige of owning a French chateau. There are plenty of examples of current and former chateaux owners in Bordeaux who will admit to having allowed their hearts to rule their head when they purchased their estates.  It is perhaps to early to say but I was interested to discover in the past week that four of the chateaux acquired within the last two years by Chinese investors are now apparently being re-offered for sale. Did the deals fall through, are they trying to finance the acquisition of more prestigious estates or have they simply lost interest ?

As for French buyers I suspect that we will continue to see interest from local owners looking to achieve greater economies of scale and to leverage established brands as well as seeing a few newcomers to the sector, either institutional buyers or family interests looking for a sound long-term investment and/or to indulge a passion. There is interest from other quarters, notably other parts of Asia and the former Soviet Union, but these buyers seem more willing to take their time, to do their homework and to wait for the right opportunity to come along.

Alexander Hall