On Trend: Luxury and Entertainment Spending Today
According to Bain & Company’s report titled The New Luxury Consumer: Why Responding to the Millennial Mindset Will Be Key, in 2017, the luxury market grew by 5% to an estimated USD 1.4 trillion globally. Today, sales of luxury cars continue to dominate the market, increasing by 6% to reach USD 572 billion in total. While the sale of prime real estate continues to be the core focus of high net worth individuals (HNWIs), the purchase of goods such as art and wine is a fast-growing luxury. Furthermore, luxury experiences remain very attractive to consumers, as illustrated by sales of luxury cruises, which are up by an impressive 14%.
Not Putting on the Brakes
Despite being outperformed by other goods annually, luxury car purchases have remained a core activity for HNWIs over the last decade. As reported by Top Classic Car Auctions, in 2018 this was highlighted by two exceptional classic car purchases, with a 1961 Aston Martin DB4 GT Zagato selling for USD 13.3 million at the Bonhams Goodwood Festival of Speed, becoming the biggest purchase for a British-made car at a public auction. Another record was set when a 1965 Ferrari 275 GTB Speciale sold for USD 8 million at the Gooding Scottsdale 2018 sale. It was also the highest price paid for any car at the classic car auction series.
Similarly, new commercial vehicles are not putting on the brakes, despite growing public and regulatory pressure seeking to curb carbon emissions. Globally successful luxury-car brand Mercedes-Benz posted its highest sales ever in the first quarter of 2018, with deliveries of the GLC crossover increasing by 33% and the revised flagship S-Class posting a 29% gain. The performance of the German car brand is closely followed by BMW, Lexus, and Jaguar Land Rover, which have all achieved positive sales records over the last year.
In the last decade, cars, wine, and coins were the fastest growing assets, at 334%, 192%, and 126% respectively, according to the Knight Frank Luxury Investment Index Q4 2017. These trends, however, are changing with more attractive assets filling HNWIs’ cellars and decorating walls in recent years.
In 2017, the luxury market grew by 5% to an estimated USD 1.4 trillion globally
Art for Art’s Sake
In late 2017, Abu Dhabi’s Department of Culture and Tourism spent USD 450 million at an auction in New York on Leonardo da Vinci’s Salvator Mundi painting. Recorded as the most expensive auction art piece ever, the purchase demonstrates the massive interest in art in recent years. According to Knight Frank’s survey, top reasons for buying luxury investments include the “joy of ownership”, which dwarfs “capital appreciation”, “safe haven for capital”, “investment portfolio diversification”, and “status among peers”.
Along with art, wine and watches were the fastest growing goods in the last quarter of 2017, with respective increases of 21%, 11%, and 7% over 12 months. In fact, real estate consultancy Knight Frank’s index recorded a 7% increase in total luxury spending last year, similar to figures from Bain & Company.
Japanese entrepreneur and billionaire Yusaku Maezawa turned heads when he bought Jean-Michel Basquiat’s Untitled for a staggering USD 110.4 million, with the artist unseating Andy Warhol as the most expensive American artist at auction. The grand interest in art seems to have continued well into 2018, with Modigliani’s Nu couché (sur le côté gauche), a piece from his series of nude paintings, selling for USD 157.2 million at international auction house Sotheby’s in May. Picasso’s Young Girl with a Flower Basket went for a cool USD 115 million at Christie’s that same month.
Another milestone in the art world was reached with the USD 140.8 million purchase of Qi Baishi’s Twelve Landscape Screens, making it the most expensive purchase in Chinese history. This momentous purchase took place against the backdrop of Chinese luxury spending that increased by a staggering 32% in 2017. European sales grew by 6%, those in Japan by 4%, and those in North and South America by only 2%.
Besides equity investments, commercial real estate remained a favored asset class for global investors during 2017, with transaction volumes robust at USD 840 billion and above-average returns recorded across many sectors and markets, as reported by Knight Frank. The firm notes that the appetite for property continues to increase globally. In 2017, it emerged that Hong Kong investor Samuel Tak Lee, whose portfolio includes the 14-acre Langham Estate in central London, had increased his share of Shaftesbury, a real estate business listed on the London Stock Exchange. The rise of Pontegadea Real Estate, a multibillion-dollar portfolio assembled by Inditex founder Amancio Ortega, shows that this can be done with speed and at scale.
Knight Frank found that luxury residential market prices increased by 2.1% in 2017, compared with 1.4% in 2016. The Chinese city of Guangzhou leads the rankings, with prime prices up by over 27%. South African coastal city Cape Town came in second at 19.9% followed by Aspen at 19% and Amsterdam at 15%. Guangzhou’s prices continue to increase due to its relative affordability, with prices averaging 70,000 yuan/m2, compared with 120,000 yuan in Shanghai. Cape Town’s luxury residential market outperformed the city’s wider mainstream market by some margin.
The area near Table Mountain, including the Atlantic Seaboard and City Bowl, attracted strong inward migration from other parts of South Africa, adding to already significant foreign buying activity.
Aside from real estate, however, another top attraction for luxury spending is wine, both as an investment and for consumption. If a decade ago you had allocated USD 100,000 to Cult Wines, a UK-based wine portfolio manager, your asset would have returned an average of 13% annually. This was noted by a Bloomberg report in July 2018, titled Investing in Fine Wine Is More Lucrative Than Ever, lauding the “drinkable asset” as a finer investment than ever before. In 2018, Sotheby’s sold USD 64 million in wine, with about 80% going to private collectors who intend to imbibe their purchase someday and 20% to investors. Most notably, a 12-bottle case of Henri Jayer 1990 Vosne-Romanee Cros Parantoux sold for USD 156,825 in late 2017.
Interestingly, according to the Credit Suisse Global Investment Returns Yearbook 2018, over the past 118 years an investment in wine generated an average annual return of 3.7%, with only stocks and cars performing better, although the latter, of course, were not around for a large part of the past century.
Beyond Goods and Borders
While commercial real estate in cities remains a hot topic for ultra-wealthy spenders, much of the prime real estate is afloat at sea. Figures from Bloomberg in 2017 indicate that private condos in cruise ships go for USD 4,285/ft2 to USD 6,200/ft2. This is more expensive than the average price per square foot of luxury homes in Hong Kong, London, and New York, according to figures from the Christie’s 2017 report on luxury residential real estate. The largest private residential ship on the planet, The World, is home to only 165 residences and boasts a USD 10.5 million three-bedroom unit whose trappings include a Macassar Ebony wet bar. As of September 2017, its annual ownership costs were nearly USD 900,000. The cruise ship travels between Antarctica, Africa, and Brazil, among many other routes, and is part of a growing trend of luxury cruises with sales increasing by an impressive 14% in 2017, according to Bain & Company’s report. Over and above goods purchases, HNWI spending naturally gravitates toward travel, lifestyle, and experiences.
The Boston Consulting Group’s report, titled Shock of the New Chic: Dealing with New Complexity in the Business of Luxury, estimated that consumers spend more than USD 1.8 trillion worldwide annually on items they defined as luxuries such as clothes and jewelry. At the same time, nearly USD 1 trillion was spent on luxury experiences, which ranged from dining at five-star restaurants to exotic vacation travel.
It should come as no surprise, then, that luxury hotel brands such as Ritz-Carlton are entering the cruise industry with exclusivity and innovation. As part of the newly minted The Ritz-Carlton Yacht Collection, the five-star hotel brand will launch three small, ultra-luxury ships with laid-back itineraries and spacious, open-concept design schemes that flip the traditional cruise experience on its head. The cruise experiences give guests a variety of leisure options, from snorkeling and mountain biking to private museum tours and helicopter trips.
Knight Frank revealed that while private jets remain relatively flat, the superyacht market is also recording growth, driven by the US, with HNWIs owning a total of 407 (Russians 168 and Greeks 107). Naturally, HNWIs are increasingly taking advantage of the most exclusive experiences they can get their hands on. US-based company Orion Span even aims to open its space hotel, aptly named the Aurora Station, in late 2021. Reservation deposits for one of four suites are currently pegged at USD 80,000, and the cost of a 12-day itinerary begins at USD 9.5 million, opening an entirely novel arena for luxury and entertainment options.