Classic cars: an investment or a hobby?

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Written by:
17/08/2015
According to the AA, a new car starts shedding worth as soon as it is driven off the forecourt, and by the end of its first year on the road, it will have lost around 40 per cent of its value.

When it comes to classic cars, the reverse is true. In 2014, private bank Coutts calculated that classic car values had increased by 257 per cent between 2005 and 2013, outperforming both equities and other common alternative assets including wine, stamps, watches and jewellery.

The classic car market is now estimated to be worth over £4bn in the UK alone.

Dietrich Hatlapa, founder of car investment research firm Historic Automobile Group International (HAGI), notes classic car prices have been rising since 1998.

“Since 2008, our HAGI Top Index has measured growth rates in double digits – sometimes as high as 40 per cent, as in the case of 2013,” he says.

Drivers of demand

One of the primary driving forces of this surge is the growth of the world’s high net worth population, according to Robert Johnson, founder of Classic & Sport Finance, the classic car finance specialists.

Growing wealth in developing countries has created new millionaires, many of whom crave luxury Western goods, both as status symbols and extravagances.

His view is supported by Rory Henderson of classic car dealer Fiskens, who notes the arrival of “super-keen newcomers from emerging markets” on the classic car scene.

Another factor driving demand is cult appeal, he says.

“Classic cars are no longer a niche interest but a worldwide phenomenon, nourished by globally popular TV shows like Top Gear.”

Classic cars are valued on their rarity and desirability, and grouped in specific categories; ‘affordable classics’ (valued under £100,000), ‘mid-market’ (between £100,000 – £500,000) and ‘collector’ (£500,000+). Each segment performs differently; cars with the strongest cultural currency – those made famous by movies, television and songs – command the highest prices, and stand the best chance of appreciation. But it is not just recognisable models that are commanding high prices. Price rises are currently slowing in the mid-market, and affordable classics are tipped as the next growth area.

“The Aston Martin DB5, the classic featured in the James Bond movie Goldfinger, currently sells for £700,000. Twenty years ago, it would have cost about £75,000,” says Lee Goggin, classic car enthusiast and co-founder of findaWEALTHMANAGER.com.

“In the same period, E-type Jaguars have risen in price from between £10,000 and £12,000 to £200,000 for the best examples today. At the other end of the scale, even Ford Capris are now being offered at nearly £25,000 – it would have been difficult to give one away a few years ago.”

The table below, produced by HAGI, illustrates the movement of the collector’s automobile market from 2010 until today.

HAGI

For love, not money

The main reward of classic car investment, the experts agree, is the opportunity to own a piece of history for a brief period, while potentially growing your money (or, at least, protecting it from depreciation) in the meantime.

“It is possible to make a quick killing in classic cars, but it’s best to get involved because you love them. The fact they may appreciate is just a bonus,” says Johnson.

His view is supported by Hatlapa, who urges prospective classic car investors interested only in money to “find something else”.

“A classic car is a unique investment, in that you can derive pleasure from it – whether taking it for a spin, or showing it off to friends and family,” he says.

“If you buy a car for £50,000, in a few years’ time it could be worth £60-70,000, perhaps more. Even if it doesn’t gain in value considerably, you’ve still had the pleasure of ownership all the while. That’s not a bad return, in any sense.”

Goggin believes the true yield of a classic car is the pleasure of owning it –  “and if the market crashes, it’s still a nice asset to hold.”

There are also practical advantages to classic car investment; in the event selling nets you a profit, it won’t be capital gains tax liable.

“Classic cars are a ‘wasting asset’, a holding deemed to have a limited lifespan which loses value over time,” explains Danny Cox of Hargreaves Lansdown.

Buyer beware

Despite the significant growth of the market in recent years, Johnson believes the investment potential of classic cars may be overhyped.

“Auction houses are hammering home the message with endless press releases claiming world-record results – but much of the information on soaring classic values has been oversimplified and manipulated in the interests of a good story,” he says.

For Johnson, this has produced a misleading emphasis on auction prices – in a market where, in reality, only around 5 per cent of sales are made at auction – and a false sense of urgency among potential investors.

“A ‘get in while you can’ mentality has been created by dealers and auction houses, both of which have a vested interest in telling buyers their cars will go up in value, and the classic car media – which is reliant on dealers and auction houses for advertising revenue.”

Goggin also believes the market is moving close to a peak.

“I’m not sure the market can carry on the way it has been doing – when interest rates finally rise, I can see people selling up and putting their money elsewhere,” he says.

There are parallels between the current state of the market and its previous peak in the late 1980s. Then, classic car prices boomed – partially driven by growing interest from affluent individuals in Japan, only to collapse when Japan’s economic fortunes fell, and the UK also entered recession. Some car values fell by almost half.

“Almost all of the things that were seen as contributing factors to the last crash are happening in the current market,” says Johnson.

“The difference is this time we are coming out of recession, rather than going in.”

Cox is entirely unconvinced of the investment potential of classic cars.

“Cars do not generate income – they only produce profit through capital appreciation, typically over an extended period,” he notes.

“In the meantime, ongoing costs such as insurance, maintenance, repairs and storage have to be met from separate resources. Over time, these costs could cancel out much or all of the profit you hope to make.”

What’s more, there’s no guarantee a car you buy will turn out to be a good investment – classic car prices fall during recessions, and are subject to passing fads and fashions. Valuation is almost always an inexact science, as classic cars have no guaranteed market or buyer. As a result, Johnson states luck is the key determining factor behind classic car investment success.

“A classic car should be considered as part of a hobby or heirloom – not as a mainstream investment,” Cox concludes.

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