Johnny Fleming, Assistant Director (Investment Management) at Brewin Dolphin in Edinburgh gets motoring with a novel investment concept

Classic cars aren’t for the faint hearted – either when it comes to driving or purchasing them as an investment. They’ve, nevertheless, grown in popularity over the past decade, with more people seeking them out as an asset over more traditional investment choices.

That’s worked out for many who have decided to get behind the wheel. According to the Knight Frank Luxury Investment Index, average prices raced ahead by more than 330% in the past decade, outpacing returns from stock market indices, bank accounts, bonds, and other investments.

Compared to other luxury goods, such as wine and art, they still do well. The Credit Suisse Global Investment Returns Yearbook 2018 found that classic cars were the “star performer” among so-called “investments of passion”.

That said, recently things haven’t been running completely smoothly for classic cars. The Historic Automobile Group International (HAGI) reported a 4.6% annual decline in its headline index for February 2018 – its first fall since 2010. Indeed, at the time of writing, all HAGI’s classic car indices were down for the year to date.

The recent decline in prices has caused some to claim that “the wheels have finally come off the classic car rally”, as sales volumes fell and buyers became more selective about their marques and models. Reports showed that prices for Jaguar Series 1 E-Types, having peaked at US$230,000 in 2015, had fallen to US$180,000. The price of a 1973 Porsche Carrera 2.7 RS, which stood at US$800,000 in spring 2017, was down to US$690,000.

However, it’s not the same across the dashboard. Auction sales data from the 2017 AXA Art Classic Car Report shows the right pick can buck the trend. The research highlighted a spike in prices for the 1967 Corvette Stingray V8, with one sale last year at €548,000, compared with €195,000 in 2015.

All of this goes to show that, like many assets, classic cars can be volatile. If you buy the right model at the right price, you might see a good uplift in value in just a few years. But, if you pay a premium price just before an economic downturn, you could be left with an asset that suffers a sharp drop in value.

There are a number of other considerations for investors too. Regular costs, such as maintenance and storage, can mount up; parts may be expensive; and, with restoration projects, the work may cost more than the value it adds. They can also incur comparatively high custody and transaction costs, with hefty commissions for selling at auction, for example.

On the positive side, classic car profits are generally tax-free. Unless you are regarded as a dealer, there is no capital gains tax (CGT) on any profit made when you sell a car - they are deemed to be a ‘wasting asset’ by the taxman.

Classic car owners also benefit from the government’s recent overhaul of Ministry of Transport rules. Cars manufactured before May 20, 1978 are no longer required to pass the annual test, which can cost up to £54.85 for some new models — and that’s before any repairs.

There is also an argument that classic cars could be a useful diversifier for a conventional investment portfolio: because their returns are uncorrelated with those from shares or property, they can reduce overall risk.

Classic cars are by no means a conventional investment – and they won’t be suitable for many people. But for some owners, it could make sense to hold them alongside a larger, mainstream portfolio, provided they buy selectively and for the long term.