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Investing in Future Classics

There are no guarantees in the investment world, and that goes double for classic cars. If you go in expecting to make a quick buck, you might be disappointed – but if you want to put your money into something you can enjoy while you wait for it to pay off, there are few better options than a new car.

Changes to pension rules introduced in 2015 mean more people than ever are able to withdraw lump sums that they can spend or invest in any way they like. From wine to rare stamps, people are increasingly putting their money into things that they can enjoy well into their retirement.

For many classic car enthusiasts, this means the opportunity to splash out on something they've always wanted. If it proves to be a tidy investment in the years to come, so much the better – and if not, at least they spent their retirement in the car of their dreams.

But buying a new classic car can be an expensive business. Purchasing a car that eventually becomes a valuable classic, and can be sold on for much more ten or 15 years down the line, is a sort of Holy Grail for car buyers. The question of what makes a car a classic is always hotly debated, and identifying the classics of the future doubly so. It's notoriously difficult to predict the future, but if you're determined to try anyway then read on for some advice.

If you're looking for a list of sure-fire future classics, or a checklist of criteria that will see you get that 400% return on investment, then unfortunately you're out of luck – no such thing exists. But what you will find is some expert guidance on how to go about investing in a future classic as sensibly as is possible among the highs and lows of investments.

Market conditions

Before you dive headfirst into an investment in a classic car, it's important to get a sense of the state of the market. Classic cars are often depicted as being on an unstoppable rise: much has been written about the 'Petrol Pension', with claims of an average return of 456%1, and growth almost twice as rapid as wine, art, coins, stamps, guitars and violins2. Classic cars may be an even better investment than London property, or so it has been claimed.

High-profile stories of Ferraris selling for $38 million at auction3 are surely the inspiration for many looking to invest, but not everyone will be able to make such returns. As with any investment, the risks are commensurate – the more you put in, the more you might get out, yes, but the more you stand to lose.

The Historic Automobile Group International (HAGI) exists to monitor the classic car sector – it is an independent investment research company and think tank that applies the same rigorous financial methodology associated with investments such as property and gold to provide transparency in the classic car market, and has become a global standard. Its founder, Dietrich Hatlapa, is confident in the strength of the market, even following the economic downturns of the past few years.

"The classic car market has done well during the downturn, and has seen some strong years," he says. "This year has been a bit bumpier."

Caution is essential in the investment world. Despite a year-to-date growth of 13% in that HAGI Top Index for 2015, a year-on-year change of over 17%, and a three year change of almost 89%, a series of small peaks and troughs between September 2014 and September 2015 show that things are never exactly certain. Still, generally speaking, the sector appears to be in good shape.

Of course, it's important to remember that old classic cars don't stop being classics when new ones come in – the sector is growing, competition is increasing, and a growing number of auctions and dealers means the market is therefore becoming increasingly diluted.

Any keen investor should pay close attention to the HAGI index to keep abreast of the sector as a whole, but that alone won't help you to identify potential future classics. For that, you'll need to do a little bit of research of your own.

Past predictions

Attempting to predict the next generation of classic cars from what's on the market today isn't exactly a new idea – car manufacturers, dealers, journalists and enthusiasts have been trying to figure out that classic factor for a long time, and it's no easy business. Unpredictable is surely the word: while it's not exactly a car, the Sinclair C5 is the perfect high-profile example of an absolute flop that seemed doomed to be forgotten, breaking every rule of what you might expect for a classic vehicle, but became a collector's item that has more than doubled in value4 over the years.

Still, drivers and industry experts continue to try and guess what will become a classic year after year – we've even tried ourselves in the past. Back in 2005, we drafted in Richard Hammond (formerly of Top Gear) to help us pick out three then-current cars that could go on to be future classics. Did we get it right then?

Hammond and the rest of the former Top Gear team's broad criteria for a classic were that it had to check at least two of three boxes: rare, beautiful and interesting. The former is fairly straightforward, but the latter are slightly more subjective. The three that TV's cheekiest car fanatic picked as either already having, or having the potential of growing into all three characteristics were:

The Ford Ka 1.3

 
 

The Alfa Romeo 166 2.0 TS

 
 

The Porsche 911GT3

 

It's definitely a bit too early to call whether these cars – particularly the Ka – have become classics just yet, but we asked HAGI for their expert opinion on how all three are maturing.

"We would agree with the 911GT3 without a doubt, because the model has many favourable attributes," says HAGI's Dietrich Hatlapa. "The Ka and the Alfa Romeo are a bit trickier from today's perspective. If they are in really good condition, and with extremely low mileage, then they could be interesting. But we would not necessarily target them for collecting."

Of course, not everyone's definition of a classic is the same, and there are many other factors that come into play. "We are sure that the Top Gear team also chose these models because they are very nice to drive," says Hatlapa – and who can be sure what effect that will have? Perhaps, in another ten to 20 years, the Ka will be seen as a triumph of mid-00s engineering, with well-preserved models desired for their handling and timeless looks.

Interestingly, Hammond picked the GT3 over the GT3RS – a limited-edition model, sure to be rarer, that harked back to the design style of the classic Porsche Carrera RS. As Hammond pointed out, the Carrera is already a classic, and an imitation of an older style will not be a classic in its own right. Collectors will be sure to favour the original – something that Hammond also cited in regard to the new Minis vs. the old.

But was he right? HAGI disagree – to an extent – and say that it can sometimes be as much a numbers game as anything else.

"Anything that was made in the single thousands, or even less than a thousand, is very interesting as a future classic," says Hatlapa. "There are some marques that have never produced models in larger numbers, like Aston Martin or Lotus – all of these cars are interesting."

It looks like Hammond missed the boat on the GT3RS a little – ten years on, and the first ever used model was listed for sale at £295,000 – 225% of its original list price5. GT3s, on the other hand, are regularly listed online for much less than £100,000.

Still, time will tell, and a Porsche is generally a safe bet: HAGI maintains three marque-specific sub-indices of its main index, for Porsche, Ferrari, and Mercedes-Benz, pointing towards the enduring value of these classic manufacturers.

New predictions

So, can we learn anything from past attempts at predicting the future? Firstly, the Top Gear definition is possibly a little bit too vague. Hatlapa's experiences with classic car enthusiasts has a few more suggestions for factors to watch out for:

"Some of the common values drivers are looking for include rarity, competition heritage, technical sophistication, as well as soft factors like beauty and soul," he says. 

Good advice, which points us in the direction of a car like the Corvette Z06. This extraordinarily powerful street-legal car, capable of 0-60mph in just over three seconds6, was developed in conjunction with the C7.R endurance sports car – which has already scored wins at the 2015 24 Hours of Le Mans and the North American Endurance Cup. It's certainly a beautiful car, but are its slightly postmodern sports looks enough to make it stand out in years to come?

At present, the going rate is around £95,000 – and just over 8,000 had been built as of April 20157. Could it have the makings of a future classic?

In HAGI's view, it may not quite be exclusive enough. "We would suggest any limited edition sports cars, preferably two-seaters or open cars that were made in smaller numbers than other versions of the same type," says Hatlapa, adding weight to the case of the GT3RS.

Similarly, he says, souped-up versions of slightly more standard-looking cars may be increasingly desirable further down the line. "Manufacturers now produce saloon cars with larger engines, or highly tuned engines with sport suspension, like the BMW M series or Mercedes-Benz AMG. Some saloons have been homologated for race or rally and a certain number of street-legal cars were sold in the open market. These are targeted by collectors these days."

 The M Series begins at just over £55,000and stays below £100,000, whereas the AMG starts lower at less than £40,000 for hatchbacks, but exceeds £180,000 for Saloons and Coupés. It shouldn't need pointing out that the more money you put in, the bigger the risk of making a loss if you come to sell. 

Both the M4 Convertible and the AMG S65, to choose some particularly stylish examples from each range, are beautiful panther-like Bond cars that look the part of the classic. They are likely to be quite limited too, particularly judging from the M4 Convertible's predecessors: in the first generation of M3s, less than 1,000 convertibles were produced9, which means a late 80s, early 90s era M3 Convertible is certainly a classic by now.

The more recent generation of M3 Coupé, meanwhile, saw more than 40,000 models produced. Does that mean the M4 Convertible may be produced in the single thousands? It's hard to say, but these are the factors that any keen investors will need to keep abreast of.

Do HAGI have any further advice for finding a potential future classic, or at the very least a car that will give a good return on investment? Unfortunately there's no sure-fire solutions or technical tips, but nonetheless some very important advice:

"Check if a collector community for a particular model already exists," Hatlapa says. Knowing that there is already interest from others in the car of your choosing can be helpful, but the most important interest should always be your own.

"We always suggest that buyers should find out about their own enthusiasm and passion for classic cars. Read books or magazines, attend some classic car events, or join clubs. In this process, it is quite likely that preferences towards specific cars, marques or models becomes apparent. 

"A future owner should follow this passion and get more involved in cars that they like. This is the best guarantee for future returns – they may not be financial in nature, but they are very valuable for that particular owner."

At the end of the day, any financial rewards from investing in a classic car should be a bonus – it's far more important to put your time and money towards something you will love driving, working on, and having in your driveway.

Maintenance and budgeting

For many, classic car dreams involve a renovation project – buying a beat up old motor that's beautiful under the rust and dust, fixing it up, and cruising around in something that's worth four times as much as you paid for it. If the actual act of renovating is what you're interested in, then you should certainly have a go at it. You will have an absolutely fantastic experience, and (hopefully!) come out with something that you can be truly proud to drive at the end of it all. But if you're hoping to make a quick buck by investing in this way, it may be harder than you think.

"You can collect whatever you like," says Hatlapa, "as long as you bear one additional important principle in mind: condition. You can even collect a mass market car like the VW Golf Series I, or the Mercedes-Benz Saloon Series W 126 – if you bring it to as new or better than new condition you have something valuable."

So if you can renovate and refurbish to incredibly high standard, then you'll be able to reap the rewards, but you will have to factor in just how much that will cost, on top of the price of the car, and whether it will keep the return on your investment from becoming a positive one.

For keen renovators, Hatlapa has some further advice: "You should make sure that all original parts with which the car was built are still with the car," he says. "That means that if, for example, a vital part like the transmission is exchanged, the old part should remain with the car. You may need some shelf space for that in your garage!"

If you're starting early and trying to predict a future classic, this is obviously something you will have to keep up throughout the car's life. Of course, Hatlapa says, some things simply can't be replaced:

"Originality is important too. An original paint job can never be replicated – therefore the best condition is original and as new. That is because this car in this condition is suddenly very rare indeed, despite of the fact that it was produced as a mass market car."

However, it's not all about condition – numbers still play a very important part:

"On the other side of the spectrum, a model that was produced in very small numbers, like a Ferrari 250 Spider California, with less than 50 units made, can be extremely valuable – even if the condition of the car is not good at all."

But no matter what condition the car began in, it will require some work to keep it in top shape. It can be something of a balancing act: a car with low mileage will be more valuable, and the majority of faults will occur when you take the car out on the road, but putting a classic into storage and leaving it there will not do it any favours either. 

A future classic is an investment of time as well as money. You will have to make sure this car stays in prime condition for a long time. Do you have the technical skills, access to a garage for storage and, most importantly, the funds?

Cars over a certain age have the benefit of being exempt from Vehicle Excise Duty, under which they boast significantly lower insurance rates. However, relatively modern cars bought with the intention to be a ‘future classic’ don’t enjoy the same tax exemptions and as such, insurance premiums aren’t so desireable.  While cars over a certain age are exempt from Vehicle Excise Duty, and can enjoy significantly lower insurance rates, anything you've bought with the intention of holding on to as a future classic will not be so lucky in regards to these exemptions.

You could avoid these additional costs by getting a Statutory Off Road Notification (SORN) and using another car for the day to day, but this will mean your potential future classic gathers dust and problems while you pay for something else. Selling your existing car and using your future classic as your main vehicle, on the other hand, will offset some of the costs, but could lower its value in the future due to increased mileage and likelihood of replacement parts. Once again, it is a balancing act. 

Community

Yes, investing in a future classic is a risk. It requires careful consideration, and balancing of usage and costs. But if you are going to invest, then it should be because you have a love of classic cars, not because you're looking for a quick and easy route to riches. Collectors who sell their cars for millions are able to do so because of their knowledge and passion for the subject.

As HAGI's founder, Dietrich Hatlapa's role in the industry is largely concerned with finance – but he is an avid fan of classic cars himself, and would advise anyone interested in investing to do so for the same reasons.

"Treat it as a hobby first and foremost. Pride of ownership and fun with classic car activities or simply driving are much more valuable returns than price appreciation," he says.

Getting involved with your classic car's owner's club is a fantastic way to get the most out of your investment – and not just because of any tips you might pick up, or the potential to find a buyer through the club. 

Cars are built to be driven and, with events going on around the country almost every weekend, you will have plenty of opportunities to get out on the road, meet fellow enthusiasts, and head to great events with your pride and joy.

Hatlapa is positive that there is money to be made, if you can get it right. "There are many owners in the classic car world who have doubled or tripled their investment in ten or 15 years, including all expenses," he says. So research carefully, keep your eye on the markets and, most importantly, make sure you're investing in a car that you love. 

References and further reading

[1] http://www.thesundaytimes.co.uk/sto/ingear/cars/article1429659.ece

[2] http://www.economist.com/news/finance-and-economics/21583662-investing-luxury-items-can-yield-high-returns-risks-are-commensurate-fruits

[3] https://news.artnet.com/market/vintage-cars-overtake-art-on-luxury-asset-racetrack-82247

[4] http://www.telegraph.co.uk/motoring/classiccars/7994293/Classic-Sinclair-C5.html

[5] http://www.evo.co.uk/porsche/911-gt3-rs/16427/first-porsche-911-gt3-rs-hits-the-forecourt-for-295000

[6] http://www.autocar.co.uk/car-review/chevrolet/corvette-z06

[7] http://gmauthority.com/blog/2015/04/over-8200-2015-chevrolet-corvette-z06s-have-been-built/

[8] http://www.bmw.co.uk/en_GB/new-vehicles/M.html

[9] http://www.bimmerfile.com/2014/02/27/the-new-m4-enters-production-in-munich/

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