Analysis
Retail

Time running out for Gulf’s luxury watch investors to cash in

December 17, 2022

The value of Swiss watch exports to the Gulf reached $2.2bn in 2021. Nearly half of this went to the UAE

Prices of luxury watches have skyrocketed over the past few years
But excess inventory on secondhand market is pushing prices down
Pre-owned watch sales could top $30bn by 2025
Investors who snap up top timepieces should still see good returns

After a boom in haute horology over the past few years, with reports of shortages that even put royals on the waiting lists, prices for Rolex watches have started to fall.

But some coveted pieces will always command a premium, collectors have said.

The value of Swiss watch exports to the Middle East in 2021 topped $2.2 billion, making up about 10 percent of global exports by value, according to FH, the Federation of the Swiss Watch Industry.

Nearly half of that went to the UAE, making it the eighth most important single country market.

“Dubai is a top centre of the world for high-end watches from exclusive brands,” one luxury watch trader, who declined to be named, told AGBI.

“That’s because our customers aren’t just from the region. We are a shopping centre for wealthy people from China, Africa, Pakistan, Russia, Sri Lanka and many other countries, who all come to buy watches and other luxury goods here.

“The past two years have been exceptionally good for us with the huge flow of affluent visitors and new residents into the UAE.”

Luxury watch prices have skyrocketed over the past few years, driven up during the pandemic as people with disposable income looked for investment opportunities amid growing global wealth.

At the same time supply chain disruptions led to a shortage in watches.

Rolex generated approximately $8.5 billion in retail last year, making it the leading luxury watch brand in the world, according to Statista.

However, the worsening macro backdrop, looming recession and excess inventory on the second-hand market are now pushing prices down.

“If you look at auctions from eight months ago to today, there’s a very big difference in price,” said Yousuf Gargash, a Dubai-based watch collector.

“A while back, the Patek Philippe 5711 Blue Tiffany & Co. Stamp Nautilus, which at one point was retailing at AED110,000 ($29,952), got an offer from someone in Abu Dhabi to buy it from me for AED1.2 million.

“I refused, not because I wanted more for it but because I didn’t want to sell it. I’m not a flipper. It’s from my own personal collection. But that price has now gone down to about AED800,000. So that’s a big drop. The Rolex Daytona, which used to sell for AED150,000, has dropped to about AED130,000.”

A limited number of luxury watches are made each year and the demand for them is a lot higher as the number of millionaires grows. Picture: Patek Philippe

The most popular Rolex models saw their prices falling 21 percent since the peak in April, according to a joint report published by Morgan Stanley and LuxeConsult.

“Post-pandemic, the prices of watches did soar quite a bit due to new-found money within different sectors like crypto,” said Julian Serrao, a watch collector in Dubai.

“A lot of new wealth was accumulated, and they were looking to diversify their investments. This was also coupled with the fact that manufacturers couldn’t meet the supply, which was disrupted in that period of time and so the prices shot up.”

Serrao added: “There are a limited number of pieces being manufactured within a calendar year and the demand is higher because the number of millionaires has increased exponentially and everyone looks at a luxury watch as a status symbol.”

A Henley Global Citizens report published in August forecast that the UAE will record the largest net inflow of millionaires on record, adding an additional 4,000 high net worth individuals, or HNWIs – those classed as having wealth of more than $1 million – this year, overtaking traditional havens such as the US and UK.

Russia tops the list of countries expected to see a net outflow of millionaires in 2022, followed by China, India, Hong Kong, Ukraine, Brazil, UK, Mexico, Saudi Arabia and Indonesia.

“Interest rates were low, so people were getting loans to buy watches and flip,” Gargash added.

“There’s a drop in the watch market now because of the increase in interest rates, and because the crypto market plummeted, which has affected the purchasing power of a lot of newcomers to the hobby.

Gargash said: “Most probably by end of Q1 or beginning of Q2, you’ll see a drop in prices, with more supply coming into the market due to people backing out from their reserved pieces, due to them not being able to afford it, or because they are no longer interested.

“People are more likely to sell a watch if it gives them, say, AED50,000 profit over a watch that will give them only AED10,000,” he added.

“I think the market is still going to keep dropping on a lot of models, but hot pieces will always maintain some strength in the market.”

Knight Frank’s Luxury Investment Index was led by watches and fine wine, both rising 16% through 2022. Picture: Phillips auctioneers

The Wealth Report 2022 by consultancy Knight Frank said the luxury collectible sector saw a strong performance last year, with record-breaking sales volumes at major global auction houses.

Knight Frank’s Luxury Investment Index was led by fine wine and watches, both rising 16 percent through the year.

“A watch value is based on how much the other individual is willing to pay, so the market is like a big illusion,” Gargash added.

“There are waiting lists depending on the piece you want to buy. If you want a Rolex Daytona, for example, you’re not even going to get on a list.”

Gargash said the perceived shortage is a tactic to manipulate the market. He believes that the manufacturers are “controlling supply on hot pieces in different areas to raise them to be more desirable”.

“Based on my speculation, it’s kind of a like a Wolf of Wall Street situation,” he argued.

“If you know someone, or if you already have a profile, you’re more likely to be on the list to be able to get your hands on a piece. Like the De Beer case, where supply is being controlled, and so hypes are being created.

“Demand is hyped and supply is manipulated by making a shortage. Hermes was one of the first to do something like this, and then Patek Philippe.”

Opportunistic flippers offloading to the grey market also remain an issue.

“A lot of the people are buying, but most don’t flip them right away because they don’t have the right contacts,” Gargash said.

“So, they end up going to the grey market to sell, which is why you see grey dealers who have 100 of the same watch.”

A 2021 report by McKinsey estimated that pre-owned watch sales hit $18 billion in 2019, and could top $30 billion by 2025.

Pre-owned watch sales will be about half the size of the market for new, retail watches by 2025, up from about a third today, the consulting firm said.

Morgan Stanley wrote in its report that it has noticed a significant increase of watch inventory in the secondary watch market this year, as a result of secondhand watch dealers and individual watch investors offloading their stocks.

“Given the current watch inventory for sale and the worsening macro backdrop, we would expect secondhand prices to contract further quarter over quarter,” the firm said.

But even with Rolex’s prices likely to drop further, amid a surplus and an impending recession, investors who snap up the right models of timepieces could still see good returns.

“In terms of investment, getting a watch from retail, especially for the models that have always been in demand over the years, is a great investment and so far there’s been no sign of that reducing,” Serrao said.

“The cost to buy a new watch will increase so it’s a great investment, but not something that will appreciate exponentially for pieces that are not in demand.”