Is Art a Good Investment?
- 12th May 2020
When luxurious art meets finance
There are times when you gaze upon an artwork and are spellbound. Your entire being is rendered breathless as you take in everything that the object d’art encompasses. Artists are passionate beings and if you are lucky, you might just catch a meaning from their expressions that would change your life forever too.
Art by definition is "the quality, production, expression, or realm, according to aesthetic principles, of what is beautiful, appealing, or of more than ordinary significance.” Although art encompasses many media and varied styles, in this article, we’ll be mostly focusing on art as paintings and sculptures.
Luxury is the embodiment of the extraordinary. And for the past few years now, the bourgeois are blending luxury and art. They are actively investing in this glamorous collectible class asset.
The global economic crisis of 2008-2009 miniaturised art investments as sales fell by 40% between 2007-2009.
“The November 2008 and spring 2009 auctions (were) gruesome: everyone lost money, people were dumping guarantees left, right and centre,” said Alex Rotter, Christie’s chairman of post-war and contemporary art for the Americas. He was then working at Sotheby’s. In 2009 he said, “volume was down 60-80%, and sale totals fell from around $500m to around $100m.”
Since then, the art market has recovered and accelerated, especially from 2017. Art has emerged as a class asset that investors are exceedingly propelling funds in. According to Art Basel, global art market sales reached over $67 billion in 2018. Knight Frank Luxury Investment Index 2020 documented a rise of 5% in the art market in the last quarter of 2019. Fifty-five percent of wealth managers reported that their clients were interested in art and collectibles as investments. Art is ranked third in exotic, collectible class assets after vintage cars and wine.
However, investing in art is not everyone’s cup of tea. It is important to consider a few points to compare the positives and negatives of investing in luxury art.
VIRTUES OF ART INVESTMENTS
Put your money where your heart is
1. The joy of ownership
The joy of ownership is the number one motivation for procuring art. It is a passion investment. It is chosen for emotional fulfilment. It is exclusively picked because of the connection an onlooker forges with it. It reflects the personality of the buyer, echoes their tastes and is a form of self expression. Art can inspire in moments of apathy and allow for the surface of pent-up, buried feelings. The beauty of art can enhance and brighten even the most drab spaces. The story of the artwork and its tales can provide enthusiasm and exultation, it carries with it a culture of values embedded in its history. It all adds to the atmosphere of the area and says a lot about the investor’s personal space. Most people who acquire art, are purchasing it for pleasure rather than an investment.
2. Potential increase in value
The price of art has risen by 1000% in the last 40 years, according to Art Market Research. These kind of returns are very appealing and alluring. “Salvator Mundi” was a painting attributed to one of Leonardo da Vinci’s followers and was later discovered to be an original. It was sold for $450 mn in 2017 whereas just 60 years ago, it had been bought for £45 at an auction. Pretty dramatic returns on investment. Although not every painting would generate such tremendous profits, long term investment horizons almost certainly guarantee appreciation in the price of the artwork. Capital appreciation ranked second as a reason for luxury investment in the Knight Frank’s Luxury Index 2018.
3. Portfolio diversification
The Number One principal of Investments 101 is to not put all your eggs in one basket. Portfolio diversification is the process of distributing your assets into varied classes and securities so as to minimise the risk to the overall portfolio. Other investments such as stocks, mutual funds and bonds offer benefits such as liquidity and transparency but the associated risk is high in case of rapid, unforeseen changes in the economy. It is also common to lose big in stocks even under normal market conditions. Art investments have very low correlation factors with other financial assets, making them a safe asset in such a situation while maintaining a positive portfolio. It is resistant to market movements.
4. Other capital advantages
Art can be insured against calamities. As the investment in fine art gains more importance, so does having sound insurance for the same. In case of any complications, the insurance can cover any losses the investor might incur. Art investments also generate favourable tax treatment in some countries. Additionally, investing in art acts as a hedge against economic and political crises. Inflation and currency devaluation will not affect luxury artefacts since their value is not dependent upon factors that apply to any other form of investment. It is a heterogenous asset that is unique and profitable.
5. Little risk if chosen wisely
There’s extensive research involved and a one must undertake a comprehensive study of art before the onset of investments in the art markets. Good art investments offer peace of mind. If the artwork has been chosen wisely, there is scant risk of losing your principal amount. There exist quite a few blue-chip artists whose craft is expensive but is a guarantee of substantial returns on resale. The world is now investing rapidly in contemporary, modern art. Knowing your artist and believing in their work can also be a boon to an aspiring art investor. Banksy’s “Devolved Parliament” was a painting of 2009 that replaced British parliamentarians with chimpanzees. It had a pre-sale value of £1.5 - 2 mn. In 2019, it was sold for £9.9 mn, making it Banksy’s most expensive till date. The artist posted a quote on his Instagram from art critic Robert Hughes, “But the price of a work of art is now part of its function, its new job is to sit on the wall and get more expensive.”
6. Ultimate symbol of status
In the high society, art is perceived to be fashionable. The idea is that the owner of an extravagant piece of luxurious fine art must also possess enviable aesthetic value. The art of luxury investment is to ensure possession of something exclusive, a symbolic capital. The best of art investments are an emblem of a person’s legitimate belonging in the rich social circles; it is a testament of their finesse and elegance. A conversation starter and a buzz creator, fine art hung in a billionaire’s living room will most certainly generate talk in the golf club or at the gala.
The security of actually feeling, holding, seeing something physical in nature instead of abstract concepts is something that many crave. The tangibility of art and the value it possesses as a corporeal form of investment, builds a sense of trust and confidence in the mind of the buyer. In context of social and economic conditions, many are investing in material luxury because they lost money in financial crises by investing in something they did not understand. Art’s quality of longevity is an additional freedom. A piece hanging in the bedroom or safe in a deposit box will not be lost because one XYZ company’s stocks fell hard.
8. The homely reasons
Since art investments are essentially profitable over long durations of time, they’re appropriately transitioned to heirs. Sometimes, art work is donated to charities. Coupled with luxury real-estate investments, the millionaires also look at buying art as luxury home décor. Sellers use art to escalate value of real-estate, which is also another reason for a spike in the art market. Occasionally, the modern aristocrats have built-in galleries in their sizeable mansions featuring some of the most lavish collections of art.
“There’s undoubtedly a close relationship between luxury homes and art,” says Knight Frank’s Rupert des Forges. “A tony show home is typically expected to display art that’s worth over $500,000.”
9. Ease of purchase
In this digital age, buying and selling art is possible through online marketplaces. Numerous third-party dealer websites, luxury art galleries’ online presence, art investment firms etc. can be reached easily for the purpose of investing in art. Other websites and blogs offer insights into many other ways to purchase art through the internet. Another option for investing in art is to buy shares in art funds for very little money as compared to purchasing original art, gicleés or reproductions. New types of collective investment aids have also emerged since art was classified as a separate collectible class asset. Art investment funds, tradable art structured products, art investment companies, art investment trusts, dedicated art trading exchanges have all cropped up. As long as you can verify the genuineness of these online tools, the ease of access has provided another boost to the art market. In this unprecedented situation of being quarantined at home, smaller auction houses have done well online. Even Sotheby’s 20th Century Design Sale in March brought in 25% above its estimate by generating $4mn.
SCOPE OF DETRIMENT IN ART INVESTMENTS
Follow your heart, but take your brain with you.
1. Barrier to entry
Lack of sufficient knowledge regarding art and the art market can do much harm to your investments. Since the art market is heterogenous in nature, there doesn’t exist any quantitative analysis or measures to judge the integrity of the purchase. One of the best ways to judge whether an artwork is beneficial for the portfolio is to have a strong understanding of and appreciation for art. In-depth research in the artist, the gallery, the auction house, the artwork etc. is essential to make a quality investment.
Apart from the time that has to be spent learning about the art market, it is possible to consider investing in art only if one is looking at it from a long term point of view. Art builds value hanging on the wall, but it takes years to do so. A large amount of financial weight is required to sustain the investment and to carry it for long durations of time. There is no chance of quick profits, especially for the less informed and the deficient art investors.
2. High risk
Fraud and forgery are two big risks when one enters the art market. With the availability of modern technology, it has become very easy to forge and replicate paintings and then sell them as authentic reproductions or gicleés that are “museum-worthy.” To verify the authenticity of the artwork, relying on trusted art galleries and credible art advisory services is necessary.
The art market operates solely on the forces of demand and supply in the industry. The price and the resale values of artworks is based upon short-lived trends. These are public perceptions about the artist or their craftsmanship and are subject to change erratically. This makes investing in a modern artist tricky whereas investing in an old-world piece of art has to be just as delicately handled.
Global political and economic uncertainty can influence the art market. The 43% drop in sales recorded in November 2008 led to the biggest plunge of 59% in July 2009. The quarantine brought about by Covid-19 has led to the shutting down of all industries. According to data compiled by Art Market Research, in March 2020, there was a 45% drop in the number of fine art lots sold at auction, compared to March 2019—because of the aberrant closure of auction houses. “Collectors haven’t deserted the market in huge numbers yet,” says AMR’s managing director Sebastian Duthy. “Of course, it took several months before the impact of the 2008 crisis was fully realised in terms of drop in sales, so we shall have to wait and see how consigners respond to this crisis.” Since art investments, by nature, are unhegdeable, there is no way to curtail the uncertainty of economic crises and adverse price movements.
Illiquid assets are those which cannot be immediately easily sold or exchanged for cash without incurring a substantial loss. Art works are difficult to convert to cash right away. The availability of ready buyers and willing investors to purchase the asset at the price dictated (or proposed) by the seller is nil. Hence, distress-sales in times of real crunch for cash hurt not just monetarily but emotionally as well. Artwork is acquired because of a serious interest in and true affection for the piece; selling it for lesser than the value it deserves would leave a gaping hole in the hearts of true art connoisseurs. Art does not generate cashflow rapidly.
The art market is traditionally a very murky field. There is no standardised method of art valuation, no agreed upon tests to determine the condition of the luxury art for sale. There is no way of truly knowing the worth of a work of art since there does not exist any quantitative analysis that even experts could justify. This opaque pricing mechanism is a disincentive to many potential investors.
Additionally, when vendors request to remain unidentified, it boosts wrongdoing. The buyers cannot comprehend what goes on behind closed curtains and who is selling them what at what price. The shutting down of New York’s 165-year-old Knoedler Gallery shook the public confidence in the trade. The gallery, for years, had been selling fakes to buyers who were told only that the artworks were the property of “Mr X” and his son, “Mr X Junior”. Issues regarding the actual ownership of art because of a lack of records and no regulation lead to a further lack of trust.
Money laundering, the conversion of illegally obtained money to “clean money” by transferring it through a complex series of banks/financial institutions with dubious records, in the camouflage of legal transactions, is prevalent in the art business. Many large investors (sans art connoisseurs) stray into the art market because of its potential to generate abysmally unreportable money.
5. Associated costs
What one bids at the auction house and is lucky enough to take the prize home, is not the end of the investment in their artwork. From then, begins a string of exuberant costs for these luxury investment pieces. Auction houses charge a commission from the seller which, for Sotheby’s, ranges from 2% on luxury artwork for sale that is beyond 1 mn, to 20% on the least expensive lots. There’s also a buyer’s premium (generally 15%) levied upon objects for sale which is the remuneration for the auction house for a service well provided.
Apart from these high transaction costs, insuring the artwork boosts the expenses incurred. The storage and maintenance of the artwork induce great expenditure. Plus, the consultation and advisory fees elicit a sizeable sum. There’s also an invisible pull on the prices that can be actually observed, from dark matter. It consists of a number of pieces that have not, cannot and will not ever be revealed to the market.
THE LAST WORD
“Is art a good investment?”
The art industry is a labyrinth of complex pathways dotted with uncertainty and ambiguity. However, at the centre is a bounty that is not only monetarily beneficial but is emotionally rewarding. If you are a newcomer to the art business without much monetary funding to work with, it is better to invest in something with a higher probability of guaranteed returns and a smaller time period to reduce the strain on your holding capacity. For confident investors looking to diversify their portfolio and a way to brag about their latest possession, for whom a few millions are earned in a day’s work, venturing in art may provide you with the perfect opportunity to explore an altogether new side of investments and through art, yourself. You may get a chance of delving deep within, seeking that new form of freedom that comes with an understanding of oneself. In the end, isn’t that the greatest investment of them all?