Fine art is an investment asset class that is rarely out of the news. There is a constant stream of announcements of record breaking sales from prestigious auction houses spanning the globe. Investors in art seeking to tap into what are reported as spectacular capital gains in fine art, should familiarize themselves with the pros and cons of this market. Trading in fine art is an enterprise that is complex. It has many unknowns.
The fine arts market is almost impenetrable by risk analysis. There is little transparency in the fine arts market. Unlike with other asset classes the market is for the most part unregulated. The trade in fine art is unpredictable because it depends not just on supply and demand but also on the unmeasurable factor of taste.
Fine art is divided into several categories. These are defined by the media used by the artist. An investor will often specialize in one of these sub-categories for example, painting, sculpture or photographs. Each of these requires specialized knowledge. An investing in art often involves specialization in colleting historical or contemporary art. An investor in fine art will decide what to buy based on knowledge of history of art in a chosen medium. Recognizing quality is also an important skill. In art investment buying the best is a good strategy.
- Why invest in fine art?
- How does art investing work?
- Evaluate / buy / sell art investments
- How to invest in art indirectly
- How do you earn from an investment in art
- What are the fees and extras costs in art investment
- Risks of art investment
Why invest in fine art?
Investing in art is complicated. It is risky and it does require special knowledge. Why then, invest in fine art? The answer is simple. Fine art does not deliver quarterly dividends like stocks and bonds. Investing in art does deliver intangible daily dividends such as the pleasure of looking at an impressive work of art. Owning fine art is prestigious and self-satisfying across many cultures. When chosen carefully a work of art will provide enjoyment of one sort or another. In the best of situations it will also produce monetary returns on investment.
Fine art is a consumable by the eye. But an artwork is unusual because it is not consumed like other assets such as natural resources. Fine art does not depreciate like real estate. Sometimes its value does go down. This is often because of changes in the market. Decrease in value has nothing to do with the objects itself unless it is discovered to be a forgery. Investing in art and art collecting are the same thing. It is enjoyable for a collector of art to show friends an artwork that he or she has bought. A collector might receive praise for their good taste. He or she might gain a reputation for skill in discovering a new talent. An art collection is a focus for social interaction.
Social interaction goes well beyond the home or office. Art investors take part in social events at galleries, museums, art fairs, and auctions. All these joys are value added aspects of investing in art. Buying art is investing in art. It might be for personal pleasure. It could be simply to decorate a room. It might be to obtain capital gains at some time in the future. Or an art investment can be all three.
How does art investing work?
Investing in art works is like buying anything else that is a luxury. A collector looks around the retail market for a piece that appeals to them. An investor does the same thing. Investors have another criterion in mind when they buy. They will want to think about whether the artwork will appreciate in value.
The art retail market includes everything from garage sales to high-end auction houses. It also includes galleries selling contemporary art. Be sure to determine the reliability of retail sources of fine art. All levels of the retail market in fine art are unique. Only a few investors in art have the patience to scour garage sales and junk stores. Those who do sometimes make great discoveries. These occasionally will deliver fantastic gains.
Novice investors in fine arts are advised to study the subject. This is done by reading, going to galleries and getting advice. Independent advisors or consultants are often used by corporate art collectors in making an art investment. They might be advisors attached to auction houses, museums or commercial galleries. It is important for an art investor to understand the motives of the various types of advisors.
For example, a museum curator may want to point a collector towards a specific artwork. They may expect that in the future it will be donated to their institution. The owner of a commercial gallery will promote the works of art in their own stock. They are motivated to make sales. Be cautious of their promises.
In selling a work of art an investor might seek the advice of an expert. These professionals will know how hot the market is for an artist’s work. They also know the market for historical art and the sub-categories of work in various media. An art investor will be cautious about this advice. Auctioneers, for example, have an interest in quantity as well as quality in their businesses. They make money whether an artwork finds a buyer or not. They profit from both high and low sales prices.
How to evaluate / buy / sell art investments
There are specialists who evaluate fine arts. The best of them provide objective services. These evaluators are recognized by tax authorities and insurance companies. Before buying an artwork, an investor could consult an evaluator. This will prevent overpaying for an art investment.
Always try to avoid overpaying when buying fine art. Don’t get caught up in the thrill of action at an auction. An investor should exercise due diligence. Check available sources for recent prices for similar works of art. This is not like checking stock ticker prices. An investor in fine art is buying something that is unique. Even experts cannot provide precise evaluations. They state the possible value of an artwork as a range.
Expert evaluators use information from auction sales. Subscription art price indexes give this data. Not included in these indexes are the prices of art in the primary market. Data on sales at commercial galleries and direct sales from artist to collector are not in the public domain. Evaluators of works by artists who do not have a record of sales at auction in the secondary market use their own knowledge of dealers’ price lists.
A dealer’s price is not a 100% reliable source. Works in the primary market may be discounted by the seller. A price list will not reveal whether a work was unsold. What a work of art might sell for in an open market between a willing buyer and willing seller is at best an inexact estimate.
How to invest in art indirectly
News stories of great capital gains in fine art are common. Jeff Koon’s Baloon Dog (Orange) bought for below $1 million in the 1990s sold in 2013 for $58.4 million. In 2017 Leonardo da Vinci’s Salvator Mundi sold for $450.3 million. It changed hands in 1958 ₤45. Returns like these attract more and more investors to turn to fine art. Returns like those on the Koons or Leonardo are rare in the art market. Both investments required special skills in buying and selling.
Some investors in art might not want to acquire deep knowledge or follow market trends. They might not want to face the challenges of owning an art work. Ownership requires securing and conserving fine art. An alternative investment to consider are art investment funds. These funds use pooled knowledge of experts and pooled capital. They may deliver substantial earnings.
Examples of these funds are Anthea 1 Contemporary Art Investment Fund, the Fine Art Fund Group and Artemundi Global Fund. The investment strategies of these funds have been tailored to take advantage of various sub-categories of the art market. Some specialize in contemporary art and others in Chinese and Middle Eastern art and old masters.
Alternative ways of investing in art are limited only by the human imagination. In Switzerland some 25,000 shareholders bough a $2 million painting by Picasso. The owners decide where the picture is to be exhibited and will decide when it is to be sold. It is unknown whether this tactic will prove advantageous to the investors. Another way to get into the art investment field is to buy shares in auction houses. Yet another art investment strategy might involve making an angel investment in a start-up commercial gallery.
How do you earn from an investment in art
Despite diligent efforts in aggregating and interpreting art sales data the results are inferior to those presented by reputable stock analysts. There are two important reasons for this. One is that data on the vast majority of transactions in the art market are unreported. Data from public sales represents just the tip of the iceberg. The other is that it is a rare occurrence to have data on the sale of the same work of art over a number of years. Remember that most public sales of fine art are of unique objects.
This means that only general trends can be charted, for example the average sale price of contemporary works of art in a single year may increase by a stated percentile. This could be interpreted as good sign for investing in contemporary art. Old masters sales may be up in a particular year. Both of these statistics are entirely dependant on what kinds of works were consigned to auction.
For a singular investment in fine art, say a painting by a specific artist, the cost of acquisition and the sum received from its sale will depend on its quality and could very well not conform to what art sales analysts conclude about the average rise in price of this artist’s works at public auction. Investing in fine art is not as straightforward as buying stocks, precious metals or gems.
What are the fees and extras costs in art investment
There are a number of expenses involved in investing in art. At auction the hammer price is not what you pay to take the artwork home. A buyer’s premium that varies from auction house to auction house according to the amount of the knockdown price is commonly charged. This premium can be in the range of 25% for works knocked down at below $300,000 to around 12% for works above $3 million.
Having bought in either the primary or secondary market an artwork intended to be an art investment must be physically protected. The point is to ensure your fine art is in the same condition or better condition — treated by an expert restorer — when you want to sell it as when you bought it.
The security of an art investment is up to the investor. Security includes keeping it in an environment that does not cause it to deteriorate. To protect against theft or other perils, insurance is necessary. The premiums for insurance coverage of an art investment will depend on expert evaluation. An insurance company might also require the installation of security devices. Every collector should be aware that art theft is the second largest category of international crime. All reported art thefts are listed on an Interpol website. Investors in art contemplating buying from sources without a known reputation should check this list before completing a transaction.
Presuming an artwork has been kept as an art investment for a number of years and it is determined that it is a good time to dispose of it to realize capital gains an investor will arrange for it to be securely transported to an auction house for sale. There is another way to reap the benefits of capital gains in art investment. This is to donate it to a public art collection in exchange for a tax certificate. Private sales of art are rare but sometimes can be negotiated through the gallery where the work was bought.
When an artwork is consigned to an auction house a reserve price can by set by the seller at some level below the low estimated sale price set by the auction house. If a sale is completed the consignor is responsible for a seller’s commission. This is set out in the sales contract. The fee is negotiable with the auctioneer. You can expect to pay between 5% and 20% of the selling price. It is clear that investing in art requires one to understand all the costs involved. These will have an impact on your actual capital gains.
Risks of art investment
Commerce in art is largely unregulated. However, there are some applicable laws. Among those actively enforced in several jurisdictions relate to art theft and the illegal trade of designated national moveable cultural property such as archaeological material. In some jurisdictions there are laws preventing corrupt practices in the art auction industry. In others there are no such laws.
Those investing in art should be aware that the price of its disposal may be affected by the activities of individuals who are neither collectors nor art investors. The art market is a notorious haven for the movement of illicitly gained capital. Beginning in 2019 the European Union will institute regulations aimed at ending money laundering in the buying side of the art market. There seems to be at present no appetite for terminating the ability of sellers to remain anonymous in public sales. Who is selling a particular piece of art can have an effect on its price.
The greatest risk in investing in art is failure to predict accurately the potential capital gain that will accrue for a particular artist. This also applies to works in the various sub-categories of fine art. It is commonly advised that a collector buy what they like. This holds for collectors who are indifferent to the eventual sale price of works in their collection. Art investors should try to hold at abeyance their personal taste.
It might be better to acquire a work that is determined by research to likely appreciate in value and then learn to appreciate it aesthetically. Often an art investment that doesn’t strike one immediately as a treasure slowly transforms in one’s mind as one looks at it over and over again. Remember your opinion of an artwork will change as it is integrated into a new office or domestic environment.
The art market as are all markets is fickle. This increases the risk in investing in art. Before plunging into buying a contemporary work as an art investment educate yourself by attending several art fairs and visit local galleries. Try to understand the pricing of artworks. Learn how price is affected by fashion over a period of time. Do your research into public auctions. Follow the connection between sale estimates and knockdown prices. This will help you establish your strategies for investing in art.
What is incontrovertible with all art assets no matter how judiciously acquired is that they are not very liquid. They are unlike stocks and precious metals. To dispose of an artwork is complicated, often expensive and will take time. With the market depending to a great extent on fashion as well as the general health of the economy, forecasting of capital gains at a specific time and for a specific artwork in the future is invariably subject to error.
It is in every art investor’s interest to minimize uncertainty. This is accomplished by looking at a lot of artworks. It is reduced by understanding the variables that affect the art market. Investing in art can be rewarding in many ways. But every art investment needs to be chosen carefully.