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Buying Art – for Love or Money?

by Lindy McNair |

Last week one of our customers happened to mention that with interest rates at 1.5% and inflation at 2.7%, his ISA was actually losing money. He'd fallen in love with an original print and was trying to justify the £2500 he was about to spend on it.

To some, financialisation of the creative product is nasty and vulgar: art should be bought purely for aesthetics. Yet more and more people seem to be turning to things that are close to their heart and which at the same time offer a return, perhaps partly as a result of losing money in the financial crisis on investments they didn't entirely understand.

According to Wealthinsight Luxury Investments Report (2013), the total investment in art and other collectibles is expected to grow at a compound annual growth rate of 10.3% to reach $621bn by 2017, which is on a par with the $681 billion invested in private equity in 2016 (Forbes: Ten Predictions for Private Equity in 2017).

Deloitte's 2009 paper Why should art be considered an asset class? makes for interesting reading and suggests that although the fine art markets are viewed by many as a 'fascinating but worrying world', art is fast becoming a staple in many investors' portfolios in order to diversify. Art market investment is covered by nearly all the main financial newspapers such as The Economist, The Financial Times, Bloomberg, CNBC, New York Times and Les Echos.

Forty years ago property became a widely accepted investment class – could art be poised to undergo the same transformation?

Here are five reasons why we think now is a better time than ever to buy art for love as well as for money:

There is no minimum spend

There is a perception that fine art assets are reserved for the super-rich. Yet Deloitte (above) estimates that around 80% of all auction transactions are below £10,000, opening the door for many newcomers to enter the market. Along with rapidly increasing access to online auctions and galleries, a much larger community has become interested in collecting and/or investing. It's true that art will not give you an income and is not highly liquid – your profit is dependent on what a buyer will pay when you come to sell, and only this, but this is similar to many asset classes such as private equity, gold, wine, oil and most other commodities. For most people, the emotional return, and the pleasure of sharing their asset with other people, more than makes up for this: based on research conducted by Deloitte and ArtTactic, 83% of art collectors surveyed indicated the emotional value of buying art is the key motivation for buying, followed next by the social value for 60% of respondents.

The art market is becoming more transparent

For a long time there has been an element of 'smoke and mirrors' to the traditional art world, making investment feel particularly high-risk. As yet, there is no 'official ' art-index which can be used to value art, but The Mei Moses Art Indices (bought last year by Sotheby's and re-named the 'Sotheby's Mei Moses'), is widely recognized as the standard measure of the state of the art market by using the sale of an art object at different points in time to track changes in value. It is quite likely that soon this and other indices will be used as recognised benchmarks to render buying, selling and valuing art far less opaque. With increasing access to art market statistics in the form of online auctions, catalogues and market data dissemination in real time, it is no longer necessary to pound the pavement visiting hundreds of galleries, art fairs and museums to research what you are buying. For the art collector, the internet is your best friend.

It's not all about London

Before the arrival of the internet, if you weren't located in London – or within easy reach of it – the variety of art on offer was fairly limited.  Now, partly due to high rents and rates, many galleries are moving online and most auction rooms have online bidding or list their Lots on online portals. With globalization of the art market, geographical barriers are breaking down and the choices for buying are increasing.

The transaction costs are lower

As is the case with all retail, moving online reduces costs and that reduction is passed on to the customer. Margins at a bricks and mortar gallery have to be much higher than for an online gallery: even in the cheapest area of London rents can't be much less than £3000 per month, along with the costs of salaries, bills, rates and utilities, the total overheads for a gallery can't be far short of £10,000 per month. It's easy to see why moving online is so appealing. For art collectors and investors, it means more options for searching around for the best value. The principal of any good investment is 'buy low'!

You don't have to buy a painting or a sculpture

Collecting original prints by famous artists has become an increasingly popular way to enter the art market now that people realise they can actually afford it. Prices range from under £100 to tens of thousands of pounds, so you don't have to spend a fortune to get started. For example, it's possible to own different versions of David Hockney's beautiful and iconic 1971 Olympics 'diver' image according to your budget: the extremely rare hand-signed lithograph before poster text was added would set you back around £15,000 (if you could find it), the scarce limited edition hand-signed poster would cost around £5,000, but it's possible to pick up the highly collectable unsigned poster for around £300.

Original prints are usually produced in fairly large quantities called limited editions. Because these are multiple examples of the same image, there are far more auction results and market data available for tracking value and investment value. Research by Clare McAndrew, founder of the consulting firm Arts Economics found that it takes on average about 30 years for a unique work of art to appear on the market again. But prints trade far more regularly into a larger market, often with lower associated costs, arguably making them a far less volatile and more liquid investment than a painting or a sculpture.

David Hockney Diver

 

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