This is shaping up to be another banner year for art.
Sales in the global art market hit a record €51 billion (HK$427 billion), according to this year’s European Fine Art Foundation Art Market Report.
However, Jehan Chu, director of art consultancy Vermillion Art Collections, cautioned that individual items do not reflect the whole market.
“Although some artworks sell for record prices in the tens of millions or even more, this is the exception and not the rule. The financial market is exponentially larger than the art market, measured in trillions not billions.”
Given the risks of alternative investment, he recommends investors allocate 10 to 15 percent of their portfolio to such asset class.
The proportion of art investment depends on how much investors are interested in art.
Information is critical to reducing investment risks.
“The art world is very opaque. In addition to their own love of the art, investors need timely information to identify interesting artists and figure out which artists will retain or appreciate in value. It is about finding the right item at the right time, at the right place and with the right access,” he says.
If collectors want to resell their collections, their major channel is auctions.
Bonhams’ Renfrew thinks auction houses provide a strong platform and a specific focal point on the calendar through which to promote the work.
It also provides equal access to potential buyers.
“Auction results from major auction houses are public. In addition, there is equal opportunity to buy the work for collectors,” he says.
“For some popular artists, their representative galleries have a waiting list of collectors. Important collectors are often given first option before others to buy works by an artist from a gallery when supply is outstripped by demand.
“At auctions, there’s a level playing field and anyone has the opportunity to bid.”
Opaque transactions have provoked controversy in the past.
Galleries may give priority to favored customers under certain circumstances.
For example, they undertake not to resell the items within certain period or they may eventually donate the items to museums for the public good.
Meanwhile, galleries can also use a blacklist to weed out speculators.
Nevertheless, it’s difficult to draw the line. There is no shortage of legal cases in the global market.
In 2010, American collector Craig Robins filed a case against David Zwirner Gallery, accusing the gallery of violating a confidentiality agreement by disclosing his transaction of an artwork by South African artist Marlene Dumas. He was blacklisted as a result.
Subjectivity and regulation
At this year’s World Economic Forum, American economist Nouriel Roubini stressed the need for tighter regulation in the art market.
He said that as a “new and separate asset class”, the opaque art market encourages market manipulation and tax evasion.
Meanwhile, as many as 78 percent of experts surveyed in Deloitte’s Art & Finance report 2014 rated the level of speculation in China’s art market seven on a scale of 1 to 10.
A common practice is to buy works by young artists on a large scale and resell them through auction.
As reported by the Financial Times, American collector Stefan Simchowitz brought 34 paintings by Colombian artist Oscar Murillo for about US$50,000 at an early stage of the artist’s career.
Later, these artworks raised US$400,000 at auction, an eightfold increase.
Yet, Bonhams’ Renfrew believes the subjectivity of art makes the art market difficult to regulate.
He made a distinction between investment and speculation.
Speculation is purely trying to second guess the short-term direction of the market, he said, while investment is looking for potential long-term value growth based on fundamentals.
Art market bubble
If there is speculation in the art market and artworks are too subjective to be regulated, the biggest risk for investors is an art market bubble.
The question that arises is when, where and which category of artworks will be the most vulnerable to a market bubble.
Bloomberg cited a recent report that sales of Chinese art and antiquities in global auctions fell 7 percent to US$7.9 billion in 2014 from the year before.
The report said China’s economic slowdown, anti-corruption campaign and fleeing speculators are to blame.
This year, Artnet and the China Association of Auctioneers published a report showing that sales of China’s art market has slumped 31 percent since 2011 and auction sales in 2014 slipped 9.3 percent compared with the year before.
True eternal value
There is yet to be consensus on whether there will be an art market bubble but one thing is certain — every market has its own cycle.
The art market in 1970s and 1990s was hit by the global economic downturn. Investors have to be cautious about their investment regardless of optimism.
As early as in 1977, economist John Picard Stein argued that art itself has value beyond dollars and cents.
In his academic publication The Monetary Appreciation of Paintings, he monetized the enjoyment of appreciating an artwork and estimated the ROI of such enjoyment at 1.6 percent.
Such ROI may not sound compelling but at least it points out the “appreciation content” of an artwork.
Despite the fluctuating art market, Vermillion Art Collections’ Chu said what matters most to investors is to own their favorite art.
“Similar to any investment, the price of art can be volatile — up one day, down the next. But if you invest only in art that you love, your investment will be valuable no matter the price,” he said.
This is the last in a two-part series on art investment. The article appeared in the Hong Kong Private Banking Journal on Nov. 18.
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