Q: Is art a good investment?
I am often asked to comment on whether or not art is "a good investment." In my experience, most collectors still buy art because of an emotional or aesthetic connection, rather than for pure investment purposes.
That said, art is certainly an asset class. It is used as collateral by private banks and specialty lenders. There are tax and legal consequences to art ownership, much like real estate or stocks and bonds. As with anything, there are advantages and disadvantages to art investment when compared to more traditional investment strategies. Read on for a brief discussion of the pros and cons.
Not only is art a tangible asset, proponents of art investment tout the fact that art is uncorrelated with other asset classes, allowing for diversification in a portfolio. A blue chip artwork (i.e. investment quality) tends to hold its value and is therefore considered an inflation hedge. Furthermore, the asymmetry of information in a market as opaque as the art market provides arbitrage opportunities for those in the know or those who work with a reliable art advisor. Mechanisms such as 1031 exchanges can be applied to art, which may benefit an art investor.
On the other hand, art is an illiquid asset, i.e. it can take a long time to sell. Auctions are only held at certain times during the year, and finding a buyer privately can take as long or longer. Timing is everything: the reason that some artworks are available for little money is that their owners were forced to liquidate at times when the market cycle did not favor them (the oft-mentioned scenarios of divorce, death and debt).
An artwork does not have an intrinsic value; which means that its value in terms of price is subject to fashion, potentially volatile and difficult to appraise. Transaction and ownership costs for art (auction and advisory fees, insurance, storage, conservation, appraisals) are high, which may erode an investor’s profit. Art investors can run into problems related to authenticity and title risk, requiring sometimes costly due diligence prior to acquisition.
Although the art market has become much more transparent in recent years, partly due to the availability of price records online, it is important to remember that the numbers don’t say everything: they don’t convey information regarding provenance, rarity, condition or other specific factors that influence price.
As mentioned above, art prices are subject to manipulation and fashion, which a buyer needs to take into account. Art can be a great investment opportunity but prospective investors should have deep market knowledge before dipping a toe into this fragmented arena.
Annelien Bruins is COO and Senior Art Advisor at Tang Art Advisory. The content of this article is for informational purposes only. ©Annelien Bruins 2015.
BASIC FACTS: "The Fine Art of Buying Art: Art as Investment" is the first column in a monthly series that explores art as investment.
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