Investing or Collecting? On the Challenges of Art Market
Just what is it that makes today's art market so different, so appealing? Paraphrasing the title of Richard Hamilton’s classic pop-art work is very relevant in the post-financial-crisis world. The art market is booming and new sale records are being set. But investors willing to enter the art world should consider it is not all shiny and glossy but comes with certain risks.
179.4 million dollars. This is how much an anonymous buyer paid for Pablo Picasso’s “Les femmes d'Alger (Version "O")" at Christie’s auction on 11 May 2015. The painting exceeded Christie’s valuation by nearly 40 million dollars and became the most expensive piece of canvas so far. In 1997, when it was last time on the market, the Picasso sold for just 31.9 million dollars. For 18 years “Les femmes d’Alger” pleased the eyes of its owner and if this wasn’t enough, immensely increased its value and proved to be an excellent investment.
Correlation between Art and global inflation (1985-2011)
|Name||Wealth Growth in Asia Pacific|
|Art 100 Index||0.32|
|Contemporary Art 100 Index||0.07|
|European 19th Century Art 100 Index||0.47|
|Old Masters 100 Index||-0.38|
|Modern Art 100 Index||0.07|
|European & North American Sculpture 100||0.01|
|Chinese Contemporary Art (since 2005)||0.76|
Source: Art Market Research, Bloomberg, Credit Suisse
Art Market Drivers
According to the annual report on the art market prepared by The European Fine Art Fair (TEFAF), last year art buyers spent about 54 billion dollars globally, which is an increase of 7% year on year. This is good news for two reasons. Firstly, it means that 2014 broke an all-time record of money spent on art. Secondly, the art market finally surpassed the pre-recession high of 2007. Steadily growing auction houses’ revenue confirm an increase in demand for art. Dan Scott and Marc Häfliger, Investment Strategists from Credit Suisse justify the development of prices and the growing revenues with an influx of both private and institutional buyers. The experts point out to growth in global wealth as the main driver behind the art market. The analysis they put together confirms that there is a correlation between art prices and emerging wealth: “A quick review of auction house Christie’s annual reports, paints a clear picture. In 2003, sales at Christie’s Hong Kong totaled 98 million dollars. By 2011, they had reached 836 million dollars.”
Art as an Asset Class
Sale records, such as the one made by the Picasso, are impressive and stimulate people’s imagination. Especially, that investors will not forget anytime soon the losses they made on traditional investments during the financial crisis. Given the current volatility, low yields in fixed income and concerns about valuation in equity markets, art is an attractive alternative.
Dan Scott and Marc Häfliger took a sober look at the subject to answer questions why investing in art can be attractive and what risks should be taken into consideration. In their view, fine art as an asset class offers several attractive characteristics, including low correlation with other assets, such as stocks, bonds and gold, which makes art an excellent tool for portfolio diversification. Art as a tangible asset can protect against inflation and has previously shown that it can perform better in an inflationary environment than equities.
While praising the positive qualities of investing in art, the Credit Suisse experts warn that art, just like any other asset class, comes with certain risks. First and foremost it is entirely different than traditional assets like equities or bonds and requires highly specialized expertise. Scott and Häfliger advise that before falling for art, investors should consider the following: illiquidity, high transaction and maintenance cost, as well as the large amount of time they will need to dedicate to art.
Investors or Collectors?
For those who are not discouraged by the challenges of the art market, André Rogger Head Curator of, Credit Suisse’s art collection, has some advice: “I would rather like to think of the ‘investors’ as collectors, who follow their own esthetic preference. Visiting galleries and art fairs, as well as engaging with a circle of friends also interested in the arts would be the way to establish what to buy.”
Dan Scott and Marc Häfliger confirm Rogger’s words from the financial point of view: “For the reasons stated above, art qualifies best as a long-term investment, and the non-financial dividend should be a key motivator behind any art investment.”
|Low correlation to other asset classes||Illiquidity|
|Growing demand (rising wealth in emerging markets)||Long-term investment|
|Low volatility||Lack of dividends|
|Diversification||High transaction costs as well as ongoing costs (e.g. professional advice, maintenance, storage and insurance)|
|Tangible asset/inflation protection||Art investments are unregulated|
|Prestige/social value||Risk of forgery|