There is little doubt that art can be valuable. The fact that thousands of museums around the world have been jealously guarding original works by artists throughout times will attest to that. However, if you are assessing the value of art as an investment, you need to look at it with slightly different criteria than a museum, or a passionate collector.
How can you decide on the investment value of an artwork which has such an intangible value? In the same way you would assess the merits of any other investment opportunity before you outlaid your capital, by weighing the initial cost, the liquidity of the investment, the risk of the venture and the return, against your own situation and your own investment goals.
Initial Outlay for an Art Investment
It is often said that you make your money when you buy in real estate, not when you sell. The same can be said about art. The lower your initial outlay, the further your investment value can go to achieve a higher profit, and your goal when purchasing any investment should be to have the returns outweigh the initial costs.
When buying art as an investment, you will want to look for local emerging talent as there are highly skilled artists working all over the world who are yet to make a name for themselves. When you can invest in these regional markets, you have the opportunity to purchase art at a low initial investment, and a high potential for growth.
Also look to buy the best art you can afford when you invest as this will help ensure you are buying high quality work. If you are buying older pieces, avoid those that actually look old or worn because you can have trouble liquidating a damaged piece of art to realize your returns.
Liquidity of an Art Investment
While art is on par with gold as a stable and alternative investment in an uncertain economic climate, it does not always share the liquidity of gold. With any investment you need to look at how quickly it can be liquidated if you need your money back.
There are three main ways in which you can liquidate an art investment:
1. Resell to the dealer. Your first port of call when selling your art investment should be the dealer you purchased it from, as they are likely to buy it back from you quickly, especially if they have sold out of the print since. You will lose a portion of the art’s value to the dealer in commission, and be aware that if you are selling the art of living artists you will not achieve the same high sale price as work from a deceased artist.
2. Art auctions. Christie’s and Sotheby’s are well-known art auction houses, but even smaller auction houses can sell pieces of art for several thousand dollars because if the work has truly appreciated in value, and its sale is well promoted, you can reach a good price. Auction houses will also charge you for listing your investment, and prices vary between auctions.
3. Online auctions. Online auction sites can push the sale price of your art investment higher as the viral nature of the web can induce hype around the sale. You will need to do your research to find a reputable online art auction site.
The Risks of Investing in Art
Just like any investment, art comes with its own risks. However, you can minimize those risks if you manage your art investment on the following guidelines:
- Remember art is a long-term investment. You will see the best returns from your art investment if you wait at least seven to 10 years before selling. At the same time you need to be prepared to sell if an opportunity presents itself, where you can achieve a substantial return on your investment.
- Art should be part of a balanced portfolio. Investing in art is a good way to diversify your investment portfolio, but it should not be your only investment path.
- Diversify your art investments. Also make sure to diversify the types of art and the artists you invest in to minimize and spread the risk.
- Do your research. The best way to minimize the risk of art investment is to research the artists and the artwork thoroughly before investing, and research art dealers for a reputable contact.
If you are not sure whether art is a viable investment option, consider the value placed on art investments by banks around the world. For example, the Deutsche Bank owns more than 500,000 works of art making this the largest corporate collection in the world. The Deutsche Bank’s collection is worth approximately $200 million. In the UK British companies spent a combined $300 million on art investments in 2005 and the US hedge funds are now a major player in the art investment markets.
The risks of art as an investment are also diminished by:
- Globalization. With a global art market there is more art available around the world, which increases the stability and the long-term viability of art as an investment.
- Transparency. With art becoming a more widely accepted form of investment, more information is available to provide you with greater peace of mind and confidence to invest in the art market.
- Contemporary art. Contemporary art is the focus of the current market, and this means there is a constant flow of new work to provide for the market, and fuel the interest of investors. Where the art market was previously focused on historical works, it relied on the recirculation of the limited number of works by old masters, and the market stagnated.
The Returns on Art Investments
If you consider that living artists such as Robert Bateman and Bev Doolittle have prints which are valued between $5,000 and $10,000 and which were originally purchased for around $200, the return on investment you can expect from art can be significant in the medium to long term.
The value of art when you come to sell it is also dependent on a number of less tangible factors, because art is typically sought after for its beauty, it is kept, and then passed on to generation after generation. When there is a limited supply of art, or work from a particular artist, this can also increase your returns, and when there is a shift in culture towards an interest in art, it will be more highly sought after.
Art’s long-term stability is on par with gold or real estate, and with exposure to the US economy becoming a liability, art is an attractive alternative.
However, an analysis of the art market from Tilburg University has found that art investments underperformed against stocks in the period between 1951 and 2007. The art return over this period was found to be just 4.03% which can be attributed to high auction costs to liquidate an art investment.
When you look at all art collections across the world, the overall returns would be negative because the intrinsic value of art is not monetary. Of the art collections of some of the greatest investors, only a very few will increase substantially in value over time because the works have been – and should have been – bought because the purchaser made a connection to the piece, beyond the monetary level.
As a result, art can be seen as an investment option to distribute risk, and will usually go up in value if the purchase has been well researched, but art is not a viable option as your primary investment vehicle.
Article by Alban
Alban is a keen investor looking at different options to increase his wealth. Alban is also a contributing author at multiple personal finance sites.