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Over the last few decades it has become increasingly common for investors to seriously consider alternative asset classes such as fine art that have been previously neglected in portfolios. The art market – in particular the contemporary art market – has seen an economic boom since the 1990’s which peaked with landmark auction results at Christie’s and Sotheby’s in 2018. This expansion of the market place has left many people wondering if they should simply invest in art and try to profit from this price surge. 

As the market stabilises, it is worth taking a long-term view and asking whether art is indeed a good investment, and also thinking through the related factors of how to invest in art, what factors determine that an artwork can go up in value, buying and selling art and which mediums to invest in. 

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How to invest in art 

The recent financialisation of the art market has made what is traditionally a very opaque and unregulated marketplace increasingly transparent and open to new buyers. This means there is now a wide range of options when looking to invest in all kinds of art, whether through online fractional investing in big-name artists, directly purchasing works on online platforms such as Kooness, or the more traditional route of auction houses, art fair and galleries. 

Doing your market research is very important. As a result of the market opening up, there is much more information on pricing, auction results and market analysis. Online platforms such as Kooness display their prices for artists for sale, a practice traditionally not adopted by galleries, and this allows for a greater understanding of the price points of the artists buyers are interested in. Websites such as Artnet offer hugely valuable databases on all of the art auction results over the last few decades, and so new buyers are able to see past results on similar works by the artist they are interested in. 

 

A work by the young African American artist Tschabalala Self, whose work has risen exponentially in the last three years. Her work now regularly sells for over $1,000,000


Below is a description of the various pros and cons of investing through different places...

Auctions

Auction houses are often seen as the public face of the art market. It’s at the London and New York salesrooms of Christie’s and Sotheby’s where records are continually being made and broken. The advantage of buying at auction is twofold: availability of works and no entry barrier. At an auction, collectors and investors are often able to buy works from in-demand contemporary artists that are not easily available anywhere else in the primary market (the primary market describes the market for works done by living artists, and the secondary market describes that of dead artists). The other advantage is that there is no barrier to entry which is often the case with a gallery: anyone with the funds is able to bid in a transparent and competitive arena. This is different for galleries as will be discussed below. One thing to be aware of when buying it auction is the difference between the ‘hammer price’ (i.e. the winning bid) and the buyer’s premium total, which is the hammer price added to the fee from the auction house. These fees vary from sale to sale but are not insignificant as anything from 10% to 25% can be added to the winning bid. Aside from the bigger auction houses, there are a variety of smaller, often online houses specialising in different areas of the market that are worth researching. 

 

A Sotheby’s auction in 2019.

 

Galleries

Galleries are a crucial part of the market ecosystem, often incubating and nurturing young and talented artists as they transition from their early to mid-career. Again, galleries can be very loosely split between primary and secondary market dealerships, although numerous galleries will deal both. The advantage of buying from a gallery are various: in the primary market, for example, a collector or investor is able to buy very new work from an up-and-coming artist by being in the right gallery at the right time, and then see the value of that work rise rapidly. There are no fees when buying from a dealer, and so the advertised price is the price you will pay. If an investor or collector were to frequently buy at a gallery, then it would be likely they would be given early access to some of the more in-demand work, and there would be a productive and close relationship between dealer and buyer. This, however, can also be a disadvantage because it means that new investors wanting to enter the market may have a barrier to access as they have not yet built up a relationship with the dealer. 

 

Mark Bradford’s show Cerberus at Hauser & Wirth’s London gallery in 2019.


Art Fairs

Art fairs form the centre of the art worlds social calendar and are hotly anticipated as places to be exposed to new artists and network. There are an increasing number of global fairs each year as they have proved highly popular with collectors. The basic principle is that an organisation, such as Frieze or Art Basel will host a number of partner galleries in a large exhibition/conference centre type venue for a week or so.  Art fairs are great places to be introduced to a huge variety of works and hone one’s eye. There are art fairs all over the globe catering to each price-point, medium and period of art. Again, the disadvantage of investing and collecting at an art fair is that many of the most in-demand works will be sold before the fair opens to those close with the dealers and so it is difficult to collect and invest as an outsider. 


 

Frieze Art Fair, New York 2019

 

Online Platforms

Online platforms have also been growing, both in number and inventory. These platforms – mainly taking the form of websites with an accompanying app – work on the principle of providing an online gallery e-space for galleries to centrally congregate and exhibition a selection of their works and exhibitions. These platforms advocate for a more open and transparent market, where prices are openly displayed (unlike galleries) and often focus on the lower and more affordable end of the market. Online platforms, such as Kooness, are great places to browse an extensive inventory of works with filters that allow a streamlined and bespoke search not available offline. 

Fractional investing

An even more recent market development than the growth in online platforms is that of fractional investing in valuable works of art. This allows investors who want to be involved in the higher end of the market to spread their portfolio between any number of paintings, rather than commit to a single valuable work, whilst still getting the same appreciation. Whilst they have received a lot of media attention, the advantage of using these platforms as an investment tool are not clear cut. 

Does art go up in value? 

With the often headline-grabbing prices reported following major auctions, it’s easy to assume that art goes up steadily and at a higher rate than many other investments. Whilst it is very difficult to claim definitively whether art goes up or down (and by extension to what extent), there have been some efforts to determine this. One paper from 2013 written by Luc Rennboog and Christophe Spaenjers entitled ‘Buying Beauty: On Prices and Returns in the Art Market’ came to the conclusion that in the period between 1957 and 2007, and from a sample of over one million auction results of paintings, prints and drawings, the appreciation in the value of art was just under 4% a year. 

How to find out if a painting is valuable  

In October 2019, a French woman found a Renaissance masterpiece by the painter Cimabue in her kitchen whilst doing a house clearance. The work was at risk of being thrown out had an auctioneer not spotted it. The painting then sold for 24 million euros at auction. Stories such as this give hope that what you might have a hidden masterpiece lurking at home. Understanding the value of paintings is generally not this unpredictable, however. It is mostly to do with sales history, provenance and any comparable auction or private sales results from that artist. Other factors such as quality, condition and subject matter should also be considered when determining the monetary value of an artwork. 

How to find the value of art prints and other mediums

These various options for buying discussed above are for both ‘blue-chip’ art (artwork selling in the top price bracket) as well as for more emerging and less expensive art from younger artists, as well as other mediums such as prints, drawings and other editioned works. For new investors and collectors looking to break into an often prohibitively expensive market, many buyers start with prints or other editioned works of the artists they are interested. 

Unlike most of blue-chip art which is dominated almost exclusively by unique paintings, the market surrounding editioned works is more complex and buyers need to be aware of a number of important factors. These include the number of editions made (including artist proofs), future reproduction rights, and whether the print was made by the artist or at a later date by an authorised printing house. It is important to research all of these factors and consult previous price indexes for similar works. 

 

A print by Bridget Riley sold at auction recently


 

Do you have to pay taxes when buying an artwork? 

The short answer is yes, although this differs greatly from country to country. In the U.S., for example, buyers will pay a sales tax on each new purchase which is collected by the seller of the work and subsequently passed to the department of revenue and customs. Tax varies in different states, with some having none. There are numerous ways investors are able to avoid sales and other taxes on new works, the most popular of which is freeports. If the work is sent straight to the free port after purchase and kept there permanently then no tax will be added. As an investor, it would be possible to sell directly from a freeport. 

General advantages in investing in art as an alternative asset 

There are a number of practical reasons why art may be a good choice for an alternative asset. Personal responsibility as a physical asset: the work is totally yours and you have total control over your own asset. Benefit of art in the home: many people and scientific studies have reported the healing, joy and mental health benefits that come with owning art and living with it in your home. Less market fluctuation, although evidently affected by movements in the stock market, art (in particular artists with an established, high-end market) generally perform much more steadily in times of economic crisis than stocks. 

Practical challenges involved in art investment and how to avoid a bad investment

Aside from these practical advantages discussed above, investing in art does come with a number of challenges investors should be aware of before buying. Art is not a liquid asset, meaning that it cannot be traded instantaneously but is more of a complicated process often involving a variety of intermediaries and dependant on demand. Taking care of the work is generally straightforward, but it should be in a temperature and humidity-controlled environment, and not overly exposed to direct sunlight. The work should also be insured in case of accidental damage or theft. If investors choose to keep their work outside of the home environment, then storage is an expense that should be factored in, as the work will need to be kept in a specialised and highly secure storage unit. 

Economic challenges involved in art investment

Aside from these practical concerns, there are some issues around how art behaves as an asset, and how inherently well suited it is an asset class. The first of these is that art doesn’t earn any sort of income, and unlike many other investments that offer some sort of return, art is more of a financial liability until it is sold on. It is important to realise that waiting for a work to appreciate can take a decade. 

The second issue is generally referred to as selection bias, or sample selection bias. This was explored in depth by a highly interesting economics paper written by an American professor, Arthur Korteweg and two European academics Patrick Verwijmeren and Roman Kräussl: Does It Pay to Invest in Art? A Selection-Corrected Returns Perspective, 2017. In the words of the paper’s abstract, it shows ‘the importance of correcting for sample selection when investing in illiquid assets that trade endogenously’. What does this mean? With regards to the ‘art market’, it can be understood that what if referred to as the art market is in reality a very small sample of relevant works that are taken to illustrate the whole market. The study, for example, used a sample of 2.3 million paintings. What they then found was that of this original figure, 32,928 paintings had sold repeatedly between 1960 and 2013. This means that around two percent of the total sample had any resale information over a fifty-year period, yet these figures were being used to create price indices and the market itself. In itself this isn’t necessarily a bad thing, but it affects different sections of the market differently. The top end of the market is generally less affected in price fluctuations off this model than the mid or lower tier. For example, in a period of general economic downturn, the mid and lower tier of the market would feel the effect more than the blue-chip market sector. 

The art market is also currently unregulated. Recently, the Inigo Philbrick scandal has demonstrated that although the art market is becoming increasingly financialised, the regulation is not yet in place to protect against fraudsters and fakes. 

Cover image: At $11.1 million, a work by Jean Dubuffet was the top lot of the night at Christie's London Post-War and Contemporary evening auction in June. Image courtesy of Christie's.

Written by Max Lunn 
 

Stay Tuned on Kooness magazine for more exciting news from the art world.

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