Art as an Asset

24 Jul, 2017 Articles

In the current climate of economic uncertainty, the investment focus is increasingly shifting towards alternative investments, which allow to diversify the investment portfolio and spread the risk incurred over various types of investments. Alongside traditional asset classes such as bonds, equity securities, real estate, and gold, new types of investments have emerged over the last decades. Accordingly, more and more investors, investment funds, family offices, or high-net-worth individuals decided to invest in more exotic products such as debt investment, venture capital, wine, cars, watches and other luxury goods, or artworks. After the 2008 crisis, most of investors indeed tried to reallocate their resources in safe investments, among which art was perceived as the newcomer.

Until recently, the fine art market fascinated the general public. However, the barriers to entry were high and access to art was reserved to the most upper class. However, through various phenomena such as crisis, globalization, new forms of investment pooling, and access to information, a much larger community has started to invest in art and collectible assets. Fine art markets have been in continuous evolution, expanding to new countries and new customers. This increase of customers can be explained by the increase of ultra-high-net-worth individuals (UHNWI), which are expected to rise 43 percent to 275,740 by 2026[1], but also by the arrival of new market entrants which is facilitated through new ways of less restrictive investment (e.g. crowdfunding).

 

Let’s have a look at this (not so) “exotic” (anymore) investment, which remains however a very particular asset that continues to inspire passion, and its characteristics.

Art as a heterogeneous and physical product. Artworks are unique. Therefore, any damage to an artwork could have a much bigger impact than for other products. The physical and movable nature of such assets also triggers specific risks and costs, as the artworks need to be physically transported from one owner to another, from an exposition to the restoration room, etc. For each transaction, the transport and insurance of the artworks need to be considered carefully, representing costs that can be much higher than for other goods because of their unique feature.

In addition, artworks are exposed to incorrect attribution, forgery, fraud and theft. Protecting these assets should therefore be a priority. Thankfully, artworks can be insured against most (if not all) of the above-mentioned risks.

Art is illiquid. Art is an illiquid good. It is sold on a segmented market and does not pay dividends or interests. The selling of other types of assets such as gold, oil, or publicly traded stocks is indeed much easier as it is facilitated by the nature of the asset or the market on which the asset is exchanged.

Artworks can be very difficult to sell. Art business is affected or at the mercy of erratic public taste and short-lived trends.

Art is volatile. The volatility of artwork is a common perception. Indeed, the price of an artwork can fluctuate over time. The volatility of an artwork is influenced by the rate of the artist, the latter being volatile as well, the number of similar artworks at the same time, marketing expenses linked to the artwork sold, trends, etc. Depending on the art category, volatility could however remain within certain limits. As an example, private banks and asset-based lenders accept certain artworks as collateral for loans, which show that financial institutions are ready to give a minimum value to artwork that should not be undermined.

Art is difficult to value. Valuation is one of the most critical points when offering investment products in artworks. In finance, the price of a financial asset is determined by the market, an index or some specific factors. However, there is currently no standardized art valuation methodology[2].

Art is opaque. Art markets have neither self-regulated nor public statutory authority supervised exchange of artworks, which leaves the art market unregulated. No centralized system exists to gather the artwork transactions, and the tracking of data in relation to purchase and sale is much more complex than for regulated investments. However, some jurisdictions have imposed anti-money laundering requirements on art dealers in order to preserve the market from abuse, which allows to gather some data in relation to artwork and its exchange in the art market. Moreover, a group of art market businesses and specialists has formed the Responsible Art Market Initiative (RAM)[3], the first of its kind. RAM seeks to provide art stakeholders with guidelines that aim to raise awareness of a growing number of operational and reputational risks faced by the art industry.

Art offers unique values[4]. Art assets offer values that no other investments offer. Among art investors, artworks can sometimes be seen as an investment product that could raise substantial economic benefits. However, in addition to a potential increase in value, artworks can enhance other needs and desires for the investor among which we can count the satisfaction of the investor’s motivations, the aesthetic value of artwork, the passion for collecting, the representation of a social status, a certain prestige, or social responsibility by financing/funding art (e.g. promoting young artists, promoting culture).

The knowledge of the general public about artworks and its characteristics have grown among the years. Economics professors at the University of Luxembourg notably observed a low but often slightly positive correlation of art with the broad financial markets, whereas art has a negative downside Beta. Investing in art could serve as a useful function in a diversified portfolio, by hedging against financial market risk[5]. However, investment products offering an exposure to the art market are still very limited.

Art can nonetheless represent a significant opportunity in a holistic wealth management approach. Wealth allocated to art assets is increasing and services around wealth protection, monetization, estate planning, and philanthropy are in demand but require substantial knowledge and expertise of the art market ecosystem. Private banks, family offices, and other investors need to build an adequate strategy in order to efficiently serve art assets. We noticed that more financial institutions are actually seeking to develop their knowledge and adapt their services to respond to this asset investment market trends and client demands.

The remaining mystery and fog surrounding the art market—which is not as well-known as other sectors—on top of the individual considerations proper to each complex transaction, thus require a deeper understanding and a closer cooperation between the financial and art business actors. Building a bridge between these two traditionally separate universes would allow to create synergies which should be beneficial and allow to share each other’s expertise. In this respect and for 10 years now, Deloitte organizes an annual conference and publishes the Deloitte and ArtTactic Art & Finance Report[6] to explore the development and intensification of art and other collectible assets in wealth management.

 

Adriano Picinati di Torcello, Director, Art & Finance Coordinator at Deloitte Luxembourg

Cyrielle Gauvin, Deloitte Luxembourg

 

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.

 

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about to learn more about our global network of member firms.

 

Deloitte provides audit, consulting, financial advisory, risk advisory, tax and related services to public and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500® companies through a globally connected network of member firms in more than 150 countries and territories bringing world-class capabilities, insights, and high-quality service to address clients’ most complex business challenges. To learn more about how Deloitte’s approximately 245,000 professionals make an impact that matters, please connect with us on Facebook, LinkedIn, or Twitter.

 

© 2017 Deloitte Tax & Consulting

 

Specially for Artlaw.online


[1] The Wealth Report 2017 by Knight Frank, with $30 million or more in net assets.

[2] Dr Roman Kräussl, Prof. Thorsteh Lehnert, and Dr. Nicolas Martelin have worked on a more objective valuation method – but quite hedonistic – by  incorporating art specific data, such as artwork style, medium, size, subject treated (i.e., landscape, portrait), influence of auction houses, artist living status, provenance (private sale, exhibition and place of the exhibition or museum), reputation, investment period –“ The True Value of Art” at the University of Luxembourg, on June 15th, 2017 (“True Value of Art Conference”).

[4] The True Value of Art Conference.