ART CONFIDENTIAL Part 3 – Is Art an Investment? November 27 2019
Many people interested in buying original art are intimidated by the art world and don’t know where to turn for guidance. Art Confidential is a 5-part guide for new art buyers. The series is written to assist new art buyers in building a foundation and a starting point for an art buying adventure that will lead to a lifetime of enjoyment and, if you’re lucky, obsession.
Written by Kelly Juhasz, Fine Art Appraisal and Services
Originally published in Distillery District Magazine, September 2019, Vol. 40
ART CONFIDENTIAL – 5-Part Guide for New Art Buyers
It is true that art has become a recognized investment class and there are plenty of recent reports stating that fine art has outperformed other asset classes. There are even art market price indexes for measuring risk and returns. Fine art, however, is among the most illiquid of assets. The art market is unregulated, lacks transparency and subject to fluctuation. Only the top artist’s performances are tracked in the indexes and the data used to create the indexes contains omissions of sales information and other factors that determine value and market activity. To realize a solid return from fine art, it takes knowledge, lots of cash, luck and a great deal of time.
Investing in art, or what are referred to as treasure assets such as coins, wine, vintage cars and antique objects, can be good investment repositories – for those with substantial wealth and an existing broad portfolio. In tough economic times, holding value is as important as increasing value in good times. But for most new art buyers considering buying art as an investment, there are some key points to learn before thinking that your art purchases will not only hold but increase in value to be counted as a viable asset class in your portfolio.
Most investments contain elements of risk. Risks in fine art can be attributed to global market changes, fickle consumer tastes, social and cultural trends, reduced access to market information, and a lack of knowledge. For new art buyers, the largest barriers to a solid return are the acquisition and liquidation costs.
New art buyers need to understand that not all original art increases in value over time. As discussed in Art Confidential Part 2, the characteristics of determining values of art are plenty and often subtle. The knowledge and information required to understand why one artist’s work sells for much more than another artist’s or why one piece by the same artist sells for more than another is formed through years of formal and informal education, experience in buying and selling, and a passion for continuous learning and looking. Most collectors who profit from their art purchases have obtained a high level of connoisseurship – judgement by intuition based on knowledge and understanding of the artist(s) and art markets – and have used a qualified art advisor or respected gallerist to direct them in their buying and learning. Access to this connoisseurship is key to buying for investment and the costs of obtaining this information can add to acquisition costs.
Buying fine art is easy.
But whether buying in the primary or secondary market, art purchases bring some additional carrying costs to keep in mind: framing, packaging, shipping, installation and insurance. Many new buyers think that they can skip one or all of these responsibilities. However, if you are trying to buy for investment, you need to protect the artwork for its future sale. The costs associated with acquisition range depending on the size and materials used to create the work but they can add hundreds, even thousands of dollars to your purchase just to get it on display. If you are purchasing at auction, you will have to pay a buyer’s premium on top of the hammer price (your winning bid) and that fee ranges from 12% to 25% of the hammer price. The costs of acquisition can add an additional 20% to 50% to the purchase price of your artwork.
Selling fine art is hard.
To divest yourself of the artwork, you are now selling in the secondary market (the market where artwork is sold a second time or by a subsequent owner such as on consignment through an auction house or specific fine art gallery). The options of selling the work yourself directly to another collector are slim unless you are an experienced collector with friends and colleagues who share the same buying habits and collection tastes.
Your options are limited to fine art auction houses who will take the artwork on consignment or specialized dealers who will offer to purchase directly from you as inventory to resell to one of their clients.
The consignment fees in the secondary market largely depend on the value of the artwork determined by the same value characteristic previously mentioned. These fees range from 20% to 50%. You may also have to pay a fee for photography to have it featured in the catalogue and additional insurance coverage while onsite at the auction house or gallery. All of these transactions costs can add up.
Let’s look at an example.
You have $10,000 to invest. You buy a painting by an established artist at auction. To account for the buyer’s premium and taxes, your winning bid has to be roughly $7,000. Add to that a 25% buyer’s premium ($1750) and 13% HST ($1,137.50). Then, you might have to reframe it, hire specialty art handlers to package, ship and hang it and you may want to add it to your insurance policy. The total acquisition costs are at or slightly over your $10,000 investment. Let’s estimate acquisition costs of $3,400. (Note I purposefully made the additional costs over the amount of investment because most new art buyers forget to include these costs.)
Ten years down the road, you decide to sell the artwork. Depending on who the artist is, the current art market (supply and demand and the state of the economy), and the condition of the artwork, the price needs to be set. To be optimistic, let’s say the artist’s profile increased, your work is known as one of his/her best to date and the economy is strong. For argument sake, the value increased by 40% (which is rare and lucky). You list it for auction. The consignment fees are 20% of the hammer (rates will depend on the estimated value of the artwork and differ between auction houses) and there is a photography fee of $100 and an insurance fee of 1.5% of the mid-auction estimate ($15,000 x 1.5% = $225). The painting is estimated at between $13,500 and $16,500 and sells at the high estimate of $16,500. You net $12,875 from the auction house. Your acquisition costs were $10,400. In the end, your return is $2,475. You may also have to claim and pay capital gains tax on your profit. This example illustrates the acquisition and transactions costs using a higher than normal increase in value for the artwork. Most investment reports state a 10-year return on a knowledgeable purchase of artwork is around 5% and likely much lower if there is a return at all.
Many top collectors say that buying blue-chip art is a hedge against recession. Note the word blue-chip. Most new art buyers are not buying art at this level. Blue-chip art is art with significant value (five, six and seven digit price tags) that is expected to hold or increase its value. Examples may include Jean-Michel Basquiat, Pablo Picasso, Claude Monet, Peter Doig, Tracey Emin or Andy Warhol. In the Canadian art market that may include Emily Carr, Jack Bush, Jean-Paul Riopelle, Alex Colville or Jeff Wall.
Buying art is not for the risk-averse investor. But if you do buy with investment as part of your goals (other than enjoyment), you’ll want to spread the transaction costs over a long, long period of time.
Most dealers and advisors will say buy what you love. This isn’t buying for investment but with a little knowledge (your own or from an art advisor) and a passion for owning original art, you’ll be able to enjoy your purchase every day for as long as it makes you happy and maybe you’ll be able to resell it at a profit.
Remember, most art buyers buy because they love being surrounded with original art and they realize that some may increase in value but most will remain works they just love to view and possess. If you are interested in buying art as an investment, it is beneficial to work with an advisor to help you select the best work available by the best artists in the best market at the best time in your price range.
Kelly Juhasz is an art advisor and a qualified appraiser specializing in fine art and antiques at Fine Art Appraisal and Services, and an Accredited Member of the International Society of Appraisers. She is the principal at Fine Art Appraisal and Services offering artist legacy services, collection management, estate planning for treasure assets, sales services and Canadian Cultural Property appraisals.