The art of investing in art

The art market has been facing tough times, with resale prices plunging, but this can provide buying opportunities for some

The art market is not immune to the effects of the increasingly tough economic environment in recent years, but that could mean pockets of opportunity for investors.

Auction houses in London and New York are preparing for sellers to give up on their investments, after the emerging-art bubble burst and the resale market for once- sought-after artists dried up, according to Bloomberg last week.

"Prices for works by young artists such as Hugh Scott-Douglas and Lucien Smith soared with the auction market in 2014, sometimes reaching hundreds of thousands of dollars, when they were traded like bull-market tech stocks," it noted.

Auction sales started falling late last year and such names have been affected, with sales by some artists plunging 90 per cent or more "as the glut of work and nosebleed prices scare away buyers".

The World All Art Index - which tracks art prices across genres, from Impressionist works to postwar and contemporary - reported a 3.1 per cent decline last year, while the S&P total return index rose 7.14 per cent.

The Tefaf Art Market Report released earlier this year also noted the values of works by old masters - European painters working before or around 1800 - fell by 33 per cent.

THE CHALLENGES

After five years of analysis, the hurdles to incorporating art investment fund products in a wealth management offering remain the same - issues related to due diligence, valuation, lack of liquidity and an unregulated marketplace are at the top of the agenda.

ACCOUNTING GIANT DELOITTE, on issues in the art investment industry.

Tefaf - The European Fine Art Foundation - is a leading fair for art, antiques and design, and publishes its Art Market Report annually.

Declining prices and an eager search for yield may make this market attractive to some.

Mr David Hamilton, chief executive of eWise, a digital money management solutions firm, notes: "In a low interest rate environment, many wealthy investors seek out alternative investments for increased yield versus stockpiling cash or bond positions, and investing in passion assets can be a tempting alternative."

UNDERSTANDING THE MARKET 

You have to do your homework before putting money in anything, and art is no different.

Mr Hamilton said when tracking the value of passion assets, it is important to rely on more than just one measure of value at any given time.

"This year's Knight Frank Luxury Index showed that in 10 years from the end of March, the value of classic cars (would have) increased by 467 per cent, with wine by 246 per cent and art by 206 per cent."

The luxury investment index by global property consultancy Knight Frank also noted the value of European 19th-century works jumped 77 per cent in the past 10 years, for instance. This could be the index for those considering holding art for the long term.

And besides the World All Art Index, Mei Moses also publishes other indices in different categories.

The Tefaf Art Market Report is another useful resource, as it aims to provide a global perspective on economic trends in the art market.

It uses data from auctioneers, dealers, collectors, industry observers and art sales databases. It has been published since 2000.

The report noted that modern art is the second most popular market segment, making up 30 per cent of all works sold last year, for instance. The segment outperformed its competitors, slipping 1 per cent in overall value to US$4.5 billion (S$6.1 billion), even though 20 per cent fewer works were sold last year.

The Mei Moses Impressionist & Modern Art Index also saw a small increase of 0.05 per cent, in line with Tefaf's findings.

Accounting giant Deloitte has produced its Art & Finance Report 2016, which takes a comprehensive look at the art world and its finances.

So while there are plenty of art indices around, it is important to look at what they choose to include or leave out.

Forbes noted: "As you think about any art market index, it's important to consider the very different methodologies they use to tackle a market where all artworks are unique, and also the usefulness of their underlying data."

AFFORDABLE ART

Singapore has The Affordable Art Fair, which is held twice a year. The next one will be held at the F1 Pit Building from Nov 18 to 20.

This time, the fair has raised the price ceiling for artworks from $10,000 to $15,000 on the back of keen interest from seasoned collectors. However, three-quarters of the works will continue to be priced below $7,500.

Or why not check out the other Affordable Art fairs? The fair in Hong Kong has a price cap of HK$100,000 (S$17,500), while the cap is US$10,000 in New York and 10 million won (S$12,300) in Seoul.

Deloitte said the art markets in Australia and New Zealand are growing, which has led to players coming in to make art accessible and affordable, bridging the gap between "the art elite and everyday Australians and New Zealanders".

"One such player, which is seen as a market leader in Australia and New Zealand, is Art Money. Art Money's simple deferred payment system allows for more purchasers to participate in the vibrant art culture."

Luxglove, a new Singapore-based online marketplace that sells a "curated collection of high-quality, pre-loved art, design and other collectibles from dealers in the region", has art pieces ranging from below $500 to more than $50,000.

THE HURDLES

The Deloitte report said the art investment industry is becoming less transparent, while art funds face issues, including a lack of regulation.

It said: "After five years of analysis, the hurdles to incorporating art investment fund products in a wealth management offering remain the same - issues related to due diligence, valuation, lack of liquidity and an unregulated marketplace are at the top of the agenda."

The Straits Times reported a major incident in March - a US$1 billion lawsuit brought here by Russian oligarch Dmitry Rybolovlev against Swiss freeport magnate Yves Bouvier, for allegedly inflating the prices of art masterpieces and pocketing the profits.

The point at issue is whether Mr Bouvier was acting as an agent of Mr Rybolovlev or whether they had a buyer-seller relationship.

The Rybolovlev Family Office noted last year: "The art market is not transparent or uniform, so there is no such thing as a standard mark-up. In general, brokers can earn between 1 and 2 per cent for arranging a sale between two private collectors. With purchase prices running into the tens or hundreds of millions and beyond, that is a significant amount of money."

Would-be investors could also consider the jurisdiction where the art was bought or being stored, to watch out for standards involving art around the world.

Mr Michael Moses, co-founder of the Mei Moses Art Index, which measures art performance by tracking repeat auction sales, told Bloomberg that buying at a regional auction house and selling at an evening auction in London or New York could often be better than selling at major auctions.

PROCEED WITH CARE 

Mr Hamilton says it is important to exercise some caution as passion assets, such as classic cars, will not produce a regular cashflow and are not immediately liquid, so you need to find the right balance between emotion and financial return.

"Individuals themselves or their financial adviser must take responsibility for tracking the performance of their passion assets within their wealth management platforms.

"Traditional investments and alternative asset classes, such as passion investments, do not sit in isolation and must be understood as part of a holistic understanding of wealth."

A version of this article appeared in the print edition of The Sunday Times on September 25, 2016, with the headline 'The art of investing in art'. Print Edition | Subscribe