Art has a long history as an asset capable of being transacted, with marketplaces and auction houses like Sotheby’s that is existing for more than 275 years. Throughout that duration of time, blue-chip works have displayed that they can increase in cultural significance through universally appreciated aesthetic qualities. Art is proven to be valuable financially also, with works at upscale of the market being worth 10s of millions of dollars.
Until recently, anecdotes of the ultra-wealthy art’s ability to appreciate were understood principally. The lack of quantifiable research around the financial figure of art as an asset has prevented the wider investment community from participating in the asset class. However, with development in technology and growing interest from investors in assigning alternative investments, the financial outline of art is becoming better understood.
The market value of art has significantly increased since NFT entered the market. NFT art is a new kind of art where limited-edition art becomes digital and can exist as programmable smart property on the blockchain. The digital art stored on the blockchain provides a trackable provenance and the art can be securely traded. Works can be partially or fully destroyed to be sold or traded. Not all art will be suited to NFTs and not all blockchain projects will make good art.
Size and Investability of the Art Market
With a transaction volume of $60 billion annually and a total estimated global value of $1.7 trillion, art represents an enormous asset class. Art is comparable in terms of size to other major private markets, all of which have participation from hundreds or thousands of institutions.
Specifically, the collectibles market, which comprises jewellery, sports memorabilia, watches, wine, and collectible cars accounts for roughly 75% of the annual transaction value. Art’s dominant part of the collectibles market is largely referable to the international scope of the art market, higher average price point per object, and bigger demand levels for the asset. The cultural significance underlying the individuality of each work of art creates a shortage not generally present in other collectibles, even at the high end of the market, editions, and multiples are common.
State of the Art Market
2020 further demonstrated how the value of art from general global trends is disconnected and also showed that the asset class is positioned to be further valued in the future. COVID’s impact on the art world showcases the reality that the top 1%, on a global basis, has been less impacted compared to the rest of the population. While most auctions were cancelled and shifted to online, the contemporary art market increased by 15.1%. This increase directly affects the increase in the number and money of billionaires, which in 2020 reached all-time highs, according to the 2021 Art Market Report published by UBS and Art Basel. The ultra-wealthy also showed that their interest in collecting had increased during the COVID-19 pandemic, so while there were hardly any opportunities to buy paintings as a result of the pandemic, the worth of art continued to increase.
The longer-term perspective of the market is also positive. The switch to online transactions during the pandemic has expanded the interest of younger buyers in the art market. According to the estimation from Sotheby, compared to 15% in live auctions, buyers under 40 accounted for 25% of bidders in online-only auctions. Given the base for online sales now exists, auction houses are more likely to keep using this feature to attract younger buyers.
Pros and Cons of Art Investment
Investing in art can be a good move to some extent, but you need to know the pros and cons before engaging in it. Let’s start with the positives first:
Advantages
- Artworks hardly depreciate in value. In fact, art prices are known to appreciate over a period of time.
- Since art prices do not depend on other possible components of a portfolio, they act as a cushion when other markets are not doing well.
- It is a good method for diversification.
- You get to invest in something you love and in something that brings you personal reward apart from the financial return. Similar to investing in collector cars that you are able to drive and enjoy. Home ownership feels similar although not identical, as the real estate market is so much more liquid.
Disadvantages
- Art “doesn’t pay dividends”, there is no associated cash flow from art, you don’t get a monthly cheque from art, and art does not buy you groceries.
- Art is speculation upon capital gain, essentially making money from art can only be done if someone offers you more than you paid.
- It’s very hard to borrow against art, it makes for terrible collateral.
- Difficult to assess value unless you are very experienced and knowledgeable
- Valuations are highly subject to two kinds of swings: (1) macroeconomic/luxury economy and (2) taste
- Market is illiquid
- Competing with other buyers who: (1) maybe more knowledgeable than you, (2) may have significant wealth, and (3) place meaningful value on the personal/non-economic benefits of the asset.
Conclusion:
As art is becoming a securitized asset class, the interest from the investor community is going to grow continuously. By learning how art can be used as a strategic asset within a portfolio, investors might be able to enhance both absolute and risk-adjusted returns, and also potentially further protect against downside losses. Considering art as an asset can put investors, advisors, and asset managers in a much better position to make intelligent investing decisions as the availability of investment products continues to improve.
Buy art because you like it. Investing in art is best left to the experts and those with deep pockets.