Art as an Asset Class? Part 2: Risks and Trends
The second part of a two-part series, this piece takes a look at the risks involved with art investments, how the market fared under GFC and Covid-19 and the future trends one can look out for…
In my previous piece, I introduced the fine arts market and the advantages of art investments. However, there’s always another side to the coin. While there are numerous benefits to investing in art, this relatively unfamiliar space does have quite a few potholes. Broad issues of availability and accessibility of information, storage of physical assets and regulations play into weaknesses. In this piece, I’ll delve into these issues, take a look at the pandemic’s impact on the market and analyse the industry’s future outlook. The following are some factors that point against art investments:
1. Speculative Investment and No Cashflows
While the fine arts market is not plagued by the volatility associated with equity markets and other traditional markets, art investments do have risks involved, especially when investing in the work of new artists whose reputation is yet to be established. Generally, art pieces do appreciate in value over time. Blue-chip pieces are, by definition, highly revered and popular. However, overvaluation and liquidity risks do exist and there is no guarantee of price appreciation. Further, one doesn’t receive any recurring cash flows from the investment. Hence, such investments are best done with capital that one doesn’t need to retrieve on a short term.
The overall perception of risk in the art market increased by 10% year-on-year in September 2019. The ArtTactic Risk Barometer reading stood at 7.0, higher than its 10-year average of 6.4. Thus, the risk is a factor that one needs to be aware of.
2. Maintenance Requirements
To ensure that pieces maintain their original quality, art needs to be preserved well. Factors like humidity and sunlight need to be managed. Storage fees, insurance costs, authenticity certificates would add to the maintenance bills. Of course, storage must be accompanied by a certain level of security. Preventing the theft of popular pieces is indeed a big task.
3. There’s More to the Art Market than what Meets the Eye — Beyond the tip of the top of the tip
While information regarding hefty price tags does make headlines, they don’t serve as accurate indicators for the art trading world. Two words — survivor bias. We hardly hear of artworks being sold at big losses. Neither will all pieces get to feature at big auctions. Spots are reserved for those works that belong to popular names, pieces holding great significance in a particular time and those whose values have skyrocketed.
4. Information Asymmetry and Pricing Gaps
Unlike in the case of instruments like stocks where proper disclosures are available in public fora, or for commodities like gold, where the market is regulated and information is fairly accessible, the art world is quite a hard nut to crack for a novice player. People who have been involved in this for years, those with good connections with galleries and artist networks can easily leverage their information advantage to make strategic bets.
There is no market correcting mechanism here since a particular art piece doesn’t get traded scores of times a day. Nor is there a firm basis and standard procedure for valuation of a piece of art. Art valuations are performed by expert appraisers who look at past pricing history, compare the piece with peer and similar works, analyse supply-demand dynamics and, of course, factor in individual perceptions. And for an asset whose value is determined by people’s perception, there’s indeed a lot of uncertainty and speculation involved. Humans can be fickle, trends and fads sprout up all the time and die down as quickly as they come.
However, things are improving on the information front. Numerous art indices are being published by various data providers. The Sotheby’s Mei Moses Indices, Artprice100 are some examples. Selection and survivor biases do impact the accuracy of some indices, yet information availability is on an overall incline. Startups, art data providers and other ArtTech players are helping with further information dissemination and access.
5. Difficulty in Selling
It’s easier to buy art than sell it. It’s not a very liquid asset and disposal in the market requires a lot of time, effort and planning. There are two broad avenues for selling art — auction houses and galleries. Some galleries focus on the primary market, where they promote first-hand work of artists. Others are involved in the resale of pieces, as part of the secondary market. Indeed, if you are the owner of an exquisite piece of centuries’ old art, you might be able to sell it and get good returns via auctions. But, it’s not so simple. Negotiating agreements with these houses isn’t a straightforward task and the seller might be left disadvantaged at the end of it. Of course, online avenues are facilitating an easier selling process nowadays.
6. Unregulated Markets
The fine arts market is quite unregulated. Well, there are copyright laws, AML laws and consumer protection forums. But, there’s no SEBI or SEC for the art market. This is a major contributor to information asymmetry as there are no rules that mandate public disclosures. Uncertainties and risks associated with the quality, history and originality of paintings may deter newcomers from entering the space. Further, the absence of a set framework for redressal makes resolutions even tougher. The art world has served as fertile ground for several high profile scandals and money laundering scams as well.
As per a Deloitte 2019 survey, 82% of private banks and 90% of family offices said that the lack of transparency in the art market was one of the biggest challenges facing the art and wealth management industry. 85% of private banks also cited money laundering to be a major threat.
Confidential nature of transactions, lack of standard valuation methodologies, the relatively unorganised and unregulated market and involvement of multiple intermediaries makes the market enticing for money laundering. In India, the PML Act (Prevention of Money Laundering Act) doesn’t explicitly cover the art market or its participants. It does penalise acts of laundering proceeds from offences under the Antiquities Act. The Antiques Act, however, covers only antiquities that have been in existence for over 100 years and art treasures. The EU’s Fifth Money Laundering Directive (5MLD) offers a more robust treatment of the issue of money laundering via the art market.
The Art Market since the GFC
The art markets also took a beating during the 2008 Global Financial Crisis (GFC), however, according to Christie’s CEO Edward Bolman, the fall in auction sales stemmed from a reduction of supply and not demand. The market for pieces worth over $5 million was highly resilient. Demand shot up from $630 million in 2005 to around $2.2 billion during 2007–08. In 2009, the number fell back to $625 million, a post-GFC setback of 4 years. The stock market, on the other hand, fell way lower, to trading levels of the early 90s. Further, the art market bounced back by 2011, while the S&P 500 reached pre-crisis levels only in 2013. In 2019, geopolitical tensions, trade wars, Brexit and other global turmoils resulted in a market dip.
Through the decade, millennial participation in the market has been on the rise. Contribution of online channels to sales has steadily risen as well, constituting a significant chunk of smaller galleries’ sales.
While online bidding was gaining popularity over the years, the pandemic seems to have accelerated the shift to online art sales. In addition to keeping the show running, this democratises art buying and more people would consider entering the frame. According to Marc Porter, chairman of Christie’s Americas, ‘More will be online. More will be private. There will be an active auction market for people who prefer to transact that way.’
Another change that’s been noticed is collaborations between galleries, to help out the ones which do not have very deep pockets or reach.
Future Trends
- Online auctions would become bigger and enhance inclusivity, whereby a lot more people may be brought into the fold of art. However, galleries and auction houses should identify innovative ways of showcasing work to online shoppers. Appropriate lighting, camera positioning, etc. become important. AR and VR tech can play major roles in this front.
- Encouragement for greater participation from the public by incorporating different types of work at different price points would be beneficial to the industry. This offers more people a chance to bring art into their lives and helps out artists as well. Multi-lingual galleries, greater communication and information spread will help in achieving such a goal.
- Having dedicated markets for reselling less famous pieces will encourage greater sales volumes in the primary and secondary markets as well.
- A standardised process of appraisal and valuation should be put in place via collaborations between art appraisers, wealth management firms and art valuers.
- Methods enabling fractionalized ownership and tokenisation of art assets are already in place. However, increasing awareness about such options is necessary to bring them to the mainstream. Incorporation of the blockchain for these transactions seeks to encourage greater participation in the sector.
- Wealth management firms must look at offering holistic solutions in the art investments space, providing art advisory services, estate planning, generational wealth transfer etc. This can help both customers and the firm. Ensuring their value proposition focuses on personal and emotional connections with clients will enable companies to stand out from the competition. Further, efficient reporting of the art services offered by wealth managers will aid in boosting awareness.
- ESG investing is on the rise. Given the desire of investors to contribute to society via social impact investing, investments in art and culture seem to be taking the main seat for many.
- ArtTech may see further growth. Some focus areas include spreading awareness about art, delivering data to the people and identifying the next big pieces. But for this, there needs to be greater awareness about ArtTech startups themselves and investments should pour in as well. Encouraging art collectors and patrons to serve as angel investors and contribute to this growing ecosystem would be helpful.
- Uniform policies and regulatory frameworks need to be worked upon as art is pretty globalized. The art world must adapt to ensure compliance with new regulations.
- Greener art shipping would become a key focus area. Shipping artwork around the world has contributed immensely to growing the carbon footprint. Collective shipping agreements, light-weight, reusable ROXBOX crates are some steps in an eco-friendly direction.
- Computer and AI art may become an art type in its own right. Art fairs and auctions to purchase such art may sprout up too. Whether such work can be called art is quite debatable, given that art is, in a way, a manifestation of human emotion and experience. However, this topic is indeed an intriguing one.
Conclusion
Overall, the art market is witnessing increased awareness and participation, with recognition both as an asset class and as a cultural and decorative ornament. Governments are taking notice and looking at the regulatory aspects surrounding the same. Innovation, digitisation and information become important drivers for the coming decade.
