With major art fairs taking place across the globe from Chicago to Istanbul to Shanghai, art enthusiasts, collectors and sophisticated investors alike are questioning whether to acquire works of fine art as investments. And as significant appreciation emerges in some corners of the art market, we see growing interest from clients about incorporating art into their investment portfolios.
Last year saw more than $60 billion in art sales, a 67 percent increase from 2009. According to the 2014 Deloitte Art & Finance Report, 75 percent of art collectors and buyers are purchasing art for collecting purposes but with an investment view — a sizable jump from 53 percent just two years earlier. In 2014, artworks sold at auction jumped more than 25 percent to $15.2 billion, with a record 1,679 sales worth $1 million or more. That’s four times more than a decade ago, according to data from Artprice.com.
When clients are considering an art purchase, we encourage them to think of art as part of their total portfolio — as they would a second home, private business or real estate investment — but not an asset class that adds diversification in the traditional sense.
From that viewpoint, consider these four factors before investing in art.
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1. Avoid getting caught up in the hype. When any asset class performs well, more investors want a piece of the action. It doesn’t matter if it’s a stock, a piece of real estate or a work of art.
Recent art appreciation has triggered great excitement, but in reality only a handful of artists and artistic periods will generate those big returns. Investors can fall into potentially hazardous behavioral patterns, hoping to ride the wave when a certain asset class performs well. Buying that soon-to-be-discovered artist or that underappreciated art form about to become the next big thing often proves to be the exception, not the rule.
“When considering an art investment, it’s important to step back and take in a holistic view of your investment assets, future cash flows and other tangible assets.”
2. Think of art as you do venture-capital investing. Just as every start-up is unique, so too are works of art. Some have a track record of success, but many are prone to the whims of the market.
What drives passionate collectors is the individual interpretation and unique viewpoints on artwork. That subjectivity also explains why it’s difficult to think of art as an asset class. Unlike start-ups, art has no balance sheet, cash flow or earnings to help determine its true value.
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To determine the fair market value of a piece of art, work with a reputable art advisor to find the sale prices of comparable works. The gallery or auction house may be able to provide documents showing their own related sales.
It also pays to learn about the artist’s life and times. That information can provide context and meaning for an investment piece. Note any prestigious awards or fellowships the artist has won, academic positions held and notable collectors or museums with the artist’s work. That information can offer positive indications about the long-term value of a piece.
3. Shun the belief that art sales translate to resale value. The secondary market for art is limited beyond works from “blue chip” artists. Also, before you calculate any windfall, remember the Internal Revenue Service considers art as a collectible — meaning the tax rate on gains is up to 28 percent. Add that to the expenses associated with acquiring, owning and selling art and you may net only 55 to 60 percent of the sale price.
Reflecting the wide spectrum of possible returns from an art investment, focus on non-financial benefits first. View any financial gain as an additional benefit rather than an expected outcome. And if you acquire art as an investment, especially if you’re new to collecting, you’ll likely want to work with a reputable art advisor.
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4. Value a collection as more than the sum of its parts. This adds a layer of complexity to appraising a collection and raises important planning considerations for wealth transfer or philanthropic giving.
The IRS and others valuing estates after death recognize art as an important part of a portfolio, so make sure you’ve updated your estate plan accordingly. Do you intend to sell your collection before you die? Gift it to your children or donate it to a museum? Each of these options carries a host of unique wealth-transfer and tax implications.