Thursday, 16 June 2011

Can Art be a good investment?*

If you pop down to your local art gallery, you will probably see a range of different works of art on display. If you ask your friendly art gallery owner what you should purchase as a good ‘investment’, he or she will almost certainly say ‘buy what you like’. Firstly, this absolves him of any responsibility to you, and also means he is free to sell you almost anything, at almost any price, as long as you ‘like’ it.  

Art is a market estimated to be worth in the region of $50 billion annually as of 2007.Since then it has dropped, and some commentators believe its present level to be around $15-20 billion. In reality, the art market is not one single market, but many different markets operating in many different countries, at many different levels, all at the same time. Art is a generic term which includes painting, ceramics, antiques and more categories, most of which have specialist experts and traders.

 If we are to get into the nitty gritty of whether art is or can be a good investment (the action or process of investing money for profit), rather than just speculation (a conjecture without firm evidence) we have to be much more specific about what we are talking about. Being more specific means identifying which art market and which artist, and maybe even what period we are talking about.

The art market is the last unregulated market of significant dimension in the world. The art markets are generally regarded as being extremely inefficient, opaque and riddled with conflicts of interest. All wise investors know that where these characteristics exist, combined with the lack of regulation means that there exist significant opportunities for financial gain. But the opportunities for financial gain mainly accrue to those relatively few players who have the time, the expertise and the capital to turn the opportunities into financial gain.

The art markets are dominated by the main auction houses which are Sotheby’s and Christies, followed by Bonham’s and other smaller auction houses who account for between 25- 50% of the market. The other 50% or so is made up of art dealers, galleries and the many other players in the markets.

In 2007 the USA accounted for 46% of the world’s art auction turnover. The second largest market was the UK, followed by China who had just recently displaced France from third position. Traditionally as the USA accounted for such a large part of the art markets, it is not unsurprising that the markets are driven by the spending power and tastes of American collectors. The state of the American economy and the international value of the dollar is a strong influence in many parts of the art markets. However in 2010 China became the premier player in the market with a 34% market share, pushing the Americans into second place. A new order has come into existence.

There is one golden rule in the art markets. It is only after an artist is dead, and that his work is therefore concluded, that a consensus of art experts will build up about the recognition and value that can be attributed to that artist. But it is only by producing consistently good work in some volume during their lifetime that artists can come to the attention of the major players in the markets and achieve that recognition.

Like all markets art is affected by supply and demand. Demand will depend on how much fame an artist can achieve for himself and his work during his lifetime. As Andy Warhol put it ‘Everyone will be famous for 15 minutes’. But they will need to be famous for a lot longer than 15 minutes if their art is ever to be considered an investment, rather than a decorative object, because as Warhol so succinctly put it ‘An artist is somebody who produces things that people don't need to have’. The trick here is that if you buy something that you don't need to have, but you want it, will other people want it too?

*This is the first blog of a series by Luxury Hedonist on Art as an investment.

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