Simply about the difficult: Art Investment. Continued
ARTinvestment.RU   17 февраля 2020

In continuation of the first material we will discuss the main characteristics of art as an asset and list the motivation of the investor

the First part of the article can be found here

art from the investment point of view the same physical asset like precious metals, real estate, shares and other securities. In the mid 1980-х "language arts" began to translate into understandable language the financial investor. 2000-х years after the appearance of the available statistical databases and investment analysts, art has been used as a meaningful financial instrument.

so what do we know today about the subject of art as investment object.

1. Art as an asset: key features

• Uniqueness

Each piece of art — is unique. Even limited edition works have a unique number and limited edition. In turn, the uniqueness has both positive (value added) and negative (the need to assess each subject) side.

• High mobility

unlike real estate, art, in most cases, mobile (except, for example, installations mounted on buildings or interior painting, etc.). This entails two advantages: portability (the ability to follow the owner in compliance with legislative procedures) and the transborder nature (ability to be sold in the markets of different countries). In fact, the mobility transforms the art into a convertible currency.

• Low liquidity

art — is not stock: it is impossible to sell at the date of the decision, what should be remembered always. The level of liquidity does not depend on artistic value and material value of an asset: sometimes selling particularly valuable items, requires a longer time (pre-auction trading, the legal registration of the transaction, the presence of similar works in the free market, etc.).

• the Geography of cost

the same object may have different cost estimates (and the final sales price) on auctions of a single house — say, the new-Йорке and Hong Kong. Sometimes work with a high artistic value is displayed for auction in the region, where it obviously will pay less, for the promotion of the author or inclusion of local collectors in a new segment of the art market.

2. Art as an asset: basic terminology

• fees and charges

When buying and selling art objects in most cases are the Commission's auction houses and private dealers. Depending on the value of an art object and the transaction terms they range from 3 to 50 percent. Ideally analysts even calculated the best country for acquisition of works, taking into account exchange rates and tax regimes of import-вывоза.

• CAGR (compound annual growth rate)

the Index, which is calculated based on the statistics of repeated sales of art objects at change of the owner. Fixed several international analysts in some niches-for example, Artnet TOP-100 Artists (one hundred best-selling artists) shows 8 % CAGR from 2010 to 2018, Mei & Moses All Art Index (entire market as a whole) has a figure of 7.3 %. Art-фонды show an average of 15 % CAGR, the most successful of the funds (with an aggressive stylecontrol and access to insider information) — to 50 %.

• ROI (return on investment)

from the Calculated values of CAGR minus the negative cash flow in the form of maintenance costs and commissions when selling (which are on average 1-3% a year for the management and 3-50% one-time Commission of the seller for the whole period of ownership).

• Volatility (risk deviation)

Deloitte Art & Finance determines the average volatility of the art market, investment grade at 25 %. Speaking roughly, this means that in analytical the choice of the purchased assets, the possibility to make a mistake (get a negative profit at resale) is one chance in four to be successful. Some studies show that the artworks acquired without the prior Analytics have a volatility at 50 % (for example, the old masters from-за the risk of counterfeiting and contemporary art from-за unfair acts in the development of the artist's career — shell auctions, etc.).

3. Art as an asset: the main disadvantages

• Low liquidity

Investors, for whom the priority is the turnover rate of the asset put a low liquidity of art on the first place among its shortcomings. By the way, in the world there are several liquidation companies (not to be confused with mortgage companies and banks providing loans —'ll talk about them at the time), willing to exchange a piece of art with a valuation of up to $100 million in cash within 72 hours. The owner gets 10-15% of the value of their subject.

• the Lack of information on 100 % of transactions

From the previous article, we remember that the statistics for the financial analysts the investor give the database of auction sales. However, this is only half of the market (up to 48 %, of the auction house), while the other side — private market (up to 52 %, galleries and dealers) — does not publish details of their transactions. For a long time it remained an unsolved problem until in 2010, the Irish economist Clare McAndrew released the book Fine Art and High Financе, in which he proposed a system of calculation of private market sales. In short, the economist has found a correlation (dependence) between the two sides of the market and determined its coefficient. Founded by McAndrew, Art Economics is conducting a survey 6.5 thousand defendants in the private market, which accounts for more than 90 % of all sales in the sector. Then applied a special statistical multiplier, which extrapolate the data on the rest of the market. Today this system is used by Art Basel for the annual report on the art market, and McAndrew heads the analytical Department. It is important to understand: the data show volume the private art market, without specifics on price of individual items. Accordingly, the investor remains the only source — auction market with 48 % of the global art market.

• "Factor provenance"

Despite the fact that the provenance — is the history of existence (a change of owners, imaging) work, this article covers all hazards associated with the documentation or lack thereof. First, here is a chance to purchase a fake piece of art.Work might have a bad history with the change of owners: from the banal theft to requisition collections during the Nazi occupation of Europe. In both cases, art is subject to restitution (return of remains to the rightful owner) that it is necessary to exclude at the stage of Analytics, recheck not only the history of work on the documents, but also the history of the documents themselves. Complete a short list of the lack of documents for import in the country of purchase (which causes the problem with the export) and the need to make additional payments to some artists in the resale of their works (right of succession according to the Berne Convention of 1886).

• High cost of maintenance

As mentioned in our material about the management of collections, managing the collection entails costs 1-3% of the value of the entire collection. At first glance it's a bit, but when the investor chooses a long-term strategy — then folded numbers to make him think.

4. Art as an asset core values

• Accessibility prediction

Available to the investor statistics, tools analysis and skilled professionals are now able to calculate a return on investment similar to other usual for investors assets.

• Stability in crisis

the art Market has shown good resilience during the economic crisis: in-первых, the turnover of the sales of art sags lower than average turnover of other goods in-вторых, art-рынок responds to crises with "late" in the middle of the season (6-12 months). This is due to the fact that with the beginning of the crisis, many owners seek to sell their assets, and others — with free capital — have the option to buy them is on the decline. The important thing to remember: in General, the art nor is cheaper during a crisis — falls purchasing power collectors. For those who is ready to sell his collection cheaper, simply can not stand the nerves. On the resumption of economic growth, the art market also reacts late in the season. This is due to the fact that art is not a necessity in first post-кризисные years.

• Moderate risk indicators

the Volatility at 25 % — is a cross between precious metals (14-16 %) and real estate (32-35 %). For many investors it is a serious advantage.

• the Ability to influence the capitalization

When the investor becomes a minority shareholder of a public company, e.g., Tesla, it not alone can influence its activity and growth in the value of shares. Purchasing a piece of art, he became its sole owner — that opens a whole other instruments. It is through the management of collections, with about 50 of action for the monetization of art, the owner may affect the growth of the value of the asset, depending on the circumstances on changing markets.

5. Art as an asset: the basic motivation

the Market identifies three motivations in buying art (summary data report Deloitte Art & Finance 2014, 2017 and Artsy Online Art Collector Report 2019):

• Emotional investment

a Fairly wide spread from "love, could not sleep, become" to "picked to match the color of the walls andfurniture". One thing unites them: the basis of buying decisions lay emotion. Those buyers in the past 10 years, the market was about 60 %.

• Financial investment

"cheaper to Buy — to sell more": this economic formula was the basis of the acquisitions, on average, 25 % of the work. Further tools were varied: tax optimization, accommodation in hedge art-фондах, speculation, etc.

• Social investment

"You —, I, I — you": an art that is acquired for the output of the holder to a new social level or support your own business. The one who shows the availability of own money, willingly bear other people's money. This category includes gifts and support of friendship or close relationship is also a social investment. However in numerical terms it is the small category: 15 %.

it is worth reiterating: the figures show only main the motive influencing the purchase. The motives of investors in the arts in the "pure" today, almost are all at the same time keep in mind these three factors. In the final article about investing in art we will talk about the typology of investors, their strategies and common mistakes.

Denys Belkevych, AI