Buying art for investment’s sake

Luxuries such as fine art have long been considered ‘investments of passion’, as they provide emotional and social enjoyment, but they can also be profitable in the long term.

“The outlook for art investing is very strong because the market is tiny,” says Philip Hoffman, founder and CEO of The Fine Art Fund Group, a London-based art investment house with an international network, which manages funds and bespoke private accounts containing assets worth $220m (€165m).

The volume of investable art available is $10bn per annum, estimates Mr Hoffman, but the amount of wealth chasing it is exponentially growing. “Only 5 per cent of the world’s rich are buying art as an investment but through private banks at least 25 per cent of the world’s rich will have art as part of their portfolio over the next 10 years,” he estimates. “That flood of money is like a tsunami hitting a tiny island and that’s why banks are waking up to it.”

Moreover, in the current climate where liquidity is king, interest in borrowing against art has increased enormously, as the wealthy look to monetise some of their assets without having to sell them. Art lending has become a revenue generator and a selling point for private banks.

But few private banks offer services in art advisory, investing or lending. “Art advisory and lending is a good example of how private banks have not fully bottomed out the importance of ancillary services to their business model, as few operators really have a commitment to this space,” says Seb Dovey, managing partner at Scorpio Partnership.

Citi Private Bank established its art advisory and finance group 30 years ago to provide objective advice on art acquisitions and sales, and in recognition that fine art as an asset class can be used as collateral for loans, says Suzanne Gyorgy, global head of the art advisory and finance team of six people at the bank.

Art lending allows clients to release liquidity from their art collections to invest back into businesses or to expand their art collections. At Citi, the total sum of the loan portfolio has increased by 20 per cent year-on-year since 2005. “People are looking more and more at art as an alternative asset and safe haven. They buy art because it is something they respond to, they love it, but have an eye for it as an investment too,” she explains. But it is very important that investors do their homework, says Ms Gyorgy, as “art is a buyer-beware market”.

There is very little transparency associated with art trading, largely because a large segment of the market is executed through private transactions.

Returns on art can be heavily influenced by macro-economic factors but also global interest in certain genres and changes in trends, tastes and culture. And then there are hidden damages, fakes and forgeries to deal with.

 “You need experts who understand when preferences are changing and need to be ahead of the times,” says Mr Hoffman. Some artists reach a peak and then drop and never recover while others go to new heights, such as Picasso. Some have held their value for centuries.

Last November, auction house Sotheby’s sold American abstract artist Mark Rothko’s No 1 (Royal Red and Blue) for $75.1m, after a heated bidding war. A collector was quoted saying he had sold that same piece in the 1970s for $300,000.

But for every story like this, there are many less appealing. “Especially in contemporary art, you really don’t know where that artist is going to go and where the piece is going to increase in value,” says Ms Gyorgy, and it is very important to be able to evaluate where a brand new artist or new work fits in the art history.

“With an in-house advisory team, we can confidentially value clients’ artworks without the need to go to a third party,” she says.

But art advisory or lending can be very risky and some banks do work in partnership with third-party providers.

 “To call on the right and best-in-class professionals for any art-related need is in the best interests of both artworks and art collectors,” explains Patricia Amberg, head of the art competence center at UBS.

As a result of the losses racked up during the financial crisis, in 2009 UBS shut its Swiss art division of 11 people, serving clients globally, deciding to focus on its core business. But a year later, responding to client demand, it re-opened an ‘art competence centre’ in Zurich, made of a smaller team of three art historians. Their services include advising clients on purchasing, building up and selling art collections or searching for works of art and bid at auctions.

Unlike Citi, Deutsche Bank or JP Morgan, UBS does not offer art lending today. “We do not consider art to be an investment asset but a part of personal wealth, not in the least for its emotional value,” says Ms Amberg. “The monetary value of each artwork is composed of a complex mix of elements, some of which are random external influences, which makes it extremely difficult to make any valid general predictions for the art market and therefore to consider it as a base for collateral.”

Art funds are not on UBS’s shelves. “Based on our analysis, the risk potential of art investment funds is significant and their applied pricing difficult to justify,” states Ms Amberg.

BNP Paribas Wealth Management also offers clients a tailor-made service aimed at helping them with estimate and authentication issues and the management of their collections, for example by arranging their works of art to be lent to exhibitions. The French bank does not offer art lending or funds nor does it work with external companies.

“We want to remain an independent and objective player in the art market in order to offer the best possible solutions for our clients,” explains Antoinette Leonardi, head of the art advisory team of four people at BNP Paribas Wealth Management, stressing that discretion and confidentiality are also key factors.

Bank Julius Baer does not have in-house expertise in art advisory but refers to external art advisory houses on client demand, says a bank’s spokesperson.

“In order to provide a top quality service, private banks would have to have a huge team, which would cost millions of dollars a year, and most of that team would not work for a bank on a full time basis,” says Mr Hoffman at The Fine Art Fund Group. His firm offers services to private banks such as BSI, EFG, Berenberg and Emirates National Bank of Dubai and has run events and educational programmes for JP Morgan, Credit Suisse and Morgan Stanley.

The only solution for private banks is to outsource to niche product providers who can support their clients globally, he says, claiming that 15 of the world’s top 50 experts work in his team of 45 people.

Today, banks tend to run “a concierge service” which provides them with just “really tiny income”. Offering high-quality art advisory or banking services would win them many clients, differentiate them from their rivals and appeal to the wealthy interested in alternative assets, explains Mr Hoffman. Banks he works with also receive a negotiated share of the firm’s 20 per cent profit share from managing clients’ art private accounts.

Art lending applies generally to a diversified portfolio of art and brings banks revenue through the margin spread. The loan-to-value ratio is around 40 to 50 per cent and private banks typically charge between Libor plus 1 and Libor plus 15, he explains.

“Lending money on art collections is for some banks an entrée to get to know a UHNW client and extend banking relations beyond that particular product only,” says Mr Hoffman. Although banks are interested in this activity, today it is focused on VIP clients only as “banks are terribly cautious about lending on anything at the moment”.

The market’s growth is clearly driven by the increasing number of professional groups who provide independent advice on investing in art, says Mr Hoffman.

“The lending facility is not always considered to be an important part of the wealth manager offering and most want to lend only in order to secure an asset management portfolio,” comments Scorpio’s Mr Dovey. “This is a passion killer for many clients.”