September 28 2014

Image of 3%

Picture: Deloitte

That's the number of collectors who buy art purely as an investment, according to a new report on art investment by Deloitte (read a summary of it here at ArtNet, and see the full report here). 21% of collectors said they bought art purely for the purposes of collecting, while 76% said they bought it partly with an investment view in mind.

That broadly reflects my experience when I was selling art in London. Most people buy something because they fall in love with it. (And you need to love a £50,000 picture before you shell out for it, as buying art usually comes way down the list of life's priorities, after paying off the mortgage, educating the kids, planning the pension, and dallying with the yacht.)

But many people often asked me if art, at least in the Old Master end of the market, was 'a good investment', and usually my answer had to be 'no', at least not in the short term. I always urged people to buy art on its own merits, and see any investment potential as a medium to long term proposition.

As a safe store of capital, Old Masters can represent good value. But the problem with using art purely as an investment vehicle is the transaction cost. Let's say you choose to buy and sell at auction; your buyer's premium start at 25% (plust Vat), and your seller's premium starts at 10% (again, plus Vat). So the average punter needs to be confident that the art has gone up by almost 40% before they can get their money back.

Now, there are many scenarios in which the margins don't need to be so frightening (auction houses are usually happy to negotiate down a seller's premium, for example) but you get the idea. In fact, I see that Christie's has now introduced a new 2% additional premium if they sell your picture for more than the higher estimate. And dealer margins can be just as high, if not higher.

Obviously, the question is a wholly different one at the modern and contemporary end of the art market, where we're dealing with a speculator's market in which quality has little to do with prices. Even here, however, you need to be prepared to wait a good while for price increases to wash out transaction costs; flip a Warhol too quickly, and you could end up losing big.

Update - a reader writes:

Regarding the 3 % this result says nothing about the amount of funds devoted to art investment rather only the percentage of collectors investing.

There is over one hundred billion us dollars of insured art value sitting in one storage facility in Switzerland to which one can add JFK and red hook in NYC and bank vaults from Wilmington Delaware to London. 

Wealth managers mainly recommend art as a portable unregistered  non monetary store of value in case the clients’ resident country or marriage falls apart rather than for near term return.  And as Volpone recommended you can send it ahead.

In a true global emergency the value of art will shrink because the buyers will disappear but it might still be there when things normalize and it is valuable if the emergency is localized as with certain countries right now

Forecasting future value for an artist's work requires forecasting future tastes and future economic conditions but rather than a paying cash dividend or interest it has a carrying cost for insurance storage and ultimately conservation in addition to high transaction costs and an unregulated market.

Buy what you love if you can afford it and any financial gain is a reward for buying and selling well.

Or look for sleepers.

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