Art as an investment, the balance sheet view

Harco van den Oever explains to The Wealth Report why he believes the way wealthy art investors manage their collections is due for a reassessment
Written By:
Andrew Shirley, Knight Frank
6 minutes to read

How fine art is perceived now? Why isn’t art treated as a balance sheet asset like other investments?

Over the last decade, there was a lot of talk about art as an asset, but you will primarily see it discussed in terms of investment. The art market is often described as illiquid, opaque, unregulated and unpredictable. There’s a lot of glitz and glamour around auction sales and some interesting ideas in art investment services, like the fractionalisation of big-ticket artworks through blockchain.

As far as how wealth managers view art, it’s still very much a passion asset. There are a few kinds of art collectors, some of them are focused on ROI, but many of them genuinely love the works they buy for emotional reasons. My grandparents were collectors, and I myself love contemporary works on paper. That’s one aspect of it - often it’s difficult to quantify these emotionally charged decisions.

The other side of it is that art value is seen as “subjective”. There is lots of interest in pricing data, you have indices like the Mei Moses, but essentially art valuation is usually up to the tastes of experts. What makes the art market so special is that artworks are not fungible, and there’s a lot of price and quality variation even between works by the same artist. So, it is not just that a Picasso is a Picasso. We have to ask, when did Picasso make this, how does it compare to other works he made, what is its historical significance, who else has owned this? These are the things experts judge on.

Following that, we have to think, how many Picassos are transacting per year? If you compare fine art to other markets, you will see less transactional volume, and a lot of it is private. So in many ways, the “asset-isation” of art was also limited by the kinds of data we have been able to collect. If you stack it up next to real estate or other alternative assets, the issue is that banks and asset managers have difficulty assessing art risk.

How do you see art as an investment?

As far as it goes, it’s stable, because artworks hold value over time. They return the same yields as bonds, they have low volatility in crisis, and they show stronger positive correlation with the price of gold than with other assets. The market as a whole returned 5.3% between 1985 and 2018 per annum.

One thing about fine art investment is that it requires specialised knowledge to be successful. There’s a risk that an artwork is a forgery or that maybe there could be an ownership claim. Knowing how to choose an up-and-coming artist, how to store all of these works, these are skills. Personally, I feel this has real potential if it could be assessed in the same way you would other asset classes. So, rigorously and in a repeatable fashion.

Of course, there are works we love and want to collect with no thought to their financial prospects. To me, the best strategy is a balanced one. Usually, you determine what kind of art you want to collect, maybe you are looking for works by a particular artist, time period or region. Strongly cohesive collections have a value of their own, and I do not think you need to always be thinking of ROI. It’s more keeping in mind that some works will be more liquid than others, so perhaps allocating some budget towards those would help manage your collection’s risk.

Why do you believe art should be treated like a balance sheet asset?

Frankly, because it benefits the collectors and the financial services. Around 75% of artworks in private hands are kept in storage. They’re considered “dead” assets, because most of the time, you are paying for storage and maintenance no matter what you decide to do with the artworks.

Traditionally, there’s collection management, which is art professionals helping to manage inventory, the logistics, what to acquire next. All of these things are important, for sure, because it helps streamline the collecting strategy.

The thing is, many countries tax art capital gains, ownership and inheritance, in addition to your storage costs. Mostly, either you sell your art or continue to maintain it, maybe one of your children has an interest, or you create a museum. In my opinion, if you can treat fine art like a stable asset class in addition to the joy it brings you, it will increase what you can do with your collection. You can start to generate liquidity from it, through art-backed lending. You can manage your collection strategy with more nuance. For instance, it would help you prioritise what artworks to sell, and what to keep. In some cases of succession planning, you could even sell artworks to cover taxes and costs.

If you can treat art like a balance sheet asset, there’s only room for opportunities. You can release capital to invest in other ventures, or to buy more art. High-net-worth individuals are continuing to allocate wealth to buying art, around 10-15% for the ultra-high-net worth. This is trillions of dollars locked up in warehouses. It would also improve fine art’s prospects as an investment as well, as you would continue to enable liquidity and the engagement of institutional participants such as financial services businesses.

You touched on blockchain in your first answer and works of art are now being created on the blockchain in the form of Non-Fungible Tokens or NFTs. Some sell for millions of dollars. How do see these as an investment and are they even works of art in the conventional sense?

First, it is important to note that NFT’s are not the artwork itself, but can be thought of as certificates of ownership for virtual or physical assets.

Having said that, I believe we live in a world that is rapidly evolving. Digital art appeals to a new breed of collectors, one that does not necessarily value the physicality of art works in the same way that more traditional collectors have. This will lead to more artists producing digital art with the added benefit that NFT’s ensure authenticity and the payment of royalties. This market is still very young though and will no doubt go through many iterations before it settles into a more stable place where it could, for instance, be used as collateral. In the meantime, be prepared for lots of interesting evolutions but also high volatility.

Harco van den Oever is CEO of Overstone Art, a fintech firm that combines financial risk analysis and end-to-end solutions to support financial planning for art.

If you’d like to discuss how your fine art collection, and other assets, can be structured strategically to unlock capital as part of your real estate plans, speak to Knight Frank FinanceAlex Ogario, Head of The Private Office, and his team specialise in securing financial loans against luxury assets.

Photo by fan yang on Unsplash