Art For Art’s Sake?

Art as an investment class is becoming increasingly popular, both in Australia and around the world.

But is such a specialist and volatile area worth considering by the average investor?

According to the Australian Art Sales Digest, the value of the art market in Australia has grown rapidly in recent years. In 1995 auctions recorded sales of $27 million: by 2005 this had risen by almost 350% to $93 million. Of this, some 93% was spent on local artists.

Also, the long term returns from art are said to be good, and comparable to holding shares. For example, the Mei Moses Art Index, which compares art returns in the US with those for stocks on the S&P 500, shows that over the 50 year period to 2005 that art achieved compound annual returns of 10.5% compared to 10.9% achieved by the stock market.

Volatile Investment

It is a volatile investment class, though.

There have been some spectacular gains made by art collectors. A good local example is Rover Thomas, a West Australian aboriginal painter who died in 1998. In 1997 his painting “Bugaltji, Lissadell Country” sold for $30,000. Nine years later it sold at Sotheby’s for $660,000!

However, for every spectacular success there are many other artworks that don’t achieve any capital appreciation at all.

Furthermore, the volatility of returns is very marked. In a recent study of a 30-year period by the Queensland University of Technology, returns ranged from a negative 37% in some years to a positive 30% in other years.

Specialist Market

It is certainly a specialist market, requiring more technical knowledge than some other investments. Some of the issues to consider include:

• Valuations are difficult, not least because fashions change over time
• The art works themselves are not regularly traded, and so may be difficult to sell, and
• Transaction and insurance costs are high.

Nevertheless, in recent years the art markets have moved closer to the operation of financial markets, and so are becoming more attractive to investors.

“Corporate leasing allows investors to enjoy a regular income stream.”For example many more works are bought and sold via auction, which gives clearer price signals on artists, styles, etc.

Also, more information is available from price indexes, catalogues, and expert media commentators and publications. This means that it is now much easier for an investor to become well-informed.

For the keen investor with little knowledge there is also expert help available. There are dealers, consultants and galleries that specialise in tailoring art investment portfolios, giving advice, and art market analysis.

Furthermore, some galleries are able to provide corporate leasing opportunities, whereby an art portfolio can be purchased and then leased to the corporate sector. This enables the investor to retain full ownership and enjoy any capital growth, whilst enjoying a useful source of income. Yields of up to 8% per annum are possible.

Self Managed Super Funds

The growth of Self Managed Super Funds (“SMSFs”) has meant that art lovers and investors have been able to use this vehicle to purchase works of art.

It is estimated that 5% of current art sales in Australia are attributable to SMSFs, and an increasing number of these are taking advantage of corporate leasing to enjoy an income from their investment.

There are two restrictions to be mindful of:

• Sole Purpose Test. This requires that the SMSF be maintained for the purpose of providing benefits to members upon their retirement. Therefore a member cannot enjoy a direct or indirect benefit from the Fund’s assets whilst the Fund is active. This is taken by many to mean that the member cannot display and enjoy the artwork unless they have entered a commercial arrangement with the Fund. Such arrangements with related parties are limited to 5% of the Fund’s total assets.
• Declared Investment Strategy. The art must fit within the fund’s declared investment strategy, so it is important to check that the strategy allows for this.

Conclusion

Many commentators maintain that shares and property are the best mainstream classes for investment. Art is seen by many as a risky investment, and one that is best left to those investors who have a passion for art.

Certainly it would be wise to seek specialist advice on the work of art itself, as well as on the investment and tax implications.

However, works of art are increasingly being seen as a useful addition to an investment portfolio, and the potential to earn an income from corporate leasing is making this type of investment more attractive.