As a college student in New York City, I feel grateful to be in one of the best cities to experience the world of art. With some of the most famous art museums in the world and a plethora of pop-up galleries year-round, it can be quite overwhelming to choose where to visit in my finite amount of time juggling classes, friends, and other endeavors. I am always enamored of art and decided to write an article on it. I want to dive into what makes art investing extremely attractive and how we should understand the valuations of certain art pieces. While I am not going to be diving into the unregulated nature of art transactions, fakes, NFTs, and a lot of other components that revolve around art investing, these are all things interesting developments I am following.
Introduction to Art Investing
Pioneered by the British Rail Pension Fund, art investing is an investment opportunity that can be quite interesting for some investors with the money and right knowledge on the subject. For art investing, there is a primary and a secondary market. In the primary market, this is when the artist first sells the artwork, whether it is out of a gallery, museum, or own art studio. In the secondary market, this is where art is being exchanged between buyers, which is the focus of this article. Typically, buyers will sell artwork for three main reasons, though not limited to just these three: to pay off debt, divorce, or death. With that being said, artwork may sometimes not sell at the seller’s expected value due to condition, prestige of the art piece, or provenance. In addition, understanding the motivations for why certain groups of people buy certain pieces of art plays a huge role. This is why finding the “correct” value of an art piece is incredibly important yet very difficult -- I will go into this in more detail later.
For many retail and institutional investors, there are many reasons for not seeing art as an investable asset class. One, it is extremely illiquid and has a thinly traded market. Given that art is generally seen as a collectible to keep for years, there are not many buyers and sellers constantly making transactions with each other on a daily basis. In addition, it is not the type of asset that your typical retail investor can afford to make. Art can be extremely expensive and when you factor in additional costs such as transaction costs, storage, and the purchasing of insurance, many people do not want to go through that whole process. For those who lack enough capital to build a physical art portfolio, Masterworks is the only alternative investing platform that gives investors the ability to buy fractional shares of certain art pieces. Even then, one may not be a believer that the art that Masterworks selects on its platform may generate sufficient returns, so there are selection issues that arise. Therefore, ways to invest in art is very limited and I compare this to investing in sports franchises where the only way to gain exposure is through private equity or ETFs to my knowledge. Finally, as mentioned before, with art sales reaching an estimated $65 billion in 2023, the biggest reason across generations for buying art was for enjoyment. While some do art as an attractive investment, it is generally just seen as one to fulfill one's happiness. A graph below from a 2023 Survey by UBS shows the breakdown.
The Thesis behind Art Investing
With all this being said, those that want to invest in art are fortunate enough to take advantage of the many drivers that can make this asset extremely compelling for years to come, if one does take the time to do the research. The first are the huge age demographic changes happening across the world. Within the U.S., we are experiencing “The Great Wealth Transfer, where in the next quarter of a century, approximately $73 trillion dollars will be passed down from Boomers to Gen X, Gen Z, and Millennials. This is important due to the fact that each generation has a different taste in art. In Asia, it was noted that millennials prefer photography and installations, while Gen Z like digital art and prints. In addition, it was indicated in a CNBC article that 40% of Christie’s buyers in Asia Pacific were millennials, an important note on tracking consumer purchasing power across generations. While there is a lot of nuance that goes with understanding conspicuous consumption across generations and different regions of the world, this huge transfer of wealth from generation to generation can help investors interested in art to find the best pieces that will appreciate in value. Later in the article, I will talk about those who do enough research and have large data sets on art prices can potentially do hedonic pricing for art to help determine which pieces are most valuable as younger generations start to buy different art than their parents. The second reason is that a lot of art buying is now going digital via online art auctions, which allows for greater and easier accessibility. While some may prefer the in-person experience of bidding at an art auction, that has not stopped the online art market from growing, with CNBC reporting that it will grow to $17.76 billion by 2030, up from $9.72 billion in 2022. With more online auctions allowing for a wider audience to participate, this can potentially pump more money into the art marketplace from investors like family offices or institutional investors who may otherwise have not participated, growing the secondary market. However, online art auctions may be susceptible to trust and authenticity issues, though more research will need to be done on this to truly understand the degree to which these effects are affecting art purchase frequency.
The third reason for driving art as an asset class is the rise of credit and collateral used to help finance the purchase of new art. While high interest rates have raised the cost of using credit at the moment and most people try to use current income for spending on luxury items, it was noted by UBS that 40% of high-net worth clients have used credit or collateral to help finance these art investments. Because consumers are receptive to using these means for financing these transactions, credit expansion from banks will likely continue to stimulate and grow consumer spending into this segment. Finally, which I believe is the biggest driver, art is an asset class that has a finite amount of supply. As an example, many contemporary artists from the second half of 20th century are either dead or very old that they are retired. Therefore, their famous art collections are not growing any more. But what is growing is the huge concentration of wealth being held with the top 1% of the world -- lots of economic data to showcase this. And for art, it is a type of collectible that can cater to all generations and all types of people regardless of gender or cultural background. Below is a graph that displays the annualized returns and volatility of certain collectables.
It is very interesting to see some breakdown between different pieces of art, which supports the idea that art as a whole may not be a great investment unless you try to figure out which pieces are most valuable. Therefore, I believe certain pieces of art returns will only grow as time goes on and easily outperform the overall market. But how can we tell which ones?
Finding the “Correct” Valuations of Art Work
For those who work at art auctions, their jobs are to sell the art, not value the art. It is really up to the buyers for understanding what is the “fair value” of a certain piece of art. But what ways can we use to determine what “fair value” really looks like? After all, there is no public valuation methodology for understanding art prices.
First, you can look at the artistic movement from when the art was created. Is it Romanticism or Impressionism? Neoclassicism or Contemporary? This should be a great indicator of at least starting to narrow down ways to group pieces together. Then, you can do it by artist. A Picasso painting and a Banksy painting will fetch totally different prices as it not only just attracts certain types of buyers, but one is dead while the other one is still alive (hopefully) creating more art that can be purchased on the secondary market. Finally, looking at the type of art is a crucial factor, one that is possibly more relevant for anything created during the Contemporary Art period, which started late 20th century. Today, more modern artwork does not just consist of sculptures and portraits, but also digital installations, photography, and installations that people want to buy. From here, hedonic pricing will need to be used to find the fair market value, just like what is done in real estate via the Case-Shiller index. All of these factors are just a baseline for how to look at the various ways of starting to create some valuation methodology. This will allow an art investor to figure out who is investing in what and to get ahead of trends before certain art pieces spike. Creating a database of all this data may take time, but definitely may be worthwhile for those with enough capital to seriously consider investing in art.
However, even if you can create an art database of sales that span across time periods, geographical locations, and other factors mentioned, there are still some things to consider that can affect valuations beyond what I said. One is the liquidity of the art market at a given time, which can cause deviations from expected estimates art auctions may have calculated. After all, since auctions are very infrequent, it can be hard to access the market of potential buyers. Therefore, while there are macroeconomic factors that can be used as prediction tools for whether there is a strong buyers market for art, there is still some idiosyncratic risk that comes with art transactions that can be random. Another factor is that certain art buyers may have asymmetric information sets when it comes to understanding the values of art pieces, which affects the purchase price of certain art pieces. More profit-driven art investors will do their research and fully understand the art piece before giving an offer. A more casual art investor or collector may just buy an art piece because of pure enjoyment, with the purchase price being an insignificant factor. Therefore, some types of art collectors that are not just in it for profit; some do it for identity, some feel connected to a piece due to a cultural significance, some may just be addicted to art collecting. This is why even if you can do hedonic pricing for artwork, it is important to understand art trends and consumer behavior when it comes to buying certain art pieces to fully capture the potential appreciation in value. With this being said, I do believe art as an asset class will grow in the future and see it as one of the most interesting collectables to look at.
Thank you for reading my article on art investing!
Updated as of March 14, 2024
Highly recommend people read The Art Basel & UBS Global Art Market Report 2024 for more information, which I did not cover.
Sources
Ann, Quek Jie. “Asia’s Young and Wealthy Are Fueling Demand for Art - What Are They Collecting?” CNBC, CNBC, 7 Jan. 2024, www.cnbc.com/2024/01/08/asias-young-and-rich-are-fueling-art-demand-what-are-they-collecting.html.
The Art Basel and UBS Survey of Global Collecting in 2023, theartmarket.artbasel.com/download/The-Art-Basel-and-UBS-Survey-of-Global-Collecting-in-2023.pdf. Accessed 2 Mar. 2024.
Belinchón, Fernando. “Investing in Art: A Profitable Activity Just for a Select Few?” EL PAÍS English, 12 Nov. 2023, english.elpais.com/economy-and-business/2023-11-12/investing-in-art-a-profitable-activity-just-for-a-select-few.html%C2%A0.
Masterworks. “A Short History of Art Investing.” Masterworks, 29 June 2022, insights.masterworks.com/alternative-investments/art-investing/a-short-history-of-art-investing/%C2%A0.
Mattei, Shanti Escalante-De. “The Great Wealth Transfer Is Encouraging Older Collectors to Sell off Their Art Collections.” ARTnews.Com, ARTnews.com, 22 Aug. 2022, www.artnews.com/art-news/news/great-wealth-transfer-art-collecting-1234637068/%C2%A0.
Wagstyl, Stefan. “The Market for Collectibles Can Be Volatile but Rewarding.” Financial Times, Financial Times, 2 Sept. 2022, www.ft.com/content/72b8a3ee-d6fe-4736-89e5-793377f1db88.
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