Since the Renaissance, art has been an asset class that has been almost exclusively available to the wealthy and has provided that select few with asset appreciation, tax advantages, liquidity options, and downside protection in volatile markets. Only recently has the high barrier to entry been lifted, providing the everyday investor with opportunities to gain exposure to this asset class. Today, in the midst of tumultuous market conditions, blue-chip art has shown tremendous resilience, having been one of the best performing asset classes across all alternative verticals. High profile transactions have continued to take place in the first half of 2022, including the record-breaking $195 million sale of Andy Warhol’s Shot Sage Blue Marilyn at Christie’s in May. While art presents unique advantages over other asset classes, it also has the rare benefit of being aesthetically pleasing, serving as a visual additive to one’s life.
What is art like as an asset class?
Historically, art was not a commodity meant for public consumption. It was not exhibited and there was essentially no secondary market. Dating back to the Middle Ages, artists received commissions from nobility or religious institutions. This became especially true during the Renaissance, when the Florence-based Medici family commissioned works from artists such as Leonardo da Vinci, Sandro Botticelli, and Michelangelo. It was that patronage that gave the world some of the most recognizable and valuable works of art ever produced. While the patronage model has shifted to a more open market, the importance of collectors supporting the arts remains - so much so that without collectors there would be no art market.
The two terms most important in understanding the art market are “primary market” and “secondary market.” A primary market transaction occurs when the work is sold for the first time, whether it be from an artist’s studio directly to a buyer or through a gallery representing the artist. For a majority of artists, primary market sales will be the highest pricing achieved for their works as the vast majority of artwork fails to achieve commercial viability.
However, for art that is commercially viable, there’s an opportunity for collectors between the primary and secondary markets. If a work is good enough to be shown and offered through an auction house, such as Sotheby’s, Christie’s or Phillips, the secondary market price will tend to be far higher than the primary market offering. Of course, buying art on the primary market presents a significant risk to collectors and investors. The price differential between primary and secondary markets compensates primary market buyers for that risk. Art is also an expensive asset to own. The upfront cost is generally quite high for investable assets, as is the upkeep. Storage and insurance can amount to a significant percentage of a work’s value every year, regardless of appreciation.
So why is art so favored by the wealthy? From an investment perspective, art is appealing because of the inherent inefficiency of the art market. A lack of transparency and the subjective nature of these assets makes it hard to determine what they are actually worth. There are also financial advantages external to pricing and appreciation. Art-backed loans tend to be at lower interest rates than those secured with other assets. Hedge fund manager Steven Cohen reportedly paid for his legal defense following allegations of insider trading through loans secured against his art collection. Additionally, there are tax-advantaged methods of transaction in art that are comparable to that of a 1031 Exchange in real estate, allowing for an exchange of assets rather than direct payment, therefore circumventing capital gains tax.
Finally, there is an aesthetic dividend to art that is unique compared to other investments. You would not hang shares of stock on the wall or display a bond in your garden, whereas with art, you can not only reap the financial benefits but also enjoy its beauty.
How do you price art?
Because of the subjective nature of art, it can be difficult to assign a precise value to a work. It is possible to look at the factors above to estimate a directional value or the approximate price range that a work may fall into. Because most art is unique, it is important to find sale records of comparable works. The terms of private sales, whether it be a direct sale between two individuals or facilitated through a gallery will be closely guarded and almost never publicly available. That is why auctions play such a critical role in providing transparency to the art market. Every auction house has records of past sales that are easily accessible through their websites. These records are aggregated and able to be filtered through platforms like Artnet and ARTBnk, which can be crucial tools for anyone looking to enter the art market.
When pricing art, you first want to understand how that particular artist’s market is performing compared to the broader market. Larry Poons is an example of an artist that was at one point a market darling. Then he changed his style of painting and fell off the map. When an artist stops being talked about, their value decreases. Once you understand that artist’s market relative to art as a whole, you would use one of these record-aggregation platforms to filter by artist, medium, size, year, transaction date and so on, to understand which works in that series or in a comparable series have sold recently. From there, it is a process of elimination, resulting in a select group of works that are as close to the one that you are valuing as possible. Pricing art is not a precision-oriented task, but rather a directional one.
