/ 31 March 2011

What a first-time art investor needs to know

Investing in art may seem like an arcane or dubious investment practice to the uninitiated, but we do know it can bear fruit. Art does have investment potential — it’s considered an alternative investment that offers investors the chance to diversify out of equities and bonds. It can enrich a portfolio and, of course, it rarely shows vulnerability when it comes to the vagaries of financial or property markets.

Stefan Hundt, a specialist at Sanlam Private Investments’ (SPI) art advisory service, and the curator of the Sanlam Art Collection, is well-placed to advise a first-time art investor of what to look for. For one thing, the art market isn’t liquid, so you need to think long-term about this kind of investment.

“Selling a piece on the open market isn’t easy, particularly if you want to realise full value,” Hundt says. It’s a slow process and you really do need to understand this before jumping in: “For part-time art aficionados and buyers, it’s vital to understand that, like any investment, timing is crucial; as is good advice,” he says.

Research your potential investment
It’s vital to build up knowledge about the sort of art you’d like to collect. Research the artist and the market in general and speak to experts in the field, and artists themselves. You’d research a company before investing; the same applies here.

“Take your time, think beyond aesthetics and if you are only interested in the ‘marketability’ of a piece be careful not to become too emotionally attached to it,” says Hundt. “Know that the value is not in the signature on the artwork, but the individual work itself. Consider the longevity of a painting, how prolific an artist is currently and what is unique about the art, the artist or the context for the art.”

The tricky thing about buying on the basis of reputation alone is that this might not be the best kind of investment — past performance doesn’t indicate future performance. “Look beyond past performance and delve into the fundamentals of an artist’s success before you invest,” says Hundt. Basic advice is free and you can find information on the internet, in galleries and by speaking to artists themselves.

Get independent quality advice
Perhaps you’re not familiar with the art world, but don’t make assumptions about it. Don’t purchase art without getting quality, independent advice. Hundt suggests you speak to dealers, agents and auctioneers with a long-term stake in the market, who also want to develop a long-term relationship with clients. They can provide good advice even when it isn’t going to directly promote the stock they sell because they realise a healthy, growing art market is worth more than a quick sale. Ask around — find out who can provide this kind of advice.

Avoid dodgy dealers
“Beware dealers, auctioneers and galleries without a fixed premises to trade from, and/or who promise unusually good returns, or describe each painting they offer as an ‘investment’,” says Hundt. “They have a stake primarily in their current stock only and this is what they will promote aggressively.”

The art market is an unregulated industry (valued at about R2-billion a year in a recent survey), which simply means that anyone can participate, irrespective of knowledge or experience.

Unfortunately, this means you may well come across unethical, unprofessional sellers, producers — even buyers. “Importantly, don’t be put off by arrogance or haughtiness, because it could be masking incompetence,” says Hundt.

Don’t be afraid to ask “stupid” questions — it’s your money, after all. Discussions need to be transparent and information comprehensible.

What should I pay?
It’s difficult to say what a beginner investor should pay, because it depends on your financial position and your capabilities. Investing in art shouldn’t be done in isolation from other investments. You’re best placed to know if an investment is feasible and affordable.

“You could acquire a good representative etching or lithograph by an artist with a growing reputation, or a smaller painting from an emerging artist with a good fundamental background and history, for as little as R5 000,” says Hundt.

Should you have more to spend, you need to refine the strategy, prioritise and differentiate between long-term, medium-term and speculative purchases. With about R65 000 upwards, you’d be able to buy a good representative work by a recognised young contemporary artist well on their way in the market.

If you have more substantial resources available you would be able to acquire a good artwork from a well-established artist from R100 000, Hundt says.

“When purchasing art for investment, stick to your strategy and realise that sometimes you could be wrong. However, over the long term, the art market does prove to have some ‘logic’, and quality prevails.

Two other pros to investing in art: no capital gains tax is payable on art if it’s owned by you as an individual, for your personal use; and you get to enjoy the ownership of the work and marvel at it hanging in your living room. Note that it’s different when it is owned by a company or a trust, in which case the capital gain could be deemed as income.

Returns on investment
Although Hundt is confident about the art market’s expecting, on average, returns of between 10% and 15% for good works, he says this isn’t set in stone as expected returns are hard to predict. He says leaving an art investment to your children is an ideal way to transfer wealth without impairing investment — inherited artwork often becomes a substantial store of wealth. But inheritors naturally need to care for the work in question: it could conceivably lose its colour, or mould could grow on the paper. Work that’s inappropriately mounted means that the acid mounting has all but destroyed the integrity of the paper, making the work valueless.

Hundt’s final advice is to have the work valued from time to time, like any other asset, as it forms part of a personal estate.

  • Hundt has been the curator of the Sanlam Art Collection since 1997. The collection boasts a representative overview of South African art valued conservatively at R128-million.
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