Art as an Investment Asset
Chiara Aluigi in conversation with Ph.D Hartmut Reck, CEO of Art & Capital Global, an innovative company combining Banking and Art Investments.
Hartmut Reck, Art & Capital Global CEO. Image courtesy of Hartmuth Reck.
Would you suggest portfolio diversification through art investing? If so, for which reasons?
That depends on the financial situation of the investor. On the one hand, many family offices always ask about older art and are happy to invest part of their assets in art. In doing so, they do not look so much at the return, but rather at the purchasing power protection. It is important for them to secure the fortunes of their grandfathers and fathers and to continue traditions. So, when Art & Capital receives a mandate for an art investment, older art is particularly about preserving assets. If you buy a Rubens or Rembrandt today and sell the work in 20 years, there is a very high probability that I will get at least the purchase price plus adjustment for inflation.
On the other hand, there are many successful entrepreneurs who surround themselves with art. Here, the financial return plays no role at all, but the emotional return does: the lifestyle, habits and social visibility that art brings with it.
These are often very contemporary witty works of art that can only be understood in terms of the time and context in which they were created.
The entrepreneurs like to surround themselves with contemporary artists from their generation or at least from their time. Often the investment is not in the foreground but works of art are part of their life like a beautiful property, a car and a boat or a horse. Incidentally, this is nothing new: Goethe already equipped the reception rooms in his house on Frauenplan in Weimar with his collection in order to talk to his guests about art and to find inspiration for his literary works. He himself lived rather meagerly on the side of the house facing the garden.
Of course, this does not meet the requirements of a return-oriented art investment: I asked a client who has a large collection whether he would like to repeat buying the works of art that Art & Capital once conveyed to him? He replied: absolutely not. They would be too expensive for me today!
Bild 1: Feng Lu, War about the egg, 2016 © private collection. Image courtesy of Hartmut Reck.
How are prices established?
In the case of older art, it's easy: usually the last auction results are used. This is far more difficult with contemporary art and yet to be established artists. If an artist is discovered by a gallery, the gallery first sets a price. The gallery owner then slowly increases it according to the system size x material value plus factor X. The factor X depends on the level of awareness and success of the artist.
For an art investment, however, a work of art only becomes interesting if these prices have been confirmed by the secondary market. So only when these prices are also achieved via auction houses and private sales, for example, you can speak of “tested” and sustainable prices.
The problem arises when, in the unregulated art market, we have to deal with a large number of actors who exercise in different functions. So we are dealing with classic conflicts of interest.
What about the different actors? Could you give an example of such actors?
The Frenchman Francois Pinot is the owner of Christie’s and is one of the greatest collectors. His collection on Punta della Dogana in Venice is world famous. In the same way, gallery owners are often collectors too, so it is not surprising if some works appear on the market and others are passed on behind closed doors. That is completely legal, because we are in the private sector, but you have to have the knowledge if you are investing in art, and you have to be clear about the pricing.
If you buy directly from a living artist, you ultimately never know how many copies there are. Works of art are so expensive and should only exist once.
How do you establish that an artwork has a potential return on investment?
For art investments, only key works by the respective artist are actually worthwhile. That makes the number of potential buyers very small, because on one hand, you have to wait a long time to make sure that it is a key work (there has to be a catalogue raisonné). On the other hand, these works are particularly expensive.
Generally, a work of art must meet three criteria in order to qualify for a good investment in art. First, it must be technically well done. Second, it has to have a statement in terms of content: the most successful works provide answers to a debate about the times or bring forth a philosophical discourse. You should be able to describe the producers of those artworks as “children” of their time. I would like to cite Jörg Immendorf as an example.
Jörg Immendorff, Cafe Deutschland (Style War), 1980. Image courtesy of MoMA.org.
The artist Immendorf made the series “Café Deutschland” and the works are ultimately an expression of the German discourse of the 70s and 80s. And last but not least, the artist has to fulfill a unique selling point with his works. One would say USP in marketing language. So, there must not be similar questions or works by other artists on the market.
To what extent are art indices capable of assessing the risk of investing in an artwork?
Art indices are nice! They help with quick price orientation and assessment for works from the lesser known artists.
Could you tell me more about the advisory services offered by Art & Capital?
Many customers are disappointed with the services offered by the large companies. How many times have we heard that art auctioned through the big houses like Sotheby’s, Christie’s, Philipps or Villa Griesebach, is almost not for sale for the next ten years? The auction prices were so high that buyers would no longer be found or that the works would not be for sale in the next ten years.
Art & Capital therefore likes to mediate from private to private or from private to institutions. Art & Capital advises and accompanies in a number of ways. In this respect, Art & Capital Global GmbH is a special weapon. We fulfill the very specific collection requests, supplement collections and also start new ones with specific concepts of our clients through tailor- made mediation and advice.
Generally, how many clients ask for your art investment-related services per year? Would you say that the demand is increasing or decreasing? (This question is to understand if more people are getting interested in art investments).
The proportion of art investments was, and will always be, small in relation to capital market investments. This is due to the nature of things, that capital market investments generate regular income and art does not. Art is also not a fungible investment: If you need cash, you need at least one buyer who is willing to buy your work of art at the expected price. In addition, the art market is an unregulated market with all opportunities and risks. Works of art cannot be rated daily. The buyer is always exposed to the risk that there will be several copies on the market or that the work is not genuine, and last but not least, owning art generates costs. Typically, every collector needs a larger property, insurance, and sometimes air conditioning.
In the end, taxes are still a major threat. One of our clients inherited a Monet and had to sell it in order to pay the inheritance tax of up to 30% that is common in Germany. But art also obliges to preserve it, especially when it comes to national cultural assets. In this respect, one needs capital for art and art does not initially generate any capital.
In this respect, the demand at Art & Capital remains rather the same due to the business model in the fluctuation ranges. Large auction houses and galleries that only grow with rising prices will likely have to rethink their business models in the future, because art prices do not only rise. By the way, some of them are already doing that.
What do you think of art secured lending services, of the use of art as collateral? And about ACDS – Art Credit Default Swap?
It is a last resort to raise money. As a rule, only up to 50% of the mortgage lending value is spent in cash and that at horror conditions: the borrower has to pay between 8 and 12% interest per year. Therefore, I would recommend everyone to finance with another tool (for example via a property). For lenders, on the other hand, this is a very lucrative business: banks, for example, earn from lending and of course from the insurance commissions.
What are your thoughts on art investment funds?
Art investment funds have gone bad in Germany. Stefan Horsthemke and Helge Achenbach, for example, set up an art fund with the Berenbergbank. As far as I can remember, the minimum participation for customers was 100,000.00 Euros. The fund did not even reach the minimum deposit.
In addition, art funds are generally a difficult number. The works have to be securely stored or hung / set up, air-conditioned and insured. That only brings costs and initially no profit. It remains to be seen whether a buyer will be found, who will pay the desired price. Since most funds also need liquidity, this is a super difficult asset class. And the big end usually comes in a crisis: the art asset class also has its economic cycles. Put simply: if the economy is booming, so will art prices. If the world economy enters a recession, the art market also reacts - with a delay - with falling prices. If the art is now in a fund, the fund usually has to sell in order to have liquidity and then often does not even achieve the cost prices.
What are your thoughts on blockchain applied to Art investment?
Blockchain is a wonderful technology. It helps in particular with a very difficult area in art investment. It can be used to prove the provenance beyond any doubt. However, the technology is still in its infancy. It cannot yet provide support for many works, and incidentally, it also needs so much data volume that it is not yet running on a smartphone. But business partners of Art & Capital Global GmbH are currently working hard to make this technology marketable.
In conclusion, how would you reply to the question: “What is the most efficient method of art investment?”
The most sustainable method of investing in art is to build a collection. Preferably with a topic. And then of course only - how could it be otherwise - with key works that are often asked for by exhibitions, so that the collection becomes more and more popular. This increases value. For example, Ives Saint Laurent’s or Karl Lagerfeld’s collection were sold for more than hundreds of millions of Euros. If a collector is lucky, their hometown or home-community will give them an exhibition house or museum. However, and unfortunately, often after the collector's death.
Thank you, Hartmut.
Chiara Aluigi,
Contributor, MADE IN BED