Following up on yesterday's "Oligarchs and Orchestras: Inside Luxembourg’s Secretive Low-Tax ‘Fortress of Art’ Warehouse".
Our intro to The Art Finance Biz Seems Quite Robust: "Sotheby’s Adds Another $200 Million to Credit Facility for Guarantees":
Our intro to The Art Finance Biz Seems Quite Robust: "Sotheby’s Adds Another $200 Million to Credit Facility for Guarantees":
In the Mutually Assured Destruction game the auction houses are playing, the guarantees to sellers has become key to getting the opportunity to sell the stuff. And then there are the art loans...From Penta:
Booming Art Market Paints a Picture of High Risk
Should art be considered a new asset class? That’s a valid question according to a report from Deloitte and ArtTactic, which notes that half of the family office executives surveyed said “one of the most important motivations” for owning art and collectibles was to better diversify the portfolio. The survey also finds that 76% of art buyers and collectors are now snapping up art as an investment, up from 53% in 2012.
But should they be? It’s worth considering. Deloitte estimates that there are “at least 400,000 art collectors in the top wealth segments [high net worth and ultra-high net worth folks], with an estimated $1.5 trillion of wealth in art assets.”
Deloitte also notes that investors are doubling down. The survey finds that investors are increasingly taking out loans on their existing collections to buy yet more art. About 53% of collectors used their collections as collateral to buy new art; versus 38% investors who used the loans to fund “business activities”; and nine percent to refinance existing loans.
Private banks typically offer these loans to their clients at a rate of 2% to 3%, lending up to 50% of an artwork’s value. Last year, Northern Trust, for instance, approved $200 million in loans collateralized by art. (For investors desperate for liquidity, a cottage industry is emerging with firms like Borro, Right Capital and Art Capital offering nonrecourse loans at annual rates sometimes well above 20%.)
At 2% to 3%, that’s not a bad arbitrage but, from a pure investment standpoint, this added layer of complexity sets up a high hurdle for art investments. Art, as an asset class, has a questionable track record, with taxes and auction house fees chipping away at returns. A 2013 study found that, between 1900 and 2012, art, stamps, wine, diamonds and violins underperformed the equity markets. Stocks earned real returns of 5.2% annually versus between 2.4% and 2.8% for the range of collectibles. A key finding: During times of economic duress, artwork collapsed between 15% and 30%, as investors sold off their collections at fire-sale prices....MOREDeloitte Art & Finance Report 2014 (136 page PDF)
