Dealing with uncertainties of the art market

The markets for fine art and other collectable items are very much fragmented, highly unregulated and rather opaque. Yet they’ve richly rewarded investors, fetching nearly triple-digit returns in less than ten years. In this backdrop the FT, UK columnist, Mariana Lemann, explains in detail how the ‘investments of passion’ have their own rewards as well as high risks. The essay makes following observations:

• Liquid art market does not imply it’s always easy to sell individual pieces. To address these liquidity concerns, banks that serve wealthy and extremely wealthy investors, such as Citi Private Bank and US Trust, have units that structure loans against art pieces.
  
• These loans can help investors extract liquidity from their art assets, says John Arena, a senior vice-president and credit executive at US Trust. “From a planning point of view, (clients) need to plan for the art,” he says. “If they just buy the art and they hold on to it, there are tax consequences that need to be considered.” During the financial crisis, he says, these loans came in handy for investors stuck in other loans. “We were able to use the financial aspect of an art collection to offset the value of a margin loan.”
  
• Planning is more important because the market is characterized by ‘sheeplike behavior’ and susceptible to passing trends, New York-based art expert and advisor, Mary Hoeveler says. “For people collecting contemporary art and fine art at a high level, it is a lifestyle, not just a hobby. You can call a collector in another part of the world, whom you’ve never met before, and introduce yourself. It is quite rare that you’d be turned down.”
  
• “People indeed derive great satisfaction from (art pieces) but it is also an investment,” another fine art expert and investment advisor states, having experienced first-hand both the investment as well as the aesthetic and emotional aspects of collecting art. Raj Sharma, a private wealth adviser at Merrill Lynch, is a collector of Indian miniature paintings from the 1500s and 1600s. “These things have quadrupled in price,” he states. “It’s exciting to see that.”