In the age of ultra low interest rates and perpetually tumbling markets, investors are now turning more into the area of alternative investments. One sector within the area of alternative investments, which has a growing presence in investment portfolios, is art. Art and collectable wealth in 2018 were reported to be worth $1.74 trillion, and global sales of art and antiques created a total of $64.1 Billion in 2019 alone. For a long time, art has been seen as a way of storing wealth. However, with new forms of financial services on the rise, one can now do more than simply admire the Jean-Michael Basquiat painting which they have hanging on their wall, or sitting safely in a temperature controlled storage facility.
Global sales of art and antiques created a total of $64.1 Billion in 2019 alone.
The idea of using alternative investments such as art finance is becoming more popular now during the global pandemic of Covid -19. Groups such as the Fine Art Group and Athena Art Finance, as well as many banks providing wealth management services, are able to capitalise on this need by offering art finance services. What exactly are art finance services? According to Yield Street, this is “The practice of using art as collateral for a loan”. This form of financing is incredibly beneficial to the owners of the art, as art is notoriously illiquid, and incurs many costs over the years due to storage, maintenance, insurance, sales tax and capital gains tax.
Art finance is "The practice of using art as collateral for a loan"
Art finance is an alternative investment which can provide investors with a myriad of benefits, such as the ability to defer taxes, low risk and an additional stream of income. However, as in any other case, there are also disadvantages. Just a few of these are the highly unregulated nature of the art market, there are no interest or dividend payments and the substantial amount of time needed to make correct investment decisions.
Overall the demand for art-secured loans is growing.In 2019 alone, there was between $21 billion to $24 billion in outstanding art backed loans. It is growing in popularity amongst art collectors and according to Deloitte, 69 percent of art collectors would use their collection, or part of it, as collateral for a loan. Although this area is becoming more and more popular for collectors, there are still more hurdles to be faced by banks. In the future however, an increased use of technology and data for valuation, as well as more uniform regulations globally may rid banks of some of the insecurity which they currently face.
Even before the global pandemic, one could see that this area is one with great amounts of potential. This is due to the global socio-economic circumstances before Covid -19 occurred.. Historically, wealth has been concentrated within the global West, making those countries the predominant buyers of art. However, as global wealth has increased over the years, this has led to new participants in the art market with people from countries such as China (including Mainland China, Taiwan and Hong Kong), Japan, Russia and India. The inclusion of this new group of buyers have led to an expansion of the market. High demand like this supports the value of art available on the market, which is in limited supply.
Overall, there is no clear end in sight to the end of the effect that Covid - 19 will have on our financial markets.This means that investors have to take more interesting and creative paths in order to gain some liquidity. Art finance provides investors with exactly that avenue, as they are able to gain value from an asset whose value before was simply idle.