Even if art is mainly considered a part of ones integral wealth and long-term inheritance, more and more investors start perceiving it as a real financial asset. Please find below the opinion of the Head of Private Banking at Swedbank Latvija on the current trends in the art market and luxury investment sector*
*Intro by ArtLaw.club
Head Of Private Banking at Swedbank Latvija
Building bridges between Art, Law and Wealth
I first started to explore the bridges built between Art and other areas in 2016 when I was back then the Director of a boutique international Law school in Riga and got introduced to attorney-at-law Irina Oļevska. Together with her great enthusiasm we set up the first small seminar that explored the relations between Art and Law. It grew into a summer school programme for Art Law enthusiasts and surely became a passion project to follow up even after I moved forward into my career. Even though I myself am a fully Finance person I always found fascinating the topics that Irina came up and they seemed to resonate not only with lawyers, but with general public as well. We have kept a close contact throughout trying to find ways to collaborate again and bring more of these issues to Latvia. And so it materialized when in autumn 2018 I brought Delloitte Luxembourg Art and Finance expert to Riga for a special seminar exploring relations of Art and Finance. I have further extended my reach to follow up news on ArtTech area as well as collecting and curating. Here are a couple of thoughts that I have taken with myself from these years of building bridges between Art, Law and Finance.
First of all, let’s admit the obvious – the beginnings of interest in art world as an outsider from Finance or Law can be intimidating. The concept of investing in art and perceiving art as a financial asset still creates a lot of debate, but what seems to be agreeable by all is looking at art as a part of ones integral wealth and long-term inheritance. There is a sweet piece of statistics that helps to ease the mind for those concerned – more than 80% of the passionate collectors admit that their main drivers for initially buying art are the aesthetics and appreciation for its beauty rather than pure investment return assumptions.
37% of wealth managers surveyed in a recent report by Knight Frank said that their clients already had a number of luxury investments, such as art, wine and classic cars. In the last two years wealth management has pivoted towards a holistic approach in servicing customers assets (based not on the product offering but rather on the life-cycle analysis of customer needs). Therefore art asset related knowledge will become a certain competitive advantage (estimated USD 1,6 trillion of UHNWI wealth allocated to art and collectibles in 2016 versus expected of USD 2,7 trillion by year 2026). In fact more than half of wealth managers in 2016 increasingly see art as a financial strategy to safeguard value.
In terms of geography the largest art and collectibles wealth in concentrated in the US taking up 36% of the total market followed by 24% in Europe and 21% for Asia. As with the general global wealth tendency the movement in art market is the same – more allocation in the coming years will be added to Asia, China specifically – from 4% of art market in 2005 to exceeding 20% at the moment.
If we would still look a little bit behind the curtain in the area of investing in art then it has indeed become more available for a wider array of investors - from the very direct/classic/closer knit form of purchases of artworks made in auctions to semi-direct of investing in art clubs to indirect of investing in art funds or even selected funds of funds for arts. The top challenges for this alternative asset class remain the obvious – lack of liquidity, lack of market-to-market valuation, lack of historical available track record of asset class performance, unregulated market and generally still quite small size of art funds market.
In this respect I see that the pressure of wealth transfer from baby-boomers to millennials shall drive the industry to finding new and better solutions for the cons mentioned above. On top of the transfer of wealth and improved art-related investment infrastructure everybody is holding their breath to see how millennials will shape the art&finance culture with their strikingly different preferences. For example while ~70% of art collectors now plan to pass their collection to family members the millennial generation are far more comfortable to sell their art in the sort or mid-term (more than 50%) and use art as a collateral for loans.
When it comes to assessing the volumes and dynamics of the art market in the Baltics one has to realize that the sheer size of the market is way too small to take a significant piece of the pie – we do not appear in any worldwide statistics as a separate region. Art being a classic luxury type of investment asset mostly targeted at ultra-high net worth individuals (with free assets of above USD 30 mln) it becomes clear that our markets will not be runners up to USA or Old Europe or China anytime soon. This also explains the relatively niche offering in each stages of collecting, investing as well as financing of art. To exemplify, art-secured lending in the US has grown by 13% in 2017 and reached an estimated USD 20 bln. JP Morgan has offered this service to customer for over 10 years already and admits that the most basic lending concepts of valuation and liquidity still remain challenging for art-secured lending. The transaction costs and loan servicing costs thus remain high, meaning that one-piece securitized lending is excessively expensive – so collections of international liquidity are the starting point for such lending product – again a massively niche product for the Baltics. To speak numbers, for collections or art-pieces worth USD 200k or less the art-secured financing generates way too high fees to be considered attractive. And if the transparency of the market or technology does not solve these then the barriers of entry shall remain high for this investment class in the coming years.
Another up and rising tendency to watch will be the effect of technology on art. Art-tech collaborations have proved themselves already in auction houses becoming more online driven and improved data and analytics platforms. Nevertheless the largest contribution is awaited from uses of block-chain technology in art in helping to increase transparency in the art market.
I am sure we will build even more ties in the coming years in these areas. Follow up on ArtLaw.club to see the updates!
Image used: Manny Ribera on Unsplash