Inflation is rising, exacerbated by world politics, and people are turning to alternative investments. Interest in works of art is also growing – always linked to the question: is art even suitable as an investment – and if so, which one?
It’s an old rule: low interest rates and rising inflation make real assets more attractive as investments. So too now: the massive purchases of debt securities by central banks since 2020 have helped push bond yields to record lows. Due to the expansion of the money supply caused by this, inflation is now rising sharply worldwide.
Thus, in addition to real estate or gold, works of art are now also attracting the interest of investors. A look into the past shows that art prices have been negatively related to changes in real interest rates. When real interest rates fell, art market sales rose and vice versa. This phenomenon is believed to be related to the characteristics of art as a zero-yield asset class. Unlike bonds, which pay coupons, and stocks, which pay dividends, art does not generate current income. In fact, art has a negative cash flow because art owners have costs in the form of insurance, storage, shipping, and maintenance. When real interest rates rise, the opportunity cost to the art owner increases: they lose out on returns that they could have made by buying interest-bearing assets instead. In today’s environment, where real interest rates are negative, opportunity cost is not a barrier to art acquisition.
Ruth Polleit Riechert studied art history in Germany and England (University of London, Goldsmiths College) and did her doctorate on “Marketing and price development of contemporary art from 2000-2007” at the Heinrich Heine University in Düsseldorf. She has been in the Art and finance world (Christie’s, auction house Ketterer, Deutsche Bank, McKinsey
However, the development of art prices is not solely dependent on the (real) interest rate. Many other factors also play a role, and different art movements sometimes show very different price developments. Here are a few figures: From the beginning of 1998 to the first quarter of 2022, the annual average increase in art market prices was just 1.4 percent. Nineteenth-century art prices have fallen an average of 0.6 percent a year. Old masters even lost 6.2 percent per year. Photographs increased by 2.7 percent and prints by 4.3 percent. In contrast, contemporary art (6.9 percent) and post-war art (“Post War”) at 6.6 percent achieved noticeable price increases. For comparison: During the same period, the US stock market index S
In the past, therefore, “art per se” was not an attractive investment medium. Rather, it was important to be invested in the right segments or plants in order to be able to achieve an attractive return.
So if you want to invest your money in art, you should either have enough knowledge of the industry yourself or work with art market experts who have proven to have the necessary expertise. However, low interest rates and especially rising inflation, which is very likely to be here to stay, should encourage investors to invest more in art.
If works should not only serve as a store of value, but also achieve an above-average return, one should rely on artists that everyone knows and whose work appeals to as many people as possible. Because what distinguishes art investments is that a work is always selected according to personal taste. The price is ultimately in the eye of the beholder. This must be ready on a certain day to pay the amount expected by the owner.
How do you find works that are suitable as an investment? Can artworks and artists be valued like companies or stocks? Yes and no. The market has changed: After the art world had long been considered mysterious and non-transparent, digitization has completely transformed and democratized the market. But despite the rise of online auctions and NFTs, many people are still unsure whether they can dare to invest in art.
So what is important when buying art?
What do I already own, what do I like? Based on what the buyer has already bought, their own taste can be identified. New art buyers should ask themselves which exhibitions they particularly like to visit, which works they can’t get out of their heads.
The second step is the question of what owners want to achieve with art in the long term. Is it about decorating the walls in a private or business environment or is a collection to be built up? More than three works were quickly bought and a small collection was created. To avoid this becoming a hodgepodge, I always advise following a strategy that defines the theme of the art selection as well as the budget that can be spent on art each year.
If art as an investment is an issue, it should be clear whether buyers want to receive the money or even increase it. In most cases, even if appreciation isn’t the goal, no one wants to lose money.
The selection criteria must be defined according to the objective. When it comes to preserving money, it is important to avoid risks and select works by well-known classics. When it comes to raising money, work by young artists comes into play, talented people who have a good chance of success. In this case, an investment is rather speculative and risky and should only be made if you can live with the fact that the value of the work will not develop further. Unless you have spent a lot, the joy of art always remains here.
After defining the goal, prospective art buyers should look at as much art as possible: in museum and gallery exhibitions, at previews of auction houses and at trade fairs. If possible on site or digitally.
Trade fairs are excellent for finding out about the market. Especially the top-class ones often offer many works in a confined space in museum quality, which then disappear into private ownership again.
When it comes to buying, however, an analogue trade fair is to be understood as an active trading area that you should only venture into if you have complete control of the buying environment.
If there are no price tags and you haven’t researched the prices beforehand: hands off!
You do not have to know everything. But a picture is an incredibly individual and personal matter. It becomes much more interesting when buyers also get to know the person behind it.
In the case of deceased artists, biographies help. With young artists there is the opportunity to meet them at the beginning of their career, to ask them questions and to accompany them in their development. That can enrich life.
Otherwise, detailed online research, including the artists’ social media pages, will help. Museums, galleries and sales platforms also offer the opportunity to take part in online artist talks.
If, after important preparations, a work comes into question, the following steps are recommended before the final purchase decision is made:
It is important to collect as much information as possible, to take your time and to observe the artist’s development. Pay particular attention to criteria such as the artist’s training and awards, originality and authenticity of his work, exhibition and publication activities, as well as price and market developments.
Called prices can be checked against existing sales and auction results in the secondary market. More and more data on the Internet makes price comparisons possible. Spontaneous purchases, even on vacation, should be avoided!
Since it is estimated that 30 to even 50 percent of all works on the market can be fakes, the origin and authenticity of a work must be ensured before it is purchased – unless it is already certified via the blockchain.
If you buy directly from the artist or from young artists, you should make sure that the work of art is signed and that a certificate of authenticity is issued.
When buying art by deceased artists or works that have already changed hands several times, it is not always easy to derive the provenance (origin) and to ensure authenticity. Here it is advisable to consult an expert for assessment.
Auctions are there to achieve the highest possible selling price. Unlike galleries, however, auction houses offer a democratic and transparent sales process. As a buyer, you should prepare yourself thoroughly and set a price limit that can also be justified based on the research. Some providers allow price bids or negotiations, while others do not. In any case, you should stick to your limit.
Last but not least, the most important rule of all: Basically, you should only buy a work if you never really want to give it back. Because even if a work is intended to serve as an investment: the decisive criterion is that the work pleases in the long term.
