Investing in art – A picture is not always worth a million dollars
South African art has seen a rise in popularity and value over the past decade and has caught the eye of both local and global art investors. While this may sound like a good opportunity to start your own art collection, the world of art investing is not as simple as it seems.
South African fine art auctioneer Strauss & Co reported a near-record financial year, with sales totalling R354 million in 2022, indicating a growing interest in South African art.
The art market, in general, has seen strong appreciation over the past few decades compared to other asset classes.
Contemporary art returned 13.8% annually from 1995 to 2021, according to Masterworks. In comparison, the S&P 500 achieved an average inflation-adjusted return of 7.89% excluding dividends and 10.48% including dividends.
Many proponents of art investing claim that one of art’s major advantages as an asset class is its ability to appreciate regardless of high inflation.
Contemporary art’s average appreciation during high inflationary periods over the past 25 years has been 13.5%, compared to the S&P 500’s 5.5%.
Another boon in favour of art investing was the soaring popularity of alternative investments like non-fungible tokens (NFT) and other digital collectables. NFTs took the world by storm in 2020 and 2021.
In an interview with Business Day TV, the general manager of Africa at Luno, Marius Reitz, described NFTs as unique, digital files that live on a blockchain and allow you to verify ownership.
“NFTs were one of crypto’s hottest use cases of 2021 – just over $40 billion worth of NFTs were sold in 2021,” said Reitz.
“The global art market’s sales were around $50 billion in 2021, to put it into context. There was an absolute boom in the NFT space [in 2021].”
However, in 2022, the NFT market suffered a major blow, as the number of sales declined over 90% compared to its 2021 peak, revealing the fickle nature of art investing.
What makes art investing so risky is its unpredictability – a range of factors need to be present at the same time for art to be considered valuable.
The most important factor in art investing is rarity. Rare art is valuable art, and an original work will, therefore, always be worth more than a copy.
Rarity is the reason why Andy Warhol paintings are still being sold for $195 million in 2022 and why artists like Banksy have a median appreciation rate of 13.96%.
Another difficult factor that needs to be considered is timing. Buying and selling art need to be planned around a range of time-related factors, such as when a particular artist is popular.
Another factor – which was partially responsible for the fall of NFTs – is demand. There needs to be a demand for the art you are trying to sell.
Therefore, while the uniqueness of an NFT gives the owner full control over the price of the NFT, there needs to be a demand for it to sell for a profit.
“If you purchase an NFT for $50 million, it is not guaranteed that you will be able to sell that NFT for $50 million. In fact, the price could crash if you can’t find any buyers, and you will have to hold onto it,” Reitz said.
Billionaire investor Warren Buffett famously used Leonardo da Vinci’s Mona Lisa to explain why art can be a poor investment.
Buffett explained in a 1963 letter to his clients at Buffett Partnership that the former king of France, Francis I, bought the Mona Lisa in 1540 for 4,000 gold crowns (around $20,000). Today, the painting is valued at around $900 million, as it was insured for $100 million in 1962.
However, if the king had put that $20,000 into an investment that generated a modest after-tax return of 6% a year, his country would have more than $1 quadrillion by 1963 – 3,000 times its national debt.
While it is, therefore, possible to turn a profit through art, it is not as simple as buying and selling beautiful artworks – when it comes to art investing, beauty is in the pocket of the beholder.