💎 How are the affluent investing in art?

The world of investments is vast, and while traditional avenues like stocks, bonds, and real estate continue to dominate, alternative investments are gaining traction.

One such avenue that has caught the attention of High Net Worth Individuals (HNIs) globally is art. But why is art considered an investment, and how are wealthy Indians navigating this space?

In this edition, we paint a picture of the art investment landscape, exploring its nuances and understanding its potential as a wealth creation tool.

The new-age art investor

The millennial generation is reshaping the art market, viewing it not just as a cultural expression but also as an investment. According to the Art Basel and UBS Global Art Market Report 2022, millennials constitute 52% of High Net Worth individuals engaged in art collecting, with a growing interest in digital art.

Collecting art has evolved from a luxury pursuit to a personal activity, reflecting individual tastes and beliefs. New galleries tailored for younger audiences are emerging across India, making art more accessible.

Digital auction houses have introduced formats where bidding starts at ₹20,000, catering to new collectors. Moreover, artists are leveraging social media, especially Instagram, to connect with potential buyers directly, democratising the art market.

In essence, art is now seen as a blend of aesthetics, personal expression, and investment, with millennials leading this shift.

A glimpse into art's lucrative returns:

The Indian art market has shown remarkable growth over the past few years. A report by Grant Thornton Bharat and India Art Investor highlighted that the market recorded a turnover of $144.3 million in FY23, with the sale of 3,833 artworks. This represents a 9% increase in turnover and a 6% rise in the number of works sold compared to the previous year.

The market has expanded significantly since the late 1980s, with international auction houses like Christie’s and Sotheby’s holding exclusive auctions for Indian art. The art market's value has grown from INR 7 crore in FY02 to INR 1,025 crore in FY22, marking a 281% increase in the past decade.

Here are some examples of investments in art that have created immense wealth:

• Amrita Sher-Gil’s 1937 canvas, "The Story Teller," fetched INR 61.8 crore ($7.44 million) on September 16, marking the highest price for an Indian artist.
• SH Raza’s 1989 painting, "Gestation," previously held the record, selling for INR 51.75 crore ($6.27 million) at a Pundole’s auction in Mumbai.
• Saffronart’s ‘Evening Sale: Modern Art’ featured over 70 artworks, including pieces by VS Gaitonde, Raza, Tyeb Mehta, M F Husain, F N Souza, and Akbar Padamsee. The auction generated over INR 181 crore.
• A 1974 untitled painting by Tyeb Mehta, initially acquired for INR 57 lakh, was sold for INR 8.2 crore after 17 years.

Art benchmarks and indices

An art index tracks the price movements of artworks over time, offering a benchmark for investors to gauge the performance of their art investments against the broader art market.

Unlike financial assets, artworks are highly heterogeneous, making it challenging to develop a standardised index. However, with the use of advanced methodologies, art indices aim to capture the essence of the art market's dynamics.

Key art indices

• Artnet: Established in 1989, Artnet covers over 1,800 auction houses and 340,000 artists. It offers seven standard indices, including Top 100 Artists and Contemporary Art, reflecting diverse market segments.
• Sotheby’s Mei Moses: Acquired by Sotheby’s in 2016, this index uses repeat sales to measure artwork value changes. Its methodology, inspired by the Case-Shiller Real Estate Index, focuses on high-value artworks.
• Wondeur: A modern approach, Wondeur employs AI to recognize pricing patterns for over 240,000 artists. It quantifies artist growth, value evolution, and global museum influence.
• IIMA-AuraArt Indian Art Index (IAIAI): Launched in 2022, this index, a collaboration between IIM Allahabad and Aura Art, uses the pricing model that reflects price movement amongst top Indian artworks.

Art indices such as the above provide valuable insights into the art market, aiding investors in understanding potential returns and market dynamics.

India's ultra-rich prefer art

The Knight Frank Luxury Investment Index 2022 highlighted that art was the top performer among ten investments. In 2022, the super-rich received an impressive 29% annual return from their art investments. A standout purchase was an Andy Warhol painting, "Shot Sage Blue Marilyn," acquired for $195 million at a Christie’s auction.

Diverse luxury investments

The allure of art as an investment has been steadily growing among India's ultra-wealthy.

Here's a snapshot of the % of HNIs willing to invest in art and other luxury investments:

While art took the limelight, other luxury investments also saw significant returns. Classic cars delivered a 25% return, with the Mercedes-Benz Uhlenhaut Coupé being sold for $143 million. Watches, too, were in demand, offering an 18% annual return. Collectable handbags and wine also saw robust growth.

Factors to consider when investing in art?

Investing in art has become increasingly accessible, not just for the affluent but for enthusiasts with different capital availability. Here's a guide on how to embark on your art investments:

1. Understanding art as an investment: Art's value can appreciate over time, especially if demand for a piece or artist grows. However, the art market isn't closely tied to stock or bond markets, making it a unique diversification option. Notably, while financial markets fluctuate, art remains relatively stable, with some pieces even setting auction records during economic downturns.

2. Investment approaches:

   • Direct purchase: Buying original works or prints directly from artists, galleries, auctions, or art fairs.

   • Art funds: If you'd prefer to avoid the complexities of physically owning art, you can still invest in art without holding the tangible piece. Art funds, akin to traditional investment funds, enable investors to have fractional ownership of artworks.

   • Digital art: Investing in NFTs (Non-Fungible Tokens), which represent ownership of digital art. However, it is best to be extremely cautious while considering investing in NFTs as they are highly risky and volatile.

3. Choosing the right art: Picking an artist or piece is challenging. Established artists command high prices while emerging artists carry more risk and potential reward. It's rare to find undervalued masterpieces, and patience is essential. This is where your own instinct and expert advice can be helpful.

4. Cost considerations: Beyond the artwork's price, investors should account for sales tax, transportation, authentication, appraisal fees, insurance, and potential maintenance costs.

5. Art's emotional value: Beyond financial gains, art brings joy. Investing in pieces you love ensures that regardless of market performance, you own something that resonates with you.

How to approach art investments?

• Understand the art market, its trends, and the artists. Engage with art consultants or curators who can guide you.
• Just as with any investment, diversification is key. Consider investing in different art forms, periods, or artists.
• Ensure the artwork's authenticity. Certificates of authenticity, provenance checks, and expert opinions are crucial.
• Artworks are tangible assets and can be prone to damage. Insure your collection to safeguard your investment.
• Unlike stocks, art is not a liquid asset. It might take time to find the right buyer and fetch the desired price.

In conclusion, with its blend of culture, history, and economics, art offers a unique investment avenue. For discerning investors, it's an opportunity to diversify and potentially reap substantial returns. As with all investments, a well-researched and thoughtful approach is key to success in the art market.