Steven Sulley – Founder of Woodbury House.
We live in economically uncertain times, when many financial experts paint a bleak picture of what’s to come. People are understandably looking for ways to ensure financial stability through their investment portfolios.
Contemporary art has proved particularly viable in this regard. The art market is independent of the stock market and is often referred to as “currency neutral,” meaning that even if the economy is underperforming, its resale value tends to remain high. This resilience is due in part to the market’s unique ability to regulate its own supply and demand, keeping prices for artworks relatively stable, even during financially difficult times.
Add to that the changes that art institutions have made as a result of the pandemic, and you’ll see a marked shift in the way contemporary art is bought, sold and, most importantly, recognized as a powerful asset class for those facing potential financial storms. As the founder of a private art gallery, I’ve seen this first hand.
From strength to strength
Although art itself evolves quickly, the art market has traditionally been slower to respond to change. In 2019, online art and collectibles sales accounted for just 7.5% of global art sales, according to the Hiscox Online Art Trade Report. However, the pandemic has catalyzed rapid change. By 2020, online sales had increased to 15.8% and by the end of 2021, it was almost two-thirds of art buyers had purchased art or collectibles online. The market quickly adapted to embrace technology and the virtual world, giving buyers and collectors access to resources such as background information and, crucially, price data.
This pivot resulted in increased resilience. A report from Citi in the global art market showed that art outperformed 10 major asset classes, including hedge funds and real estate, in the first seven months of 2020, with contemporary art posting the biggest gains, making it a powerful means of diversifying investment portfolios.
The new openness of the art market to experimentation, digital advancement and risk-taking has also meant that online channels offer buyers greater accessibility and convenience, opening up more investment opportunities.
At the start of the pandemic, art fairs and auction houses shifted to a digital infrastructure, investing heavily in digital viewing rooms and virtual reality. These proved worthwhile, with Art Basel’s online viewing room that replaced the Hong Kong fair in March 2020, so popular that the site has crashed. Meanwhile, major auction houses have made a huge leap in online sales in 2020, with Sotheby’s taking a 413% increase and Christie’s 120%.
With this shift to the online marketplace, a younger generation of buyers is becoming dominant. In 2021, Sotheby’s reported that the number of buyers under 40 had increased by 187%and a study by Art Basel and UBS found that millennials now have the fastest growing constituency from collectors. The market has responded in kind and has continued to adapt to the preferences of these buyers to buy online to avoid missing out on this target audience.
From the collector’s or investor’s point of view, this rapid digital innovation not only creates more accessible markets that reach a wider audience, but also compresses margins, ultimately benefiting the buyer.
Access to art
Online art marketplaces make contemporary art from all over the world accessible to a global audience and investors, presenting a great opportunity for those looking to diversify their portfolios, build their assets, or begin their art investment journey.
Online platforms allow smaller, emerging artists, often from diverse backgrounds, to become much more visible to a wider audience, while offering fantastic investment potential to those who buy early – a win-win scenario for artist and investor.
Investors have unprecedented access to art. With adequate research and careful timing of investment, contemporary art has the potential to pay huge dividends, especially as the demand for new categories, especially works by identity-focused emerging artists, increases.
Avoiding Potential Pitfalls
The potential of contemporary art as an alternative asset class does not translate into guaranteed returns. Success in this unique market requires an awareness of potential threats and an understanding of how art investments work.
Artworks are naturally not as liquid an investment as other asset classes such as stocks. Artworks are long-term investments that are unlikely to turn into cash quickly. A work of art can best be seen as a store of value: it is not optimized for generating income, nor does it yield a dividend.
With long-term investments, it is important to consider initial and ongoing costs. For art, these include shipping and handling costs, as well as long-term storage and maintenance considerations. Art often has specific maintenance needs, depending on the medium and materials, and ignoring these can lead to depreciation.
The unprecedented access to contemporary art, while generally useful, also carries potential risks that investors should be aware of. Doing less research or lowering your standards in the face of a quick deal can put you at unnecessary risk. The art market can be complex and careful research is vital to avoiding overvalued, poor quality or even illegal works of art. When in doubt, consult those already immersed in the art world: art consultants, experts, galleries or even the artists themselves.
A Fall 2021 analysis of Bank of America 2021 is referred to as the ‘recovery year’ of the art market and 2022 the ‘new frontier’. Some of the key factors driving this growth, according to the report, are low interest rates, the explosion of digital sales and the creation of very high net worth. Together, these factors have created the perfect environment for investment potential in contemporary art, allowing it to expand beyond the somewhat niche market for traditional fine art.
While no investment is entirely risk-free, contemporary art has shown remarkable resilience, while increased access to data and information in our digital age means sophisticated buyers can feel confident in their investments. This new frontier of contemporary art has made it appealing and appealing to more people than ever before.
The information provided here is not investment advice. You should consult a licensed professional for advice on your specific situation.