Investing in art is - or should be - like investing in the stock market. If your time and willingness to learn are limited, you should find an expert to buy on your behalf. If you want to do it yourself, you'll have to build up your knowledge about artists and the art market in order to separate the hype from the truly talented. We provide these pointers.
Once upon a time, as a pacing bachelor, I bought an erotic painting. It was well executed by an accomplished artist, an excellent investment in my fantasy world and it led to a life-changing meeting in a crowded gallery. Financially, however, it was a damp squib. The paint peeled off and the artist hung up his brushes.
Needless to say, there are a number of points that can be teased from my experience.
The blue lady(for want of a better title) was retail therapy and sexual fantasy, but definitely not part of a broader financial plan or an investment strategy. I wanted to hang it on my wall, not put it away in a safe. I paid no thought to selling it on - although I could have made a quick buck when it turned out someone else at the exhibition desperately wanted it!
I knew a bit about the artist but didn't know how many exhibitions he had had and where, nor how serious and/or prolific he was. And the peeling paint? Well, that is akin to buying a flat and having the walls cave in.
No doubt there are far better ways of making money than investing in fine art, but they might not be nearly as interesting. Antoinette du Plessis, of 34 Long Fine Art, a gallery in Cape Town, puts it well: "The committed collector is rewarded with a lifetime of wonder, of living with loved objects and, sometimes, with a handsome financial return."
Just how much time do you have and how interested are you in investing in art? Your answer to these questions will dictate your investment strategy.
One way of doing things is to hand over your cash and decision-making to a gallerist or an art dealer, or to invest offshore in a hedge fund that includes fine art. If, however, you want to get your hands dirty, you will have to put in the time, because, as in all investing - as opposed to gambling - knowledge and research are fundamental.
Assuming you would like to be a hands-on investor, the first thing would be to decide how much you are prepared to invest and over what term. Du Plessis says: "Like all investing, has an edge of unpredictability and always some risk ... outcome is determined by information, risk-taking, patience and passion. Timing can be crucial."
But everyone knows how difficult it is to time the market, be it the stock market or the art market. Sometimes you will get it right but more often than not, you will lose money on costs and be out of the market at the wrong time.
If you have to put some time frame to an art investment, it seems like three to five years is a good horizon with which to work. What is of more importance, however, is to ascertain whether the particular work or works in which you are interested are overpriced and, more specifically, whether there is a bubble in the market ... too much cash pushing up the prices and then FFZZZZst as major collectors offload their work and the bubble deflates.
Alfred Bester, of international professional services firm Maitland, in Cape Town, advises clients on the benefits of fine art investment where appropriate in estate planning.
He points to the slump in the art market between the late 1980s and early 1990s. The Japanese, cash in hand, climbed into the art market, and when their equity and property markets retracted, they were net art sellers. Prices slumped internationally, and it is only in the past two to three years that art values globally have recovered to the levels they were at 10 years ago.
Bester observes: "There is not a direct correlation but a similarity in movement between the art and the share markets, with ups and downs you need a crystal ball to predict, but obviously driven by sentiment."
Having said this, Bester believes that the quality of good South African art is now starting to compare favourably with top international art, and he does not think there is a bubble in the local market, although recent international sales would indicate that the bull run in art prices may be coming to an end.
Until about 10 years ago, the South African art market, like the financial markets, was pretty much off the map. By the mid-1990s, it seems no South African artist had ever achieved more than R1 million on auction, whereas now some good work is fetching prices closer to R5 million. This increase in value has been driven by two factors. First, and most dramatic, has been the extended bull run in our share market, and additional markets have been created as people turn to find other stores of value. Second, South African art has also become inter-nationally recognised, especially many of the dead artists: Irma Stern, JH Pierneef, Gregoire Boonzaier, Maggie Laubser, and other "big hitters" such as Gerard Sekoto, Gladys Mgudlandlu, Francois Krige and George Pemba.
The international recognition of South African artists is not without some dangers for art lovers. Bester feels strongly about the possible loss of good South African art to overseas investors. He feels it would be a sin for a beautiful painting to be secreted in some bank vault, lost to appreciative eyes and hearts.
Positing the obvious, value for money is crucial, as is trying to spot a winner before everyone and their horse gets in on the deal. This is not as technical as when you analyse a company in which you want to invest. Basically, you are trying to anticipate what the future sentiment around an artist and a piece of work will be.
Andries Loots, of Vgallery (a South African online gallery), suggests that a would-be investor does some cross-checking and consults at least three different galleries. Some galleries might well punt "their" own artists and it is vital to get a broad view of the market. Loots also suggests going to exhibitions and auctions, reading and doing online research. This is a period of building "visual literacy", which continues until the day you die.
Separating substance from spin
There was a fairly unanimous agreement among the experts to whom I spoke about what you should look for in a potential winner.
Estelle Jacobs, a former director of the Association for Visual Arts, one of Cape Town's oldest non-profit art galleries, notes the following important traits you should look for: commitment, professionalism (artists who deliver when they say they will), ambition (whether it is for fame and/or fortune), the energy to create and have exhibitions every couple of years, and a solid track record of past exhibitions.
Loots suggests that a fine art degree is viewed as a sign of serious intention and commitment, certainly in some circles.
However, what might overshadow all of the above and what can never be underestimated is the power of spin - which artists are getting airtime and who is being punted by the galleries? None of us wants to be the next naked emperor, so it is vital to ascertain what and how much substance is behind the spin or if it is, in fact, just hot air.
As far as the building of an artist's reputation goes, Loots refers to the importance of the secondary and tertiary markets for art - in other words, an artwork coming back onto the market for a second or third time. Loots always knows when a particular artist has sold well on auction: his telephone doesn't stop ringing as buyers try to find the availability of other works by that artist.
How to buy
Once you have identified an artist, there are a number of ways that you can go about buying his or her work. Artists often have exhibitions or open days at their studios, are part of an "art route" - for example, the Midlands Meander or False Bay art route - or will set aside time to show you their work.
Auctions are also exciting places to buy, but you need to know what you are after and to know your ceiling. There is often bidding up (people getting carried away in the moment) and the ensuing feeding frenzy is great for the auction house and seller, but after a few seconds of glory you will be left holding the baby. It is a sobering thought that, according to Loots, paintings go for more on auction than they do in galleries, and it is tempting for speculators to buy from galleries and put the work straight on auction.
If you buy from a gallery, about 30 percent to 40 percent of the cost of the artwork will go to the gallery as commission and on top of that you will pay value-added tax. Most serious buyers build up a relationship with a gallery owner or two. There are definite benefits in going this route. With a bit of prodding, the gallery ought to reduce its commission on sales. The gallerist will recommend up-and-coming artists and, when it comes to resale, the gallery will offer advice and/or wall space. Galleries are obviously very keen to build up a long-term relationship and will not be too impressed by a hit-and-run speculator.
Many people also buy artwork online. However, this can be very difficult because art is so tactile, and textures and to a lesser extent colours can never be captured properly at the low resolution demanded by the internet.
According to Jacobs, opportunities do arise when the work of a well-known South African artist is sold online in the United States, for one reason or another, cheaper than it can be acquired here.
The work is "repatriated", held for a couple of years and then sold at a handsome profit. Well, that's the idea anyway.
It is worth noting that the offshore art market is highly sophisticated and there are a range of indices that you can follow.
Two websites that track fine art as an investment are www.artasanasset.com and www.artprice.com. Big auction houses also track individual artists just as you might track a share.
When it comes to buying work by one of the "big hitters", the authenticity of the piece must be validated and the physical condition of the work determined. If you buy a stolen painting, the original owner is entitled to reclaim it and you will be left with empty pockets, so the provenance of a piece, its unique history (where it was exhibited and who has owned it) will settle the authenticity of ownership. There are experts who can assist with this, as well as with the valuing of a painting.
Taxes and commissions
Owning art is one thing, but how do you look after it once you have it? Will you put it into a trust vehicle or keep it in your own name? Do you want to ring-fence your collection to protect it from business risk or from unappreciative family members?
Bester says: "If, in your will, you leave your art collection to a family trust and during your lifetime you enter into a lease agreement with, for example, the National Gallery, the gallery will have the right to exhibit it publicly (rather than the collection being hidden away in your home), and after 30 years it reverts to the family trust without incurring either estate duty or capital gains tax (CGT)."
Another important point raised by Bester is that if you are a dealer buying and selling art, you will be subject to income tax, but if you are a collector and doing it as an investment and as a store of wealth, there is no CGT because art is a movable asset. Although your collection needs to be included as an asset in your estate that is calculable for estate duty in the event of your death, your estate would not need to pay CGT on the profit of a sale of the art.
One of the big pros of selling artwork through a gallery is that the gallery will have a buyer list and if the artist is well known it should be a fairly straightforward process, although you stand to lose a chunk in commission.
On the auction front, the South African public seem to be laggards but this appears to be changing. Auctions are attractive to buyers and sellers alike because of the likelihood of getting a better price and the reduced commission payable.
A note of caution, however: costs need to be checked out pretty carefully. For example, in the event that your work is not sold, you need to determine whether you, as the would-be seller, will be saddled with "hidden" costs.
Bester has the final say on auctions: "There are a lot of artists out there who are overvalued, based on the marketing practices of certain galleries. They create the hype, but if you analyse it and compare the price at the gallery against what you might realistically get on auction, it's like being the manager of a boxer: you talk up your guy until he gets into the ring and gets smacked. The litmus test for most of our artists is how well they do on public auction, where you haven't got the intervention of galleries. There are a range of individuals and dealers, and that is where you will find the true value."
Fine art investments must surely fall under the banner of ethical investments. Dividends are paid in every glance and in the satisfaction of knowing you are supporting a creative person, challenging you to look at the world in new ways. Shares you can feel excited about, but a painting you can fall in love with. No doubt, had I invested that money I spent on The blue lady in a good share, I would surely have made some decent money, but then ... I might not have met my wife!
- Michael Thorne is a dabbler in the arts and the managing director of Sparx Media Illustration Agency.
The art of reducing estate duty
Alfred Bester discusses how art owners can organise their affairs to minimise estate duty and donations tax.
Art is usually acquired out of a love for art rather than as an investment. However, the market value of art assets may well contribute substantially to the dutiable value of your estate when you die.
Should there be insufficient liquidity in your estate, the executors may be compelled to realise the art assets to pay administration expenses, creditors' claims and estate duty. The collection might be divided among a multitude of beneficiaries. Worse yet is the case where none of the beneficiaries has any interest in the collection and may simply dispose of it.
It is important to appoint an executor who understands art, its value and the ultimate benefit it could serve, not only to the family but also to the public.
It might seem odd that deceased estate practitioners seldom encounter art collections or objects of art in deceased estates in South Africa. This might lead to the conclusion that these collections are disposed of prior to death, but often they are simply not declared to executors.
The fact that there is no centralised record of art in South Africa has led in many cases to art collections becoming a "secret store of wealth" that passes silently from one generation to the next without being disclosed. This could be an oversight but it could equally be to escape estate duty and donations tax.
The South African Revenue Service (SARS) is becoming more sophisticated, and at some stage it is likely that a centralised record of art sales will be established.
With the introduction of the Financial Intelligence Centre Act, any suspicious transaction must be reported by any suspecting party to the Financial Intelligence Centre. This could have a direct effect on the auction industry, which could be compelled to declare details of buyers and sellers of art through auction houses. This "big brother" concept already directly affects the banking, financial, fiduciary and property sectors. It would not be unreasonable to expect tighter controls in other sectors of the economy, forcing the ultimate disclosure on death of art, art objects, book collections and the like for the purposes of estate duty and donations tax.
Art acquired by way of purchase, inheritance or donation must be disclosed on your income tax return, even if you regard the items merely as personal-use items and part of your household furniture and effects. In terms of current legislation, art or art objects are not subject to capital gains tax (CGT) on disposal unless you are an art dealer, because they are regarded as personal-use assets. (Interestingly, neither the Income Tax Act nor the Estate Duty Act actually defines an art object.)
Should you leave your art assets to your spouse, they will be exempt from estate duty in terms of section 4(q) of the Estate Duty Act. However, on the death of the last-dying of you and your spouse and assuming you have left the assets to your children or their offspring, the market value of the assets will contribute to the dutiable value of your estate. Estate duty is charged at a flat rate of 20 percent on the net dutiable estate. The net dutiable estate is determined after deducting the primary rebate of R3.5 million, administration expenses and creditors' claims, as well as any further deductions in terms of section four of the Estate Duty Act.
There are perfectly legal ways of minimising estate duty, notably through the opportunity afforded by art assets. The Estate Duty Act creates the mechanism by which you can create a structure to minimise the impact your art collection will have on your estate for estate duty purposes. This can be achieved by subjecting the collection to a notarial lease (a lease drawn up and executed by a notary) for a period of not less than 30 years, during which period the owner's death occurs (meaning the owner has to die during the period of the lease).
The lease could, for example, be in favour of Iziko South African National Gallery or an association, such as The Friends of the South African National Gallery, as long as the lessee retains the status of a public benefit organisation (PBO) in terms of the Income Tax Act and related legislation. The total value of the collection would therefore not only escape CGT, but would also be exempt from estate duty. At the end of the notarial lease period, the collection would merely pass to the lessor's beneficiaries, which could be a suitable family trust.
Should Iziko South African National Gallery elect not to take control and possession of an art collection after the death of the lessor, another recognised state institution or PBO, such as The Friends of the South African National Gallery, as a quasi "art ombudsman", could be appointed to have effective control, while the benefactor's estate would still be able to enjoy estate duty relief.
Other opportunities exist where the collection could flow through to a specialist trust, which looks after the collection in perpetuity. The founder of the trust could appoint family members and the nominees of, say, The Friends of the South African National Gallery or a similar institution as trustees under conditions stipulated by the trust deed. The founder of the trust may also be a trustee of the trust.
- Alfred Bester is the head of trust and corporate services of Maitland, in Cape Town. This article was originally printed in InTouch, Maitland's quarterly newsletter.
Art and collectibles in your portfolio
Andrew Bradley
Over the past few years there has been a great deal of publicity about the phenomenal returns achieved by art and other collectibles. These reports are a reflection of reality.
However, it is inappropriate to extrapolate these cases as a general rule, because it is impossible to determine how far down the value chain these remarkable returns have permeated.
As human beings, we have a nasty habit of over-simplifying matters and creating rules of thumb. We also have a selective short-term memory when we do not properly understand what it is we are dealing with.
To avoid being caught up in hysteria, it is important to create a proper framework for making any investment decisions. Firstly, you need to understand the different kinds of assets you may own. There can be business assets, lifestyle assets, investment assets and philanthropic or speculative assets.
Art and collectibles do not meet any of the criteria to be classified as an investment asset because they do not generate any investment returns. Property and shares, for example, do meet the criteria in that they generate rental income or dividends. Based on these they could also generate capital growth. Art is therefore not in the arena of an investment. So, where does that leave it?
Well, if you are a dealer who buys and sells art, taking a commission from these activities could make it a business. If this is the case, there are significant other implications that do not apply to most art lovers.
Art can be a lifestyle asset you enjoy and from which you gain fulfilment, just like a motor car or boat. The fact that you may ultimately make some money from these assets is purely incidental to the lifestyle and aesthetic benefits you derive from them.
Art can also be a speculative or philanthropic asset. If you are buying art to support a budding artist, your art purchases could have a very strong philanthropic slant to them. You expect nothing in return except the emotional fulfilment from the gesture you are making.
If you are buying because you believe the artist or the piece will in time receive greater recognition than is currently the case, you are speculating - not investing. Your gamble may well pay off, or it might not. The artist may not fulfil his or her potential, or the piece may not receive any interest from anyone other than you. In these instances, the odds on the gamble will be too high.
It is therefore crucial that you understand where any purchase fits into your overall portfolio. If it is art, make sure that, from the start, you derive full enjoyment from it. It is therefore a lifestyle asset, which may have some speculative benefits. It is at no time an investment.
As you accumulate lifestyle assets and speculative assets, remember that your financial future will be secured only by investments, with help from business assets. Until you have secured your financial future through investment assets, you should keep your speculation and lifestyle assets to a minimum, otherwise you are gambling with your future well-being.
As a sobriety-check, also ask yourself where the money comes from to bid up the prices of art and collectibles. The only conclusion can be from business and investment assets. So when these two areas of the economy are buoyant, you will find that they fuel the prices of lifestyle and speculative assets. Even then you should have your money tied up in the engine room of economic growth and prosperity. Only surplus assets should be allocated to art and collectibles that can give you a speculative gain.
- Andrew Bradley is the chief executive of acsis, a financial planning company.
This article was first published in Personal Finance magazine, 2nd Quarter 2008. See what's in our latest issue