Irma Stern, Two Arabs, oil on canvas in the original Zanzibar frame, signed and dated 1939, sold for R21 166 000 in September 2011, which was a South African record for a work by Stern and the most expensive painting sold at auction in this country.

This article was first published in the third-quarter 2013 edition of Personal Finance magazine.

If you had a spare R9 million, you might have approached the Strauss & Co fine art auction in Johannesburg in June last year with the excited expectation of being able to pick up an Irma Stern painting known as Arab. And you might even have hoped to be lucky enough to throw in a work by Alfred Thoba reflecting South Africa’s struggle period, 1976 Riots, for under R100 000.

In the event, you would have been sorely disappointed. The Irma Stern sold for R17.2 million – at least R8 million above the auction estimate and the second highest price ever achieved by a painting in South Africa. Thoba’s work sold for more than R913 000 – at least R800 000 more than the artist’s previous record price.

Of course, by global standards, such amounts are small change. With total sales at auction of about R300 million a year – the equivalent of one painting in the United States – the South African market is minuscule. The record price paid for a painting in South Africa is R21.166 million, again for a Stern work, Two Arabs.

But small can be beautiful, we know, and the point about this market is that the records have been tumbling steadily over the past three years. In 2010, a Stern painting, Gladioli, set the previous record for a painting sold in South Africa: R13.368 million. That record was broken by Two Arabs the following year, and the new second-highest price was set a year later.

Compare these with record prices in the 1980s and 1990s. In 1985, JH Pierneef’s Extensive landscape Northern Transvaal broke through the R100 000 barrier for the first time when it sold for R120 000. It took another 10 years, until 1995, for the R200 000 barrier to be breached – once again by Stern, whose Still life of Delphiniums fetched R209 000, which set a new record for the artist and was the highest price paid at auction for a painting for more than five years.

Of course, a few record-breaking sales may not mean all that much if the rest of the paintings on auction remain unsold – and this is not always factored into excited press reports. But commentators giving their views on Strauss & Co’s first auction of 2013 in Cape Town were full of optimism about the market.

Journalist Michael Coulson, who specialises in art and finance, wrote on the South African Art Times website (www.arttimes.co.za/news): “If Monday night … is anything to go by, 2013 will be a great year for the SA art market. Excluding the handful of international items, Strauss & Co’s two sessions comprising 218 lots of South African art grossed R38.7 million, closer to the top than the bottom of the estimate range of R29.6 million to R42.2 million, with 178 lots selling – a more than satisfactory 81.65 percent.”

At the same time, Stefan Hundt, head of the Sanlam Private Investments Art Advisory Service, said the sale demonstrated “that there is still a healthy confidence in the South African art market, and that there is consistent interest in works of quality. There is certainly is a willingness to pay a considerable premium for rarity.”

Hundt says the market has been through an extraordinary period since the late 1990s and the end of South Africa’s isolation. “In 1994, if you took R10 000 to an auction, you could come away with 15 paintings by well-known artists. Then, from 1997, the graph of auction prices shoots up exponentially. It’s not quite as good now as it was five years ago, but there is a lot of liquidity in the market and paintings sell well over the auction estimates on a regular basis. If you know what you’re looking for and have done your homework, the value will be there.”

Like most art market experts, Hundt is reluctant to talk about art in purely investment terms, but he does say that anyone who is serious about investment returns should be buying for more than R1 million. “That’s where the real returns are. The more you spend, the better, potentially. There’s a lot of liquidity in the market,” Hundt says.

There are speculators operating in the market who can make returns of 12 percent to 15 percent a year if they know what they are doing, he says.

“But, for the most part, the people who make money in the art market are the dealers and auctioneers, not the collectors. Though, of course, it is sometimes hard to draw the line between a collector and a dealer. It may come down to the taxman to differentiate between someone who is a shrewd collector cashing in on a good investment and someone who is actively speculating in the market over short periods of time, much like trading the share market.

“But if you are a collector, art is a personal-use item and your profits are not subject to capital gains tax, which adds to the attraction of art as an alternative or supplementary investment vehicle,” Hundt says.

On the other hand, you can do what Cape Town collector Piet Viljoen recommends and “buy art, even if it’s not much of an investment”.

Viljoen is unusual: a financial man – a former investment analyst at Investec, now chairman of asset management company RE:CM – who recently opened a private museum to display his personal collection of contemporary South African art. Viewing at The New Church in Tamboerskloof, just outside the city centre, is by appointment or at very limited times published on its website, www.thenewchurch.co

In an article published on the website State of the Art (www.stateoftheart.co.za), Viljoen analyses the investment value of contemporary art (1950 onwards) more clinically than most. No one doubts that the dramatic market upswing in the past decade was due to wealthy investors searching for alternative investment opportunities.

As Hundt says: “With no obvious opportunities on the JSE and the banks not offering much, what were they to do with their money? Art became almost a safe haven.”

But can art really be regarded as an asset class like any other?

Viljoen believes not, making the point that “stock markets are efficient price-discovery mechanisms, but dealers’ rooms – where most art sales take place – are not. The dealer sets the price; there is no aggregation mechanism where buyers and sellers can get together to determine price.

“In the art market, price creates value and buyer satisfaction, rather than reflecting it. The incentives are inverted: the higher the perceived price, the more valuable the object is and the greater the buyer satisfaction – the opposite of how investing works.

“A serious investor would be crazy to trust the art market to price his investments correctly. To earn good returns from art is hard. You might end up with the right pieces at the right time, but to get into that position requires an interest bordering on obsession and deep pockets.”

The upwardly mobile art indices that have so tempted investors in the past few years are fundamentally flawed, Viljoen says, because they include only paintings that have sold at least twice at auction; they do not include work that failed to sell.

“So they measure only successful artists. That is like setting up a stock market index that includes only stocks that have gone up in price. They also exclude private sales, dealer sales and sales at art fairs – all significant sources of turnover in the art market, where prices can differ substantially from those achieved at auction.”

Viljoen believes the art market is highly psychological and social. It offers a sense of community, but also of personal achievement, cultural superiority and social distinction. He says collectors often refer to the feeling they get from buying art as a “high”.

“As an investor, it just doesn’t make sense to compete for assets in a market that is primarily driven by emotion,” he says.

The gain of which Viljoen is absolutely certain – and which drives his collection – is social.

“I recommend that we all buy as much art as we can afford. Collectors facilitate the examination of society’s values and norms by people who have generally not been co-opted into the power structures of politics and business. As such, collectors play an important role in developing our ability to look at ourselves critically.”

Even more importantly, Viljoen says, “art can also simply be beautiful to experience, thus providing even more social benefit. And this should be the primary driver of our decisions about what art we buy and why.”

So, you may not have R1 million to spend, but you might be able to find R10 000 or R20 000 a year to invest in art. What can you expect?

“At this level, you are limited to a certain section of the market, but you can still buy some very nice things,” Hundt says. “But you must buy the artwork, not the artist. If you were to say to me, ‘I want to buy a Kentridge’, I’d ask you ‘which one?’.

“You can’t work on an artist’s name alone, or what sells at auction – that is just a reflection of demand and taste at a particular time. For example, take the late Larry Scully, head of the Department of Fine Arts at Stellenbosch and a reasonably well-known artist. In the late 1990s, no one would buy his work; now you will not find anything under R20 000.”

Hundt regards it as a “pretty good sign” for the market that contemporary South African artists sold well at recent Stephan Welz & Company and Strauss & Co auctions. “That means more and more of the younger generation are getting involved in the art market and are supporting their contemporaries.”

Ian Hunter, head of the art department at Stephan Welz & Company in Cape Town for 10 years before he became an independent art consultant and valuer, agrees that you should buy artworks because they strike a chord with you, not just for their investment potential. After all, he says, “a good return on your investment generally entails living with your collection for a fair amount of time while the artists extend and cement their careers.

“Once you have found artists whose work appeals to you, it is important to look at their careers, where they exhibit, who handles their work and in which prominent collections their work appears. This is a good guide to future saleability and possible career longevity. New buyers entering the market – at any price level – often overpay because of insufficient knowledge about the artist’s body of work, the provenance of a particular piece and the art market as a whole,” Hunter says.

Of course, there are no guarantees that any work will increase significantly at inflation-beating rates, he says.

“But knowledge is power. Buy art books and contemporary art publications, speak to people you trust who deal in art, do internet research and ask questions. With contemporary artists, you can speak to the artists and read their artists’ statements. Compare prices; find out why some works command higher prices than others. Why does one work command R13 million and another R200 000 to R300 000?

“Even the big-name artists do not live up to their reputations all of the time. South Africa’s leading Expressionist, Irma Stern, was prolific, but not all her works are equally valued and her output falls into three distinct categories with corresponding values.”

There is generally a hierarchy of values based on the medium a work is executed in, Hunter explains. For example, works on paper are generally worth less than oil paintings and sculpture – the exception being William Kentridge’s charcoal drawings, which command significant prices.

“But however much care you take, there are sometimes external factors that shift artists out of vogue. They might be dropped by their gallery, so they fall from prominence; or perhaps they emigrate to another country, or begin to work in a particular mode that becomes unfashionable. That’s why it’s so important that you love what you buy. Then, if it doesn’t appreciate, you’ll profit from it in an

aesthetic sense.”

On the other hand, Hundt says, lots of people collect for purely sentimental reasons – while travelling, for example. “That is not an art collection. To have a collection, you should have a strategy … a narrative in your own mind for where you are going with your collection.”

With limited funds, Hundt says, one option is to buy the work of art graduates, especially if, as he puts it, “they have done everything right”. In other words, they’ve graduated with high marks and got themselves an exhibition in a reputable gallery, such as the Goodman in Johannesburg.

“Still, the chances of them becoming famous are very, very slim, and the galleries tend to set prices far too high. I wouldn’t buy one of those. In fact, I did once have R10 000 or R12 000 to spend and was offered a large painting by a young artist who had all the right credentials, or a small sculpture by an established artist/craftsman. I bought the sculpture.

“I have never seen the artist exhibit again, but my sculpture would probably be worth about five times what I paid for it if I sold it now.”

Hundt believes that art prices are close to their peak. “The people who have been buying paintings through this boom period will hold onto them – they are not speculators – and we’ll have a better idea in three or four years how sustainable prices are.

“If you’re expecting moderate returns, as everyone should be, and if you are shrewd and alert, there will always be some good opportunities. There are one or two at every auction.

“But they won’t be what the herd is buying.”