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Thu 7 Feb 2008 04:00 AM

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Art in the frame

Most financial advisors and institutions now accept art collection as a viable alternative asset class.

Most financial advisors and institutions now accept art collection as a viable alternative asset class.

Ray Waterhouse, Chairman of the international art advisory company, Fine Art Brokers, and joint owner of the London dealership Waterhouse and Dodd. Here he gives a personal view on the booming art market and some tips on investing.

One doesn’t have to spend huge levels to benefit from the rewards that art collecting offers on many levels.

How's your new Picasso?" might just become an accepted greeting, such is the dramatic change in the profile of art collecting in the last ten years.

Whilst the desire to buy and own art is centuries old, it is only recently that the perception of collecting has changed from being an elitist indulgence to an accepted, almost necessary lifestyle choice, and one which most financial advisors and institutions now accept as a viable alternative asset class.

In the last two years alone, art collecting has hit the Middle East with a bang and the art world has taken note, thanks especially to the proposed museums - 12 in Abu Dhabi alone - and the recent successful auctions, fairs and gallery openings.

Private and corporate collectors in the region are clamouring for both Western and Middle Eastern art.

My art advisory company now receives more enquiries from the Gulf than it does from the USA, with requests for help about how to buy anything from multi-million dollar Post-Impressionist works to Shirin Neshat photos. Everybody wants to join the exciting and potentially lucrative party.

The digital age has opened up global buying opportunities for a vast range of private buyers. When I joined my first gallery as a young art history graduate in 1973, auction catalogues were in black and white, rarely had any illustrations and didn't even publish estimates - they were published just for the trade.

Private buyers bought all their art from their local gallery, if there was one, as art fairs and the Internet didn't exist and the only art magazines were academic.

Now one can sit at home and enjoy virtual exhibitions in New York or Shanghai, check on price databases, while auction houses woo private buyers at all levels with an intoxicating medley of bubbly, colour catalogues and glamour.

Witness too the current round of art fairs across the Gulf. Artparis-Abu Dhabi last November was sensational and there are major international fairs in Dubai this month and next.

Artists themselves have become global brands and celebrities in their own right; just think of the aura that surrounds artists like Damien Hirst or Jeff Koons.

The media has played a huge part in making the art market more egalitarian, with headlines screaming the latest record results and relentlessly pumping up the allure of fairs such as Art Basel and Frieze.

These fairs have become ‘must-see' events for collectors. At December's Art Basel Miami Beach there were 20 satellite fairs feeding off the main event - it seemed as though the whole of South Beach was rocking.

Significantly, the information blitz and wealth of opportunities have introduced a new generation of investors who are now looking at fine art as a recognised asset class.

Many ditherers have felt compelled to enter the market by the massive price hikes - between 2002 and 2006 art prices overall rose 152% and contemporary prices a massive 233%. Since 1997 Andy Warhol's price has index increased 440%.

One doesn't have to spend huge levels to benefit from the rewards that art collecting offers on many levels - cultural, educational, decorative and financial.

I have bought 8,000 paintings in my career and know that great investments in art can be made for a little as US$10,000. To make really good buys you need to use a combination of knowledge, experience, taste and gut feeling - or be very lucky.

Becoming an ‘art day trader' might be fun; it can also be risky.

Getting on the inside track

I hope in this short space to offer some insights on how the international art market works, how art is valued and offer some thoughts on the differing rationales for collecting.
Doing this may help you establish your priorities and collecting strategy and allow you to enter what can be a complex market with a little more confidence.

Most of the examples I refer to in this piece will be related to Western art, but the same general principles apply to Middle Eastern or Chinese art.

By collecting, we don’t just decorate our walls. We go much further.

Collecting art is a club opens to all where you can learn the value of things rather than simply the price. Because by collecting, we don't simply decorate our walls.

We go much further, learning about ourselves and various cultures, and making statements about our interests, our tastes, our politics and even our wealth.

In my experience, the vast majority of people with the means and even the desire to collect never get started because not only do they lack expertise and time, but they lack confidence in assessing value and consequently are afraid of looking foolish.

The short cut to meaningful collecting is to employ an experienced art advisor with expertise you can trust.

A good advisor can help train your eye, get access to works you won't even know about, and create a collecting strategy so that you don't end up with a group of unrelated paintings.

But even so, it's best to wise up so you can take an active part in the collecting process. Admit to yourself the main reasons you want to collect - is it for decoration, the pleasures of ownership, a diversion from your working life, prestige, patronage, the many social aspects, or investment?

Many collectors claim that the monetary aspects of art are not important: "We only buy what we like, we don't care about value". I rarely believe such statements."

"Whilst most buyers don't have investment as their primary criteria, very few are foolish enough not to care what the resale value is."

So to start you should look as much as you can at galleries, fairs, auctions and on the internet, and talk to as many knowledgeable people as you can.

You will very soon get a feel for what period and style you want to collect. You might surprise yourself as to how soon you start to understand value patterns.

Assessing value

The main factor in value is the name of the artist, the equivalent of location for property. For example, compare the two works depicting shoes by Taylor and Van Gogh.

Of course the crucial aspects are initial creativity - Van Gogh was at the forefront of the avant-garde - and the date.

The two paintings are separated by 120 years. Whilst Taylor's painting is a beautifully executed work with a personal vision, it is not part of a new style let alone one that changed the course of art history.

The date a painting is executed within an artist's own career is also crucial. Generally the most valuable works of an artist's career come from his first mature period, soon after he has created the style for which he is known.

Clearly some artists have many styles and Picasso, an exception to so many rules, made the second most expensive auction price in history, US$95m, for a work executed in 1941 when he was 60 years old. (Picasso also holds the world auction record, US$104m, for any work of art).

Other highly important aspects affecting value include subject, condition and provenance, sadly none of which I have the space to discuss here.
These are important to find out about because they significantly affect the price of any painting you might consider. There are usually reasons why a painting might seem inexpensive but bargains are always possible.

I always advise clients to be clued up so that when they spot a painting they like they know how to act.

The investment picture

In December 2006, artprice's global index was up 25.4% pa. The Mei Moses Fine Art Indices has shown that over the last 50 years art has just outperformed stocks, with annualised compound returns of 12.6% compared with 11.7% for stocks.

The global art market is worth an estimated US$30bn annually, including private sales.

The advent of sophisticated online databases (such as artnet and artprice, both available on subscription) and a range of indices and statistics have made it easier to get a take on where the art market is, both in absolute terms and relative to other asset classes.

Having said that, there is no one ‘art market'; there are a hundred or so different markets, from Chinese porcelain to Old Masters to video art. So make sure you read data specific to your own area of interest.

Another word of caution - beware art statistics (which all use different and sometimes suspect methodologies) that compare sales results to the stock market. First of all, the only data available is from auctions which represent only an estimated 40% of all art trades.

Art is not a standard investment product - the unique fascination of investing in art is that each work (counting editions, multiples and photographs as one ‘work') is unique, subjective and a matter of taste.

Unique works need to be examined - some works by the same artist of the same year have magic, some don't. Stock certificates in a company aren't too pretty and are all the same.

Furthermore, all market participants do not have equal access to information, as only sales at auction are public knowledge.

It is the very subjective nature of art that means that information relating to authenticity and comparable sales and above all the ability to detect true quality is crucial.

Another factor to be aware of are the transaction costs in art dealing. At auction, for example, the hammer price for buyers has an added premium of between 10% and 25% depending on value. Sellers are charged up to 10% commission plus charges for images and insurance.

I advise clients who look to make a good financial investment in art to divide their portfolio in to a 70/30 split between established artists (who have a proven re-sale record and more speculative or emerging artists (who might boom or bust).

Whatever you buy you should like and even feel passionate about. Being a great collector requires dedication and a competitive spirit.

The prospects for 2008

I predict the market for Middle Eastern art will continue to be very strong. I also believe that most sectors of Western art will defy the credit squeeze.

It is probable that the stratospheric price increases seen in contemporary art will slow somewhat, but the underlying market for quality and exciting innovation is so strong, that it will remain strong.

The art market is always active and always exciting. Will you anticipate the next trend? Remember that financial rewards can be great but they are only one aspect to collecting.

Finally, I recommend that you buy quality rather than quantity, and try to buy the best within each field.

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