Investors in art need a good eye before they buy

With the financial markets blighted by uncertainty, investors are turning to alternatives such as artworks. But would-be collectors cannot afford to be naive.

DUBAI - OCTOBER 29,2009 - Art works on display at Christies auction at Emirates Towers in Dubai. ( Paulo Vecina/The National ) *** Local Caption ***  PV Auction 8.jpg

In an era of uncertain stock prices and property bubbles, private investors are increasingly turning to fine art as a more reliable long-term asset.

Fine art is one of what are referred to as "Swag" assets. These comprise silver, wine, art and gold - all of which appear to have defied economic gravity throughout the prolonged global recession.

According to Michael Plummer, the co-founder of Artvest Partners, based in New York: "From an investment standpoint, fine art - contemporary impressionists and modern art - is a deep market. It is globally traded."

There is also evidence that investors are increasingly drawn to an investment medium that enables them to display coveted works in their homes.

The 2012 Barclays report, Profit or Pleasure? Exploring the Motivations Behind Treasure Trends reveals that high-net-worth individuals on average hold almost a tenth of their wealth in collectibles. Barclays surveyed more than 2,000 individuals worldwide, each with in excess of US$1.5 million (Dh5.5m) in investable assets to determine their reasons for seeking out and holding collectibles such as fine art.

Investors in fine art are motivated by aesthetic reasons as well as purely mercenary motives. Only 18 per cent of those surveyed by Barclays buy collectibles solely for financial reasons.

The mushrooming global investor interest in collectibles such as fine art is now turning the spotlight on regions such as the Middle East, which have been previously been largely sidelined by the traditionally European-centric art market.

The leading global auction house Christie's was among the first in the art world to realise the potential of the ancient but undervalued Middle East art markets when it set up a presence in 2005 before starting trading in 2006. In April 2010, Christie's was entrusted with selling 25 works from the Mohammed Said Farsi collection. The following October, the second part of the collection was also fully sold. According to Christie's, the $15.4m Farsi collection was now the highest-selling private collection offered at auction in the Middle East.

"We are very proud to be able to use our global reach to introduce the work of young artists to clients both in the region and further afield," said Michael Jeha, the managing director of Christie's Middle East.

"While global interest in this category continues to grow, we are also seeing Christie's activities in the Middle East offering a gateway to the international art market, with clients from Dubai participating in our international sales across many categories. For every $1 that our clients are spending in Dubai, we are seeing them go on to spend $15 in our salesrooms around the world."

But anyone tempted to enter this increasingly buoyant market should realise that investing in art is far more complex and challenging than virtually any other investment medium. Unlike gold or silver, there is no easy benchmark by which to judge quality or precise investment value. For this reason, the best investors tend to be connoisseurs, although the less experienced often employ the services of a specialist art investment adviser.

"The art market is quite complicated. Connoisseurship is something you can't pick up overnight. It's learnt over time by looking at objects and training one's eye, and learning about artists and the best periods of their work," says Mr Plummer.

The first thing experts say investors need to understand is that art is not a commodity asset, meaning it cannot be easily traded on the global market and must be viewed as a cultural as much as a financial asset.

"It is difficult to combine the two modes of thinking when art is illiquid, opaque and unregulated," says Jeff Rabin, a co-founder of Artvest Partners.

At the very least, this means finding a willing buyer. In practice, this can mean waiting for an international auction such as those held by well-known houses such as Sotheby's and Christie's.

According to Artvest, investors need to have a liquid asset base before deciding to invest in fine art. When the financial crisis started to go global in 2008 and 2009, collectors were selling "phenomenal works of art" at knockdown prices.

To avoid what amounts to a distressed sale in the event of a sudden recession, investors should have a wider asset base that includes cash or easily tradable commodities.

Another major pitfall for the unwary is the high likelihood of being sold a fake when entering the market for the first time. The reason that the internet has not affected the art market to the extent that might otherwise be assumed is that most shrewd investors and dealers are constantly wary of the danger of spending a fortune on a fake.

This makes due diligence a priority. Establishing the provenance, the origin, of a work of art is essential. But this is not something that is easy for even a knowledgeable amateur to perform as experienced dealers often rely on their instincts as much as on the paper trail that accompanies a painting.

According to experts, if a deal looks too neat and clean, particularly in the case of a painting supposedly by an old master such as Rembrandt or Raphael, it could be a scam.

But before even approaching a bona fide dealer or attending an auction, potential art investors should take the time to learn as much as they are able about their new investment medium. Experts recommend reading art publications, visiting galleries and attending events wherever possible.

Other considerations are a result of the essential fragility of works of art. Ageing paintings cannot just be locked away in a bank safe but must be stored in a condition to maintain their pristine state.

But for those prepared to overcome these hurdles, the burgeoning fine art market offers a stability not achieved in the stock market for some time, as well as the opportunity to own and enjoy beautiful things.