Buying art at the bottom of the cycle

How do the cycles in the art market correlate to the general market?

Art is a highly-cyclical market, which moves in line with overall economic conditions. When stock markets are hot, for example, you will see many first-time purchasers drawn to the art market due to the glamour of it all. In volatile times like these, however, many of those purchasers are washed out as they can’t afford to have an expensive piece of art hanging on the wall. Now is a great time to buy.

Why would you invest in art?

If the investor purchases well there is a strong potential to achieve great capital gains. Secondly there are the lifestyle aspects of art collecting – it can be quite prestigious and the owner can enjoy looking at that asset on their wall every day.

What gains could realistically be made on art holdings?

Every piece of art is unique, so of course it is difficult to be general. On named pieces that I own I would expect that they appreciate at no less than 20% per annum, taking into account the cyclical movements over time.

That seems high – how is it valued?

The standard approach is a comparable analysis of similar pieces from that artist that have sold within a recent timeframe. Art is a global game so it is easy to follow trends and prices from auctions and sales that are taking place around the world. At auctions the auction house has typically done this work for the prospective purchaser and included a ‘range’ within the catalogue promoting
the piece.

The auction house will investigate the recent sales by the artist and additionally will research the piece itself and its overall quality as a representation of the artist’s work. They will then place a range of high and low prices on what they expect the value of the work to be.

How accurate are the ranges given from the auction houses?

It is a pretty smart marketing tool to set the expectations of potential purchasers. You would be amazed as to how many times the sale value ends up within the range.
 But personally I think there are better ways to buy than on the auction floor.

One of the things that a potential investor needs to be really aware of are additional costs to purchase and they can be fairly expensive in the art world. There is a wonderful little thing called a ‘Buyer’s Premium’ which is a set percentage (usually 20%) – that is, whatever you buy the piece of art for on the floor of the auction, you then add 20% of that purchase price, which is the commission going to the auction house.

How do you avoid buying art at auctions?

I prefer to buy pieces that have failed to sell at auction – then you can negotiate a lower price and one that includes the buyers commission (an all in price). You can pitch at a really low price. I usually try to purchase at 50% of the bottom end of the range of the piece’s marketed value. I bid on numerous pieces this way and generally end up picking up one or two that I want. But I also miss out on a lot.

Is the high failure rate worth it?

I prefer it to paying what might be too much in an auction scenario. I am finding it somewhat difficult to buy great leading pieces at the moment where they have failed at auction as often the vendor has paid a high price in the top of a market cycle.

At auctions it seems to be that unless you really want something you should be patient and look to acquire after an auction has taken place.

Exactly – it is a similar approach to art galleries. Most galleries are selling pieces on consignment. They don’t own the art, but market it on behalf of the artist for a percentage of the sale on successful divestment. Typically they will take a 20% commission, but for up-and-coming artists I have known the commission rate to be higher. Similarly to the auction strategy you can bid aggressively for pieces that are on a gallery’s walls. Always ask if the piece you are interested in is on consignment and try and work out how long it has been on the market. It is the same as with any asset – a long time being offered often makes the vendor a little bit more desperate to do a deal.

What should you pay and what should you buy?

It is all about buying quality. The lowest amount one should look at committing is around $3000 to $5000 for a quality piece. Of course you can go crazy and spend much more, but for the first timer I would look at that amount of money. And I would go after a name – a Pro Hart, a Blackman, or even a Whiteley.

But those names are expensive, aren’t they?

It depends on what you are after. All great artists work across a number of media. Not just oil paint on canvas. Consider watercolour. Charcoal sketches. Pencil sketches. Even mixed media. In the recent market I have seen smaller examples of works from artists such as those going for a few thousand dollars. The range valuations are often $5,000 to $10,000.

Does the frame make any difference to the price?

It should make no difference whatsoever other than the value of the frame. I have often bought a great work of art in a rotten frame and spent a few hundred dollars reframing it.

What are the negatives and risks to this form of investment?

The most obvious one is liquidity. The liquidity of any art is a function of overall market conditions, which in my opinion is linked to the economy. And of course this is not a cash flow based investment. Then there are the costs of purchasing and selling (brokerage).

What are the intangible benefits of owning art?

Being involved in the art community can be a lot of fun. Most leading galleries have opening night cocktail parties when new exhibitions are revealed. State galleries have private receptions for members when things such as new pieces are acquired, or in the case of the Art Gallery of NSW when the Archibald Prize is decided and exhibited. Plus there is the feeling of pride that you can have from looking at that wonderful piece of art on your wall.

Any final tips?

You have to buy and sell well - don’t be scared about driving a hard bargain. Buy what you enjoy. Buy quality. And make sure that you appreciate what you have hanging on your wall each and every day.

How to do it

• Spend some time in galleries and at auctions and join your state gallery for regular exhibitions
• Check out prices at the auction house or through independent sites such as Art Net and Art Price
• Make sure you keep a copy of auction catalogues – you never know what will come up for sale again and what the price may be
• Be aware of additional costs
• Be tough in the purchase process
• Ignore the frame
• Chase the big names
• Enjoy your assets once you have bought them