The Art Detective is a weekly column by Katya Kazakina for Artnet News Pro that lifts the curtain on what is really current on the art market.
In 1974, when inflation in the UK was hovering around 30%, the British Rail Pension Fund decided to invest up to 6% of its total holdings in art. It was a radical move and the first large-scale institutional investment in art as an asset.
Over the next six years, the fund spent more than $70 million to 2,400 objects in categories ranging from Impressionist and Old Master paintings to Chinese porcelain and African tribal art. By the time everything was sold in 1996, the fund had achieved an annual return of around 13%, a “respectable, if not spectacular” result, the the wall street journal reported at the time. (The figure was later adjusted to 11.3% IRR, or 4% after accounting for inflation.)
High inflation is on people’s minds again. JThe consumer price index, a key gauge of inflation, jumped 7.5% in January from a year ago, the biggest increase in 40 years. The Federal Reserve is considering an interest rate hike. Prices for cars, fuel and orange juice are on the rise due to pandemic-related supply chain disruptions and pent-up consumer demand.
What does all this mean for the art market? Do Picasso and Basquiat offer inflation protection? Or should investors shift money to other more reliable assets, such as real estate, gold or even treasury bills? And will the prices of works of art increase due to the rising costs of doing business?
I spoke with advisors, economists and business owners to get their thoughts on the situation. The takeaway: art is seen as a strong hedge against inflation. But is this really the case? The jury is still out.
“This crazy market that we started seeing already in November, a lot of it was preparation for inflation to rise, knowing it was coming, preparing for it,” said Anita Heriot, president of the Fine Art Group for the Americas, referring to the flagship auctions in New York. “People have a lot of cash and they need to invest it in durable assets.”
She presents art as another bucket in which the rich can invest their money. Some wealth managers “could never think of it,” Heriot said. “And now even the most conservative wealth advisor will say, ‘Okay, I’m ready for my client to buy art.’ ” What changed ? “Inflation!” she said.
Not all buyers
Traditional collectors don’t buy art specifically because it’s an inflation hedge, said New York art adviser Todd Levin. But financially savvy buyers with excess capital are attracted to blue-chip art because it appears to be less volatile than the crypto and equity markets. The thinking is: worst case scenario I won’t lose too much, and best case scenario I might even see a good comeback.
“As far as my clients are concerned, they think art isn’t a bad place to park a portion — and in some cases a significant portion — of their net worth,” Levin said. “They really like buying and living with their art, and think it’s a win-win proposition. It’s definitely a lot better than tying a bunch of cash in a bag and stapling it to the wall.
But the art is far from bulletproof, which has been one of the lessons of the British Rail Pension Fund investment. Fund managers began to divest in 1987 and managed to sell off their impressionist holdings at the height of a market driven by Japanese investment. Just 25 paintings, including those by Renoir, Cézanne and Monet, fetched $65 million in an evening sale at Sotheby’s in 1989. But when the market crashed, liquidity dried up completely and nothing happened. was sold from 1990 to 1993, according to the WSJ. Additionally, draws and multiples fared poorly. A group of Old Master prints only earned 2.5% per year over 22 years. The S&P 500 has risen about 13% annually over the same period.
Art also has significant holding costs, such as storage and insurance, and transaction costs, such as auction house premiums.
“I wouldn’t go buy a bunch of art just because I think it’s going to help protect against inflation,” said William Goetzmann, professor of finance and management studies and faculty director of the International Center for Finance at the Yale School of Management. His research showed that art prices move in tandem with inflation, but that wouldn’t be Goetzmann’s first choice as a financial asset.
“I’m not a big fan of sustainable assets that don’t pay dividends,” he said. “But real estate, for example, has traditionally been a good hedge against inflation because you can charge rent that would rise with inflation.”
Historical data shows that, like other real assets, art protects against inflation better than cash or bonds, according to Christophe Spaenjers, associate professor of finance at HEC Paris. “But there is no evidence that it does particularly well in times of inflation,” he said. Other commodity-type assets, including gold, diamonds or even stamps (which are easier to store and trade) are more likely to be explicitly used as hedges, he added.
Price hike is coming for art
While the prospect of inflation could trigger an immediate wave of demand, the reality can negatively impact arts businesses and nonprofits.
“I’ve heard from galleries that the cost of production, supply chain issues coupled with inflation hasn’t been great,” said Natasha Degen, chair of Art Market Studies at the Fashion Institute of Technology in New York. “The prices of everything have gone up.”
Fritz Dietl, who runs one of the largest art logistics companies, Dietl International, sees rising costs for materials and fuel. Transportation costs are much higher than before the pandemic. The job market remains tight and there is a lot of pressure for wages to rise, he said.
The little things add up too. Airports are now starting to charge for storage after 24 hours instead of three or four days. Cargo-related fees have risen from $30 to $200 at some airports, he said.
With air freight still affected by pandemic-related travel cuts, prices are doubling every two months. A shipment of paintings destined for an exhibition in Shanghai cost $200,000 in August. By the time he had to return to the United States in November, the costs were $600,000, Dietl said.
Eventually, these costs will be passed on to consumers, resulting in higher prices for art collectors.
“I would expect art prices to eventually reflect the increased costs associated with gallery rents and transportation costs,” Goetzmann said. This means that if a painting by a recent MFA graduate cost $10,000 in 2019, you can expect that number to rise – dramatically – in the not-too-distant future.
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