If the meltdown in Cyprus’s banking system has taught investors anything, it’s that financial safe havens are increasingly difficult to find.
Governments now find it easier to tax income on bonds and equities while near-zero interest rates, inflation, and currency devaluation pose a continued threat to investors and savers alike.
Commentators have even begun to speculate that gold, the market’s traditional refuge, may become subject to government controls.
Amid such financial uncertainty, fine art, once seen as the most capricious of asset classes, has become an increasingly popular form of investment among those with spare cash seeking higher returns and a degree of market protection.
“There has never been a better time to invest in art. If you do have cash in the bank, it’s probably making very little but if your investment is managed properly, you can make a good 18 per cent annually by investing in art,” says Salma Shaheem, the Dubai-based Head of Middle Eastern Markets at international art investment house The Fine Art Fund Group (TFAFG).
“Every investment has an element of risk, but one of the reasons to invest in art is to alleviate this,” she explains.
“At the very nadir of the recession, art was averaging 8 per cent per annum. It’s a real asset that enjoys a negative correlation to traditional assets as it’s movable and a hedge against inflation. It’s also a unique and enjoyable way to diversify your financial portfolio.”
Unfortunately, the art and the lucrative potential returns are not within every investor’s reach, as TFAFG’s Group CEO and founder, Philip Hoffman, explains: “There are two very different art markets. There’s the rare end, where Christie’s and Sotheby’s are selling works of art at around half a million dollars and upwards, and there’s the not-so-rare end that people aren’t so interested in. You really need to focus at the top end of the art market.”
TFAFG only advises high net worth individuals and public and private institutions on the acquisition of museum-grade art works, with the explicit objective of long-term capital growth. It offers its clients two services: an art-specific managed investment fund and a personal art advisory service to help clients buy wisely, and build up a collection cum portfolio of art works.
Unlike some personal art advisors, TFAFG makes money on the sale of an artwork rather than at the point of acquisition – as well as charging an annual management fee.
To illustrate the kind of returns such an investment can bring, Hoffman uses the example of a friend who bought an Andy Warhol painting in the mid-1980s for US$386,000 (Dh1.4m) and sold it 23 years later for $43 million (Dh158m).
In the Middle East, Hoffman believes, new museums, galleries and cultural initiatives such as the new Louvre and Guggenheim in Abu Dhabi are driving demand. In the art market, as in any other, supply and demand are key.
“There is huge pent-up demand and very short supply,” Hoffman says. “There are roughly only 3,000 works of art that are sold for over a million [US dollars] per year so it’s only a very small number of works of art that come up. Qatar is looking to add something like $500 million to a billion dollars a year to their museums, and Abu Dhabi are doing something even greater.”
As the art market in the Middle East has matured, petro-dollars have not only affected the prices achieved by art from the region, they have driven up the price of international art as well, as collectors’ attentions have shifted from the art of their own country to that of the wider region and beyond. It’s just one of the patterns in the regional market that Michael Jeha, Managing Director, Christie’s Middle East, has mapped since the auction house started their UAE-based sales in 2006.
“There are now more than 50 galleries in Dubai; exhibitions on a weekly basis; international art fairs in Dubai, Abu Dhabi and elsewhere in the region; museums coming into play and increasing amounts of education courses, seminars and panel discussions.
“All these factors have led to the audience and collector base maturing and becoming more sophisticated, asking a lot more of the right questions, doing a lot more research, and being far better informed when they go after particular works.”
Jeha has also witnessed the development of a broader collector base willing to invest in contemporary work by living artists. This impulse led Christie’s to introduce two-part sales in October 2011, with the first sale consisting of works by established artists (with an established market) followed by a second sale focusing on more affordable works by contemporary artists. It’s a move that Jeha believes is vital for the long-term sustainability of the market.
Buying contemporary works or new works by young artists directly from galleries and fairs in the primary market may allow new collectors a more affordable introduction to collecting, but this comes at a price. While the potential rewards here are greatest – in most cases, a collector is effectively buying low in the hope of eventually selling high – the contemporary and primary markets are the most volatile and liable to the forces of fashion.
While international auction sales of contemporary art may have increased by 32.5 per cent between 2011 and 2012, the largest increase of any sector in the art market, the likelihood of discovering the next Cezanne or Rembrandt is remote, as Michael Jeha explains.
“With the art market over time quality will prevail and the best artists will be the ones who stay for the long-term. Everyone has to accept that when you’re buying contemporary art – this is why we always advise people to buy what they like – more artists than not will probably fade away over time.”
Even when collectors are buying works by established artists, received wisdom states that the quality of a piece will dictate its value just as much as the reputation of its creator. To put it plainly, it is usually better to buy a high quality work by a ‘second tier’ artist than a lesser quality piece by an artist whose best work can command millions. Thanks to the relentless laws of supply and demand, however, even this truism is subject to caveat as fluctuations in the fortunes of one artist may affect the market for related ones.
For example, an absence of works by the Italian sculptor Giacometti at auction since 2010 has led to an increase in demand for pieces by Alexander Calder and Henry Moore, an effect that TFGAG predicts will have a positive impact on the market for more affordable artists such as Lynn Chadwick and Barbara Hepworth. Conversely, a fall in the value of an artist may also have a negative knock-on effect on the work of others in the same school or genre.
In fact, a fall in the value of the market as a whole has just been reported - last year saw a seven per cent contraction in global art transactions – according to a report by Dr. Clare McAndrew for The European Fine Art Fair (TEFAF). The Chinese market recording a punishing 24 per cent drop in reported dealer and auction sales, relinquishing the pole position it had assumed in 2011 to the US, where sales actually increased by five per cent last year. McAndrew’s report describes a market of subtle variations between different collecting categories and geographical regions skewed towards the top end, with only the most established artists commanding the highest prices.
Confidence in the region, its market and its art, however, remains buoyant. In 2011, eight per cent of Christie's global turnover - $456 million - came from Middle Eastern buyers and at last year's sale of Modern and Contemporary Arab, Iranian and Turkish art in Dubai, the modern Egyptian artist Mahmoud Said's 1941 work Pecheurs a Rashid (Rosette) sold for US$818,500 over an estimate of $400,000-$600,000.
This year has also started well for the region. Just prior to the opening of Art Dubai, New York's Metropolitan Museum of Art announced its acquisition of Shattered Music, a painting by the well-regarded Iranian contemporary artist Reza Derakshani, whose work is currently on display at the Salsali Private Museum in Al Quoz.
Art Dubai also succeeded in attracting more than 25,000 visitors this year – a record - as well as 75 museum groups and 300 individual museum and institutional representatives. After seven editions, the fair would seem, finally, to be gaining the respect and recognition it deserves as a serious platform for high quality regional art, and one of the most important and influential events in the international art calendar.
The next litmus test for the region comes in the shape of a giant, jewel-encrusted bear. The bear, and the sleeping, pyjama-clad child it carries through an enchanted forest, are the subject of Secret Garden by the renowned Iranian contemporary artist Farhad Moshiri. At Bonham's inaugural Dubai sale in 2007, Moshiri's Swarovski crystal studded calligraphic work Eshgh (Love), broke records for an artist from the Middle East by being the first to achieve more than US$1 million at auction.
Not surprisingly, Secret Garden is seen as the leading work at the forthcoming Christie's sale of Modern and Contemporary Arab, Iranian and Turkish art in Dubai where it carries an estimate of $300,000 – 500,000. Potential investors should take note: at what price the hammer falls will be seen as both a reflection of the health of the market in Dubai and the wider region as well as an indication of the appetite for art from the Middle East in the wider market beyond.
Christie's auction of Modern and Contemporary Arab, Iranian and Turkish Art, takes place at the Jumeirah Emirates Towers Hotel April 16 and 17. Viewing is open to the public at JET 14-15 April, from 2pm to 10pm.
To view the sale catalogue in full, see www.christies.com
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