Art as an Asset

A little late, but about a week and half ago the Washington Post published this short article on art as an investment. Not sure how I missed it as the WP is my hometown paper. In any event, it takes a look at art as an asset, liquidity, banks with collections and art as collateral.

It is a good indication of the importance of art as an asset as we see article about investing in art and art as collateral continue to show up in not only new media, but also mainstream legacy media as well. This is good for appraisers as more collectors and financial advisory become aware of the importance of adding fine art to financial portfolios.

The Washington Post reports

The big idea: The current bull market has helped art prices set headline-grabbing records. In May 2015, Christie’s auctioned ­Picasso’s “Women of Algiers” for $179.3 million — an auction record for a painting at the time.

While the market for museum-quality art may not be large, there are clearly high-net-worth individuals who are interested in collecting art. Not only do collectors derive personal satisfaction from their pieces but art has long been considered a store of value and a potential source of investment profits.

Given the high price tags of art auctions, a natural concern for collectors is the liquidity of their portfolios. While the value of a collection might be large, it isn’t clear how the collector could access the cash value of that wealth in a simple way. One possibility is to borrow against existing pieces in a collection to finance a purchase. In 2015, Steve Wynn, a noted collector and casino owner, borrowed against his art collection at an interest rate of 1 percent.

The scenario: Wynn’s ability to borrow at such a low rate highlights the willingness of financial firms to lend against art. At the same time, using any asset as collateral for a loan is a risky proposition. In the financial crisis, homes were used as the collateral for mortgage loans. As properties declined in value, the probability that the borrower might default on the loan increased.

As an asset, art has unique risks. It’s a heterogeneous, highly subjective and illiquid good sold on a segmented and near-monopolistic market that pays no dividends. The unique nature of art as an asset also means it has unique risks caused by incorrect attribution, fakes, theft and physical damage. And the cost of trading at auctions is high, while rapid liquidations in the private market may result in fire-sale discounts. Should traditional or private banks lend against such collateral?

The resolution: With its longtime corporate culture of acquiring art, JPMorgan Chase has amassed a collection of some 30,000 pieces, including sculptures, paintings and photographs from artists such as Andy Warhol and Roy Lichtenstein.

The collection has come in handy, especially for clients of JPMorgan’s private bank who invested in art. These clients valued JPMorgan’s chief curator, full-time curatorial staff and employees well-versed in art investment.

This expertise let JPMorgan Chase’s private bank lend safely to clients who wished to use their art as collateral. The lending was based on stringent rules because of the mercurial value of art. For example, the collection had to be diversified, with a minimum of five pieces, with each piece of art worth at least $750,000. The bank also had to physically inspect the art each year, while a JPMorgan-approved appraiser had to determine each piece’s fair market ­value. The bank also established loan-to-value limits, interest rates and maturities commensurate with the riskiness of art as collateral.

Art-secured lending enabled collectors to raise cash without having to sell their precious artwork.

The lesson: Using art as collateral has been profitable for private banks and convenient for its appreciative clients. But investing in art should be done out of passion or pleasure, not for financial rewards. Buy stocks or bonds instead.