In recent years, the number of people in high-net-worth circles who choose paintings and other works of art as their investments has increased rapidly.
Both seasoned and young investors are engaged in a daily information war to obtain the latest information on the works of popular artists.
In this article, we will explain why investors invest in art, its disadvantages and advantages, and how to get started.
Why are paintings a good investment?
Why art and paintings increase in value
To begin with, paintings and other works of art have long been a must for cultured families as a way to cultivate aesthetic sensibilities. A single work of painting, depicted in a variety of techniques and styles, is worth seeing on its own, and can be a daily comfort and an exercise in aesthetic appreciation.
But a painting is also something that, in addition, increases in value over time. This is the most unique point about paintings.
Once a work of art is appreciated, most of the time the same piece never goes down in value.
Value is determined by evaluation criteria such as the popularity of the artist, rarity = total number of works, and the quality of the work itself, and in recent years there has been an increase in the number of cases where even very young artists are rapidly gaining recognition. Of course, it is difficult to determine the value of a work, but it can be said that paintings and other art works are quite good investment targets.
Trends in the Ever-Expanding Asian Art Market
The art market in Europe, the U.S., and Greater China continues to grow in size, and the number of young collectors is increasing, This is a 3% increase over the previous year, 2021, and a near V-shaped recovery to pre-Corona levels.
In addition, Sotheby's and Christie's, the world's two largest auctioneers, have set new record highs for total sales in 2022, with Christie's at US$8.4 billion (about ¥1,112.1 billion), up 17%, and Sotheby's at US$8 billion (about ¥1.08 trillion).
Of particular note is the increase in transaction value in Asia, where Sotheby's 2022 auction sales in Asia totaled $1.1 billion, matching the previous year's record high. The overall number of bidders is at an all-time high, and the number of collectors in their 40s and under is also on the rise. The average bid per person was also 40% higher than in other regions.
One-third of Sotheby's sales in Asia are to new bidders. Furthermore, when looking at new bidders at the global sale, 70% of them were from Asia.
In response to the rapid growth of the Asian market, Sotheby's has announced that it will open a major new facility in Hong Kong in 2024. The company is also fully supporting and hosting events for Asian collectors from its new facility scheduled to open in Shanghai this year 2023 and its newly opened office in Tokyo in 2010.
Source: Art Basel & UBS 2022 Art Market Report, , Art Basel Bijutsu Techo, Bijutsu Techo Bijutsu Techo
Diversification by MPT Theory
Now, in the above section, we have looked at the expansion of market markets.
Now in 2023, there is a recognition among many in the industry that the Asian art market is particularly promising.
Let us introduce the MPT theory.
MPT theory is an abbreviation for Modern Portfolio Theory, one of the basic investment theories.
The term "portfolio" here originally refers to a bag used to carry documents, but in the world of asset management, the term is used interchangeably to mean "a comprehensive view of an individual's assets as a single entity.
To give a specific example, assets come in many forms, including cash, stocks and other credits, and real estate.
Many people invest in multiple types of assets, but a portfolio is a concept that encourages people to think about these assets as a single group (portfolio) and then to think about what percentage of the total should be allocated to which type of asset.
An important implication of MPT theory is that owning a combination of assets with low correlation coefficients minimizes risk.
In other words, by combining asset B (with a negative correlation coefficient between the two), which falls in price when asset A rises in price, or by simultaneously owning asset C, which has no relationship to the price movement of A (with a correlation coefficient of zero), a portfolio can provide a stable return (and is less likely to lose money).
It will be easier to understand if we consider the totality of one's assets as a "portfolio.
Minimum variance frontier and efficient frontier in modern portfolio theory Source:wikiwand
Why do wealthy people invest in art and wine?
Many of those who are already wealthy today already own stocks, real estate, and other assets. However, there are also many who have set up a system where they can diversify their risk even if one asset has a large fluctuation by simultaneously owning assets that have a low correlation coefficient with those assets.
Normally, the word "risk" in Japanese is often used to mean "the possibility of something negative happening. In the world of asset management, however, it rather refers to "the magnitude of the blurring of returns.
In other words, "making more money than expected," which may seem like a good thing, is also a type of risk. This is based on the ironclad rule of asset management, which states that asset stability is the first priority and that it is good to avoid large unexpected fluctuations, both positive and negative.
In this way of thinking, the MPT theory of diversification has led to "alternative investments" such as art and wine, which have nothing to do with stocks or real estate, as investment destinations.
Healthy Lunch by Karameta's｜W 90.00cm x H 70.00cm / ¥237,500
List of investment destinations of the world's wealthy
Cap Gemini, one of the world's leading consulting firms, conducted a survey of approximately 2,500 of the world's high-net-worth individuals with assets of ¥100 million and over between January and February 2020, prior to the Corona.
It shows that, on average, HNWIs allocate 30% of their money to listed equities, 17% to bonds, 15% to real estate, and 13% to alternatives.
Alternatives, meaning "alternative assets," include art, wine, forests, and other types of assets that do not fit within the confines of stocks and real estate.
We find that just over 10% of the portfolio should be allocated to art investments.
Disadvantages of Art Investments
Let's start with the disadvantages and failures here.
By knowing the downsides first, you will know if investing in paintings is in line with your own taste.
Demerit 1) Short-term returns are not expected.
Take art auctions as an example.
Auction fees are approximately 20%, which is a very high fee compared to financial assets such as stocks.
In addition, to begin with, an auction is a system whereby a work you already own is auctioned and sold to another collector, and you get a return on the difference when you buy it.
This means that the only cash point as an investment is capital gains (profit on price appreciation). This is quite different from regular income gains such as rent income from real estate or dividends from stocks.
It takes a few months at the shortest, usually several years to a decade or more, for the price to rise sufficiently to sell.
It takes a certain amount of time for artists to form popularity, so "waiting" is very important.
Disadvantage #2: Not suitable for those who are not interested in the artwork itself.
The key to success in art and painting investment is to identify and purchase artists and works that are not so popular now but are likely to become popular in the near future, and to sell them at the right time.
This requires a great deal of intellectual work, including daily checking the latest trends in the niche world of the art industry, learning about the history through books, and making a comprehensive judgment based on the opinions of the artists themselves, critics, gallerists, and others.
To do this, you must be able to enjoy the artwork and feel that you enjoy having it or feel that it is a positive addition to your life.
After all, it will be displayed in your own home until you resell it, so can you live with it? This also leads to the question of whether you can view the work from the perspective of "Can I live with it?
Disadvantage 3) Storage can be difficult and deteriorate over time.
Paintings and sculptures take up a relatively large amount of space for storage, and quality control is also costly.
The most common type of painting, oil or acrylic paint on canvas, can be protected from deterioration by avoiding hot and humid environments. However, there is a risk of sunburn, for example, if the artist himself used less durable materials, or if the painting was hung near a sunny window or in a foyer.
However, this can be avoided by using an art storage service or by acquiring knowledge of appropriate storage methods yourself, so that you can keep your artworks in good quality at home. For more information on how to store and display artwork, please refer to the following article.
How to Hang Art on the Wall (The Definitive Guide to Decorating Paintings)
Demerit 4: Unclear value basis
Compared to real estate again, the price of investment products is calculated and the appropriateness of the price is determined based on indicators such as yield and accumulated value for real estate, and PER, PBR, and EPS for stocks.
In the case of paintings, on the other hand, there tend to be fewer indicators and evidence to support prices than for real estate or stocks. Especially in the case of contemporary art, in most cases, the decision is made at the discretion of dealers, gallerists, curators, and artists with extensive sales experience who have expertise in the field of art. It is extremely difficult.
Advantages of Art Investment
Merit 1) Less risk of earnings fluctuation due to asset diversification
As mentioned in the explanation of the MPT theory, a major advantage of art investment is that it can be used as a destination for asset diversification as a type of alternative asset management.
Even if stocks were to take a major plunge, art works have a low risk of plummeting in value because they are not affected by the economy as much as stocks and bonds.
In addition, disadvantage 1) states that there is no short-term return, but conversely, it can be said that it is an asset that is expected to increase in value over the long term. In fact, the average annual growth rate of paintings is above 8%.
For example, if a painting purchased for 1 million yen in 2000 grows by 405%, it will be worth 5.05 million yen in 2021. Even after deducting storage costs and other expenses during this period, it can be said that a large return will remain in hand.
Advantage 2: It is a hobby and an asset at the same time
When you view paintings at home on a daily basis, you will discover and notice something different than when you view old paintings at a museum. You can feel the artist's breath as a more real presence, and by displaying a series of works by the same artist or works of similar genres, you can create a collection with a sense of unity.
Another major benefit is "art thinking," which has become a hot topic in recent years with the publication of books.
In business and other fields, two basic types of thinking are required: "critical thinking" and "design thinking," but "art thinking" is being actively practiced as a third way of thinking that is different from either of these.
In a nutshell, Art Thinking is "starting from individual problems.
Let's compare this with Design Thinking. Design Thinking is about "empathizing with the client, finding their latent needs, and solving them. The objective is to find new solutions and new demands that have not been seen before by getting to know the client thoroughly.
In contrast, the purpose of Art Thinking is to "create value that has never existed before.
For example, Mr. Masamichi Toyama, the representative of Soup Stock Tokyo and a well-known practitioner of Art Thinking, used to create art himself. Using this experience, he has created a lifestyle that no one had ever imagined before, a lifestyle in which soup is the staple food, and has made such a mark on the company's history that it will celebrate its 20th anniversary in 2019.
Merit 3) Tax savings.
When purchased by a corporation, an acquisition cost of less than 1 million yen (excluding antiques, etc.) can be expensed as a depreciable asset. Since the total amount in a fiscal year should be less than 3 million yen, a considerable amount of money can be used for expenses.
In addition, although it is a matter of detail, it is possible to include not only the price of the work itself but also the frame cost, delivery cost, and purchase commission in the acquisition cost, thus bringing the painting to the state where it is displayed in the office completely on an expense-only basis.
In addition, even if you are a sole proprietor, you can include in depreciation any work of art up to 300,000 yen.
These are some of the advantages and disadvantages of investing in paintings and art.
Below, we will provide information on how the market actually works when starting to invest in paintings, as well as some cautions and recommendations on how to buy when making an investment.
How to Start Investing in Paintings
Primary and secondary markets
The art market can be divided into two main categories: primary and secondary.
The primary market is the market where art works are available in primary distribution.
This includes galleries, art fairs, the Internet, and direct purchases from artists.
It is characterized by the ability to purchase artwork by well-known artists before the prices rise as high as they do on the secondary market. Works by artists who are still unknown but have the appeal of gemstones are also purchased on the primary market.
However, works by artists who are too well-known to be purchased by beginners may be difficult to purchase, as priority is given to collectors and dealers who have a proven track record of purchasing such pieces.
The secondary market is the secondary market for works of art.
This is what is known as an auction. The familiar Yahoo! Auctions and Mercari are also a type of secondary market.
When it comes to the top auctions, prices tend to skyrocket, especially for works by famous artists.
Basically, in art investment, you can buy on the primary market and then sell on the secondary market when the time is right.
Learn to invest in paintings
When it comes time to consider a work of art for investment on your own, aesthetic sensitivity is of course important, but it is also a prerequisite that you have a grasp of basic art history, background knowledge, and industry common sense.
Here are five books we recommend for acquiring knowledge about contemporary art.
The cover of this book, with its cute and colorful illustrations, is titled "All you need to know about the basics of contemporary art in one book. The book explains the world of contemporary art, which tends to be seen as a difficult subject to approach, based on the concept of "making it understandable to everyone.
The two chapters, "Artists" and "Keywords," provide an introduction to famous artists and their works.
The names of artists such as Warhol and Yayoi Kusama, whose works appear on the cover of the book, are introduced in two chapters, "Artists" and "Keyword", so that readers can learn about famous artists and their works. You will often hear the names of artists such as Warhol and Yayoi Kusama on the cover of this book, even when you are viewing other contemporary art works.
In this new book, too, the author, who declares that he "values the position of ordinary people," honestly states that he "doesn't understand art," as he dishes out one difficult contemporary art work after another.
People around me are somehow saying that they understand, but do they really understand...?
Am I the only one who doesn't understand how great this is?
This book is especially recommended for those who have ever thought like this.
This book by Hiroki Yamamoto, who is both an artist and a researcher of contemporary art history, is much more like an article than the above two books. It connects the existence of what is called "contemporary art" to the overall flow of society after World War II.
This book is recommended for the theorists, as it covers the theories, artists, and art movements that are often mentioned in art commentaries.
The contemporary art world is a small but mysterious world where money swirls on a tremendous scale.
The players in this world are, in fact, various: super-collectors, including the heads of global corporations and royalty; gallerists who are in the dark; curators who maintain a delicate distance from capitalism; theorists who are trying to fight back while losing their presence; and artists who are challenging a new world order.
This book dissects the difficult world of contemporary art in an easy-to-understand manner from the unique perspective of the "contemporary art scoring system," which charts the "motives" behind contemporary art.
5. contemporary art for everyone: how to flatter the masses, or for art to be art
In this book, artist Grayson Perry answers simple questions about art with sarcasm and love.
The pop illustrations make this book easy to read, but it is also a very informative book that will give you a higher level perspective on contemporary art from a critical point of view.
Contemporary art works Recommendations for purchase
TRiCERA ART: Art Marketplace
How should you buy a work of art, taking into account the various knowledge, management methods, and advantages and disadvantages as an investment, for both you and the artist?
Our company, TRiCERA ART, brings together artists from 126 countries around the world and offers a large selection of contemporary, classic, or pop artworks. Among them are many popular Japanese artists, and there are also other artists who can be called gemstones and whose value is expected to increase in the future.
Check out the latest trends.
View TRiCERA ART's latest works
A system for continuously increasing the value of artworks through resale
In addition, from April 2023, a new feature Resale" service will be launched in April 2023.
This service will not just be a one-time purchase of a work, but will serve as both a primary and a secondary on the same TRiCERA ART platform.
The most important differences from the previous secondary market are, first, that the system returns a portion of the proceeds to the artist for each resale transaction that takes place.
Second, as a matter of course, customers who purchase primary on TRiCERA ART will receive a variety of useful and profitable coupon information and other benefits.
We hope you will consider both bidding and selling your items.
TRiCERA ART members receive a variety of special offers and preferences.
- Discounts such as members-only secret sales and coupons
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- Receive a weekly newsletter with selected art
- Personal Assessment to find out what kind of art you like.
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