Use Of Art As Collateral Grows, But Beware Overheating - Study

Tom Burroughes Group Editor 25 April 2016

Use Of Art As Collateral Grows, But Beware Overheating - Study

A report takes a look at major trends in the world of art and investment - producing some eye-catching data and a few words of caution.

The use of art globally as collateral against which to borrow is growing, a report by Deloitte and ArtTactic, an analysis firm, says. It also warns of some overheating in the market.

In the US, art-related lending is worth between $15 billion to $19 billion, with boutiques and auction houses scrambling for a piece of the action.

The firms issued the findings in Deloitte’s Art & Finance 2016 report, drawn from more than 120 art industry figures, 53 private banks and 14 family offices, as well as more than 90 art collectors.

Investment in fine art is increasingly starting to feature the kind of financial engineering and techniques once associated with debt and private equity markets. Last year, for example, Carlyle Group and Pictet, the private bank, backed Athena Art Finance, a business focused entirely on the sector. (To see an interview about this venture, see here.)

A number of banks, such as Deutsche, UBS and Citi Private Bank, already have art advisory offerings, including advice on investment and use of art as collateral. Art’s status as a “hard asset” in uncertain times has also encouraged the trend of art-related financial engineering. The rise of affluent consumer groups in regions such as Asia has also helped propel demand in recent years.

In its report, Deloitte’s art and finance practice US leader, Philip Ashley Klein, said wealth managers and banks are seeking to stand apart from their peers by offering art services. The Deloitte survey found that 72 per cent of collectors demand such services. 

Stoking the fires
The report also warned that prices may be becoming overcooked.

“We are seeing a marginally overheated market: a number of factors have been driving inflation in the art market, from the growth in global wealth to the cheap and easily accessible liquidity providing the means. Also important are the social value factors stoking the fire like the global proliferation of art fairs, the expansion of galleries, and 'art as celebrity' – artists becoming celebrities, more celebrity collectors, and traditional celebrities seeking art-world recognition,” it said.

Among other findings, 73 per cent of the wealth managers surveyed in 2016 (up from 58 per cent in 2014) said their clients wanted to include art and other collectible assets in their wealth reports to have a consolidated view of their wealth. 

“The financial component of art collecting seems to become a primary driver for developing art wealth management services. The key interest is not the investment or yield-seeking aspect of it; rather it is more the preservation of the capital allocated to art and collectibles,” said Adriano Picinati di Torcello, art and finance practice director, Deloitte Luxembourg.

“72 per cent of art collectors around the globe buy art for passion with an investment view, while only 6 per cent indicated that they buy for a mere investment purpose. 22 per cent of the collectors surveyed buy art only with the aim of collecting,” he said.
US market
The report said the US art-secured lending market, the world’s largest, stands at somewhere ranging from $15 billion to $19 billion, measured by the value of loans outstanding. Within the three market segments, private banks are dominating with an estimated loan book size of between $13 billion and $15 billion.

“The US has been leading the global market development for art-secured lending for some years, supported by low interest rates, and an attractive legal environment provided by the Uniform Commercial Code," the report said. “The latter essentially allows the art collector to keep possession of the artworks while the loan is still outstanding—which is quite different to Europe, where banks and specialist lenders often have no choice but to take possession of the collateral in order to perfect their security interest. Our Deloitte colleagues from the US have estimated that the US art lending market has grown by 15 to 20 per cent annually over the last five years (measured by value of loans outstanding),” Picinati di Torcello said.

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