Passion Pays. Art and appreciation

When Pablo Picasso made “Le Reve”, French for ‘the dream’, little did he imagine that the portrait of his mistress would become such hot property. Made in 1932, it was first bought by Victor & Sally Ganz in 1941 for $7,000.

It was later sold for $48.4 million to another investor in 1997 and then in 2001 for $60 million. In 2013, Steve A Cohen finally bought it for $155 million, fetching the highest price ever for an art work.

Over the 72-year period of 1941-2013, the value of Picasso’s art work has appreciated at a CAGR of 14.9 per cent, outperforming S&P 500 returns (7.5 per cent annually) by a wide margin. Unfortunately, Picasso is not alive to hear about this story.

“The artist might not live to make money from his art work, but a shrewd investor certainly does” said a well-known Mumbai-based gallery owner years ago.

High networth individuals are increasingly looking at investing in art to diversify their portfolio today, lured by good returns of some artist works in the recent past. For instance, the artwork by artist V S Gaitonde of Indian origin appreciated 20.6 per cent on a CAGR basis over the last six years. No equity market, including that of India, has given such a return to its investors.

Tracking square inch rate However, the caveat for investors is that appreciation and recognition for artwork happen only for a handful of artists — many investments also go kaput. And moreover, the acceptance of an artist depends on the number of gallery shows he participates in and how far he is accepted among the art community.

Once an artist starts getting recognised, his work of art gets valued on the basis of square inch rate (SIR). Thereafter, the valuation of his work rarely witnesses a deviation of more than 10 to 15 per cent from the SIR values of similar work at a given point in time.

“Over a period of time, the value of the artist far surpasses the art or painting that he created”, says Rishiraj Sethi, Director of Aura Art. It’s a matter of how the artist has evoked a response from the buying community. Once the artist’s work gets established, buyers will come looking for them in the galleries and in the auction market, he says.

Playing to the gallery Galleries play a vital role in creating the initial platform for an artist. Initially, the artist and the gallery together decide the price per square foot for the art form created. The valuation is based predominantly on three factors — the ability of the artist to engage the audience, the skill to emote reality and the nature of the art form.

For an amateur artist, the value of art depends on how well he captures reality. But, for a well-established artist, the buyer’s aspiration value to hold his piece of work takes precedence while deciding value. Most importantly, the market perception and how the artist’s work gets re-rated in the auction market is the key. Once an artist’s work gets re-rated in the secondary market, the price of his art automatically gets reflected in the primary market too.

Artist Alagarraja, Director, Bhuvaneswari enterprises says “a gallery in India may not necessarily promote the most talented artist”. During the initial years of the artist, the gallery takes close to 70 per cent of the revenue from the sale of art, he says.

Usually, during these years, he sticks to a theme or a genre of work. As an investor, one should have an eye on the revenue-sharing model between the gallery and the promoter.

Illiquidity However, investors should know that the art market is fairly illiquid. The possibility of manipulating the valuation indicator in an illiquid market is very high. This is especially true when an established artist dies and his art supply is capped.

“Rothschild allocates one-third of its portfolio to art over the last 150 years and Deutsche Bank has 60,000 art works on its balance sheet.” says Sethi. Nowadays, the buyers expect the art form to capture reality and see whether the artist has managed to palpably get it out in the form of an art.

The art could be on varied subjects such as global warming, corporate appeal, climate change, spiritual art, karmic pattern, water scarcity, imbalances in nature or a beautiful woman.

Chinese miniatures The market and demand for the art work vary across regions. While the UK, Europe and the US dominate the contemporary form of art and paintings, Chinese miniatures and antiques are also increasingly taking up the global market share.

On the contrary, in India, the regional influence still plays a significant role. For example, while Mumbai is known for contemporary form of artwork, Chennai prefers traditional paintings as well as novel approaches to representations of Gods such as Krishna and Ram. Moreover, nowadays, art work done on acrylic takes precedence over that on oil or canvas (that might not be durable).

Globally, the art market is valued at $60 billion.India's contribution is a meagre 0.5 per cent ($200 to $300 million). While 60 per cent of the turnover is contributed by the top 100 artists (as of 2016), the share of Chinese artists contribution has increased from 8 to 30 per cent over the last 10 years .

The Chinese dominance in the art market can be seen vividly in the auction market . Till recently, Sotheby's and Christie's, the two auction market across the US and Europe, dominated the auction market with a 90 per cent market share.

However, with the entry of Poly and Guardian auction houses in China, its market share fell to 60 per cent in 2016. In India, Osian and Saffronart are the two well-known auction houses.

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