Banks turn to art as an asset

There is growing evidence that financial institutions are looking much more seriously at art as an asset for investment and loan guarantees.

A Reuters report out last week noted that UBS Wealth Management America had unveiled a $150m loans programme using art and antiques as collateral in a bid to capture a larger slice of the ultra-high-net-worth finance market.

This follows the publication earlier this summer of Wealth Insights, Profit or Pleasure? Exploring the Motivations Behind Treasure Trends, a detailed report in which Barclays Wealth Management looks at the issues and risks involved in diverting capital from traditional investment vehicles.

What this does not seem to be is a liquidity free-for-all for those involved in the international art and antiques market. Financial experts exploring the potential of art as an asset class are well aware of the emotional element of investing in this sector and the unpredictability of some of the more intangible factors that can affect its performance.

The introduction to Barclays' report, for instance, notes: "It has long been known that investors in equities and other financial asset classes can be susceptible to a host of cognitive biases that make it difficult for them to make rational decisions. With art, wine and other treasure assets, these biases can be even more pronounced."

Market Reassessment

Nervousness and unwillingness to back art investment remains the signature of many banks and financial institutions. At this year's LAPADA Conference, Richie Coulson of Lloyds TSB dismayed delegates by admitting that neither his bank nor any high street names had the time or resources to understand the market.

Now, however, with even the traditionally safe areas of bonds and gilts seen as risky, the art market is being seriously reassessed. The potential of this largely untapped asset class, set against a backdrop of ongoing global economic uncertainty and tougher financing conditions across the world, has made buying in the right expertise an increasingly viable option.

Barclays Wealth, for instance, drafted in Elizabeth von Habsburg, managing director of the Winston Art Group, and Philip Hoffmann, chief executive of the Fine Art Fund, as well as leading art market analysts Don Thompson and Dr Sara Thornton as part of their 13-strong investigative panel for their report.

Meanwhile the UBS WMA programme is being underwritten by Emigrant Bank Fine Arts Finance.

On the loans side of the equation, checks and balances to limit risk include limiting deals to the ultra wealthy, who enjoy a wide spread of other assets, loaning no more than 50% of the professionally assessed nominal value of the art in question and charging a healthy rate of interest, quoted as generally being around 5.25%.

For the ultra wealthy looking for liquidity, such loans enable them to raise cash without disposing of their assets, thereby avoiding capital gains tax or transaction costs.

Easier access to expertise and the wider availability of market indices online are helping to make art a more tempting option for investment. Finance specialists have already noted the healthy revenue stream generated by the major auction houses' own finance operations in issuing art-backed loans and advances.

Barclays' report concludes: "Collectibles now increasingly share the characteristics of broader financial markets."

What the wider art market will be watching for now is whether finance controls will be gradually loosened to open up similar loans and investment programmes to individuals further down the chain of wealth.