Works of art as assets — new target groups for a growing market
Works of art are a lucrative business. The five most expensive works of art sold in Germany in 2019 changed hands at prices of at least 1 million euros or higher. Despite turbulent fluctuations and tectonic shocks on the financial market, the art market remained largely stable in the new millennium. Even more — the hitherto opaque, exclusive art market is experiencing an unprecedented opening for new target groups through technology-driven business models. But how is the value of a work of art actually determined and which factors play a role in this?
Valuation between formulas, hypes and reputation
The valuation of contemporary works of art is determined primarily by two factors: Who is the artist and how large are the dimensions of the painting? Since, in addition to the “hard facts”, the idealistic value in particular plays a decisive role in works of art, the value of contemporary artists is also heavily influenced by irrational factors such as fashion, trends and hypes, which sometimes disappear as quickly as they have come. For established artists, on the other hand, whose social reputation has already been consolidated over decades or even centuries, the value is extremely stable. In addition to paintings, works of art also include sculptures or installations, which are also regularly auctioned off and have inherent value. However, we are concentrating on valuing paintings here.
Who is the artist?
The artist is the most important component in determining the value of a work of art. Most paintings bear the artist's signature, either on the picture itself or on the back of the painting. The more famous the artist, the more valuable his work. In contemporary art, the artist's popularity is given in a number, usually starting at 5 — the so-called artist factor. For beginners, this is usually 5; there is no upper limit. The following aspects influence the artist factor:
- Market history: for example, prices achieved at past auctions for works of art by an artist.
- Increase in value: The increase in value is significantly influenced by global demand for an artist's works of art. In addition, the illiquidity of the art market generally has a very positive effect on performance.
- International presence: Ideally, the artist's works are represented in museums, exhibitions and galleries worldwide. This increases the artist's popularity and increases the value of his works. Good networking with gallery owners, museum directors, collectors and art experts is essential for entering the international art scene.
How big is the work of art?
In addition to the artist factor, the size of the work is also decisive for determining the value. Basically, the bigger, the more valuable. These two factors result in a formula that can be used to determine the value of contemporary works of art:
Height in cm + width in cm x artist factor = gross price
If unknown artists still stick to this formula, it becomes irrelevant as their reputation increases. Gerhard Richter was actually guided by the factor formula until the 90s, before his name became an independent brand that allowed the value of his works to shoot into the millions.
Modern and early art: type, condition and provenance influence the appraisal
This formula is not applicable to older works of art, for example modern and earlier works of art, since in addition to dimensions and the artist, other factors play a role in the calculation of value, such as the type of work of art. When it comes to paintings, it should first be clarified whether they are an original painting or an art print. Art prints can also have a high monetary value, but paintings are generally more valuable.
However, if the type of work is a real painting, that does not mean that it is also an original. There are numerous repainted copies of paintings that have even adopted the artist's signature. Reliable information about the authenticity of the painting is only available through laboratory tests, analyses by art experts or the existence of a certificate that confirms the authenticity of the work.
The classification of a work in the respective creative phase of an artist also has a decisive influence on the determination of value. Picasso is not the same as Picasso. Depending on the period of an artist's career the work was created, the value varies. A painting by Picasso created for his wedding is generally worth more than one he made in his early days.
The origin of a work of art, known as the provenance, can also significantly increase the value. For example, if a painting was owned by a famous person or a specific collection for a while, it is worth more than a comparable painting.
A particularly important factor in determining the value is the condition of the work of art. A painting that is completely undamaged and unused is of course far more valuable than a painting that is damaged or soiled. With paintings, the most common problem is that the colors fade over time. It is therefore very important to store or display paintings in such a way that they are protected from direct sunlight whenever possible. The frame in which the painting is located also plays an important role. Regardless of the painting, its value increases when it is in a high-quality frame.
Development of the art market
The crises of the financial and money markets barely reach the art markets. The total turnover of the global art market quadrupled from 3.2 billion euros in 2000 to 13.3 billion euros in 2019, making art an increasingly popular asset class. It is not surprising that prices are rising on the global art market. The Artprice art database report for the first half of 2019 showed a price increase of 40%. The reason for this is a decline in supply as demand increases.
The average annual return for art market investors in the first half of 2019 was 4.6% with an average investment period of 13 years. Even though the Corona crisis hit particularly large galleries and art fairs hard in 2020, this only accelerates the unstoppable transformation of the art market towards digital business models such as online auction houses, which has already begun earlier.
Tokenized tangible assets - art for retail investors
Retail investors had no access to the art market in the past. Private retail investors have rarely been able to benefit from increases in value in the art market, spectacular auction results and returns on works of art loans. The acquisition, support and promotion of art usually takes place largely in exclusive networks that operate more behind closed doors.
Investments in tokenized tangible assets open up new opportunities for investing in works of art, with Platforms that provide professional support for customers, such as selection of works of art, appraisal and storage as well as placement in exhibitions or museums. Customers can purchase digital shares of a work of art with minimal investments and benefit from returns in accordance with the increase in the value of the painting. Thanks to secure blockchain technology, even retail investors can build up their own multi-asset portfolio of illiquid assets.
