Recently, there has been a substantial increase in utilizing artwork as collateral for loans.
Collectors are increasingly managing their art collections with an eye toward the bottom line. They are looking into art financing to re-deploy the capital that has been locked up in their high-value passion asset. Keep reading to find out some of the key points we believe you should be aware of regarding Art Finance.
Borrowers apply for loans at various stages throughout an economic cycle.
The art market, like most other markets, goes through cycles. During a crisis, borrowers from Pennsylvania frequently look to obtain financing from PA Green Day without forfeiting ownership of their artworks.
During a period of economic expansion, borrowers are confident enough in their future finances to purchase new art or borrow rather than sell to avoid paying significant capital gains taxes.
Independent of market conditions, blue-chip art with good provenance by the top 200 artists, such as Warhol or Picasso, has historically held its worth well, despite fluctuations in the market.
Year after year, the art finance industry keeps expanding.
As the value of art continues to climb, it is becoming a more significant component of a collector’s overall net worth. Before making a purchase, today’s collector is more concerned with the artwork’s long-term appreciation potential and the most reliable sales channel via which this value might be realized. On the other hand, selling an artwork can be extremely difficult due to the hefty transaction costs and other associated expenses.
The high value of art and the relative lack of liquidity in the market are driving the growth of the art finance business.
In recent years, obtaining an art loan to fund other investment opportunities has grown in popularity as an alternative to selling artwork. Collectors might take advantage of this to gain access to liquidity from their art collection and reinvest the loan proceeds into higher-yielding traditional or alternative investment opportunities.
The United States is a world leader in the art lending industry.
There are two main reasons why the United States is a leader in art lending. First reason, the regulatory and legal environment for secured lending activity is among the most favorable in the industry.
Second, the proportional size of the market and the amount of activity encourages expansion. Global demand is increasing, and it is predicted to continue to expand in several geographic areas, with China being the most notable.
Most borrowers are not aware of this type of financing
The importance of being aware of the financial solutions now accessible to art collectors and art dealers, as well as the ways in which using their art as collateral can help them achieve their financial objectives, cannot be overstated. In our opinion, Art Finance’s greatest constraint is a lack of public awareness.
The most valuable artworks are typically those created by artists with a long track record of success.
Emerging artists may command high prices for their works of art in the current market; nevertheless, their values are more susceptible to fluctuations in the future market. The value of loan collateral should at the very least remain stable, and historical performance across many economic cycles is our greatest indicator of future stability. For art to be accepted as loan collateral, it is ideal to have a large buyer base that can provide a ready bid at any point in the cycle.
The Art Finance sector is expanding due to an influx of new buyers, particularly those whose credit needs cannot be supplied by traditional banks.
As revealed by the 2018 Art Basel/UBS Art Market Report, while there is still a relatively small number of collectors at the upper end of the market, the market has grown significantly, reaching approximately $64 billion in 2018.
This asset class is projected to grow even more in the future as more financial institutions gain confidence in Art Finance transactions. Currently, there are two types of people who frequently use art loans:
- Private collectors who want to reinvest their money
- Art market professionals. These include galleries and dealers whose financial situation does not fulfill the strict lending criteria of traditional financial institutions.