Savvy investors profit from art appreciation

PUBLISHED : Monday, 05 July, 2010, 12:00am
UPDATED : Monday, 05 July, 2010, 12:00am

Hong Kong has been labelled a cultural desert, but players in the art sector disagree, saying art is a good investment - and there is no shortage of canny investors interested in adding to their collections.

Some galleries have shown they are more recession-proof than banks and stockbrokers, while art collectors have kept on buying art items both for pleasure and for investment during the financial crisis.

Art collections can pay off in other ways. For example, Lehman Brothers, which has the dubious honour of being the largest US banking collapse in history, is in liquidation, including its art works.

The lender will sell 400 contemporary works formerly displayed in its board room and corridors at a Sotheby's auction in New York in September.

Sotheby's expects the sale, which includes works by some leading contemporary artists, including Damien Hirst, Takashi Murakami, Richard Prince and Julie Mehretu, will reap more than US$10 million.

Lehman acquired many artworks in the past two decades, which have proven to be profitable and wiser than the subprime mortgage investment which brought down the bank.

Besides banks and funds, there are many individual art lovers in town buying art products, supported by hundreds of art galleries selling paintings, sculptures and other art objects.

A new kid on the art block is iPreciation, a Singapore-based gallery that invested HK$4 million to open its first shop in Jardine House in Central last month.

The company was set up in 1999, focuses on Asian artists and is an agent for Taiwanese sculptor Ju Ming.

Helina Chan, owner of iPreciation, held an exhibition of Ju's tai chi and swimming sculptures at Exchange Square and the Landmark last month to mark the shop's debut.

'Hong Kong is an important market for Asia so it's important to have Hong Kong as a point for Northeast Asia while Singapore remains the centre for Southeast Asia,' Chan said.

She does not think that opening a gallery in Hong Kong during a European debt crisis is risky.

'There is never a good time or bad time for business. We showcase very good artists and the demand for good art is always there,' she said.

Chan said galleries were not so much affected by the financial crisis because they sold art differently from auction houses.

'As a gallery, we sell artworks at a fixed price. This is unlike the auction market where the result hinges on whether there is more than one bidder for the same piece of work,' she said. 'Our business has been very steady so far. Art is not merchandise. It does not go out of fashion. Good art will always holds its value.'

Her view is shared by Grotto Fine Art founder Henry Au-yeung, whose gallery in Wyndham Street has been in business for 10 years.

'We have weathered the bursting of the dotcom bubble in 2000, Sars in 2003 and the global financial crisis in the past two years,' Au-yeung said. 'We have recorded pretty steady growth every year. That shows that the art business is pretty recession-proof.'

Au-yeung's business is not so affected by the ups and downs of the stock market because his customers are art lovers instead of speculators.

'My clients are usually art collectors who buy paintings or sculptures for their own collection. They are not buying them for investment,' Au-yeung said.

They bought paintings or sculptures because 'they like the artists' and when the artists had new works on display, the clients would buy some items to expand their collection, he said.

He said many of these art collectors were well-to-do professionals such as lawyers and doctors, and others were from wealthy families.

'Our clients are not nouveau riche who purchase artworks just because they have made money on the stock market,' he said.

'Instead, they are from rich families who have been rich for several generations and can afford to buy art items even during a financial crisis. As such, they are less affected by economic cycles.'

The business model of the art gallery may also be a reason for it to be able to survive financial crises.

For Grotto, there is no need for heavy capital investment on stock nor does it need to hire hundreds of salespeople to sell artworks. The gallery, on the second floor of a building, is Au-yeung's office as well as an exhibition place for artists and place to meet customers. He only employs one assistant.

Success hinges on the owner, who needs to be an art expert and to know how to choose the right artists and how to promote them.

Au-yeung, who studied art history and worked in other galleries for many years before setting up his own, is well connected to individual and corporate clients.

'A good artist needs to be creative and to be a craftsman. For an artwork worth HK$10,000, maybe HK$8,000 is paid for the craftsmanship and the rest for the creative idea,' he said.

Grotto focuses on promoting only Hong Kong artists. It has signed up about 30 of them including Wilson Shied, Joey Leung, Angela Su, Danny Lee. On average, Au-yeung would add two new artists every year.

Grotto pays for exhibitions in Hong Kong and overseas, and to issue booklets and promote artists' works. The price of artworks typically ranges from HK$5,000 to HK$100,000 each, depending on how well known artists are, and the gallery takes a cut of about 50 per cent of sales.

This could be a risky business as a gallery could lose everything if none or only a few works in an exhibition sell.

However, Au-yeung said that rarely happens and usually about half of the works in each exhibition sell.

The gallery now has an exhibition of wooden sculptures by Kevin Fung Lik-yan, who is an engineer in the telecommunications industry but is also a celebrated artist whose new works deal with the pressures faced by the middle class in the city.

'I have taught art in the university and found that many Hong Kong art students are very talented,' Au-yeung said. 'This is why I want my gallery to have a focus on Hong Kong artists. This will allow us to build up a group of loyal customers who like Hong Kong artists and will keep coming back to us to expand their collection.'

He said the auction houses were more likely to be affected by the macro economy as they had some collectors who invested in art, while some hedge funds and corporates were buying art expecting to resell it later for a profit.

From the point of view of artists or collectors, selling by auction may raise more cash as many bidders are chasing a single piece of artwork.

Last month, a self-portrait by Edouard Manet sold for GBP22.4 million (HK$265.2 million) at Sotheby's in London, setting a record for a work by the master impressionist.

In April, a Sotheby's spring sale of contemporary Asian art raked in more than HK$144.88 million, while its Southeast Asian paintings fetched almost HK$69.3 million. World records were set by Liu Ye, whose work, Bright Road, fetched HK$19.14 million, and Lee Man-fong, whose Bali Life sold for HK$25.3 million.

Many works fetched prices that exceeded estimates by up to six times.

In the first three months of this year, Sotheby's posted 100 per cent sales growth compared with the same period of last year, when the world was reeling under the impact of the financial crisis, according to Sotheby's global president and chief executive, William Ruprecht.

Au-yeung, however, believes selling by auction is not a good idea for young artists. 'Auction houses will usually promote only one piece of an artist's work - not his or her whole collection. But if the artwork fetches a high price at auction, the artist can expect to raise prices in the gallery,' he said.

'This is not healthy for the development of young artists because they should develop their career step by step rather than dreaming of overnight success.'

Chan said the current art auction market in which many bidders were paying top dollar was reminiscent of the Japanese boom in the 1980s.

'At present, there is a lot of new wealth and people are willing to pay any price for trophy pieces. It's a bit like the Japanese boom in the late 1980s.

'Buyers who paid top dollar at auctions for artworks back then have never managed to get their money back when they resold their pieces.

'Like any investment, you can make or lose money in the art market, depending on what you collect and when you want to sell it. There are no guarantees,' Chan said.

'A lot of artists are not creating works but reproducing works based on market demand. The art market is very unhealthy at the moment. Like everything else, the art market needs to slow down a bit.

'Collectors need to start reading and doing their own research before they buy a piece of art. My advice is: Don't buy art using your ears, but by listening to your heart.'