Article by Sarah Ansari from Finance Wing, GAEE JMI

Everything that we see around us, the colours on the walls of your room, and the wallpaper that you use for your phone is a form of art. Art inspires people to break the monotony of day-to-day life and helps them express and create.

Owing to its importance, art has also found its place in the financial world. Even with a limited number of collectors, at $63.7 billion, the art market continues to grow. The factors contributing to this growth are art’s high value and a lack of liquidity. Thus, while buying a piece of art, the buyer is also focused on its future value.

Mainly, there are three types of borrowers when it comes to art finance: collectors, art dealers and corporate clients. Art finance can be about acquiring artworks by financing instead of purchasing them outright or by collateralising with artworks and related property. Firms offer such services, including art purchase financing, art insurances, art appraisal, art investment advice, et cetera. In addition, art owners can extract liquidity from their collectors by securing an art loan to fund other investment opportunities. Finally, when talking about the sale of art, auction houses are hard to miss. An auction is a system of selling a displayed object by placing bets on it and selling it to the highest bidder.

Owing to its importance, art has also found its place in the financial world. Even with a limited number of collectors, at $63.7 billion, the art market continues to grow. The factors contributing to this growth are art’s high value and a lack of liquidity. Thus, while buying a piece of art, the buyer is also focused on its future value.

Mainly, there are three types of borrowers when it comes to art finance: collectors, art dealers and corporate clients. Art finance can be about acquiring artworks by financing instead of purchasing them outright or by collateralising with artworks and related property. Firms offer such services, including art purchase financing, art insurances, art appraisal, art investment advice, et cetera. In addition, art owners can extract liquidity from their collectors by securing an art loan to fund other investment opportunities. Finally, when talking about the sale of art, auction houses are hard to miss. An auction is a system of selling a displayed object by placing bets on it and selling it to the highest bidder.

The artworld is majorly dominated by the two arch-nemesis auction houses: Christie’s and Sotheby’s. Almost identical, these two auction houses are international giants and offer great benefits for buyers to attend auctions. Such services include buyer rebates and other incentives. The “duopoly” also finds its connections to royalty and billionaires.

Christie’s is private in nature; however, Sotheby’s was held accountable to share information with shareholders. Moreover, in June 2019, Sotheby’s was bought by French billionaire Patrick Drahi for $3.7 billion, thus, granting it some flexibility in its deals.

Five auction houses comprise half of the global art sales, out of which Sotheby’s and Christie’s are responsible for 40% of them. Due to the auction system, it is hard to determine the prices of artworks, necklaces, et cetera; however, both these auction houses offer a “reserve,” i.e., a minimum price for which an item’s owner is willing to sell. In case of no sale or a sale preceding the reserve price, the costs are covered by the houses.

Of the multiple records that these auction houses hold, Christie’s sold Leonardo Da Vinci’s “Salvator Mundi” for $450 million at an auction in 2017, making it the most expensive painting ever sold.

Much recently, a new concept has been introduced in the art world, known as “NFT” or Non-Fungible Token. People can buy and sell any digital object such as a drawing animation or a mere sticker with a certificate of authenticity created by Blockchain technology. In the post-pandemic world, the introduction to NFTs provides auction houses with a way to make their sales virtual. And with our top auction houses fighting to stand out by mixing up their categories, Christie’s managed to sell a digital collage by American artist “Beeple” For $69.3 million, thus setting a record for NFTs.

The art world thrives on buyers who are willing to pay enormous amounts for artworks, and the industry also allows large cash deals. This gives way for “Money laundering”. People can buy artworks and hide their illegal money by claiming to have acquired it by selling the said artwork. Paintings or other pieces of art are also an investment as their value increases with age. International sellers can also get their art pieces admitted to “Freeports”, which work as warehouses and showrooms for their sale. They also act to avoid the complexities and expenses of imports, exports, shipping etc.

For example, the Swiss authorities had discovered a Nazi-era looted painting in a Geneva Freeport.

To conclude, we can say that the art market looks beyond the principles of supply and demand and works on the cultural value, fast value, and future value of an artwork. It is a place where it’s impossible to put a specific value on an item by either buyers or sellers.

(Sarah Ansari is a B.A.(Hons.) Economics student at Jamia Millia Islamia, Delhi, and a part GAEE JMI, an autonomous branch of Global Association of Economics Education in India. The views expressed are personal and they do not purport to reflect the opinions or views of GAEE or its members.)

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