Art Radar looks at TEFAF’s annual Art Dealer Finance report, written by Anders Petterson of ArtTactic.
The analysis tracks the historically illiquid art market from the perspective of both consumer and provider. Art Radar takes a look at the report’s key findings.
How do art dealers finance their day-to-day business activities and what sources are made available to aid them? What types of funding are out there for galleries and how do they, considering histories of unpredictable sales patterns, sustain their financial health during the ups and downs of the art market cycle? Beyond the glamour of the industry, these are concepts seldom (openly) discussed, leaving arts businesses in a cold cloud of confusion when searching for the resources they need to survive.
The European Fine Art Fair (TEFAF) has published their 2018 Art Dealer Finance Report in hopes of clarifying some of the opaquer aspects of owning an arts business – gallery, auction house, museum, independent art space, etc. – and operating it for maximum sustainability in a globalised, increasingly digital world. Written by ArtTactic’s Anders Petterson, the analysis peers into the perspectives of both “consumer and provider”, giving an in-depth consideration of collector capital in what the report calls an “historically illiquid market”. With this comes a riveting and accessible question-and-answer-style setup where more than 140 art market professionals – from investors to software gurus to contemporary gallerists – introduce their future predictions and the innovations that are underway to provide transparent solutions. Art Radar takes a closer look that the key findings.
Small fish, big pond
Currently, art-based financial aid that goes to dealers accounts for less than ten percent of the overall art-secured lending market. TEFAF details that the current value of loans to larger commercial galleries and dealers is estimated to be between USD1.4 billion and USD2.1 billion, or eight-ten percent of the global art secured lending market. This is a considerable difference from last year’s sum, which was estimated to be between USD17 to 20 billion in “loans outstanding against art”. Art dealers in the United States seem to be benefitting more from this developed asset-based finance, though the document notes that it is difficult to put a precise figure on the geographical share of this lending market.
Research has shown that lending companies estimated that more than 90 percent of global art secured lending to art dealers is to be underwritten in the United States, where the majority of the art secured lending is currently taking place. The report also finds that the estimated leverage (value of loans against art) accounts for between 5-8 percen of the gross gallery or dealer sales. This is significantly lower than most other retail industries, where the average leverage ratio is between 46-70 percent.
Gallery growth versus lacking law
Petterson writes that the United States art-based lending market benefits from a “more advantageous legal framework”; he explains that the Uniform Commercial Code (UCC) allows borrowers to hold onto their ‘purchases’ while the loan details are still up in the air, which is of great advantage for dealers. The report states:
This makes this type of financing significantly more attractive than in countries where the lenders are more likely to take physical possession of the art work. [However], the European legal framework remains fragmented: although there are proposed changes to the law in different European countries around the registration of charges over chattels, similar to the UCC code in the US, the lack of a pan-European uniform legal framework remains a hindrance for the future development of the European art-secured lending market.
It has been speculated that the implementation of an overarching legal framework would be the answer for the art lending industry. According to experts, if international jurisdictions like the United Kingodom, the European Union and Hong Kong created a legal structure akin to the UCC, it would enable providers to protect their capital while allowing borrowers to maintain possession. This could be the jumping-off point for massive market growth.
How does debt financing figure into the mix?
This is one of the larger, and largely-overlooked, segments of the current art market. The report maintains that the average debt-to-asset ratio among all of the galleries surveyed was seven percent (including real estate). The majority of gallerists said they had between zero and nine percent in debt-to-asset ratio, whilst 56 percent of those questioned said they had no debt at all. When considering those spaces who use art-secured lending, the average debt-to-asset ratio is 15 percent (including real estate), which Petterson claims is “more than double the average of the overall gallery sample”. Though, with 75 percent of this group saying they obtained their loans through private banks, it suggests that the higher leverage is a sign of dealers who are able to use their own personal collection to obtain inexpensive funding through “their private banking relationships”.
Comparing the use of leverage between different art market sectors, there are signs that galleries who offer Impressionist, Modern and Contemporary work have higher leverage than dealers focusing on other collections. This observation may correspond with the simple fact that most art lenders choose to concentrate on the largest and “most liquid segments” of the market. Last year, the combination of Impressionist, Modern, Post-War and Contemporary art accounted for more than 50 percent of Sotheby’s, Christie’s and Phillips annual auction yield, a sizeable increase from 46.1 percent in 2016.
Financing the day-to-day
Currently, most art dealers use their retained earnings to fund their business activities: from running the space, paying employees, buying inventory and maintaining an ever-expanding schedule of exhibitions and art fairs. Yet TEFAF’s survey found that co-investment from private investors is often preferred to debt-financing for, what Petterson calls, “opportunistic investments”. The majority of dealers said they typically involve co-investors when they see new business or investment prospects. 28 percent also said that they would use private investors to finance their artistic inventory, and 6 percent said they would involve private investors in financing gallery space and real estate, if/when the opportunity presented itself.
Current challenges and future demands
Despite the lengthy, bureaucratic processes in obtaining an art-secured loan – which turns many dealers into anxious puddles – many lenders say that galleries are often ill-prepared to meet the requirements: investigations into money laundering, credit checks and other due diligence operations.
Based on interviews with several high-profile lenders, one of the other key stumbling is the “valuation of art work(s)”. There is a mistrust among institutions in the valuation used by lenders, often as a result of a gallery’s perception of market value retail prices, whilst lenders tend to opt for the “more conservative auction value”. With this comes difficulty in establishing a clear title (for example, line of legal ownership) for an artwork. A number of cases were mentioned where artworks had been presented as surety for loans, as well as instances of fakes and forgeries. These present obvious risks to the lender, who could potentially be left with a valueless object with an obscured title. However, new technology based around blockchain, including Nanne Dekking’s Artory database, might provide a solution to this conundrum.
Despite only four percent of dealers regularly using art-based financing, the report interestingly points out that 31 percent of dealers said they would be interested in obtaining art secured loans. And acquisition finance is at the top of this list; 87 percent of the dealers surveyed said they could benefit from more access to acquisition finance.
The final chapters of the report, while reflecting inherently negative and lived-in struggles, are quite optimistic. It is written that 57 percent of galleries say their access to credit is “poor or very poor”, but this further suggests a demand for more accessibility and market transparency. There is a future potential to increase the sources of credit available to support the growth of art galleries (at every financial tier), but more information and education around the possibilities and the associated financial risks is required. This will both require and fuel a systematic shift towards greater integrity and professionalism.
- Basel, fast and slow: Art Basel 2018 + VOLTA14 – fairs round-up – June 2018 – the Art Basel and VOLTA14 fairs closed last weekend with strong turnout from over 100 countries
- Discussing the future of the art market with The Sovereign Art Foundation – May 2018 – Art Radar summarizes key points discussed in the panel by the Sovereign Art Foundation
- Towards an unpredictable sky: ArtTactic MENA Auction Analysis 2018 – key findings – May 2018 – the London-based analytics firm notes an 8.9% downturn last year after record sales in 2016
- Global Art Market Outlook 2018: ArtTactic report – key findings – April 2018 – ArtTactic has released its latest report on the economic outlook for the global art market in 2018
- The Leonardo Effect: ArtTactic’s Raw Facts Auction Review 2017 – key findings – February 2018 – the London-based analytics company has released its 2017 Raw Facts Auction Review on the global auction market
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