Investing in Art 2016

Start a new kind of art conversation. T +61 2 9660 7799info@piermarq.com.au www.piermarq.com.au76 PADDINGTON ST, PADDINGTON NSW 2021

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Why invest in art?

Art investment is not a new concept. The world’s wealthiest families and largest companies have been investing in art for hundreds of years. The main reason to collect art is to appreciate something of beauty, however 76% of art buyers and collectors now consider investment as the key part of their decision to acquire.1 With increasing transparency and liquidity in a fast growing market, investing in art makes sense as part of a balanced portfolio. With straightforward research readily available it is no longer out of your reach.

Wisely selected art: * Outperforms traditional asset classes such as shares and property. * Low correlation to traditional asset classes. * Doesn’t fluctuate in value on a daily basis. * Can generate rental returns above property. * Demand outstrips supply unlike any other investment market.

How big is the art market?

The global art market is estimated to be worth US$67 billion, growing at 8% per year in the last five. New wealth creation is seen as the largest driver of art market growth, primarily fuelled by emerging markets such as south-east Asia. The U.S. market is still the dominant player representing 38% by value, followed by China with 24%, then the U.K.. Post-war and contemporary art is growing at the fastest rate, achieving compound annual returns of 10.5% over the 10 years to 2014. 1

The Australian art market is estimated to be worth circa $250 million. In 2014, the auction market achieved $106 million, with the remainder of sales attributed to the private market of galleries and dealers. Considering Australia’s place as a top 20 economy and the levels of individual wealth eclipsing almost all other developed economies, the Australian art market is undervalued by every indicator, with significant potential for rapid growth over the coming decade.

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What are the returns?

Over the last 50 years, art has achieved compound returns of 8.8%p.a. 2

Since 1993, the Australian market has shown similar returns of 8.2%p.a. 3

Status, rarity and quality are the elements that determine the growth in value of art. This will continue into the future as people will always desire items of great beauty and cultural importance. According to JPMorgan, there is an increasingly diverse set of art buyers as emerging markets become wealthier, which is “good news for the art market.” 4

Australian Art Auction Market 1993-2015

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1993 2000 2007 2014

Annual Auction Turnover ~$millions

Is art risky?

Similar to property, art is not volatile like the share market and your investment is secure through your direct ownership. It also has a very low correlation to traditional assets such as shares and property which provides important diversification benefits for a broader investment portfolio.5 However no form of investment comes without risk, which is why receiving insider art market intelligence and advice from a professional is crucial to success.

According to a Barclays report published in 2012, art and collectible holdings on average represent 9% of at the net assets of wealthy individuals. 1

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Can I buy art in my self-managed super fund (SMSF)?

The ATO allows you to buy art in an SMSF, subject to some simple regulations. There are simple steps to follow to ensure compliance - Piermarq can guide you through this process.

‘SMSF Frequently Asked Questions’ are covered on page 9 of this guide.

Can art generate an income?

A unique market has developed in Australia in the last decade - corporate art rental. Renting high calibre fine art allows businesses to make a powerful statement and enhance a work environment. Art can ‘brand’ a physical space and project an image of sophistication and success. Renting art is typically a tax deduction for business and the government organisation, Artbank, has been renting artworks in Australia since the early 1980‘s.

Piermarq offers works of investment calibre rather than for decoration, allowing a growing rental clientele at the top end of town which have more selective tastes. Companies rent artwork from Piermarq through secure legal contract. You benefit directly from rental returns of up to 10%p.a., in addition to any capital growth.

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What do you look for when investing in art?

Status, rarity and quality are the elements that determine the growth in value of art, but how do you define these?

We have developed a unique selection process based on a number of indicators to qualify and quantify the future potential of an artist. In the same way an investment banker analyses a company, we source market intelligence directly from the artist and other industry insiders to ensure we have the best information available.We then conduct technical analysis of the market to uncover trends and predict future price performance. This highlights specific artists with sufficient volume and price indicators to investigate further. When targets are identified, detailed fundamental analysis is pursued to further value the status of an artist based on their career milestones and key market drivers.

Once an artist’s status has been determined, we then look specifically at the artwork level. This is a crucial step for you to succeed in art investment. Why? Not every artwork by an artist is a masterpiece. To simply rely on an artist’s ‘name’ is the quickest way to failure in art investment. The rarity and quality of an artwork dictates the future investment potential, including the medium, scale, period, subject matter and provenance. This analysis forms the basis of our criteria for which specific works we source for our clients.

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Tommy Watson’s works have exhibited at global art fairs including TEFAF, Art Miami, Art Palm Beach and Art Silicon Valley. He is the top rated living Aboriginal artist.

What are the current trends?

We are constantly looking to take advantage of existing trends, plus uncover new trends towards the future.

There is a shift underway in the Australian market, with a new wave of artists becoming highly collectible. The contemporary sector is where strong upside potential exists, with artists such as Tim Storrier, McLean Edwards, Geoff Dyer and Maximilian Daniels well-placed to see solid gains over the coming decade.

The international market is currently booming, achieving record prices. Many of the trends seen in this market began in the major art fairs, such as TEFAF (The European Fine Art Fair), Art Basel, Art Miami and Art Frieze London. Since 2013, an increasing number of international galleries have been exhibiting the best examples of Australian Indigenous art, including major works by Tommy Watson, George Hairbrush Tjungurrayi, Naata Nungurrayi and Warlimpirrnga Tjapaltjarri. Piermarq is playing an active role in further promoting this sector, having been invited to exhibit Australian Indigenous art at the prestigious Art Palm Beach 2016 in Florida, USA.

“Returns to investment in Indigenous art are generally higher and less risky compared to Non-indigenous art. Australian art generally and Indigenous art in particular is found to have a relatively weak correlation with the stock market suggesting that Australian art has a role to play in a balanced investment portfolio especially taking into account the aesthetic utility that can also be derived as a result of holding art.” 4

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How much do I need to invest?

There is a reality in the art market that the higher status an artist achieves, the higher the price of their artwork. This is common sense when considering the dynamics of price with relation to demand and supply. If considering art for investment, clear value can be defined from around $25,000. This is not to say works below this level are not worthy of consideration, or indeed that works above this level are definitely good investments. The status of an artist, and the quality and rarity of the work are the key considerations.

A $5,000 painting may be an amazing example of quality, possibly quite rare at the time, however it is unlikely the artist will have a high status. If this is an emerging artist, it may present a high risk/high reward opportunity, more like a pre-IPO company or I.T. start-up. If you wanted to buy the equivalent of CBA, a $185,000 painting by Tim Storrier is closer to the mark.

You often get what you pay for, but you need to understand why.

Tim Storrier was rated the highest Australian artist among the Top 250 Contemporary Artists 2013/2014 by global art market tracker Artprice.

How long will I need to hold my art to see the best returns?

Art is a long-term asset class. Research shows the ideal time horizon on average is 10 years or more, however capital returns can occur in as little as 2 years, given the right set of circumstances. Our advice is to take a 5-7 year horizon as a minimum, then track the market for a price spike.

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What are the costs?

When you decide to consider an opportunity for acquisition, your Piermarq advisor will present you with a proposal featuring an image of the artwork, a clear rationale for why the opportunity presents value, and of course any associated costs.

Acquisition price: The cost of the artwork.

Valuation: Each work we source has the opportunity to receive an independent third party valuation from a licensed valuer. We recommend members of the Art Consulting Association of Australia, as they are further endorsed by the ATO for the Cultural Gifts Program. This provides you with a second opinion of value, plus a record of provenance for your artwork which is extremely important when it comes time to sell. The valuation fee is $165 per artwork, which we simply pass on to you.

Buying for the wall at home: Costs related to excess framing of the work to your taste, transportation and hanging would be the key considerations.

Art banking: If you are purely treating your acquisition as an investment asset, Piermarq has a storage and insurance solution, underwritten by Lloyd’s of London. The management fee is 0.9%p.a. of your artwork’s valuation.

Art rental: If a particular artwork is suitable for the corporate rental market, the management fee is 0.9%p.a. of your artwork’s valuation. This covers the storage and insurance of your work if not in a rental placement, plus any marketing, logistics and hanging costs. When placed, insurance is covered by the corporate rental client, who must provide a valid certificate of currency detailing the valuation and that the artwork is rented from Piermarq Art Advisory.

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SMSF Acquisitions

The ATO sets out regulations for acquiring artwork in a Self-Managed Superannuation Fund (SMSF). Piermarq recommends conducting your own due diligence as trustee, but the regulations require that artwork:

• must not be leased to any related party of the fund • must not be stored or displayed in the private residence of any related party of the

fund • trustees must make a written record of the reasons for the decisions on where to

store the artwork and keep the record for 10 years • is insured in the name of the fund within 7 days of acquisition • cannot be used by any related party of the fund • the transfer of ownership to a related party of the SMSF must be done at a market

price determined by a qualified independent valuer.

Piermarq offers 2 compliant solutions for SMSFs wishing to invest in art - corporate Art Rental and ‘Art Banking’.

* Piermarq acts as bailee to lease your artwork to other companies. * Your artwork is stored with Piermarq for art banking or when not rented. * The portfolio proposal document provided by Piermarq can form the basis of this

written record. * Some SMSF administrators have signed off on our comprehensive primary

insurance policy as compliant, but we recommend a totally separate, second insurance policy in the name of the SMSF. The second policy we have sourced typically costs $290p.a. for artwork up to the total value of $100,000.

* The artwork is managed by Piermarq. * Piermarq has a network of qualified independent valuers ready to complete any

required market valuations. The fee is $165 per artwork.

How do I get started?

Start the conversation with Piermarq. We deliver clear, insightful art market intelligence to help you acquire the finest examples of Australian Contemporary and Aboriginal Paintings. But we’d also like to invite you to discover the thrill of expanding your knowledge of art through engaging experiences, one-of-a-kind encounters and networking events exclusive to our clients.

We tailor our approach to match your exact needs, finding important works that also offer clear value.

Whatever your interest in art, you’ll find Piermarq delivers an alternative to your average gallery experience.

Contact us+61 2 9660 7799info@piermarq.com.au

76 PADDINGTON ST PADDINGTON NSW 2021AUSTRALIA

1 Deloitte Art & Finance Report 2014

2 MEI MOSES® World All Art Index

3 Australian Art Sales Digest

4 “The Art of Investing in Art”, JPMorgan, 2012

5 Bronwyn Coate PhD, ‘An economic analysis of the auction market for

Australian Art: Evidence of Indigenous difference and creative achievement’,

RMIT, August 2009