Leveraging fine art to finance property

In 2015, the global art market turned over $64billion in sales, with works by Francis Bacon and Pablo Picasso reaching over $100million at auction. These attractive figures and high profile cases are leading to more and more people considering art as a profitable investment opportunity, with some borrowers leveraging fine art to finance property.

We recently worked with the prestigious Colnaghi, the London-based art dealership now over 250 years old and one of the oldest commercial galleries dealing in Old Masters (with European paintings from c.1400-1820), who discussed this subject with us; in short, yes, art can be a good investment but like anything it is important to be considered in your approach. For example, there are a number of individual art markets; the market for a contemporary piece by Jeff Koons, for example, is very different to that of watercolours by the 19th-century master JMW Turner. There is also likely to be a higher quantity of modern art and, therefore, older art is seen as a longer-term investment, rather than one which will increase in value rapidly. The market for older pieces has tended to be populated by collectors who desire specific works of art, and who recognise that while they might not increase in value at breakneck speed, they present a very stable store of value in the longer term.

This tends to be made most apparent during times of economic turbulence and Colnaghi told us of two examples where their clients purchased artwork as a long-term investment,

“Take, for example, two important clients of Colnaghi. When one of Colnaghi’s clients J. Pierpont Morgan died in 1913 as America’s richest man, it is estimated that approximately 85% of his wealth was in art and books. Another client of the gallery was Andrew Mellon. In 1931, two years after the Wall Street Crash, he acquired Raphael’s Alba Madonna from the Hermitage Museum in Russia in a deal negotiated by Colnaghi for £240,800 – a record price for any work of art at the time. It had previously sold in 1808 for £4,000 and in 1836 for £14,000 – a reassuring growth in value over the longer term. Today, it is a highlight of the National Gallery of Art in Washington.”

When it comes to financing property, clients are often unaware they can leverage their art collection to do so. It can be hugely beneficial if clients are highly geared on their current properties and are struggling to release equity, or if they simply need a cash flow injection. For example, if a client was to sell artwork in order to finance a property purchase the transaction would be liable to capital gains tax (CGT), but if it is leveraged with a lender, both tax and transaction costs are eliminated and the client can retain the collection.

We know of a private bank who prefers to lend against multiple pieces of art than one single asset. As a result of the low levels of fluctuation in the value of art, they will loan up to 40% loan to value (LTV) – a minimum of $2million – at a rate of 7.5% – 9% + US LIBOR. When lending against fine art, there are two ways it can be done; the lender may take security of the art by keeping it in storage, enabling them to lend at a lower rate, or they take security over the art whilst it remains in the client’s possession. This will attract a higher rate but is often preferable as collectors feel a connection with their art and wish to display it, rather than keep it in storage.

If you would like to speak to someone about how to leverage your fine art collection to finance property, please get in touch with one of our expert brokers.

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