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Investing: art, property, or the stock market?
What is the most profitable form of investment over the medium term? This exclusive offers a comparison of the main types of alternative investment. Do you prefer art, property or the stock market? The figures tell their own story. Do you live close to the Eiffel Tower, in the heart of the Big Apple or on the banks of the Thames? Your location is important as investment strategies can have very different outcomes depending on which country you are in.
As markets go, London is by far the most lucrative: property values soared by 91% between January 2001 and July 2005, while its art market outstripped even this performance, with prices up 92% over the same period. In fact, taking into account all investment types and locations, over the medium term the London art market is the most profitable option, with an average annual rate of return of 22.3% over the last three years.
Buoyed by heady price growth, it’s full steam ahead in the UK's art market. Take Frieze: since it was first held in October 2003, it has become a force to be reckoned with in the contemporary art market, with 150 international galleries and 40,000 visitors. In the auction market, meanwhile, Sotheby’s, Christie’s and Bonhams are putting on so many exceptional sales that London took the biggest share of fine art receipts in the first season of 2005, with 38.2%—ahead of New York with 37.3%.
Between January 2001 and July 2005, New York’s art market posted headline-grabbing records such as the USD 93 million paid for a Picasso. However, with prices rising by 47%, New York was only half as profitable as London over the same period. In 2001, the New York art market had a few difficult months, before getting back on track when the fall in value of the greenback boosted dollar prices. However, the enthusiasm for fine art is far stronger in London than in New York.
Moreover, US investors are far more active on the finance markets than their counterparts on the other side of the Atlantic, and trading on Wall Street had been much more lively there than in Paris or London of late. While on 28 July, the Dow Jones IA closed 0.5 points higher than on 2 January 2001, the FTSE 100 and CAC40 were both down over the same period, at -21.5% and -17.4% respectively. As for real estate, the rise in US prices, as measured by the OFHEO index, was nowhere near as spectacular as in the UK or France.
Thus, in France, where investors favoured bricks and mortar, property has been the only really profitable form of investment over the last four years. According to INSEE, the price of existing housing stock shot up by almost 60% during the period, while in Paris the bourse was down 35% and the art market remained broadly flat, untouched by the euphoria pervading the UK and US markets.
Although France is the leading art market by number of works sold, it has been largely left behind while markets elsewhere prosper. Auction turnover for fine art fell by a further 18% compared to the spring/summer season in 2004. The 2001 auction reform has not helped. Too often tied to a handful of prestigious sales, periods of exuberance at Drouot are few and far between. While some very successful sales took place in June, French auctioneers are gradually losing ground because of the pressure from other markets. Transaction volumes continue to decline, and the fine art sales that took place in France in the first half of 2005 accounted for just 5.7% of the global market, versus 20.5% in 1990. On the positive side, the most entrenched prices appear to have risen since the beginning of the year.
But at a time when the euro is trending down against the dollar and oil prices threaten to hit a new record high each day—prompting fears of an unprecedented economic crisis—we may well see a radical reversal of roles in the not too distant future. We have already seen that the London and Paris property market bubbles look like they may soon burst. In the art world, prices in the US and UK have never been higher, even surpassing—in June—the all-time highs of 1990's speculative bubble.
On the other hand, if we see a halt to these spiralling prices, the crucial question we will all be asking is: are we heading for a soft landing or a crash?