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Arts as Alternative Investment

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This is presentation being presented by Shivi Aggarwal, Radhika Gupta, Sweta Agarwal and Madhusudan Partani Students of FORE School of Management ( FMG-18).

It evaluates Art and Colectables as Alternative Investment. Also covers the Participants, Valuation of Art, Insurance, Tax Aspects.....

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Arts as Alternative Investment

  1. 1. What people Say<br />The happiest collectors are those that motivated by the fun and enjoyment they derive from collecting. <br />Like a picture, a painting speaks a thousand words and makes billions for the investor.<br />"You can't avoid the art market these days if you're a sensible investor," said Mehul Patel, a 27-year-old Indian tech entrepreneur based in Singapore<br />"Today, people aren't buying art out of conviction or pleasure, but because they see money in it," says DadibaPundole, a gallery owner<br />So what do You Say ?<br />
  2. 2. Alternative<br />Art as an Investment Option<br />
  3. 3. Members<br />Madhu<br />91029<br />Shivi<br />91051<br />Radhika<br />91041<br />Sweta<br />91059<br />Group 2<br />
  4. 4. Flow of Presentation…<br />Facts & Acts<br />Art Industry<br />Why Invest in Art<br />Costs in Art Investment<br />Risks in Art Investment<br />Participants<br />Art Valuation and Appraisal<br />Art Indices and Funds<br />Taxes and Insurance<br />Tips for Art Investment<br />
  5. 5. World Wealth Report 2010- By Merrill Lynch and Cap Gemini<br />The two categories that were most attractive to “investor-collectors” (HNWI) were Art and Other Collectibles (coins, antiques, wines, etc.)<br />Luxury Collectibles (e.g., luxury automobiles, yachts, jets, etc.) continued to account for the largest portion of HNWIs’ investments of passion – 30%<br />Overall,22% of HNWIs’ investments of passion were held in Artat the end of 2009, However, interest in Art is clearly picking up again in 2010. <br />Art primarily as a financial investment, Art was the most likely of all such investments to be acquired for its potential to gain value<br />
  6. 6. World Wealth Report 2010-By Merrill Lynch and Cap Gemini<br />* Does not Real Estate which is included in the total estimated US$ 39 trillion<br />
  7. 7. Karvy Private Wealth’s: India Wealth Report<br />Global wealth in financial assets with High Net Worth Individuals (HNIs)1 at the end of December 2009 was US$ 39 trillion<br />Total wealth in India held by individuals is estimated to be Rs.73lac crores<br />1. investable asset of US$ 1 million or more<br />
  8. 8. CAGR of 25.4%<br />Individual Wealth Forecast<br />
  9. 9. Wealth Allocation 2009-10<br />
  10. 10. India Vs Global<br />Source: World Wealth Report 2010 and Karvy’s India Wealth Report<br />
  11. 11. Masterpieces & Museum Quality<br />Series VI- ET Intelligence<br />Top 10 Results For Indian Contemporary Paintings, Drawings & Books Auctions-2006 <br />
  12. 12. The Antiquities And Art Treasures Act, 1972<br />Sec 2(1) ‘Antiquities’ - which have been in existence for not less than 100 years Viz.,<br />Sculptures in stone, terracotta, metals, ivory.<br />Painting in paper, wood, cloth, skin etc<br />Manuscripts <br />Sec 2(2)“Art treasure” means any human work of art, not being an antiquity, declared by the Central Government by notification in the Official Gazette, to be an art treasure for the purposes of this Act having regard to its artistic or aesthetic value: Provided that no declaration under this clause shall be made in respect of any such work of art so long as the author thereof is alive<br />
  13. 13. Sec 3: It is unlawful for any person, other than the Central Government or any authority authorized by Central Government to export antiquity or art treasure.<br />Sec 5: Antiquities to be sold only under a licence.<br />Sec 14: Any person who owns controls or is in possession of any antiquity shall register the same before the registering officer and should obtain a certificate.<br />Sec 25 : If any person exports or attempts to export any antiquity or art treasure is liable for punishment for a term not less than 3 months which may extend to 3 years and with fine.<br />
  14. 14. Art Industry<br />The global art market is estimated at $23.5 billion, and more than half of it is in the US, considered the most-developed art market. <br />The Indian art industry is estimated at about Rs 250 crore, and is expected to grow at 35per cent a year. <br />Price increases of between two times and eight times in just the last three years for the works of artists like M.F. Husain, V.S. Gaitonde, SatishGujral and Tyeb Mehta .<br />Today, people aren't buying art out of conviction or pleasure, but because they see money in it.<br />
  15. 15. Indian Art<br />With a 5000-year-old culture, Indian Art is rich in its tapestry of ancient heritage, medieval times, Mughal rule, British rule, Progressive art and now contemporary art<br />Indian artists relied heavily on religious scriptures to draw inspiration<br />Water colors, charcoal, vegetable dyes were popular methods of painting<br />Stone and marble were also used to create art. One of the many purposes of art was to spread the word around about the king and glorify his deeds<br />
  16. 16. Indian Art: History<br />2nd century BC: Ajanta ad Ellora Caves (Maharashtra) <br />Mughal Art: bought the Persian influence in their artwork.<br />Rajputana Art: Lord Krishna is depicted in many Rajputana paintings. The miniature paintings from the Rajputanas flourished<br />Madhubani from Bihar, Tanjore from South, <br />
  17. 17. Indian Art<br />Modern Indian Art: Rabindranath Tagore, MF Hussain Raja Ravi Verma.<br />Theme changed to Nature, portraits, were some of the themes artist chose. <br />As artists started to express themselves, art galleries were needed to display their works. Art galleries appeared in Delhi and Mumbai only in the post sixties. The face of Indian Art was changing with times. <br />The uniqueness of Indian Art still lies in its rich cultural heritage.<br />
  18. 18. Why Art?<br />To diversify your investment portfolio. <br />High volatility of equity markets<br />Art has attracted a lot of attention after the year 2000.<br />Indian art is growing tremendously and breaking new trends of unprecedented appreciation due to excess liquidity in the economy<br />It's not as volatile as stocks, gold and property, and is not affected as much by economic downturns — and, it provides the investor an aesthetic benefit, as well. <br />
  19. 19. Collectables<br />
  20. 20. What are Collectables?<br />Stamps<br />Coins<br />Wine<br />Face Lift<br />Candle Stand<br />Handicrafts<br />Vintage Cars<br /><ul><li>Bags
  21. 21. Antique Weapons
  22. 22. Utensils
  23. 23. Perfumes
  24. 24. Furniture
  25. 25. Music Instruments
  26. 26. Estate Jewelry</li></li></ul><li>Why Collectables<br /><ul><li>Hobby ( Self Fulfillment)
  27. 27. Long term Appreciation
  28. 28. Protection from Inflation
  29. 29. But, Unlike Art, No Regular Income
  30. 30. Illiquid market
  31. 31. Difficult to determine True Value
  32. 32. Not for Pure Investment</li></li></ul><li>Types of cost in Art Investment<br />
  33. 33. Risk Pyramid<br />Where does Art lie?<br />Which is Most Risky?<br />Which is Safest?<br />
  34. 34. Risk Pyramid<br />
  35. 35. Risks/ Drawbacks<br />Art is far less liquid than stocks: One can't simply push a button and sell a Picasso tomorrow: Illiquid Market<br />The Indian art market is especially shallow, with relatively few buyers<br />High Transaction Cost<br />High Valuation cost and Require critical valuation<br />
  36. 36. Risks/ Drawbacks<br />High Maintenance cost leading to negative Income if not lent to galleries<br />Galleries provide income but at cost of losing benefit of enjoying the art<br />Price is dependent upon Bid of 1 or 2 bidders<br />Art Index though proved returns of Art at par with that of other Financial Instruments, but the method of valuation has few serious inconsistency.<br />
  37. 37. Participants in Art<br />
  38. 38.
  39. 39. Art market<br />Primary Market<br />where new art comes to the market for the first time<br />Valuing will be more difficult here<br />Secondary market<br />existing art that has been sold at least once before<br />Valuing will be less difficult<br />
  40. 40. Art Valuation<br />Art valuation, an art-specific subset of financial valuation, is the process of estimating the potential market value of works of artand as such is a financial rather than an aesthetic concern. Art valuation involves comparing data from multiple sources such as art auction houses, private and corporate collectors, curators, and specialized analysts to arrive at a value.<br />
  41. 41. Factors affecting Pricing of artwork<br />
  42. 42. You purchase a work of fine art from a gallery The owner assured you that the price you paid was based on an appraisal provided by the manager of the gallery. You go home feeling comfortable that the price you paid was accurate since it was based on the appraisal provided by the gallery. Is this comfort justified? <br />
  43. 43. Appraisal<br />A proper appraisal of artwork means: <br /><ul><li>A signed written report
  44. 44. Regarding a clearly identified piece of art,
  45. 45. Prepared by a person with the necessary training and experience
  46. 46. Who is impartial and disinterested,
  47. 47. Stating an opinion as to the market value as of a given date, and
  48. 48. Setting forth the facts and analysis supporting the opinion</li></li></ul><li>Purpose of Appraisal<br /><ul><li>To determine a purchase or sales price
  49. 49. For tax purposes(charitable deduction, gift tax)
  50. 50. For insurance purposes(premiums are usually set and claims paid based on replacement value)
  51. 51. To obtain a loan secured by artwork
  52. 52. To satisfy the curiosity of the owner</li></li></ul><li>Difficulties in Appraising Artwork<br /><ul><li>Original artwork is one of the most difficult things to value
  53. 53. Value depends on external factors that are difficult to quantify.
  54. 54. Appraisals are only as good as the time period in which they are presented
  55. 55. No cash flows as in other asset classes</li></li></ul><li>Basic Appraisal Methods<br />
  56. 56. Market Comparison Approach<br />
  57. 57. Cost Approach <br /><ul><li>Not applicable to all artworks like in painting.
  58. 58. Applicable where say the value of an artwork made of precious metals or gems depends largely on the raw materials or in the case of decorative arts where the cost of manufacturer is the main factor in determining its value</li></li></ul><li>Income Approach<br /><ul><li>Where the artwork produces income, such as artwork in the stock of someone in the business of renting out artwork or a master image used to produce signed and numbered prints or commercial products such as posters and t-shirts.
  59. 59. Under this method the stream of income is capitalized and used as the basis for estimating value.</li></li></ul><li>Intuitive Approach<br />This approach is not officially recognized by any of the major appraisal organizations or the IRS, but it is commonly used in the art world. <br />
  60. 60. Replacement Value Approach<br />
  61. 61. Art Index<br />Equity: NIFTY/SENSEX/Others<br />Real Estate : RESSEX<br />Inflation: CPI<br />Commodity Price Indexes<br />Diamond : IDEX Diamond Price Index <br />Why is an Index reqd?<br />
  62. 62. ET Art Index<br />ET and Osian’s– Connoisseurs of Art<br />world’s premier Archive on the Indian contemporary fine and popular arts<br />For the fund managers and insurance companies, but also for investors (HNIs)<br />Uses the transactions of artworks belonging to India’s leading 51 contemporary artists<br />M.F. Husain, F.N..Souza, Tyeb Mehta, Akbar Padamsee, GaneshPyne, J. Swaminathan, J. Sultan Ali, 3 Tagores<br />transaction value of these 51 artists comprise 88% of the total organized Indian art market<br />Calculated on the basis of the average Square Inch Rate (S.I.R) of works<br />The Liquidity and Historical Significance weights have been considered so as to arrive at the final index value<br />
  63. 63. ET Art Index<br />ET Art Index gave a return of 47.8% since it’s inception in January 1, 1998. From a level of 100 on December 31, 1997 the index value stood at 2513.1 on March 22, ‘06<br />
  64. 64. ET Art Index<br />ET Art Index gave a return of 47.8% since it’s inception in<br />January 1, 1998. From a level of 100 on December 31, 1997 the index value stood at 2513.1 on March 22, ‘06<br />
  65. 65. Mei Moses Fine Art Index<br />Michael Moses and Jiangping Mei (New York University's Stern School of Business,)<br />They take the original sales price and then subtract it from the most recent sales price at Christie's and Sotheby's in New York<br />Most recent update shows, over the last 50 years, the art index returned 10.5 % p.a.<br />
  66. 66. Mei Mosses – Art Index<br />
  67. 67. Art Funds: Alternative to Art Investment<br />People who are keen on investing in art can make their investments through Art Funds.<br />These art funds in India basically operate like mutual funds, with people investing money in them and the fund manager purchasing art with the collected money. <br />These art works are bought through exhibitions or directly from the possessors. <br />The profits obtained from the sale of these art works are distributed amongst the investors.<br />
  68. 68. The following are some of the major art funds currently operating in India:<br /> Osian’s Art Fund<br />Crayon Capital Art Fund<br />Yatra Art Fund<br />Copal Art Fund<br />The latest entrant, the Indian Fine Art Fund which is a $25 million fund, has invited investments starting from $100,000.<br />
  69. 69. Wealth Management Services* for Art<br />* OSIAN’s Wealth Management and Deutsche Bank Private Wealth Management<br />
  70. 70. Tax<br />At what stages Tax is attracted?<br />
  71. 71. Tax on Purchase<br />Art purchased in India<br />Sales Tax(VAT) 12.5%<br />Art purchased from outside India<br />Import duty 14.712%<br />Sales Tax(VAT) 12.5%<br />
  72. 72. Pay for being Rich: Wealth Tax<br />
  73. 73. Tax on Income from Art<br />Any income earned from work of art such as <br />rent for allowing it to be displayed in an exhibition, <br />Fee for allowing it to be reprinted in a book<br />Taxed as normal income under the head “income from other sources”.<br />
  74. 74. Tax on Art as Gift<br />Gift received during the year: paintings, sculptures or other works of art<br />Aggregate value: exceeds Rs. 50,000<br />Also Includes any concession on Art exceeding Rs. 50,000. ( Deemed Gift)<br />Subject to: Income tax<br />Rate: Applicable tax slab<br />
  75. 75. Tax on Sale<br />Finance Bill 2007 amended scope of “capital assets”<br />After 2007, “capital assets” also include<br />Archaeological collections, Drawings, <br />Paintings, <br />Sculptures, <br />Any work of art <br />
  76. 76. Tax on Sale<br />If held for 3 years or more<br />LTCG Tax @20%<br />Benefit of Indexation<br />Base year April 1988<br />If held for Less than 3 years,<br />STCG Tax @ relevant tax slab<br />Cost of Improvement, Cost of restoration allowed as deductions. But Cost of storage is not allowed for deduction from taxable Gains<br />
  77. 77. Art vs. Capital Market<br />
  78. 78. Art Insurance<br />
  79. 79. What is insured<br />Collection of:<br />drawings<br />paintings<br />Sculptures<br />any work of art<br />
  80. 80. Insurance<br />Title Insurance<br />Defective or lack of title<br />Property Insurance <br />Loss<br />Fire damage<br />Water damage<br />Restoration cost on damage<br />Theft<br />
  81. 81. Title Insurance<br />Need: lack of transparency<br />Confidentiality of buyers and sellers<br />No central registry for art transactions<br />
  82. 82. Real Life Case<br />Steven Spielberg, the movie producer and art collector,<br /> wanted a Norman Rockwell painting. He called the<br /> gallery he usually purchased art from and was told that a<br /> Rockwell was available. He purchased it for $700,000,<br /> took it home. Sometime later Spielberg was sued by the<br /> previous owner who claimed that the gallery was not at<br /> liberty to sell the work because it lacked the proper<br /> documentation. In point, Spielberg had defective title to the<br /> work, and as such, he did not legally own the Rockwell.<br />
  83. 83. $700,000<br />Norman Rockwell painting<br />Legal charges: $50,000<br />Court case<br />
  84. 84. Cost vs. Benefits<br />Cost<br />Premium: 3%-7% of value of work<br />One time cost<br />Benefit<br />Insured for defending against defective title in courtroom <br />Insured the value of the work<br />
  85. 85. Cost Vs Benefits<br />Had Mr. Spielberg taken the insurance<br />Cost: 7% of $700,000= $49,000<br />Benefit: Insured for $750,000<br />Value of the painting i.e., $700,000<br />Defending charges i.e., $50,000 <br />
  86. 86. Property Insurance<br />Special attention to be paid on<br />Risks to be covered: loss, theft, damage or destruction(due to fire, flood etc)<br />Valuation clause of the policy: agreed upon value or market value in case of loss or theft<br />A right of first refusal to repurchase the recovered artwork from the insurance company at a pre-negotiated price (i.e. the original value of the claim)<br />Arbitration clause to adjudicate any disagreement on valuation after damage<br />
  87. 87. Property Insurance<br />Premium depends upon<br />Geography: For e.g. Mumbai is more prone to floods than Delhi is. So more premium in Mumbai for insurance against floods<br />Neighbourhood where the building is located<br />The security and construction of the building where the artwork is stored<br />Inherent fragility of piece of art<br />
  88. 88. Exclusion<br />The following may or may not be covered under property insurance<br />Wear and Tear <br />Inherent defect and breakdown <br />Gradual deterioration <br />Loss by insects or vermin <br />Damage by atmospheric conditions <br />Confiscation and War <br />Breakage and non violent theft while home is being lent, let or sub let <br />Radioactive contamination <br />
  89. 89. Tips for Art Investment<br />Buy the Art which you like. <br />Having emotional Connect would mean less loss even in case if value falls<br />Buy Lower priced Art( more room for growth) instead of Million Dollar Masterpieces<br />Consider Growth Shares( Young Artists) along with Blue Chip ( Famous Artists)<br />Only a small portion of Surplus to be invested in Art<br />
  90. 90. Tips for Art Investment<br />Know thy artist - Art buyers should know the history of the artist's work apart from the quality. Also check the provenance, condition and period in which it was painted before investing.<br />Have a clear idea about the time horizon and gestation period for a particular work to appreciate in value.<br />Last but not the least, buy art only if you like the quality of work and not just the artist. And take good care of your purchase. A work of art can never be replicated.<br />
  91. 91. Thank You!<br />