Art-Secured Lending in Monaco
The transformation of the wealth management sector, the global art market and the cultural and creative sectors (CCS) are rapidly creating new needs and opportunities at the intersection of art and finance, including one of the most discreet financial services in the world, art-secured lending.
It is not a secret that I grew up in an art collector family admiring various contemporary paintings. My grandfather was a well-established man, gaining his wealth from real estate developments. However, his real hobby was tinkering. He especially had a passion for creating wooden frames for artists and art collectors to dress their most precious artworks.
We lived in a three-floor house, and my grandfather used the entire third floor for his picture frame factory. This became also storage for more than hundreds of contemporary artworks. As a child, I often played in the attic of our house. Therefore, for me, it was always natural to be surrounded by art. I remember that I used to play there, spending every day some hours among the artworks. So it was just natural that I ended up focusing on cultural values.
Through my background, I learned that by safeguarding art and supporting artists we can enrich our culture and show a piece of our present to the future generation. This passion for art was burnt into my heart and followed me on my journey wherever I went. I supported charity art auctions, artists, musicians, I invested in cultural projects, cultural-educational books and I also started to own and collect original contemporary paintings. I once was also married to an artist, therefore I had the chance to experience all the diverse sides of the art world.
One of my authorised Monaco based businesses is Niche Media, the publisher of the Living in Monaco magazine, promoting the culture of the Principality and bringing together its residents’ community. However, my other business is Monaco Art Structuring, an art advisory firm focusing on art collections and art financing.
The average price of a work of fine art sold at global auction was only $42,439 in 2019, therefore I often get the question related to the size of the art market, especially in the Principality of Monaco.Art and collectible assets require the same attention as other assets. Talking about the market size, the Ultra-High-Net-Worth Individuals’ (UHNWIs) wealth associated with art and collectibles was an estimated US$1,481 billion in 2020. But what is the underlying reason that UHNWIs favour art-secured loans?
Based in the Principality, Monaco Art Structuring plays an important part in the Ultra-High-Net-Worth scene. Since 2014, we have actively helped art collectors to manage their financial needs.
I have to admit that this is definitely an ultra-niche service, especially if one considers the average price of artwork sold at auctions. However, it would be a mistake to compare the collaterals of the art-secured lending deals to the average art prices, it is like saying that Monaco is full with millionaires. Comparing art-secured lending with the general art market would be a bit like comparing the residents of the Principality of Monaco to each other. It is a well-known fact that 1 in 3 residents in Monaco are millionaires. It is also known that approximately 1 in 52 people are considered as UHNWIs. Ultra-high-net-worth individuals are defined as individuals with investable assets over $30 million. They are the minority in Monaco, but also the top-of-the-range residents. It is a fact that 2 in 3 people are regular employees, they are not necessarily wealthy. Monaco has a very similar situation as the art market.
Compared to the lengthy process of the superyacht re-financing (on average up to 8 months), or the real estate loans (1-2 months), the funds of the art-secured loan are usually available within 10 days after collateral assessment. Lenders usually offer transparent pricing, quick decision timeframes, and personal services.
Although the United States is the leader of art finance, the Covid19 pandemic has changed the European market and increased the appetite towards art-secured loans as a tool for addressing the liquidity challenges. Some European banks also started to offer art-secured lending as their complimentary services for HNWIs, therefore they are becoming ideal partners for the collectors. However, most of the clients have different agendas.
Generally speaking, most of the UHNWIs do not need a loan, however, wealthy people like to increase their wealth by making smart decisions. They also prefer liquidity since utilising part of their cash flow can bring them much more results.
The most coveted Art Finance Report by Deloitte discusses that 48% of collectors are saying their main motivation for using their art collection to secure loans is to finance the acquisition of more art.
Using art-secured financing to buy art without having to sell other assets and unlocking capital for other investments are the main drivers in the art lending market for most (80%) of the art-secured lending providers surveyed this year.
It is a niche-credit service targeted to (U)HNW individuals, where almost all of the major financial players will lend against up to 50% of the appraised fair market value of the artwork. However, every art has a different financial value. It is a bit like George Orwell’s legendary book, Animal Farm, with its famous quote: “All animals are equal, but some animals are more equal than others”.
Typically, the loans are in the 1 to 20 million Euro range, but some banks are willing to lend up to 250 million Euro on a case-by-case basis. The loan is usually offered up to three years (two years with the possibility to extend) against artworks that have proven track records on the secondary market.
Art-secured loan is relatively a quick process, however, the main advantage why the UHNWIs choose this financial service is the utmost discretion. When it comes to art finance, the focus is on the artwork only, no extensive background check and taxation/financial reports are needed from the owner. If the provenance of the artwork is in order, then it fully serves as the collateral and guarantee of the loan. Liability is strictly restricted to the artwork. This is one of the key reasons why UHNWIs love this service because they are not screened and questioned by the banks.
One can also be eligible for art-secured lending even when their artwork has never been presented on the secondary market, however, it has to have an acceptable fair market valuation. The ownership tracking and estimation process might be more complex. Yet, there are solutions out of the “high street” banks, such as with private art funds that are interested to look at such transactions. They can offer quick assessment and closing process and are often good short-term solutions for art dealers or private sellers.
Art-secured lending is not something new. It was first pioneered in the 1970s. The key is that a work of art is not only an object of pleasure, but it can also be long-term collateral to secure further investments. This way, art-secured lending can unlock liquidity for investment or personal finance purposes. While one enjoys their art collection on the walls at home, one can also use it to inject money into their business.
Depending on the regulations of the country of the primary residence of the owner, they might even keep the artwork in their home, enjoying it, while the art-secured loan is in place helping to achieve new acquisitions and endeavours.
Deloitte’s annual Art Finance Report conservatively estimates that the overall market size of outstanding loans against art could reach between US$24 billion and US$28.2 billion in 2021, a 10.7% average growth rate, and further grow to an estimated US$31.3 billion by 2022. This is especially interesting in the light of their survey disclosing, that a staggering number of 76% of collectors said they would like wealth managers to incorporate art and collectibles into their service offering.
Just to put this estimated US$31.3 billion in context, according to the art market website, Artnet, the total amount of money spent on postwar and contemporary art at auction in 2019 was US$4.2 billion, and the total amount of money spent on fine art, design, and decorative art at auction last year was US$17.8 billion.
Art-secured lending ranked among the most popular art and wealth management services in 2019. Based on a survey conducted by Deloitte, 60% of the art collectors say that art-secured lending was one of the most relevant wealth management services for them. Also, 69% of collectors said they would be interested in using their art collection (or parts of it) as collateral.
What one can find fascinating as well is that despite significant demands for art-secured lending services, only one in three banks is willing to offer this service in Europe. In contrast to this, 80% of US private banks are open to providing art-secured lending. On the contrary, Europe has not yet included its art-secured lending into its services. The team of Monaco Art Structuring strongly believes – seeing the trends in the Principality of Monaco and other European UHNWIs locations – that increasingly more art collectors prefer this way of overcoming temporary liquidity problems.
At Monaco Art Structuring our goal is always to support our valued clients with complete discretion, and to offer them solutions to increase the value of their art assets. For instance, when someone uses art as collateral they have three basic choices.
1, They deposit the artwork in a Freeport or a bank, which is the most popular choice of many.
2, In some countries, such as in the USA the regulation allows that they can keep the artworks in their home without moving them.
3, There is an option to lend the artwork to a museum for the period of the art-secured loan. This has multiple benefits. It can serve in the best interest of the owner because generally speaking the more public exhibits an artwork has, the more valuable it becomes. With a smart display, the artwork will significantly increase its value by the end of the loan agreement.
In the first two options, the artwork stays “hidden” from the public eye and the value is not necessarily increasing. On the human side, the third option is not just a winning situation for the owner, but also for all art lovers because they have a chance to see a privately owned artwork in public display.
One could assume that in general, art collectors are enjoying their beloved collections, seeing them on the walls of their homes or yachts. The truth is that the majority of art collectors are buying artworks only as part of their investment portfolios. When art is purchased for investment, one automatically creates art speculation, where the aim is to keep costs and tax duties low. Therefore, they often choose a Freeport over public exhibitions.
The purpose of a Freeport warehouse is to make it possible to store works of art, items from collections, antiques, and jewellery without incurring duties and taxes. In short, a Freeport is a storage facility that exists formally outside of the territorial jurisdiction of any country. The Principality of Monaco also has its Freeport.
In general, we can say that in their dynamic cultural contexts, countries offering Freeports aim to promote and develop their art market. The Freeport warehouse makes it possible to store or sell works of art without incurring duties and taxes. Most of the Freeports are located in a strategical place, close to important international airports, helping the transportation of the assets between the other Freeports.
I love art as an investment and an asset class, but I truly appreciate the human nature of art. I always stand up for creative people who are talented and brave enough to inspire us and the future generation with their visions and inspirations. I believe art is all around us and aesthetic inspiration is our footprint to the next generation.
Art is not just a piece of canvas, but a passion and message from our century, something from us to our grandchildren. Artists tell us their stories and share their emotions through their works. Finding the moment to understand the art pieces allows them to communicate and tell you their individual messages. When you find this harmony, you can also combine the passion with the profitable long-term investment.
We have a global clientele. Also, our partners are international because each artist has a different art expert, and sometimes for USA-based collateral, we recommend a USA-based partner. Our service cannot be limited to a single destination; we collect the most trusted art experts from all around the globe.
To be honest, for me every art piece is a journey of joy. I love when a hidden artwork comes to public display. We are like modern Indiana Jones in terms of discovering rarely seen artworks from private collections. It is always amazing to be part of a collateral assessment and to see a piece of art history. For me, who greatly appreciates art, there is always that excitement factor combined with a precious moment that money can not buy.
But every transaction requires an ethical start. By this I mean, owners need to invest in advance to prove that their artwork is original, in good condition, and also that they are the legitimate owners. It would be basically the same with any type of asset class, whether it is a car, yacht, or real estate.
Our process starts with the appraisal, in some case, it is already in place in some forms, but for us and the lenders, it has to be done by an independent expert at the expense of the borrower. If the appraisal is acceptable by the lender, we provide a term sheet and a legally binding commitment from our side. Still, the artwork has to be transported and stored in a bonded warehouse, selected by the lender. All the related costs such as transportation, insurance, and storage fees have to be borne by the borrower.
Authentication and trusted valuation is a key source of concern when it comes to art-secured lending. Therefore, sometimes we have to challenge existing art valuations but it really depends on the artworks, on a case-by-case basis. Sometimes it happens that we get ridiculous valuations from people who are not recognised in the art world. In these cases, we challenge the valuation through a globally recognised expert of the artist. This is important for the owners as well so they have realistic expectations. Of course, art is subjective and often the emotional value overshadows the fair market price, but when it comes to financial services the involved parties must have an agreement of the valuation. Probably this is the most challenging part of this job.
If you ask any wealth manager, they will say that the primary withholding reason is their lack of internal expertise on international art which is a must-have to develop a broader and diverse financial service around art and collectibles. On a positive note, they has also realised that they can make more proactive approaches by working hand-in-hand with reliable art experts to develop this new service.
Without any doubt, the art market is going through a great expansion where more funds and players are involved in art. Art is becoming a niche of wealth and asset management services, which will continue its revolution.
To conclude, when collectors have more financial freedom, it is more likely that they will re-invest a fair share of their assets into new artworks. This way we can safeguard a great share of our cultural heritage, as living artists need financial support to create and make new artworks. It is a beautiful circle to enrich cultural development alongside the undeniable financial benefits.
Further information: https://monacoartstructuring.com
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