Investing in art: all you need to know about liquidity

One of the biggest deterrents for investors entering an alternative asset class is the question of how liquid the investment will be. This concern is particularly relevant in the art market, where liquidity can vary significantly across different artists, periods, and even individual works.

For a retail investor, this can often be a deal-breaker, especially if the investment they're considering is their first or represents a significant portion of their wealth, particularly if they foresee sudden liquidity needs. The importance of liquidity cannot be overstated, as it directly impacts an investor's ability to convert their asset into cash when needed, without incurring substantial losses.

While wealth managers and Independent Financial Advisors (IFAs) can provide advice on how to best balance your portfolio, if you're looking at alternative assets or wondering about the different liquidity positions in art, here you'll find some objective, data-backed information. It's crucial to understand that art as an investment requires a unique approach, blending financial acumen with cultural knowledge and market insight.

The asset

Let's start by defining our playing field: the Art Market.

When discussing art with investment potential, we're looking at what is defined as "Fine Art" - which we'll simply refer to as art throughout this article. This distinction is important, as not all art has equal investment potential or liquidity.

Art is first and foremost a cultural asset and its potential increase in value is intrinsically linked to the cultural relevance that the artist acquires over time. This cultural relevance can be influenced by factors such as critical acclaim, museum exhibitions, academic research, and changing societal tastes.

Art has multiple financial definitions and categorisations. The most common you'll encounter are: alternative asset, passion asset, tangible asset, and luxury collectible. Each of these classifications emphasises different aspects of art's value proposition, from its potential financial returns to its aesthetic and emotional appeal.

Among passion assets and luxury collectables, art stands out as the largest and most liquid market. This liquidity, however, is relative and should be understood in the context of other alternative investments.

With over $65 billion in annual transaction volume, the fine art market is four times larger than the second-biggest market: collectable watches ($15 billion/year). This substantial market size provides more opportunities for buying and selling, contributing to the overall liquidity of the art market.

This gives you an understanding of what we at Artscapy advise on:

Fine Art with strong cultural growth potential, which represents the most liquid segment of the market. Our focus is on identifying artists and works that not only have aesthetic value but also demonstrate the potential for long-term appreciation and relatively easy tradability.

The actual liquidity

Even within the segment we advise on, there are thousands of artists and millions of artworks, making art a challenging market to navigate without the right expertise. The sheer diversity of the art world means that liquidity can vary dramatically from one piece to another.

To set the scene, although it may sound confusing, some works sell in days while others take years. As a general rule of thumb, the majority of transactions - in the segment Artscapy advises on - occur within 30-90 days. However, this timeframe can be influenced by factors such as the artist's reputation, the work's condition, provenance, and current market trends.

What does this mean for potential investors? Understanding these timeframes is crucial for managing expectations and planning investment strategies.

Liquid artists and illiquid artworks

The best way to understand an artist's liquidity is to assess the size of their secondary market. Public auction data provides a decent insight into this, though it's important to note that private sales also play a significant role in the art market.

For example, in 2023, Picasso was the number one artist in terms of transaction volume, with over $500 million in sales and more than 24,000 works sold at auction within the $5,000-$50,000 bracket. These figures demonstrate Picasso's enduring appeal and the high liquidity of his works in general.

You might think this looks great - that you could simply buy a Picasso and always be able to sell it quickly. However, it's not that straightforward. The art market's complexity means that even within a single artist's oeuvre, liquidity can vary significantly.

If we look at this artist closely, we could split this segment by medium, year, subject, multiples or unique pieces, and more. There are exceptions, and one of these is within the etching category, which is a printmaking technique used to generate multiple images from the same matrix that is destroyed once the desired number of prints is created.

Our example, which is an approximation of a broad category that deserves further unpacking, shows that etching is Picasso's worst-performing medium, with about 40% unsold lots and over 30% sold below the auction house's low estimate, which in many cases is a value below fair market value. This demonstrates that even for a highly sought-after artist like Picasso, certain works or mediums may be less liquid than others.

So, even with the most liquid artist in the world, many factors within an artist's practice will influence the actual liquidity of the work itself. These factors can include the work's size, subject matter, condition, provenance, and even the current fashion in collecting trends.

Moreover, another consideration regarding "very liquid" art is that it is such because there is a large quantity available. So desirability and availability are also crucial factors to consider. A large supply can contribute to liquidity by providing more opportunities for transactions, but it can also potentially dilute the value of individual pieces if supply outstrips demand.

We conducted two in-depth analyses on Damien Hirst that we invite you to read as further learning opportunities:

1. Damien Hirst timed editions: oversupplied or well-received?
2. Damien Hirst multiples: is it time to think twice? 

These analyses provide specific insights into how liquidity can vary even within a single artist's body of work, highlighting the complexity of the art market. They delve into the nuances of edition sizes, market saturation, and how these factors can impact an artwork's liquidity and overall market performance.

Objective rating 

When making an art acquisition, especially when there is a strong investment angle, it's fundamental to have as objective a picture as possible of the market, the artist, and the artwork. This objectivity is crucial in a market that can often be driven by subjective factors and emotional decision-making.

At Artscapy, building from financial rating methodologies applied to art, we've created a rating system capable of offering an objective and unbiased picture of the opportunity. This can help you make the best-informed decision when it comes to your next acquisition. Our rating system takes into account multiple factors, including an artist's market performance, critical reception, institutional presence, and the specific characteristics of individual works.

Remember, liquidity in the art market is not a one-size-fits-all concept. It varies greatly depending on the artist, the specific artwork or series, current market trends, and even global economic conditions. The art market's sensitivity to these factors means that liquidity can change over time, with some artists or styles becoming more or less liquid as tastes and market conditions evolve.

Moreover, it's important to consider that while liquidity is a crucial factor for many investors, it shouldn't be the only consideration when investing in art. The potential for long-term appreciation, the aesthetic value of the work, and the personal enjoyment derived from owning a piece of art are all important factors to weigh alongside liquidity concerns.

Always conduct thorough research and consider seeking expert advice before making significant art investments. The complexities of the art market mean that informed decision-making is key to successful art investing, whether your primary goal is financial return, building a meaningful collection, or a combination of both.

For any enquiry don't hesitate to get in touch with the Artscapy team.

*Deloitte Wealth Report 2023 

**Artprice