Buy-to-Lease Art Can Add Diversification And Income

By Isabella Zhong

Buying art and then leasing it to corporate clients for between two and four years can deliver 7% returns.

Art is a great way to diversify a portfolio, but the lack of income means it's a no go for some investors. But with buy-to-lease art, investors can have their cake and eat it too.

Art investors have traditionally relied on capital gains to generate returns over the medium-to-long term by buying the right artist at the right time and at the right price. Buy-to-lease art investing adds an extra layer of returns: income. But the catch is investors will have to forfeit the joy of hanging a new art purchase on their own walls. Instead, the art is leased to a borrower – often a company – as part of a rental contract that comes with the purchase.

Singapore-based boutique advisory firm Art Works – which was previously known as Art Index International – is a pioneer of the buy-to-lease art investment model in the Lion City. Art Works' contracts have terms ranging from two to four years and offer investors a 7% annual return. The firm earns a commission from the spread between the rental yield it receives from corporate art borrowers and the return it offers to clients. At the end of the initial lease, investors can opt to sign another contract – with the same or a different borrower – or take possession of the art work. "It's just like investing in rental property," says Joe Hallard, senior art consultant at Art Works.

The investment model works especially well with Chinese contemporary art, says Hallard. "We are steering towards the Chinese market because we're following the profits," he explains. "It's like any form of investing – you follow the money." Strong demand in a booming Chinese art market means the genre stands a good chance of delivering capital appreciation for investors. The often quirky yet philosophical nature of Chinese contemporary art also makes the genre a good fit for corporate offices.

Hallard stresses the importance of looking at fundamentals when investing in art. "When you buy a stock, you look at the price point, history, what the company looks like, what the company's future is, what the company's market share is etc.," he says. "You can apply the same rationale to art." There's also a sweet spot when it comes to price tags. "It's anywhere between SGD30,000 and SGD60,000," says Hallard. "Anything above SGD100,000 becomes too expensive for borrowers."

Penta Asia gave buy-to-lease art investing a test drive for our readers. We asked Hallard to walk through a consultation for a typical reader who is looking to diversify their investment portfolio with art. Hallard first helps us to figure out what would be a good amount to invest based on existing investment holdings – say SGD100,000 for an investor with a decent portfolio allocated between stocks and real estate. "Some clients allocate a small portion of their portfolios – say 10% or 15% – while other people invest more urges diversification across different genres. He recommends splitting the SGD100,000 between two or three pieces of art – one of which is priced at around SGD60,000 and acts as the center piece. He then recommends two artists whom Art Works represents – Liu Li Guo and Lincoln Townley – and shows us a selection of suitable pieces that have already landed corporate leases.

Beijing-based Liu Li Guo is a Chinese contemporary artist whose prices have doubled over the past six years. The highest price that Liu has fetched at auction is CNY672,000 in 2015 with a medium-sized oil painting on canvas titled "To Write Bygone Event." Hallard argues Liu is still very much undervalued compared to his peers and sees great value in his works.  

Interesting fact: Liu was fairly low key outside of China for many years because of his dislike of flying but has since been traveling internationally in recent years, which has helped to boost demand for his work. Hallard shows us an oil painting on canvas titled "A Thousand Miles" that's valued at SGD65,000 as an example of a Liu Li Guo piece that would make for an apt investment.  

British contemporary artist Lincoln Townley has been dubbed the next Andy Warhol by actor Michael Caine. Townley is known for his works featuring celebrities, including a SGD14,250 print of Caine on paper that Hallard recommended to us. The artist has broken his own price record four times over the past year with his latest – a painting of Muhammed Ali – fetching more than half a million pounds. Hallard says Townley is one of the most talked about artists in the global art investment market and has a strong following among celebrities and business people.  

To view the full article on Barron's Asia, please click here.