Art secured loans: trick or treat?

Stefano Pirovano  -  November 29, 2017

Art secured loans market will grow by 13% in 2018. For the first time in the EU private banks are lending without taking physical possession of the artwork.

Rodrigo Matheus, Hunting piece, 2016, detail.

Art secured loans could sooner than later become a alternative to auction sales also in the European Union. New financial product have recently come to the market allowing art dealers and collectors to borrow money using artworks as collateral and keeping them at home

According to the Art & Finance Report recently released by Deloitte, these new art financing methods could be a game changer for the European art secured lending market. In fact, art secured loans have been, up to now, available in the EU only under the condition that collaterized artworks were kept in a safe storage.

In the United States lenders are less demanding. Generally you can have the money and keep the art work hanging on the wall of your mansion house or gallery space. Phillip Ashley Klein, US Art & Finance Coordinator at Deloitte, estimates the art-secured lending US market to be between $17 and $20 billion in 2017, roughly 13% up from last year. ‘When there is a need for liquidity – he claims – we often see collectors favor unlocking capital through credit versus sale, driven by the perceived complexities of the consignments process and the uncertainty of auction results’. He also points out that while in 2016 loan-to-value rarely hit 50% on average, now a set of private US banks offer up to 55% LTV.

Within this frame, managing risks and knowing the art market are both fundamental issues for the lender, who may be keen to collaterize a post-war masterpiece by Picasso or Richter, but would refuse any potentially illiquid piece of art, even if the piece is of an outstanding quality.

The other side of the coin is that financially ‘wise’ collectors may prefer to buy proved masters with solid market than taking risks with emerging talents or yet to be discovered old masters. According to a survey from the above mentioned report, a further 71% of wealth managers think that the challenges around assessing risk was among the biggest hurdles when it came to offering art-secured lending.

Privatebank Berlin is among the few banks in Europe permitting money borrowers to retain possession of pledged pieces of art. ‘In response to overwhelming client demand – claimed Shirin Krantz, the bank’s Head of art lending – we have taken on the challenge of bringing art-secured lending up to its full potential in Europe’. It is worth mentioning that Privatebank Berlin is also specialized in real estate and vintage cars loans. Also Ms Krantz notices that art-secured loans should allow art dealers and collectors to realize liquidity without having to make unfavourable sales ‘to satisfy short-term cash-flow concerns’ (the loan’s term ranges from six months to five years). Of course these financial tools are non-recourse one but, Privatebank Berlin’s LTV ration is 40% and it goes without saying that a market-strong piece of art is required. That is an important piece from one of the top 20 auctioned artists (see the Tefaf Art Market report 2017). Or, in the case an entire collection is pledged, key variables include the number of pieces, their value, and diversification.

We are not going to even try to predict the future (thanks again Professor Kahneman for writing Thinking Fast and Slow), but if the art-secured loans market will increase as expected they will need an healthier, more transparent and regulated art market; and finally having it would be a good news. But it also must be said the success of this financial tool cannot be given for grated at the moment.

The costs of money borrowed through artworks is sometimes very high. In the US small lenders can charge interests rates up to 59% on yearly basis, while most private banks rates are in the area of 10%. Turning artworks into liquid money is still a complex, likely expensive task. Moreover, a significant presence of this tools in the art environment may enhance the market polarization, making the auctionable artists even stronger than today. And has to be regarded as a very dangerous down side.