Where oil prices don't stop rising

We may be recovering from a financial crisis but people are still ploughing their money into art. Expert Philip Hoffman tells us why now is a good time to invest

By Candice Krieger, July 28, 2010
Art of investing: Picasso’s Portrait of Angel Fernandez fetched £34.7m at auction last month indicating the strength of the art market

Art of investing: Picasso’s Portrait of Angel Fernandez fetched £34.7m at auction last month indicating the strength of the art market

Despite the ongoing uncertainties in the financial markets, art-market records continue to be broken.

Only last month, Picasso's Portrait of Angel Fernandez became one of the most valuable paintings sold at auction in Europe after going under the hammer at Christie's for £34.7m.

And previously this year, two new world records had been made: London-based Jewish billionaire Lily Safra bought an Alberto Giacometti sculpture for $103.4 million (£65m) at an auction in London in February; and in May, a 1932 portrait of his mistress by Pablo Picasso sold for $106.5 million (£71m).

Experts anticipate a continuing rise in prices over the next few years.

Philip Hoffman, chief executive of the Fine Art Fund, the prominent art investment fund based in London, says: "People who have been making a lot of money in this economic crisis have been spending it on art at the very top end.

Philip Hoffman says art prices have risen hugely over the past five years

Philip Hoffman says art prices have risen hugely over the past five years

"Art is going to get rarer and rarer, and if you have £250,000 or more to spend at the top end, you are not going to find it any cheaper.

"It is an interesting time to buy - if you buy well." He anticipates prices on some pieces reaching $200 million (£150m) in the next year or so. "This would be incredible and must beat any piece of real estate in the world, apart from a Sultan's palace."

Mr Hoffman, 48, a former director at Christie's, set up the Fine Art Fund in 2001. It buys and sells paintings rather than stocks or bonds. He acknowledges that it is mainly wealthy people who are fuelling the art boom."It is private individuals - wealthy hedge fund managers, private equity fund managers and people who have made money selling their businesses that are investing heavily.

"Buyers are coming from the Middle East and Russia. China is also active, as are those from Hong Kong and Asia."

They are attracted by the generous returns, which can reach up to 100 per cent. Mr Hoffman points out that the Giacometti would have sold for around $6 million (£3.8m) ten years ago, and the Picasso would have sold for about $30 million (£19.4m) five years ago. "So they are pretty phenomenal results."

Prices for impressionist and contemporary art appear to have bounced back to where they were in 2008, before the recession started, and the Fine Art Fund itself has averaged annual returns of 34 per cent on every asset sold. They are about to launch a third fund to invest in old masters.

But it is not an entirely pretty picture. Mr Hoffman acknowledges that there is a bigger divide between the top end of the market and the middle and the bottom end. "The bottom end - the $5,000, $10,000 and $15,000 pieces - across the board are going to have a very hard time selling and the prices have been bought down, and the middle end is probably down around 20 per cent. The art market is much stronger now but only for the right things. It's more selective than it was in 2008 but the good things are making huge money - a bit like prime real estate, which has not been as badly affected as other real estate."

The markets have seen very strong prices for Chinese porcelain, Middle-Eastern art - particularly Arabic art. "A Middle-Eastern piece that we bought last year for £100,000 is probably going to fetch £350,000 this year." And with the museums looking to acquire, old masters have also stayed strong. They never really went down, even in the worst times." On the day that Lehman Brothers collapsed, the Fine Art Fund sold an 18th-century Dutch painting for $6 million (£3.8m) - they had bought it for $4.75 million (£3.07m).

And for those who don't have millions to spend, where should they be investing? "You are better off buying one great piece for £50,000 than three average pieces," advises Mr Hoffman, who started his career as a chartered accountant at KPMG International.

"There are some interesting deals to be done but you need to be selective." He cites German-born British painter Frank Auerbach as an interesting option. "The prices have gone up considerably. You could have bought a lovely Frank Auerbach five years ago for £100,000, which is now making £500,000." Another interesting prospects he says, is contemporary British painter David Hockney.

As for old masters, he acknowledges that you need to spend about £250,000.

"Don't bother with furniture," he says. "You are not going to make any money in furniture at the moment unless you buy very, very rare million-pound pieces." He warns to be cautious about Russian art, which can be unpredictable. Mr Hoffman, who lives in Chelsea, admits he is no art lover. He founded the company nine years ago purely as a business. He says: "Inevitably you start to like one or two of the paintings but at the end of the day, it's a business and I stand back from it to keep an objective eye." Today, the Fund employs 40 people and has offices in New York, Dubai, Lugano, Athens, Geneva, and London. Mr Hoffman spends 200 days a year abroad.

Last updated: 3:53pm, July 28 2010