Security over art July 2019
Although there is no shortage of borrowers in the market, many lenders have not had a large appetite for funding works of art because of a number of factors including:
- Issues of authenticity and the risk of the art being a forgery;
- The identity of the art;
- The portability of the art;
- The archaic method of taking security over art from an individual under English law;
- The possibility of a challenge to title e.g. a holocaust restitution claim;
- The lack of compulsory art register in the UK; and
- The lack of any real equivalent to UCC-1 filings in the UK which makes the registration of an interest in art in the UK a little hit and miss.
Having said all that, there are ways for a lender to overcome many of these issues and obtain valid and effective security over the art, which are discussed below.
Developments in the Market
With London's biggest art festival Frieze having recently finished, we bring you a brief update on developments in the art market, as well as an update to our biannual paper on security over art. Two general trends are worth noting:
- Art and wealth management are part of a longer term trend
Art as an asset class has seen increasing growth. When the first Art and Finance report was published by Deloitte six years ago, one-third of wealth managers said they were aware of art as an asset class. In 2017, 60% said the same and 65% actively offered services related to art and collectibles. Art market growth and higher valuation means more demand and more wealth is being allocated to art as part of a holistic investment and wealth management strategy.
- It remains the case that only the wealthiest private collectors have access to funds (and banks are, generally, still cautious about lending against this asset class)
The global market for loans backed by art was between $17 billion and $20 billion in 2017—but only about 8 to 10 per cent of those funds went to galleries and dealers. Private collectors secured the other $18 billion to $18.5 billion in financing; most often to invest the loans into assets that provide a regular return, like securities and real estate. Of the few dealers who borrow against art, more than 90 per cent operate in the United States. The disparity between American and international dealers is largely the result of features of the Universal Commercial Code (UCC) that allow borrowers to maintain possession of their collateral (in this case, art work) throughout the loan term.
The due diligence required by responsible lenders is a major turn-off to many dealers. Among dealers resistant to art-secured financing, 44 per cent cited the slow-moving and lengthy due diligence process. The wealthiest, well-resourced art sellers are the ones most willing and able to satisfy lenders’ concerns about provenance, authenticity, valuation and other need-to-know aspects about the work in question.
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