Art investment has recently gained attention not only from wealthy individuals but also from general investors. However, art investment has unique market structures and trading methods different from stocks and real estate. Understanding the primary market and secondary market is the first step to success.
This article will explain the basic concepts of art investment and the roles of primary and secondary markets in an easy-to-understand way. We will proceed while avoiding technical terms as much as possible so that beginners can understand. Let’s grasp the structure of the art market and acquire basic knowledge to start investing.
Basic Knowledge and Market Structure of Art Investment
Art investment is an investment method where art and craft works are purchased as assets, and profits are gained by selling them when their value increases. The diversifying modern art market is attracting attention as one of the “alternative assets” following stocks and real estate. Below, we will explain in detail the reasons why art investment is attracting attention, the market structure, and growth factors.
Reasons Why Art Investment is Attracting Attention and Its Appeal
Art investment has characteristics different from other assets. First, art has appeal as a physical asset and the advantage of being relatively resistant to economic fluctuations and inflation. Particularly, contemporary art expresses new concepts and messages, and since individual works are evaluated for their unique stories, they tend to be resistant to value depreciation.
Furthermore, art works have dual appeal – not only as asset value but also as something to “enjoy viewing.” Therefore, while investors expect an increase in asset value, the ability to own and enjoy the works themselves is a reason for their popularity.
The art market generally involves investment with a long-term perspective rather than aiming for short-term profits. This is particularly because it takes time for the popularity of works and artists to mature.
Roles of Primary and Secondary Markets
The art market largely consists of the primary market and the secondary market. The primary market is where works are sold for the first time, either directly from artists or through galleries.
At this stage, works can often be purchased at relatively accessible prices, and investment focuses on the novelty of the work and the artist’s future potential. On the other hand, the secondary market is where already owned works are resold, with auction houses being the main trading centers.
In this market, the artist’s evaluation and the work’s rarity significantly affect prices, and when demand is high for specific artists or works, substantial price increases can be expected. Art works can particularly increase in value as the artist’s fame grows, and investment value often becomes apparent in the transition from the primary to the secondary market.
What Are the Growth Factors in the Art Market?
The art market continues to grow in recent years, particularly with the advancement of digitalization and internationalization. The rise of online auctions and art fairs has improved transaction convenience, expanding purchasing opportunities to those who previously had limited access to art. Furthermore, the increase in wealthy individuals in emerging markets, particularly in Asia and especially China, is also a factor supporting the market.
The art market is expected to become increasingly globalized in the future, with the emergence of new artists and digital art anticipated. While investor education and market transparency improvement are cited as challenges for sustainable growth, these factors are expected to lead to further expansion.
Art investment requires specialized knowledge and insight, but it is an attractive field where unique returns can be expected with a long-term perspective.
What is the Importance of the Primary Market?
The primary market is where art works first appear in the market and is an important phase where emerging artists directly interact with galleries. This market functions as the first opportunity for artists’ works to pass from galleries to collectors, establishing artists’ recognition and setting work prices.
Success in the primary market has a significant impact on artists’ careers, making the relationship between galleries and artists very important.
Characteristics of the Primary Market and Benefits for Investors
In the primary market, since works are sold through galleries for the first time, buyers can often obtain works at relatively low prices. Additionally, investment here has the potential for value increase along with the artist’s growth, sometimes leading to larger potential profits than in the secondary market.
Particularly for emerging artists, market value is formed through promotional activities conducted by galleries. Therefore, investment in the primary market has the following benefits:
- Relatively low initial investment
- Value increase through artist growth
- Building relationships through work ownership
Artists featured in the primary market are often just entering the market, making it possible to purchase works at affordable prices. As artists succeed, their works have the potential to significantly increase in value.
Furthermore, purchasing works from emerging artists can build relationships that directly support their future growth, potentially leading to privileged information and purchasing opportunities.
Value Formation Process of Art Works in the Primary Market
In the primary market, the value of art works begins with prices set by galleries. Galleries determine prices considering the artist’s recognition, work quality, and market demand, influencing subsequent evaluations in the secondary market.
Moreover, galleries can cultivate artists’ brand value through exhibitions and recommendations to collectors to increase work value. Additionally, when successful artists’ works gain exposure and evaluation in the primary market, their prices typically rise in the secondary market as well. This makes it easier for initial investors to obtain long-term returns.
The primary market is an important step where emerging artists are evaluated in the market and lead to success in the secondary market, and can be considered a process where galleries and investors jointly support artists’ growth.
Auctions and Art Collection Liquidity in the Secondary Market
The secondary market is where art works are resold by owners after being sold in the primary market (first market).
This market is an essential element for successful art investment as it ensures liquidity for art works and provides important selling opportunities for investors.
How Does the Secondary Market Work?
The secondary market is where art works’ valuations are reconfirmed and serves as an important indicator of how much value works hold. When works are traded at auction, bid trends and hammer prices influence the entire market.
Major auction houses include:
- Sotheby’s
- Christie’s
- Phillips
These companies hold regular auctions, adjusting art supply and demand balance and reflecting market prices. At auctions, “reserve prices” and “estimate prices” are set, with reserve prices functioning as minimum hammer prices. Works are not sold if they don’t reach the reserve price.
Estimate prices (expected hammer prices) are set by auction house experts at the time of listing and indicate the work’s market value in advance. These price ranges are set considering work demand and market trends, serving as price indicators.
Art Work Trading at Auctions and Factors Affecting Price Fluctuations
Price fluctuations in art auctions are influenced by multiple factors including work rarity, artist popularity, work condition, and provenance (work history). Unlike the primary market, past hammer prices and market evaluations directly influence the secondary market, making previous trading data important.
Particularly, economic conditions and art market trends significantly affect prices, and financial market fluctuations cannot be ignored. During periods of economic instability, art may attract attention as a safe haven for assets, potentially causing auction prices to soar.
Conversely, investors need to be cautious as prices may stagnate during economic downturns.
Investment Opportunities and Risks in the Secondary Market
The secondary market offers relatively low-risk investment opportunities as it provides access to works with established evaluations based on past trading history. However, investment in the secondary market also involves unique risks.
For example, purchases at auction incur buyer’s premiums (purchase fees), and may be affected by auction success or failure. Additionally, if works fail to sell at auction, there’s a risk their value may decline.
Furthermore, art investment in the secondary market carries the risk of forgeries. Purchases involving forgeries or inaccurate certificates can lead to significant losses, especially with expensive works. Also, transparency in transactions and accuracy of information may be lacking, making data collection from reliable sources and expert opinions important.
What Are the Risks and Returns in the Art Market?
Risks and returns in the art market vary greatly depending on the timing of purchase and distribution stage. Particularly in the primary and secondary markets, investment strategies differ, making it important to understand which aligns with your goals.
Below, we will explain in detail the risks and returns in these two markets.
Primary Market Risks and Potential Long-term Returns
Art investment in the primary market has great appeal in the potential to purchase emerging artists’ works at low prices and aim for future value increases. However, investment in this market involves certain risks. Particularly, as artists’ future potential is unclear, investment requires a long-term perspective.
Investment in emerging artists can yield significant returns if artists gain recognition, but there are risks that careers may not progress as expected or demand may decline. Therefore, it’s important to thoroughly research artists’ exhibition history, awards, critics’ evaluations, and market trading history.
Furthermore, as the primary market is sensitive to market fluctuations and artist evaluations, investors need to understand market trends and manage risks themselves. Diversifying investments is also recommended to reduce risk.
Secondary Market Price Stability and Short-term Profitability
Art investment in the secondary market is considered more stable as works and artists already have established market evaluations. Investing in works by established artists can reduce price fluctuation risks and expect more predictable returns. Additionally, investment decisions can be made based on past trading history, making it possible to aim for short-term profits.
However, transactions in the secondary market involve high fees, with auction houses’ “buyer’s premiums” and other costs potentially squeezing profits. Also, auctions tend to become competitive, potentially causing work prices to rise excessively, requiring consideration of the risk that expected returns may not be achieved upon later resale.
What Are External Factors Affecting Market Trends?
Art market prices and demand are greatly influenced by economic conditions and social trends. During prosperous times, interest in art increases, with certain artists’ or styles’ works tending to gain popularity and increase in price. However, during recessions, overall market liquidity may decrease, often cooling demand for high-value art works.
Recently, the emergence of digital art and NFTs (Non-Fungible Tokens) has brought new changes to the art market. NFTs have gained popularity as a means of authenticating digital works, with high-value transactions now occurring at auction houses like Christie’s and Sotheby’s. This has led to digital art holding value in the market equivalent to traditional physical art works.
However, the NFT market still carries high price fluctuation risks, and market conditions may change in the future due to regulations and technological evolution. As NFTs are relatively new technology with high legal uncertainty, careful analysis is needed to determine long-term value.
Comparison of Investment Strategies in Japanese and Overseas Art Markets
Art markets have different characteristics by region, with clear differences between Japanese and overseas markets. Understanding the trends in each market is important when developing investment strategies.
Here, we will compare domestic Japanese and overseas markets, explaining in detail the characteristics and strategies of their respective primary and secondary markets.
Current State and Development of Art Investment in the Japanese Domestic Market
Japan’s art market is relatively small compared to the global market size (approximately 10 trillion yen), with unique characteristics due to cultural elements and market structure. Japan’s market size is about 258 billion yen (according to the Art Industry Market Research 2019), accounting for about 2-3% of the global total. This market still has many immature aspects, with lower awareness of art investment among wealthy individuals.
However, since the COVID-19 pandemic, domestic wealthy individuals and private investors have increased their interest in art, with contemporary art particularly gaining popularity. In Japan, there is a strong tendency to emphasize local artists and traditional crafts, with stable domestic demand but limited international recognition.
Also, compared to overseas markets, there are constraints in terms of tax systems and investment support, requiring policy support for the growth of the domestic art market.
Possibilities in Overseas Primary Markets
Overseas art markets are expanding primarily in the United States, China, and the United Kingdom. According to 2023 data, the United States accounts for 42% of the global market size, remaining the largest market. China is second globally, surpassing the UK with 19%, particularly with active art investment among younger generations. China’s market is driven by the rapid growth of emerging artists and increased demand for contemporary art.
In contrast, overseas primary markets actively support young artists. New works often trade at high prices in galleries and auction houses, and particularly with major auction houses like Phillips and Sotheby’s entering the primary market, it has become easier for young artists to enter the market. Due to these conditions, market evaluations of emerging artists often rise rapidly, with gallery exhibitions
contributing to increased investment value.
International Art Collection Trends in the Secondary Market
In the secondary market, particularly in America and Europe, auction houses lead the trading of high-value art works. This market records annual sales of about 30.6 billion dollars, primarily dealing with highly evaluated artists and notable works. Major auction houses like Christie’s and Sotheby’s play significant roles in these high-end transactions, with increasing investment from wealthy individuals in Asia as well as America and Europe.
On the other hand, Japan’s secondary market is relatively small, with less fluctuation in transaction amounts, showing less active movement than overseas markets. However, the Japanese market has room for growth, with expected future developments particularly in emerging fields like contemporary art and digital art attracting international interest. In recent years, Japanese art works have gained higher evaluation in international markets, with expanding overseas demand influenced by artists like Yayoi Kusama and Takashi Murakami.
Art Investment is Evolving Through Digitalization and Emerging Technologies
The art market has undergone significant transformation with the advancement of digital technology. Emerging technologies such as NFTs (Non-Fungible Tokens), blockchain, and AI are bringing innovation to art creation, distribution, and evaluation methods.
Here, we will look in detail at how these technologies are influencing the art market.
Transformation of the Art Market Through NFTs and Blockchain Technology
NFTs, which confer ownership rights to digital art works using blockchain technology, have brought new revenue sources to the art market. While NFT trading began attracting attention around 2017, in 2021, a digital work by artist Beeple was sold for approximately 7.5 billion yen ($69 million), drawing significant attention to this technology’s impact on the art market. This created expectations for assigning unique value to digital works and as a means of proving ownership and solving forgery issues.
NFT blockchain technology strengthens the reliability of authenticity verification, which has been a challenge in traditional art markets, due to its transparency and tamper-proof nature. However, NFT ownership does not necessarily include copyright, and the distinction between ownership rights and copyright can be unclear in some cases. These technical and legal challenges need to be resolved through future regulations and legal frameworks.
The NFT market still has significant growth potential, and as adoption across the art industry progresses, more collectors and artists are using NFTs. Additionally, unlike traditional physical works, NFTs enable trading in digital environments, activating transactions in the global market, particularly popular among younger collectors.
Spread of Online Platforms and Digitalization of Art Trading
The digitalization of the art market is rapidly progressing, with online platforms playing important roles. Major auction houses in particular are focusing on online sales, allowing collectors worldwide to participate beyond physical constraints. This has improved global access and significantly enhanced the convenience of art transactions.
Furthermore, with the introduction of AI technology, online platforms are increasingly featuring functions that analyze users’ preferences and purchase history to recommend works matching their interests. This personalizes user experience and improves art purchasing efficiency. AI also helps streamline gallery operations, enabling more strategic sales by quickly performing work cataloging and market data analysis.
The spread of online platforms is particularly beneficial for emerging artists, making it easier for them to access international markets. This has led to further globalization of the art market and expanded connections between artists and collectors.
Price Evaluation and Prediction of Art Works Using AI and Big Data
AI and big data are bringing revolutionary changes to price evaluation and market prediction in the art market. AI analyzing past transaction data and market trends enables more accurate predictions for previously opaque art work pricing, serving as a means of risk reduction for investors.
Specifically, machine learning models using AI enable price evaluations based on specific artists or genres, making transactions more rapid and efficient compared to traditional methods. Furthermore, AI is also used for authenticity verification, with deep learning and computer vision technology helping detect forgeries by analyzing work details.
These technologies capture characteristics such as brushwork and color patterns, determining work authenticity by comparing with past data. This improves art market reliability and enables reduction of forgery risks.
Summary
The art market is entering a new phase not only with traditional primary and secondary markets but also with the advancement of digital technologies like NFTs, blockchain, and AI.
These technologies are significantly impacting the market in terms of digital proof of work ownership, improved price evaluation accuracy, and enhanced online transaction convenience.
The digitalization of the art market will continue to accelerate, and the processes of art work trading and evaluation are expected to evolve further. This will create new investment opportunities while making art more accessible to a broader audience, increasing its attractiveness as an investment target.
