Author | John Sibbald | June 2015
On the eve of global recession in 2007, the Barclay Wealth Insight White Paper UK landscape of wealth, March 2007, described the United Kingdom as “one of the elite nations leading and benefitting from its wealth upsurge.” The same report estimated that 26% of all UK households would soon be worth £500,000 and that more than a million households would be aggregating wealth in excess of £1,500,000. The Report broke this down further into the number of households with financial assets of £500,000, excluding property, as being expected to rise to 940,000, and break one million in early 2017.
A subsequent Barclay Wealth Insight The changing wealth of nations, published in January 2013, provides an interesting snapshot of how wealthy individuals believe they were affected by the global recession. 38% of respondents reported that the recession had had a "negative" or "quite negative" impact on their net worth; a rather larger share (42%) reported a marginal impact; a fortunate minority (6%) reported a positive impact, with 14% claiming no change.
The 2015 Sunday Times Rich List finds that while the average Briton is only as well or marginally better off than they were before the Recession, “Analysis of the last 10 years of the Rich List shows that the top 1,000 have powered through the recession” with their overall net worth doubling since 2005.
A new wealth consciousness
One of the key findings of Barclay Wealth Insight Report was the advent of a new wealth consciousness. The impact of the global downturn was found to have encouraged high net worth individuals to become more informed about investment and to play a more active role in investment decision making. Over a quarter of those interviewed for the report were found to be spending five or more hours a week reviewing their portfolios, and three-quarters of respondents saw themselves as interested in, and knowledgeable about, finance and investment.
The Deloitte ArtTactic Report Art & finance 2013 also identified a heightened awareness among wealth managers about the development of art as an asset class, with a total of 43% of wealth managers indicating a strong awareness, up from 33% in 2011. The Report also noted a majority of private banks were found to be offering art related services (77%) with 57% offering art advisory and 47% art valuation services.
The rich in the UK
Focusing more specifically on the rich in the UK, while it remains a changing picture, many of the 2007 Barclay Wealth Insight predictions may still be on course, albeit fuelled currently by escalating property prices, notably in London. The Sunday Times Rich List, May, 2014, began “Just six years after Lehman Bros collapsed, sparking the worst recession since the Great War, the world’s rich have never been richer – and more of them are based in Britain than ever before. “The 2014 List had to up entry level to the thousand richest in the UK from £80m in 2008 to £85m: the 2015 List opens at £100m. The 2015 List includes 117 billionaires (up on 2014 by 13) with a total of wealth of £325.131bn. The total wealth of the top 1,000 people based in Britain has reached a record £547,126b (up 5.4% from 2014). It now takes £198m to feature as one of the 500 richest, more than double the figure 10 years ago (£80m).
The Office for National Statistics reported the UK’s net value for 2013 as amounting to £7.6 trillion, up 4% on the previous year, making each person in the UK worth an average £119,000, albeit wealth is increasingly tied up in house property which accounts for more than three-fifths of the total, a rise of 5% to £4.7 trillion. (The Times, 21 November 2014).
A comprehensive survey by Wealthinsight published in January 2014 predicted that the UK, supported by its entrepreneurial economy and property surge, as set to create an extra 45,000 millionaires in 2014 as the economy continues to improve, seeing it have the biggest percentage increase in millionaires in Europe and one of the highest in the world - ahead of global powers including Japan, Russia and Canada. (From the G8 only the US ranks above the UK). The International Monetary Fund also forecast that 2014 would see the UK grow faster than any other economy. (The Times, 5 June, 2014). The IMF has now upgraded Britain’s growth four times in a row. Its October forecast was for growth at 3.2 per cent this year and for 2.7 per cent next year. (The Times, 8 October, 2014)
Analysis of the landscape of wealth reveals a changing picture
When the U.K.’s Sunday Times Rich List was first published in 1989, only 43 of the country’s richest 200 people, or 21%, had made their fortunes themselves. The List was a who’s who of inherited wealth and aristocracy, led by figures such as the Duke of Westminster and the Queen, but also encompassing 11 of the UK’s 25 dukes, six marqesses, 14 earls and nine viscounts. A quarter of a century later, this picture in the UK, as in many other countries, is very different. Wealth is now more international, more diverse and more driven by entrepreneurship rather than inheritance.
According to a Wealthinsight press release Mind the gap: mobile entrepreneurs are coming (March, 2014), one in twenty millionaire entrepreneurs is mobile, with the US and the UK as destinations of choice. (29.6% have obtained a US citizenship and 19.6% citizenship in the UK). A recent survey of over 2,000 global professionals from nearly 100 countries by the Hydrogen Group, a global recruitment company, found that even though the US was the country where most wanted to relocate, London was chosen as the favourite city by 14 per cent, twice as many as New York.
The Barclay Wealth Insight Origins and legacy, 2014 comments “This changing landscape of wealth has significant implications across a wide range of areas. Individuals who have earned their fortunes through entrepreneurship or success in business typically have a different relationship with their wealth than those who have inherited it. Their approach to spending, saving and sharing their money is likely to be quite distinct and driven by factors such as their risk tolerance, confidence in future earnings potential and a desire to fulfil social obligations with their wealth.”
London - “the undisputed global hub of wealth”
Of the 117 of Britain’s billionaires in the 2015 Sunday Times Rich List, only 62 are British, but those who are from abroad choose to live or base their businesses in London. With 10% of all the world’s billionaires and with more billionaires than Moscow or New York, the 2014 List claimed that this made London “the undisputed global hub of wealth”, or as the Chancellor referred to it in his Budget speech (18 March 2015) “the global capital of the world.” 2015 sees a further 13 billionaires now based in London. According to the Johannesburg based wealth consultancy New World Wealth, London is now also the dollar millionaire capital of the world, where almost 3% of the population of the British capital, or 395,000 people have more than $1m (£593,000) in net assets. (The Times, 6 August, 2014) HMRC estimates that there are around 200,000 top rate tax payers in London and the South East (compared with a total 13,000 in the whole of Scotland) (The Telegraph, 21 September, 2014).
London also emerges as being viewed as the best place to work, with a 2014 poll, conducted by the Boston Consulting Group Totaljobs among 200,000 people from 189 countries, finding one in six people indicating they would like a job in Britain’s capital on the basis of the range of jobs and cultural attractions offered by London. (The Times, 7 October, 2014).
The findings of the 2014 Foreign Direct Investment Confidence Index found that the UK has performed especially well as a haven for safe investment, with it being the favourite destination, outside the US, of Asian investors. The survey found London’s status as a financial centre and new home for a number of global and regional headquarters (e.g. Aon, the former US insurer, General Electric’s oil and gas unit, etc.) an important lure. Earlier in the year Hitachi announced it was moving its global rail headquarters to London and more recently, the company is reported as considering moving its nuclear operations from Japan to the UK to take advantage of London’s status as Europe’s financial hub. On the other hand, the recent rumblings from HSBC and Standard Chartered about relocating their headquarters against a background of uncertainty as to Britain’s EU membership and the prospects of increased bank regulation and taxation, may be signalling that an end should be called to the competitive sport of bank bashing by the political parties. (HSBC and Standard Chartered face a combined bill of $2bn (£1.3bn) this year as a result of of the UK banking tax, which is double that paid in 2013).
The Centre for Economics and Business Research has raised its growth forecast for London from 3.8 per cent last October to 4.2 per cent, describing the capital as “pulling above its weight” and set to account for nearly a third of Britain’s growth over the next five years.
The CityUK’s Fund Management 2014 report shows that the fund manager sector recovered quickly from the fall experiences at the outset of the economic downturn and is now nearly 50% above the pre-crisis peak. The Report found that the sector was responsible for a record £6.2 trillion of funds at the end of 2013, of which £2.2 came from overseas, making the UK a global leader in managing foreign clients; funds. (The Scotsman, 29 September, 2014). The recent triumph for the City with Britain’s landmark victory in the European Court of Justice over attempts by the European Central Bank to force all euro-denominated securities onto Eurozone soil has averted the removal of trillions of euro-worth securities processing from the UK. (The Times, 5 March, 2015)
A report by Savills last year concluded that that the capital’s new status had resulted in London becoming the most expensive city in the world in which to live and work and where the cost of property and office space was now twice as expensive as Sydney and four times that of Rio de Janeiro. Savills warned that this may risk London becoming less competitive. (The Times, 24 September, 2014). London now claims the five most expensive streets in Britain – though the so called mansion tax and abolition of non-dom tax status threatened by the Labour Party during the recent election was reported as having had a chilling effect on the London property market.
Holdings of alternative asset classes
Looking at UK holdings of alternative asset classes, The Barclay Wealth Insight Profit or pleasure, 2013, found considerable UK variation in the regional holdings of such assets as art, jewellery, wine, etc. Perhaps unsurprisingly, individuals in London hold the highest proportion of treasure assets by a significant amount, with Londoners owning on average 9.3% of their total wealth in such assets. In line with global trends, and similar to those in the South West, North West and Midlands, the three most popular types for Londoners to collect are precious jewellery, fine art paintings and antique furniture. More than half of individuals surveyed (56%) said that they had held fine art pictures and paintings in the past five years; and 32% said that they have owned fine art, tapestry and rugs, which is the highest of any region.
The Report notes that Scotland is just behind London for the number of high net worth individuals who own fine art. Just under two thirds (62%) of Scottish respondents currently own fine art pictures and paintings, compared to 63% in London.
Future investment in alternative asset classes
Looking to the future, more respondents in London wanted to invest in classic automobiles (21%), precious metals (22%) and fine art tapestry and rugs (33%) than anywhere else in the country, suggesting a desire to diversify their treasure collections. Furthermore, indicating that treasure ownership is financially motivated in part, nearly a quarter (23%) of fine art sculptures owned by Londoners are held primarily for financial reasons, which is 4% above the national average – perhaps a reflection of Frank Knight’s recent calculation that the rise of 154 per cent since 2004 in the value of Barbara Hepworth’s Curved form had outperformed the 135 per cent rise of London prime property over a similar period.
London based art business
According to the recently published 2015 TEFAF Art Market Report the US remains the largest single market with a 39% share at €19.9bn, with the UK and China in joint second place with 22% of global share each at €11.2bn. This represents a 2% increase in share for the UK and 2% fall for China.
An increasing interest by international collectors in London auction sales has been attributed by Sotheby’s as one of the reasons for their outperforming all other global regions at auction. (Source the ATG, 4 October, 2014). The newly established Art Business conference held in London on 4 September heard the Culture Minister Ed Vaizey not only underscore the importance of the art market to the British economy but report that 20% of the world’s art trade takes place in London. Both he and Victoria Borwick, Deputy Mayor for London, also emphasised their support for the Special Policy Area Initiative devised by Westminster Council for protecting the gallery community in Mayfair.
However, just as the threatened mansion tax is reported as having a chilling effect on London property sales, a new report shows a similar frost creeping into the British art market due to the effect of Artists Resale Rights which applies to the Post-War, and Contemporary Art sectors - the most revenue driven categories of the international art market accounting for 70% of all money changing hands for fine art and close to half of all money changing hands in the British Market. The five years from 2008 which saw the extension of ARR from living to dead artists’ estates, where works remain in copyright, has seen the UK’s share of the Post-War and Contemporary art market more than halved from 35% to 15%. The latest HMRC figures reflecting the value of art and antiques moved across UK borders during 2014 are being interpreted as a significant shift in influence away from London towards New York. (Antiques Trade Gazette, 21 March, 2015)
The growing attraction of the art market to investors
Since the onset of the recession, the art market appears to have become increasingly attractive to new investors looking for alternative asset classes while economic uncertainty both global and domestic continues to predominate. Indeed, the forecast by a large majority of the wealth managers consulted in the 2013 Deloitte ArtTactic Report is that we shall see even stronger demand in the future for such investment as economic uncertainty continues.
This would seem to be born out in Christie’s figures for 2013 recording a 16% rise in sales to £4.5bn, with 30% of buyers new clients who accounted for 22% of all sales by value. Sotheby’s too saw a 17 per cent rise in sales for the same period, including a record total for private sales – although this year has seen private sales dive to $294 million in the first half of 2014 from $561 million a year earlier - attributed by Sotheby’s to the fact that a number of high value transactions completed in 2013 have not been repeated in the current year and by less charitable sources to client concerns over the uncertainty around the future management and direction of the firm. The 2014 Deloitte ArtTactic Report finds art buyers and collectors continuing increasingly to acquire art and collectables from an investment point of view (with a rise in those contacted from 53% in 2012 to 76% this year).
Further evidence in support of this appears to be found in the performance of the Mei Moses All Art Index, one of the most widely used bench-marks for fine art which measures sales at auction with comparisons to equities, government bonds, gold, cash and real estate, and which recorded a 13.83 per cent average annual return over the period 2007 to 2012, providing a return far greater than the S&P 500 or the Dow Jones industrial average over a similar period.
The 2015 TEFAF Art Market Report shows that the art market has fully recovered since the 2008 financial crash. The global art market reached a total of over €51 billion in 2014, an increase of 7 percent over 2013, and the highest level ever recorded. In just two weeks in November 2014 in New York, the auction houses Sotheby’s and Christie’s sold over $2 billion in art, a record for major New York fall auctions. The billionaire investor Steven A. Cohen paid $100,965,000 for Chariot by Alberto Giacometti. Manet’s Le Printemps sold for $65,125,000, two by Mark Rothko for $45 million and nearly $40 million, a Georgia O’Keeffe for $44 million and a small Jasper Johns American flag for $36 million.
Demonstrating the increasing spending power available to potential buyers, the $2.67bn (£1.8bn) achieved so far by the latest round of Sotheby, Christie and Philips sales in New York has already eclipsed the total for the 2014 November sales. At $160m (£108.1m) Picasso’s Les femmes d’Alger attracted the highest ever price paid for a work of art at auction. Bidding by or on behalf of Asian private clients has been notable in these sales.
The New York Times, 28 November, 2014, quoted Michael Moses, one of the founders of the Mei Moses Fine Art Index as commenting “At the Christie’s postmodern and contemporary sale, the average compound return was 20 percent annualized. That’s amazing.” The article (“Deacquisition” is preferred) went on to say “For better or worse, fine art is now firmly planted alongside equities, bonds, commodities and real estate as an asset class. Financial terms like “compounded rates of return” have elbowed their way into the traditional vocabulary of connoisseurship even as art’s old guard has trouble with the word “sell.”
Succession and philanthropy
Paralleled with this is a growing interest in succession and philanthropy. The Barclay Wealth Insight Origins and legacy, 2014, finds that “The rise of entrepreneurial wealth and the shifting centre of economic power have profound consequences for the way in which wealthy individuals plan for the future and think about a legacy for their wealth. As inherited wealth declines and as fortunes are made at a more rapid rate than ever before, the challenges facing newly wealthy individuals and families around planning for the future become more pressing and acute.” As previously referred to, 42% of collectors interviewed in preparation for the Deloitte ArtTactic 2013 Report said they were looking for inheritance and succession planning advice.
The theme is continued in the 2014 Report where art and estate planning join the increasing strategic importance of art and philanthropy among wealth managers, art professionals and collectors. Major art collectors are combining their passion for art and art collecting with a strong philanthropic agenda.
Planning for succession
In the UK, the freeze of the Nil Rate Band, since 2009, and now extended to 2018, has contributed to a significant rise in the total of IHT revenue for HMRC with rising house prices, asset prices and inflation, pushing more estates into IHT. It is estimated one in ten estates will be paying IHT by 2018. Into this too has to be factored that by 2018 through inflation the current threshold of £325,000 will be worth little more than £263,000.
While more people are likely to have a handle on their financial and real property assets evidence suggests they are much less likely to have accurate figures for their chattel assets with the consequence that, where changes in market values have been ignored, there is a chance for changing values to upset long term succession plans. Having said that, more than half of wealthy investors do not receive any tax advice on their investments according to data revealed at the Compeer Quality of Service – the Clients’ view conference (25/11/2014) which indicated that 62 % said they did not get tax advice from their wealth manager or other professional advisers. (eprivateclient news update, 28 November, 2014) Tax planning opportunities such as conditional exemption, gifts, and chattel rental schemes offer protection with the corresponding requirement for accurate and reliable valuation of the items involved.
The Barclay Wealth Insight Origins and legacy, 2014 finds it characteristic of many entrepreneurs today that, when they want to engage in philanthropy, they often want to give away their wealth while they are still living. Among respondents questioned in preparing the Report, entrepreneurs and business owners said that they intend to give 41% of their wealth away during their lifetime, compared with those who acquired their wealth through earnings or savings, who plan to give away 27%. These entrepreneurs and business owners often want to apply their knowledge and experience in a useful way, and that means getting involved while they have relevant skills to impart.
These findings are supported by the Wealthinsight study Emerging philanthropists shaping the future, February 2014, which finds “Millionaires across the globe are demonstrating ever-increasing participation in philanthropy. With the volume of millionaires across the world rising, the global philanthropic sector is poised for long-term growth.” The study notes a shift from spontaneous donations towards structured contributions. Of the ten über rich collectors listed in article on Artnet (17 November, 2014), eight out of the ten are listed as having set up art related foundations and galleries.
There are taxation issues related to the transfer of chattel assets. If part of that giving is through the sale of or raising sums on works of art or trying to protect them in trusts, then there could well be tax issues arising and where establishing correct and accurate valuations at the time of putting such kinds of arrangements into place will be of the utmost importance as well as their continual review.
Domicile and residence issues
While the introduction of the statutory residence test now offers a great deal more certainty to the large number of internationally mobile individuals flocking to London who need to determine their residence status, determination is not necessarily all that straightforward. Bringing in a large art collection could at a later stage give rise to IHT or its part disposal in this country could give rise to tax considerations. Establishing valuations of such assets will be important, not only from the point of view of import and export, but, as cases such as Gains Cooper have shown, ignoring the accumulation of value in such assets may ultimately produce unintended consequences.
Art as collateral
Raising money using art as collateral is on the increase. Whereas banks have been previously cautious, with a few notable exceptions such as Goldman Sachs, Deutsche and Citi Banks, an increasing number of banks, helped by new insurance products such as the recently introduced Hiscox “Collaterised Art Protection” insurance, are offering services in this area where the amount of the loan can be typically up to 50% of the value. The survey of important collectors and art professionals for the 2014 Deloitte ArtTactic report found a stronger client demand for art-related financing. 48% of collectors surveyed said they would be interested in using their art collection as collateral for a loan. 53% of collectors responded that they would use the loan to buy more art: the others to refinance existing loans or finance other business activities.
Michael Spencer, the Treasurer of the Conservative Party, who runs the city broker Icap, last year arranged an additional £30m of borrowing from Barclays using Modigliani’s Cariatide in part security. (The Times, 22 November, 2014)
Lending on art is forecast to reach £15 -20 billion pounds per annum. Goldman Sachs has launched a new European lending unit with the goal of building up a US $5 billion loan book within the next three years. The market has also seen the arrival of specialist art financiers such as Borro, Right Capital and Falcon Group’s recently launched Falcon Fine Art. The new arm of Falcon’s business that has seen $7b of structured asset backed financing in other fields, aims to spread that service to Contemporary, Modern, Impressionist and Old Master art largely in the $2-15m bracket, bringing liquidity to people in Europe and the States who can have as much as 95% of their wealth tied up in pieces that are “not being put to work.”
Borro, which has recently secured an additional $19 million in funding led by strategic investments from Israel's OurCrowd and Berlin's Rocket Internet, has seen diamonds emerging as key collateral for Britons looking for cash loans and where they have lent clients a total of £20 million against diamond rings since its launch in 2008. The firm cites the major reasons for the loans as being to help fund the legal costs of divorce settlements. Other motivations include the payment of tuition fees and tax bills and the financing of SME investments. (eprivateclient news update, 26 November, 2014).
Unless the lender is in the States, most lenders in Europe, particularly where the borrower is a private collector, will require to take physical possession of the item on which the money is being lent and while the loan is outstanding. In the States the lender registers its security interest under the Uniform Commercial Code, thereby putting third parties on notice that the collateral is encumbered.
The requirement for art secured lending has been one of the factors behind the new Luxembourg Freeport. Built at a cost of between €60 to 70m, and opened in October, the cavernous, space-ship-like site offers an 11,000 square metre storage facility. The ability to provide specialised storage for art, valuables and wine is seen as likely to become a major draw for bringing art and collectible assets to Luxembourg. Few banks or other lending institutions can offer proper storage facilities, let alone accommodate, for example, the kind of large art installation works for which the Luxembourg Freeport has been designed. It has also been designed to let collectors hold exhibitions of items in storage, facilitate conservation requirements assisted by two laboratories, and other client driven activities which banks are simply not in the business of providing.
The importance of sourcing reliable, independent, professional services such as valuation, authentication, advice on condition, provenance, etc. will be obvious.
The landscape of wealth in the UK is changing. London has emerged as punching above its weight as a hub for global wealth. But that wealth is now not only more international, more diverse and more driven by entrepreneurship rather than inheritance, but the move by the wealthy into art, antiques, jewellery, wine and other collectibles as alternative asset classes, as distinct from their traditional acquisition as the hard earned trophies or embellishments of success, has brought an increased requirement for ancillary services.
The latest results from the Knight Frank Luxury Investment Index indicate that the so-called “investments of passion” are still catching the imagination of the wealth management sector. The report highlights the strong demand for top-quality gemstones where, since 2005, The Fancy Color Diamond Index has seen an increase in value by 167%. Classic cars were also noted as a strong performer over both the long and short-term. The Index notes a bounce back by art with annual growth of 15%.
The 2014 Deloitte ArtTactic Report highlights one of the key debates in the wealth industry at the moment as being how wealth managers can build sustainable and better value-added relationships with their clients. While there are a number of areas that need the focus of a wealth manager, the client sees some as best left to others. For example, while only 30% of collectors interviewed for the Report wanted an art advisory service from their bank, an increasing number were found to be looking to their wealth managers in connection with their estate planning needs in key areas related to art and collectibles, particularly with regard to taxation, inheritance and succession planning and valuation.
Art valuation and art advisory remain the two most important services clients look to the art professionals to provide. Valuation and art advisory services are the “glue” that connects the wealth management industry and the art professionals.
John Sibbald is a member of Lyon &Turnbull business development team and edits the Valuation Department Newsletter
To access the Barclay Wealth Insight Reports mentioned in the course of this article click here
Similarly, to access the Deloitte ArtTactic Reports, click here