Master art and frame the profits

Auction prices are breaking records, but how good an investment is art?, asks David Prosser

Britain's art industry is booming. The value of sales at London art auctions rose 15 per cent last year, while contemporary art prices are up by more than 80 per cent over the past decade according to Artprice.com. But is art really an investable asset class and where should budding investors begin?

Nicky Wheeler, director of The Affordable Art Fair, which takes place in London for three days from 19 October, says buying cheaper works of art is the best way to get started for inexperienced investors and collectors alike.

"Art fairs like these are a great place for first-time buyers because they're not elitist or intimidating," she says. "Also, you can choose from a very wide range of different artists and styles of work [including all the work featured on the front of Save & Spend today]."

While her fair does not allow artists to exhibit works costing more than £3,000, Wheeler says: "There are definitely people coming along with an investment mentality - Charles Saatchi picked up quite a bit of work at last year's fair."

However, like other art experts, Wheeler warns would-be investors not to count on long-term returns. "It's crucial you buy stuff that you like," she says. "Even if it doesn't increase in value, art is a good emotional investment."

Working out what you actually like can be the first challenge for many art collectors. Wheeler's advice is to spend as much time as possible looking at a very wide range of styles before making final decisions.

Her own tips for future gains right now include sculpture and photography, two areas less well-followed by many collectors. But the holy grail for investors is to spot an up-and-coming artist - even a recent graduate - who is set to hit the big time. Three years ago, for example, Damien Roach was selling his videos for £10 at the Affordable Art Fair; now he is exhibiting at Tate Modern.

However, Spencer Ewen, managing director of Seymour Management, a City-based art advisory service for wealthier investors, warns that there are serious dangers in investing in art, particularly at the speculative end of the market.

"It's not really investing at all," Ewen says. "You should be looking for value for money certainly, but that's simply buying prudently and sensibly." While Ewen does advise art buyers on possible investments - though Seymour would expect collectors to spend at least £10,000 - he thinks it has major flaws as an asset class.

For one thing, he points out, there is no yield on art - you get nothing back until you sell. Even then, there's no guarantee of a positive return, especially as this is an illiquid market.

"You'll generally be better off with artists who have at least some sort of exhibiting track record," he says. "You're looking for artists whose work is likely to have longevity."

Ewen suggests asking dealers and auction houses whether work you are interested in has been bought and sold at auction in the past. If so, it at least demonstrates that there has previously been a market for the piece.

Above all, Ewen's advice is that collectors and investors must not be intimidated by the art world. "You need to immerse yourself in the subject and that means taking to as many people as possible in galleries and auction rooms," he says. "The art world deliberately dresses itself with a certain mystique but never be embarrassed about asking as many questions as you want."

One option for investors keen on art as an asset class but nervous about buying their own pieces is a collective fund run by experts. The bad news is that there is only one such fund currently active in the UK - and it's limited to high rollers, with a minimum investment required of $250,000 (£132,000).

Philip Hoffman, chief executive of the Fine Art Fund, says his vehicle invests in art dating from the 15th Century right up to the modern day. "There is huge amounts of money chasing the best work," he says. "Art is a safe haven in inflationary times, particularly for people looking for alternative assets."

However, lower down the scale, Hoffman is dismissive of investments in art. "Art simply is not an investable asset at the bottom end of the market," he says. "For me, that means below the $25,000 mark."

Finally, budding art collectors need to think about two practicalities: the first is insurance. Standard home contents policies will not cover theft of or damage to single items worth more than a set amount - typically £1,500. Specialist art insurance is available from companies such as Axa and Hiscox.

Also consider your tax status carefully. Profits on art above a certain level - £8,800 in the current tax year - are subject to 40 per cent capital gains tax. They will also count towards the value of your estate for inheritance tax purposes.

What the art experts recommend

* The British art market is one of the busiest in the world, selling everything from Old Masters to Aboriginal art and Andy Warhol. The art is knowing which art to buy. But for those wanting to invest, these are three areas worth a look:

* Twentieth-century British art is now thriving, largely at the expense of Victorian art, which is struggling. In June, an auction of modern British art at Christie's realised £12.4 million. But this success isn't just at the upper reaches - the prices paid for Hockney, Bacon, Moore or Freud, though they help to stimulate the market - but at all levels.

There are several reasons. Modern British art is much talked about - there's the annual controversy over dead sheep and unmade beds, and angry headlines regarding the acquisitions of Tate Modern and Saatchi.

A very full calendar of exhibitions, sales and fairs promotes the market - they include Frieze Art (now rivalling Basel in importance), the British Art Fair, and, by contrast, the Affordable Art Fairs. For many young professionals, modern British art satisfies a desire for art as art, as décor and as investment.

* Prints, another important area of growth, have long provided an excellent way into the art market - they certainly offer the least expensive way of owning original art by major artists. A signed Hockney can set you back around £6,600 (lithograph at Christies, June this year) but you can pay as little as £1,000 (etching, same sale) - which is good value.

Prints have been around for over five centuries so the range - in period, style, subject, size and method - is extraordinarily wide. Etchings, which are generally small and monochrome, tend to be an intimate form, while screen prints and lithographs are usually larger and can be wonderfully bright.

There is also a very strong British tradition, such as woodcut of the 1920s and 1930s. Good quality woodcuts (left) from celebrated artist of this period (Robert Gibbings or Eric Ravilious, say) might cost from £300 to £900, but many by lesser known or even unknown artists cost as little as £40.

A Tracey Emin, Antony Gormley or Damien Hirst print will go for around £1,000.

* In recent years there has been steady growth in modern Indian art with well-established elders such as Tyeb Mehta, Maqbool Fida Husain and Francis Newton Souza commanding high prices. Souza, who died four years ago, is typical .

In May, at Sotheby's London, Amsterdam Landscape passed the $1m barrier. Many of his works sell for much less (his pen-and-ink Townscape with Trees, went for £3,200 at Bonhams in September). As he lived in England from 1949, many of his pieces are on sale here, and sell for less than they would in New York.

By Chris Murray