The upcoming Art Basel event in Hong Kong is a testament to the growing willingness of U/HNWIs in Asia to drop serious amounts of cash when it comes to their burgeoning art collections. However, what is perhaps less known is that art can go beyond being a potential investment or personal passion – but can actually be a source of financing and liquidity.
“When we explain to our clients the concept of releasing some liquidity from their art pieces, they appreciate our advice and understand the concept that can marry their passion with their business,” Jyrki Rauhio, regional head of credit advisory for Asia Pacific at HSBC Global Private Banking (GPB), told Asian Private Banker.
Jyrki Rauhio, HSBC
Moreover, despite the booming art market, art financing is offered by relatively few private banks in Asia, making it largely untapped.
“There are a number of art financing transactions that we’re working on currently. As clients look for alternative sources of liquidity, they will also be increasingly looking at their art as a source of potential financing for their investments or projects,” said Rauhio.
Art financing as a product has been on HSBC’s shelf since 2012 outside Asia. The bank officially expanded this capability to Asia around the beginning of 2022. Last year, it even brought Grammy-award winner Pharrell Williams to Hong Kong to dine with its UHNWI clients as part of a series of events to promote the product.
Growing interest
“Art is an area of increasing interest to our clients. The pandemic has reshaped their values to some extent and driven them to think more about their passions,” Rauhio said. “It’s also a topic that the next generation is quite interested in, and the average age of collectors is getting younger.”
While the global art market showed some signs of cooling in 2023 in part due to rising interest rates, a recent Knight Frank report has found that UNHW and HNW individuals in Asia retain a keen interest in luxury investments, including art. According to Knight Frank’s Luxury Investments Index, art prices increased by 11% in 2023.
APB previously reported that family offices in Asia are also showing a growing appetite for art investing, although their expertise in art as an asset class is still nascent.
“Once you eliminate the volatility and chart a long-term trajectory, it reveals a consistently upward trend,” said Rauhio, referring to clients’ interest in art.
Untapped product
Reaching a certain number of deals or dollar amounts is not really the point, according to Rauhio. Instead, he said the bank wants to be part of the dialogue and the ecosystem so it can engage in conversations about topics close to people’s hearts, encouraging them to open up and deepen relationships with the bank.
“This product is highly specialised, and we work with clients whom we know and understand well,” Rauhio said. “If you want to be in this business, you need to have the right talent to be part of that ecosystem. You need to understand the other players, how you fit into it, and be able to get things done within it.”
He added that “this area requires a mix of expertise, time, investment and dedication, setting the bar pretty high for entry.
“That’s actually a plus for us, as it means there aren’t many private bank competitors out there right now,” he said.
Unlike other areas that see crowded competition among private banks in Asia, art financing is a field with relatively few players. Apart from HSBC, JP Morgan Private Bank and Citi Private Bank also have similar lending services in the region.
Meanwhile, there has been an increase in specialist lenders offering art financing, who take a slightly different approach to lending against art pieces. For instance, auction house Sotheby’s relies more on the art piece per se rather than the owner’s profile, in part due to its knowledge of over 70 categories of fine art, watches, jewellery, wine, spirits and other collectibles, APB has previously reported.
Ascertaining value
For HSBC GPB, Rauhio said that “art financing is only one of the structured lending solutions,” adding that the bank recognises the value of incorporating it into its suites of services as a way to help its clients to pursue financial goals without disrupting their investment strategies.
Every financing deal involving trophy assets as collateral is based on the client’s relationship with the bank, according to Rauhio. This is to deepen the bank’s relationship with the clients, and the bank does not treat this as a one-off transaction, he explained.
“We need to thoroughly understand our clients, including their net worth and metrics such as cash flow and risk appetite,” he said.
He added that the value of the art pieces factors into the loan underwriting process. For instance, the art must have been sold at auctions where public data are available for the bank to derive a value.
“We do need several pieces and we don’t do transactions based on single pieces,” explained Rauhio.
“The bank also turns to the ecosystem to get different views from professionals to come up with a valuation,” he said. “These lending solutions are tailored and highly structured. And you need to have specialists on the team to execute them in a speedy fashion.”
