K-Pop, parasite, and high-tech beauty products got South Korea hooked in the recent past. Nowadays, paintings and sculptures are in great demand, and this craze is sweeping across South Korea. This phase could just be a fad, but the interest shown is due to the simple pleasures of owning something of cultural prestige. Apart from this, there is a more significant incentive at work. Financial gains through tax breaks are giving the trend momentum to sustain longer.
According to Bloomberg News, the South Korean government has taken specific steps to cool the overbought housing market. South Korean investors have looked to build wealth historically by owning multiple properties. The government has raised taxes along tightening real estate loans with new regulations. For the first time, levies and capital gains tax are applicable on the sale of properties after a certain holding period.
The government plans to impose capital gains tax on cryptocurrency and equity trading from 2022 and 2023, respectively. The capital gains tax exemption threshold limit is on artworks valued up to 60 million won (USD 51000). Anything above that attract a tax of 22% on 20% of the sale proceed. However, there is no tax on artworks done by local living artists. Well-off Korean who traditionally invested in real estate for wealth building has now switched over to other areas in light of new developments.
An investor, Jemma Lee, 52, is a case in point. She bought two sculptures and five paintings for 300 million won this year which is a sixfold increase from 50 million won spent in 2019, her first year in the art collection. When the new government took over, as a canny investor, she could foresee people rushing to other alternative investments. She came across the art market and seeing the too good to be true low taxes in this segment, which made her switch over.
The Seoul-based Lee made about 65 million won profit from selling artworks, including works by Hun Kyun Kim, Sarah Lucas, and Emily Mae Smith. So, what started as an alternative investment soon became an interest in art for Lee. She enjoyed collecting the artworks and feels that art is a great asset to increase their wealth.
Art investments in 2021 are expected to touch 500 billion won, around USD 422 million. This year auction sales in the first six months of 2021 surpassed the entire 2020 sale, according to Korea Arts Management Service, a government-run agency.
Turmoil in Hongkong, which is known to be the art hub in Asia, has forced investors and international art institutions to diversify their operations to South Korea. This has boosted the art market. There is also no value-added tax in art trading in South Korea, making it an attractive destination.
“South Korea is Asia’s next emerging destination for art after Hong Kong. There is massive demand from auctions and art fairs, with famous artists wanting to showcase their arts in South Korea,” said Kim Yoonsub, the CEO of Aif said.
According to Bloomberg sources, an outlook report by ArtTactic, a consultancy predicts that the art industry will place South Korea ahead of many countries globally. Many countries like the U.S. and in Europe will find it challenging to get back to pre-covid levels, especially after a disastrous 2020.
The new concept of offering work of art into several joint ownerships has ensured that new clienteles have emerged other than the older and wealthier Koreans.
New start-ups have come up that allow one to own a Banksy or a Warhol painting by buying a slice of the artwork at a prefixed value.
Ro Seung, 38, owns a part of such paintings and says,” I always loved art, but now it’s possible to afford a tiny share in Banksy. One must have a love for art and investment together to enjoy the combined experience”.
Seung works for a brokerage and has invested USD 400 on four paintings, including Banksy’s “Choose your weapon” and “Dollar Sign” by Warhol bought from a start-up, Tessa, in an exhibition.
Tessa, a start-up platform launched in 2020, buys artworks that have been put up in auctions at least 100 times in a year. The prices are fixed and then sold in portions to different investors. The modus operandi here is that Tessa sells those artworks where its price has appreciated by more than 15% and after it has the consent from the majority of its owners. To date, they have sold 3 out of the 22 artworks in their portfolio that met the two criteria.
Jun Kim, the founder of Tessa, said, “we are treating this platform for trading in arts and not as financial products.” This is because many have shown interest in the past year, even if they had little knowledge of art.
Investors, especially individual ones who are buying from Tessa or any other start-ups, need to be careful. The risk in dealing with artworks needs to be understood. Investors must realize that art valuations are known to be notoriously fickle, and this craze could be a passing phase. If they think flipping artworks quickly can earn them profits, they can be in for a big surprise. Those who need money in an emergency could be in trouble due to a lack of liquidity in the artworks market.
Jason Haam, a gallery owner in Seoul, feels that this boom could spin out of hand. However, he insists that artists must continue to produce their artworks irrespective of other demands. The boom is a good thing for the art market, but the more critical factor is the sustainability of such growth.