I once had a suit of plate that cast waterbreathing. That was in an AD&D game and it saved my life a couple of time and was great for dealing with moats.
Peter, you nailed it right on the head, in both sections of your post.
The over powered items take away from the gameplay, such as Artifacts. It's awesome to have one, but if it's overpowered, you are stuck playing in over powered campaigns, or the party complains that you are either A) Killing too easily and they sit back and send you in, or B) you are leaving them helpless while they take a pounding and you play it safe. Forget that you are trying to play your character's personality in-game... if it's not what the party likes, they get upset.
Example: Lvl 8 Cavalier. Shield Slayer Battle Axe. Destroys shields on first hit. Treat all armour as AT1. Not to mention I do double damage due to a high STR stat and I have Gauntlets of Might that allow double damage for the first 5 rounds of combat. For 5 rounds, I am doing x4 Damage vs. AT 1 with 2H Battle Axe. All too often I heard "Just send the Cavalier in, we'll look over here for the <fill in the blank>." I ended up making a new character to play just so I could be "part of the party" again.
Now, the second part, and more on topic perhaps... the best armour we had in the party was Armour of Water Breathing. AT20. Encumbers as AT12. Allows wearer to breath underwater normally. That opened up a new set of possibilities for the player once we hit the ocean and waterways of our campaign. He never took a skill in swimming and the Elf Maiden was aware of that when she revived his waterlogged body so he was granted this armour. What ended up happening was a battle on ship that we were getting hammered on pretty badly. The Fighter got desperate and did a Tackle/Grapple and pulled the leader over the edge of the boat. They sank like lead, he held on until the foe drowned, then he resurfaced.
IMO, that's not really what I would consider an "Artifact Level" armour. I do have C&T-I with me and "Artifact" grade armour and weapons are in the +40 to +50 DB/OB range, High protection, lower encumbrances, rare material, innate spells, and often times a Will or Int associated with them.
What level is the crafter? Is he going to be crafting an Artifact for you? The item can't have level properties greater than those of the crafter. It sounds like you have free reign over what you would like in the armour. That being said, and still IMHO not what I would consider an artifact.
AT12 (Since you stated Demon Hide)
Protects as AT20 (Demon hide is very tough)
0 Encumbrance (by nature of being "skin" and skin doesn't encumber)
Fire resistance - immune to all natural fire (Since it's a Demon)
+35DB Fire Resistance vs. magical sources
Those seem to be "naturally" occurring features for Demon armour. Then add these properties from the crafter:
Water breathing (Because it's awesome to have in emergencies)
Swimming (+5 ranks)
If you wanted it to be Artifact quality I would add more to it
+40 DB (Mithril Plate of the Dwarfs is +50 (C&T-I). In our world, Mithril is the penultimate
metal to have. There are other
materials that are better, but for metals, it's Mithril)
If wearer is grappled, foe takes automatic +35 C Heat crit until he lets go of wearer
Int - Low: While owner is still alive, if anyone other than the owner tries to wear the armour, wearer takes +35E Heat and +35E Krush crits as the armour tries to squeeze the foe out.
IMO, just try to play off of what would seem "natural" to the material, then enhance it a bit and add a little story to it. The armour protects from heat as being part of a demon. That stored up heat energy gets released against a foe if you are grappled as the spirit of the Demon is angered by the hostile action. Some of the Demon's Intelligence is still imbued in the skin as it refuses to let go of its grip to the mortal plane of existence and the only way it can maintain its tentative grasp in this physical plane is through the continued existence of its skin, so it will use what remaining power it has to keep you alive, for it knows that you are strong, worthy, and capable of maintaining its continued existence.
+40DB as it is skin and not metal. If it were Mithril, I would give +45 or +50 even.
Skin, for the wearer, is AT1 IMO, so no encumbrance. If you were naked, you are AT1 and no encumbrance. LOL
Water Breathing because it's freaking awesome!
Swimming, because it's good to be able to move around a bit while you are underwater.