Cracks in the Business of Art?

The NY Times takes and interesting looking at the business of art and comes away a bit bearish. The article looks at falling stock prices of both Sotheby's and China's Poly. The article starts out by immediately stating the art market is baffling.

The article discusses a claimed shrinkage of art buyers, as well as slow growth for major international auction houses in addition to the falling stock prices.  Part of the reason is a lack of participation in the middle market by the large houses, which is why many are turning to the internet. This view is no doubt a bit contrarian in nature, but in some respects may be correct as the top auction houses as well as dealers look for growth opportunities.

The NY Times reports

LONDON — Sometimes art can be difficult to understand. Sometimes the art market can be even more baffling.

Back in December, the contemporary dealer David Zwirner said in a New Yorker profile that art was “an industry in its golden age.” His point seemed to have been proven during the June 17 preview of the Art Basel fair in Switzerland, when his gallery sold more than $20 million of artworks by Ad Reinhardt, Jeff Koons, Luc Tuymans and other investment-grade names.

But if these are such gilded times, what do we make of Sotheby’s share price of around $41 as of Friday, down from a high of $53 in January? And of the 48 percent drop in the auction house’s private sales in the first half of this year, according to an Aug. 8 Securities and Exchange Commission filing?

To be sure, part of Sotheby’s stock price weakness might stem from the hostile criticism of management from its biggest outside shareholder, the hedge fund manager Daniel S. Loeb. But aren’t we supposed to be in the middle of an art boom?

And what do we make of shares in China’s state-owned Poly Culture Group Corporation, the world’s third-largest auction house (and a possible suitor for London-based Bonhams, according to the Financial Times), trading at 28.50 Hong Kong dollars, or about $3.70 — well below its initial public offer price of 33 Hong Kong dollars on the Hong Kong stock exchange in May?

“There’s a feeling among financial analysts that the valuations of art-related companies are peaking,” said Fabian Bocart, the director of quantitative research at the Brussels-based art investment advisers Tutela Capital. “These valuations are based on expected volumes at auction. Very expensive items have almost no impact.”

Despite these scratches in the gilding, the auction houses continue to talk about the unstoppable momentum of the globalized art market — or rather, the market for contemporary art, where most of the action is happening.

Christie’s half-year public and private sales of 2.7 billion pounds, or about $4.5 billion, featuring 51 auction results of more than $10 million, was a new high for the company, though Sotheby’s equivalent figure of $3.5 billion — dented by that drop in private transactions — was a fraction lower than last year. Christie’s, in their accompanying half-year press release, talked of a “new era of excitement and engagement about art and for art.” And in a recent article in the Wall Street Journal, the auction house’s contemporary specialist, Brett Gorvy, said he possessed a list of at least 140 collectors capable of spending $50 million or more on artworks.

The presence of 140 billionaires on Christie’s books, if not actively buying, sounds impressive. However, that figure represents just 6.5 percent of the population of 2,170 billionaires living in the world in 2013, according to a report published by the inaugural Wealth-X and UBS Billionaire Census.

“There’s a large contingent capable of buying art at high prices,” said Clayton Press, a partner at the New Jersey-based art advisers Linn Press. “But the number of people actually engaged in it is relatively small, and the competition at the top tends to be for a very narrow range of brand artists. The auction hyperbole doesn’t take into account that the majority of works are sold by dealers.”

Collectors, as a distinct socioeconomic group, continue to do what they do, making their confidential purchases from auctions and galleries, most of which are privately-owned entities that don’t publish financial results. The resulting opacity is a plus for publicity-shy buyers and sellers, but makes it difficult for outsiders to determine whether this is, in financial reality, an industry basking in a golden glow. Christie’s, for example, is owned by the French billionaire François Pinault, and it publishes biannual sales figures without any indication of whether these transactions have made the company a profit or loss.

Multigallery dealerships like Zwirner, Gagosian, Pace, Hauser & Wirth and Emmanuel Perrotin also run expensive operations, but they do get the art first and take a 50 percent cut. Unlike Sotheby’s, Christie’s and Phillips, they aren’t locked in a race to offer the most lucrative possible terms to sellers of big-ticket auction lots, terms that can leave them with a negligible profit, or even a loss. The auction houses enjoy higher rates of commission for works priced in the $5,000 to $5 million range, but these returns are being defrayed by the rising costs of having to hire staff to source and market the art, and to pamper their richest clients.

“Auction houses aren’t scalable businesses. They can’t expand by multiples like dealerships,” said Michael Hutter, a cultural economist who is director of the Cultural Sources of Newness research unit at the WZB Berlin Social Science Center in Germany. “Profits are crumbling at the top of the market. They can’t charge 50 percent, which is partly why they’re turning to online sales.”

But perhaps what is most baffling about this golden age is the lack of a wider sense of involvement and excitement. Market insiders were enthralled when Christie’s “If I Live I’ll See You Tuesday” auction of fashionable contemporaries raised $134.6 million in New York on May 12. Remarkably, this Instagram-promoted selection fetched more than the $127.3 million evening session of the landmark artist-sourced “Beautiful” auction of Damien Hirst works at Sotheby’s, London, back in September 2008, the final blast of the last art market boom. Clients new to Sotheby’s represented 18 percent of the buyers at that sale and 21,000 people attended the view.

Are the minimalist abstracts of American painters like Wade Guyton, Christopher Wool and Alex Israel capturing the global imagination in the way that the more brazenly populist art of Mr. Hirst, Jeff Koons, Banksy and Takashi Murakami did when they were in their commercial pomp in the 1990s and 2000s?

This might just be important if high volumes of profitable sales are what ultimately determine the gold-standard of an art-related company.

“There are definitely fewer art buyers than there were in 2008,” said Mr. Bocart, the research director. “The cards have been redistributed by the financial crisis. Fewer people have more money, and they do spend more, but the base has been diminished. Art needs to be refreshed. We’re waiting for something to happen.”

Source: The NY Times