Allied art professional Mark Bench Director of Valuations at art lender Borro sent me news of an interesting Financial Times article on the state of sales at major international auction houses. We have heard from some reports in the recent past the bubble would soon burst, we also heard from financial experts such as Mike Moses that comparing the analytics, there is no bubble, and now we have statements in the FT that the art market is now in a corrective state. There are also signs of hope, but with the auction houses expanding into more luxury markets and competing with galleries through private sales.
The Financial Times reports on the art market
Source: The Financial TimesIt was turning into a bad night for Henry Wyndham. The normally urbane chairman of Sotheby’s Europe was taking the house’s Impressionist, Modern and Surrealist art sale, but the atmosphere in the room was listless, the prices low, and the staff taking calls from international bidders were doing slow business.
Despite a full saleroom and bids in the millions of pounds, there was little excitement. Time and again lots were sold for below or just above their low estimates, and several failed to meet their reserve price, forcing Mr Wyndham to pause, look down, then mutter “pass”. The work had failed to sell, been “burnt”, in the parlance of the art world. The Contemporary art sales last week fared no better.
The star lot at the February 3 sale in London, Picasso’s rainbow portrait of his muse Marie-Thérèse Walter, scraped over its low estimate of £16m by £700,000. A few lots later, Matisse’s “Leçon de Piano”, went for £9.5m against an expectation of £12m-£18m.
Even with buyer’s commission — the auction house’s profit that is often included in the total to make it seem plumper — the total sales for the auction still fell short of the low estimate of £97.6m. For arch-rival Christie’s, which had its equivalent auction the night before, it was a similar story. One in four of its lots had failed to sell, a high rate, and no picture sold for more than £8m. Their total, without premium, crept over the low estimate of £83.7m, but last year’s equivalent sales netted Christie’s £147m and Sotheby’s £186m.
According to Ivor Braka, among the ranks of art advisers who buy or sell for individual clients, these high estimates are a sign of the auction houses striving, not for profit, but for headline-grabbing turnover. “We’ve had it so good for so long that the sellers are getting overconfident — and they’re almost blackmailing the houses for often quite average material,” he says.
The disappointing sales came on the back of a round of voluntary redundancies at Sotheby’s, cutting staff numbers by 5 per cent to below 1,500, at the end of 2015. The mood darkened further when the company announced this week that the co-head of the Impressionist and Modern department, Melanie Clore, was leaving after 35 years.
Emerging market money
Over the past decade, the news from auction houses has been relentlessly positive. Many in the industry, like Aditya Julka, co-founder of online auction house Paddle8, say what is happening now is a correction rather than the bursting of a bubble.
“Certainly the very top end of the market, where there are only a handful of collectors competing for a small group of elite works for eight or nine figures, has seen prices that are perhaps due for a correction,” he says.
One argument is that the London sales were simply two ill-starred sessions at a dreary time of year, with works described by another art adviser as “particularly average”. But the message the art world will have taken from the results, and patchy sales in the US at the end of last year, is that a decade of blockbuster prices could be coming to an end.
The slowdown in the global economy — and especially in emerging markets such as China and Russia which have buoyed the art market of late — is an important factor. But the fall-off in prices also comes as fewer Impressionist and Modern masterpieces, from Monet to Picasso to Francis Bacon, come up for auction. It means the big auction houses are facing shortages in both demand and supply, and their business models — dangerously reliant on guarantees to sellers — are not helping.
Clare McAndrew compiles an annual report on the value of the art market using data from auctions and estimated private sales. Last year, the total passed €51bn, more than double the €24.4bn value a decade earlier and, despite a significant fall in 2009, it has risen 81 per cent since then. But, she argues, such high prices mask bad news for the industry. “The high end, mainly the extremely high end, has buoyed up a lot of the aggregate figures and that has made it very positive,” she says. “But it’s not the case that everyone’s business has been doing extremely well.”
If, as Ms McAndrew and others argue, the middle of the market has fallen, and global worries are weighing on the top end, the pressure on auction houses is only going to intensify.
In theory, the auction-house model is simple: both the buyer and the seller pay a premium to the house for handling their artwork. The premiums go down as the prices go up: at Sotheby’s in London, the buyer pays 25 per cent up to a value of £100,000, 20 per cent up to £1.8m and 12 per cent over that.
Sotheby’s and Christie’s accounted for 42 per cent of the global auction market in 2014, with total sales of $14.4bn; China’s Poly International was a distant third in the market with €908m.
But in their scramble to attract artworks which bring telephone-number prices, media attention and the promise of items to sell from consignors, auction houses have hit upon the perfect formula for their own ruin: guarantees. They have brought houses low before — Phillips was sold by billionaire Bernard Arnault after it lost $80m in 2001 on guarantees.
They come in two types: one where the auction house promises to pay the buyer a fixed amount, regardless of the hammer price; and one where a third party promises to buy the item, taking some of the house’s profit if they are outbid. Art adviser Lisa Schiff, who works with Leonardo DiCaprio among others, says: “There are a lot of innovative mechanisms to ensure top material and the successful sale of a work, but that sale isn’t always very profitable to the auction house.”
That view is echoed by Nicolai Frahm, a collector whose recent purchases include Ai Weiwei’s Zodiac-head sculptures and one of Napoleon’s hats, who says guarantees can be a highly unprofitable risk for the auction houses. “It is a tricky situation because someone who sells something obviously thinks, ‘What’s the best deal I can get?’ [They are] not thinking that might not be very good for the auction house.”
Offerings for sellers
The use of guarantees is guided by “judgment and sensible risk management”, according to Tad Smith, Sotheby’s chief executive who in January said the company’s outstanding guarantees were “a relatively modest $92m”. Last year it guaranteed the estate of Alfred Taubman, its former chairman who was sent to prison after a 1990s scandal in which Sotheby’s and Christie’s illegally agreed to fix buyers’ commissions.
In order to wrest the sale of the collection out of Christie’s hands, Sotheby’s gave the Taubman family a guarantee of $515m. But the sales fell short by $3m and Sotheby’s declared a fourth-quarter loss of $10m-$19m, partly as a result of the Taubman deal.
Christie’s also offers guarantees says Jussi Pylkkanen, its global president, mainly to “secure consignments”. A private company owned by François Pinault, the founder of luxury-goods holding company Kering, Christie’s does not have to publish its profit or loss; even so, its 2015 full-year results showed a 5 per cent fall in sales to £4.8bn.
The use of guarantees will slow in most cases, predicts Todd Levin, director of Levin Art Group, an advisory company, because of the risks to auction houses and third-party guarantors. And the fall in guarantees will drag down prices, he predicts.
Ms McAndrew says it is no surprise that the art market’s rapid expansion is slowing. If you measure back to 2005, a 1 per cent increase [in growth today] would be like a 20 or 30 per cent increase [then].” The boom in emerging market wealth partly explains that growth. Sotheby’s sold art worth more than $1bn to Chinese buyers in 2014, and more than $900m in its Asian salerooms, while Christie’s has expanded its sales into Beijing, Mumbai and Dubai.
But falling equity and commodity prices are having an impact. There was little activity from the Chinese-language staff at the recent London auctions. Philip Hook, a Sotheby’s board member, said after the sale that there had been Chinese participation “but it wasn’t successful”. The Artsy.net website reported this week that some Brazilian galleries had suffered declines in turnover of up to 40 per cent as the country endures its worst recession in a century.
It is not all gloom. One Chinese entrepreneur who has been on a spree of late is Liu Yiqian, who is worth $1.17bn according to Forbes. He paid HK$281m ($36.3m) for “Chicken Cup”, a record for a porcelain piece, and won Modigliani’s “Nu Couché” for $170.4m, which he is said to have paid for on his American Express card to earn air miles.
If you can’t beat them, buy them In January, Sotheby’s tried a new tack. Having observed the rise of the art advisory groups it bought one of its own, Art Agency Partners, paying $50m for essentially an address book of individuals reluctant to use auction houses.
Such companies are attractive to the auction houses as they bring client lists of wealthy individuals who may not be confident in navigating the auction houses and dealers by themselves, or experienced collectors in need of someone who knows their taste. These advisers often broker private sales that offer anonymity to both buyers and sellers. In 2013, the two big houses made $1.2bn each in private sales revenue, which was almost 23 per cent of the turnover of Sotheby’s and 14 per cent of that of Christie’s. But a year later, Sotheby’s sold $624.5m behind closed doors.
The move into private sales is part of an effort to combat the rise of galleries, like Gagosian, White Cube and Hauser & Wirth, which often compete in secondary-market work with auction houses. In total the galleries account for more than half the art market, according to the 2015 European Fine Art Fair report.
The houses have found other ways to innovate. Christie’s has moved into luxury goods — from Birkin bags to Rolex watches — with an online operation, while Sotheby’s, has teamed up with eBay. It has also ramped up its financial services division, which offers loans against art with clients putting up paintings or sculptures as collateral.
The business has grown from $9.7m in revenue in 2010 to $33m in 2014. But rating agency Moody’s said in September that such expansion “poses the risk of materially weakening its [Sotheby’s] credit rating in the longer term”.
There is little Sotheby’s and Christie’s can do about the global economy. But, say critics, they are also victims of their own strategies, particularly the bidding wars they fight, often to the point of destroying their own profit on multimillion-dollar items. It is a cut-throat rivalry — the danger for the houses is that the only throats they are cutting could be their own.
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