Masterpiece Prices Soar While Lesser Art Flounders

Low interest rates, energy concerns and a global slowdown have provided headwinds against equities and bonds—but amid all the financial turmoil, how is the art market holding up?

Since 2000, the global art market has grown at a 13% average annual rate, but it is showing signs of cooling, according to the Citi Private Bank’s “State of the Art Market” report.

“We see this as a positive factor. It means people are thinking about what they’re buying,” says Betsy Bickar, an art advisor with Citi Private Bank. “The market is showing more selectivity because there’s so much opportunity to buy artworks now.”

After a 15-year period where the average price for fine art at auction increased from around $27,000 to more than $49,000, the growth in prices may be ready to level off, led by declining sales at the major auction houses, according to Citi.

In 2015, Christie’s auctioneers sold $7.4 billion in art, around $1 billion less than their 2014 totals. Sotheby’s $6.7 billion in sales was flat from the previous year. Sales at both auction houses earlier this month were down more than 40% from a year earlier.

There were bright spots—Amedeo Modigliani’s “Nu couché” sold at auction for $170.4 million to Chinese collector Liu Yiqian. Another Modigliani nude reportedly sold privately for $118 million, and Roy Lichtenstein’s “Nurse” sold for $95.4 million at Christie’s, a record price for the artist at auction.

Citi reports that the masterpiece market bottoms out at $10 million.

“If one publicly buys at auctions, it’s a prestigious thing,” Bickar says. “People will pay a premium for the difficult-to-find, museum-quality works.”

The prices for masterpiece art sold at auction aren’t a good indicator for the greater art market, says Annelien Bruins, chief operating officer at Tang Art Advisory in New York.

“There’s a huge discrepancy between the high-end auctions, the types of works we see in the newspapers, and the rest of the art market,” Bruins says. “The masterpieces are a small, manipulated market where the dynamic of the competition is very different.”

For one thing, many art auctions are choreographed, with sales pre-arranged before bidding takes place to guarantee a good price on the works, she says.

“There were a large number of guarantees in 2015 where someone purchased the work at an undisclosed price before it went to auction,” Bickar says. “That shows a lot of confidence in the market.”

A case in point: In 2015, Sotheby’s paid $515 million in guarantees to auction the collection of its late former chairman, A. Alfred Taubman, but so far has only recouped around $472 million from its sales. In a recent SEC filing, the dealer projects a $12 million shortfall after the collection is sold.

“The auctioneers often have to negotiate so much for the masterpiece business that they negotiate away their sellers commission, but it’s still great publicity,” Bruins says. “However, the perception that an art auction is an open marketplace is not true. What’s happening in that space is kind of unrelated to anything else going on in the rest of the market.”

This year, the major auction houses and third parties appear to be more hesitant to guarantee the sale of masterpiece works, with both the monetary amount and the total number of guarantees dropping at the February sales at Christie’s and Sotheby’s.

Bickar says that may point to a downturn or a leveling out of prices at the top of the art market, which could eliminate one of the largest drivers of the market’s growth over the past 15 years.

It’s difficult to say whether private sales are increasing in terms of the number of works or the amount of cash changing hands, but they are becoming more common, art consultants say.

“We do know that private sales of artwork at the masterpiece level are happening,” Bickar says. “There was recently a $500 million-level private sale for two artworks.”

Art is also increasingly sold at art fairs, which Citi estimates now account for 40% of dealer sales. But the Internet may become the most popular way to buy and sell art, Bruins says.

“Dealers are trying to improve their digital strategies and they’re trying to sell artworks online,” Bruins says. “Online sales help companies because they can have a large international footprint without having to open branches. It makes it easier for smaller companies to compete with larger companies.”

Though the big-name auctions aren’t doing as well, art is still in demand as a financial instrument. Art lending, which uses pricey works of art as collateral, appears to be rising in popularity, says Bruins.

“Most of the big banks have started lending with art as collateral,” Bruins says. “Art is being turned into a financial instrument, not just an aesthetic one, but that leads to some issues because the value of art is subjective.”

Investors are also using art as a long-term, generally illiquid investment. Citi reports that art is only 11% correlated with equities over the past 40 years, with an annualized rate of return of 2.4%.

“A lot of people are buying art because they love it and often overpay as a consequence, but at the same time they expect their works to continue going up in value, even if they were bought at the top of the market cycle,” Bruins says. “That’s why price research is so important.”

While concerns about China weigh on stocks and bonds, the Chinese are still buoying the art market to some extent, according to Citi’s report. China has become the second-largest art market in the world after the United States, accounting for more than a quarter of all art sales. China was responsible for about one-third of the 450% growth in the art market since 2000, according to Citi.

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