5 February, 2021
C. Contemporary Art Market: What are the current trends and how do they influence the market of a specific artist?
London Trade Art’s “ABC’s of art evaluation”, the guidebook on art investment which aims to provide a compelling manual on the complexity of art appraisal for anyone willing to better understand the art industry and to possibly make smart investments, comes to its third and last chapter: C. Contemporary Art Market: What are the current trends and how do they influence the market of a specific artist?. After having focused on the first two important aspects to take into consideration when evaluating art: A. Artworks: What to look for when buying art? and B. Biography of the artist: What does the artist’s curriculum tell you about an artwork?, it is now time to consider the impact of the art market trends on the art investment.
As for any kind of investment, also when buying art investors aim to pay a fair market value, perhaps with the ambition that the artwork will gain in reputation and market desirability over time, resulting in an appreciation of the value at the moment of its resale. But how to tell which is the fair market value of an artwork? In the real estate sector, for example, the fair market value as defined by the Internal Revenue Service Publication 561 is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts. With respect to art, apart from personal knowledge and considerations, it is useful to identify what are the art market “relevant facts” which influence art appraisal.
Overall market trends and main sources of information
Knowledge and passion should be at the base of any investment. In the specific case of the art sector, being aware of the overall market trend is quite important to make a conscious decision. Unfortunately, the opaqueness of the system doesn’t help to collect useful information, as the art market is still reluctant to bring transparency about artworks’ prices, ownership, provenance and other important details. Another obstacle is the lack of a scientific price index which guarantees objective references to take into consideration when evaluating an artwork.
Nevertheless, nowadays there are several sources of information, allowing to get closer to the industry: online databases, as Artnet and Artprice, provide data about artists and auction sales which, due to their increasing popularity, represent the main thermometer of the art market. When auction houses set a new record-breaking, in fact, the entire market benefit of a positive trend, as it becomes appealing, as well as glamorous, also for those who never invested in art before. An extraordinary example was the historic sale of the Leonardo Da Vinci’s Salvator Mundi purchased by Russian businessman Dmitry Rybolovlev for $127.5 million in 2013 and sold at Christie’s New York in 2017 for $450 million, recording the most expensive auction sale of history. Because of the media resonance, immediately after the Salvator Mundi’s sale, Google searches for ‘investing in art’ hit a record 12-month peak.
A great number of factors can affect the art market, so it is important to keep an eye on it, try to spot trends and acknowledge what collectors are looking for. In this regard, annual market reports represent the main sources of information of the overall market trends. Just mentioning some of them, the Contemporary Art Market Report by Artprice is one the first and most reliable reports of the global sales and volumes of the contemporary art market, with specific focus on the auction sales and on the geographical distribution of sales and turnovers. It also contains a list of the top 100 auction results and of the top 500 artists of the year. The Art Market Report produced by Art Basel and UBS represents instead a compelling database of the global annual art market trends, including an analysis of the most important fairs and exhibitions of the year and of the progressive change of buyers’ profiles. For a more specific economic insight, the Art and Finance Report by Deloitte provides an interesting collection of data focused on art as investment and on the relation between art and the wealth management sector. Finally, the HISCOX Online Art Trade is one of the most credited report, highlighting the online sales trends, the impact of the most disruptive tech innovations and the role played by the new generations of art collectors.
Deloitte Art & Finance 2019 report
Sales prices of similar artworks
Once considered the overall trend of the global art market, it will be useful to focus on the specific market of the artist of interest. Artworks may be most effectively valued if examining the market of similar pieces, sometimes referred to as “comparables”.
Artworks with common characteristics, in fact, should be similarly priced on the market. Medium, size, technique, date of creation are the most important details that associate artworks with a similar market value, making them comparables. For example, when considering to buy a painting, it is essential to take into account that paintings are generally valued higher than works on paper. Within a fluid market, also the sale date represents one the main characteristics to refer to, as sales dated more than few years ago might result obsolete for the artist’s current market value. On the contrary, recent sales may indicate the most reliable information in determining the value of the artwork. When it is not possible to receive prices information of comparables directly from the artist or the representative gallery, auction sales results represent the most accurate and widespread information about prices. In this context, Artprice provides a public database of auctions’ sales results, ranked by artists or by artworks. Buying a membership service also allows to unlock some reserved information and to filter the research on the basis of the characteristics of the artworks of interest, thus obtaining the most refined results of potential comparables.
Nevertheless, it’s quite unlikely to find comparable works by emerging artists sold at auction, as most of the lots of important auctions are high valued artworks or masterpieces. However, through a more meticulous research, it will be possible to scout minor auction houses that could have sold one or more comparables of the considered artwork.
In fact, as argued by Artnet, the greater the volume of public sales records for an artist, the more important it is to find comparable sales of works within the same criteria. If an artist is new to the auction market and has only ten public sales (in various media), any price realized will be important in determining the value of the work. In the case of an artist whose work has appeared at auction often, and who has perhaps two hundred, or even two thousand sales records, finding an average price for similarly measured, “comparable” works is essential in understanding present value. (https://www.artnet.com/auctions/Pages/Common/Help/HowToValueArt.aspx)
Uniqueness and rarity of the artwork
An additional factor that affects market quotations is the rarity of the artistic production, representing how many of the artist’s works are available on the market. Scarcity somehow justifies the prices of high valued artworks, creating a unique and peculiar allure around them. The feeling that nothing like that can never be reproduced again, creates an irresistible desirability of the object. The prolificity of the artistic production can be more or less extensive, influencing the market demand: Monet who lived until he was eighty-six, was a prolific artist and painted virtually every day of his life, and produced 2,000 paintings. Van Gogh died at thirty-seven having made 864 paintings, and Pollock died at forty-four having produced just 382 works on canvas. (https://news.artnet.com/market/defining-the-value-of-art-27673). Claims of rarity also have to be carefully examined, not only because artists explore specific themes through a variety of mediums, but also because total output varies widely from artist to artist.
However, it is not only about rarity, but also about uniqueness: artworks are not always unique assets and, increasingly more often, artists produce limited editions or Prints & Multiples. Unique artworks have generally higher value on the market, while the multiples category is less valued. Nevertheless, this sector represents a remarkable opportunity to invest in an established artist at an affordable price. Accordingly to the HISCOX Online Art Trade Report 2019, in fact, Prints and limited editions are still the favourite medium for millennial online art buyers, with 79% of them saying they had bought prints online in the last 12 months. Also, multiples are more stable on the market and contain the risks related to provenance and authenticity, as most of them are dated and signed. Many artists create editions of sculptures, photographs and often drawings and prints. The market value of the editions is calculated depending on the characteristics, numbers and quality of the series. Generally speaking, the lower the editions, the higher their value might be.
Hiscox Online Art Trade Report, 2019
The art market financial performance
Art is a passion investment by definition, but collecting art is also considered a smart way to diversify the portfolio of investments. As a result, when evaluating an art purchase, it is also useful to consider how the art market is performing compared to the trend of other industries, in particular to the performance of the financial market. Having historically proven to be counter-trend, art is told to be a “safe haven asset”, as it is regarded as a value preserving asset-class, especially in times of economic and financial turmoils. Like gold, in fact, artworks are less susceptible to risks associated with financial market crashes than stocks and bonds and, because of its intrinsic value as luxury item, it is able to rebound and even grow faster than traditional asset classes in response to financial crisis.
This dynamic has been deeply highlighted by the 2008 financial crisis: while the Artnet index for the Top 100 Artists bounced back and even outperformed its 2008 peak within two years of the drop, the S&P 500 took five years to recover, being able to regain its strengths only by 2013, as shown in the Deloitte Art & Finance 2019 report.
These data demonstrate the capability of artworks by blue-chips artists to retain value during economic crisis. Also, art as an asset class has a stronger positive correlation with the price of gold than with other asset classes, indicating investors’ perception towards art more as a value preserving asset class than as an investment vehicle.
In this context, the art segments that mainly have showed these characteristics are represented by Post War and Contemporary Art, which underwent significant growth after 2009. In fact, even if the related prices took a dive from 2008 to 2009, they have aggressively outpaced the financial index over the last decade.
Even today, due to the spreading of Covid-19, we are facing an unexpected phase of global economic crisis, which will be followed by a period of adjustment that financial experts associate to the 2008 post-crisis. Considering the reaction of the art market to historical financial instabilities, it is reasonable to expect a faster economic recovery of the art sector compared to the financial one, being art, as said, an alternative, counter-trend and “safe haven” asset.
Deloitte Art & Finance 2019 report
Long-term re-selling opportunities and the role of professional advisory
As mentioned, the art market still lacks of scientific and objectives parameters and indexes able to measure the return of the investment. Nevertheless, recent studies show the potential of this kind of investment, demonstrating an average annual return of 10% over the past four decades.
Focusing on the return of art investments over varying time periods, it is possible to note a positive compound annual growth rate (CAGR) in the long run across all art price indices. As shown in the Deloitte Art & Finance 2019 report, between January 2000 and October 2018, in fact, Artnet art market indices show positive CAGR of between 2% and 9% across the varying collecting categories. In this context, Global Post-War and Contemporary Art have generated the most consistent returns over the past 15 years, with positive CAGR across all investments cycles.
More specifically, evaluating the performance of art as an asset class over the last two decades, the Artnet Index for the Top 100 Artists displays a considerable positive return over time for art, outpacing the S&P 500 in growth consistently: Artnet’s index for the Top 100 Artists produced an 8% compound annual growth rate (CAGR) between 2000 and 2018, compared to 3% for the S&P 500, as reported in the Deloitte Art & Finance 2019 report. In this sense, the Artnet Index for the Top 100 Artists is a strong proof of the strength of the market at a general time.
Nevertheless, it is important to be aware that the mechanics of the art economy are governed by unique and volatile forces, meaning that each purchase can never be entirely considered a safe bet, as it happens also for other investment assets. As a result, opting for a professional consultancy can be determinant when starting a collection.
According to David Hulme, director at Banziger Hulme Fine Art Consultants and president of the Art Consulting Association of Australia, provided you get proper advice and you have some sort of investment strategy that is developed in conjunction with an art consultant, you can build up a major collection. There are a number of people who have made much better returns on their art than they have on the stock exchange. (https://www.intheblack.com/articles/2015/10/27/picture-this-a-guide-to-art-investment-for-the-uninitiated)
Without a professional support, art collectors may struggle to determine the right time to buy or sell a work of art. This decision can be influenced by a wide range of factors, as the market trends, artists’ recent auction activity and exhibitions’ history. Also, it is not enough understanding the right timing, but also the most appropriate selling place, as private sale or auction, in order to obtain the most of the investment.
Moreover, any work of art contains both an intrinsic and a market value. Specialists have the role to help collectors to quantify the latter, privately or through the support of recognized intermediaries as auction houses. The owner of an artwork should proceed to auction only if the piece attracts interest before the auction and at a satisfactory price. It would be also beneficial, especially for low-value pieces, to ask the support of professionals in charge of privately investigating the potential demand and, hopefully, conclude a remunerative private sale.
What it is important to take into account is that art is a long-term investment, and, in this sense, it would be beneficial to retain the artwork for at least three years, in order to mature the most convenient timing to sell and, also, to avoid becoming a part of the “speculative art collectors” blacklist. As argued by Michael L. Klein, Head of Sotheby’s Mei Moses, from 2014 to 2018, collectors holding art for at least ten years were much less likely to lose money than those reselling within three years. A total of 88% of Contemporary works and 80% of Impressionist & Modern works held for over ten years, in fact, had a resale price higher than their purchase price, while only 65% of Contemporary works and 57% of Impressionist & Modern works resold within three years obtained a higher price (Deloitte Art & Finance Report, 2019). However, consignors were more likely to realize outsized gains and losses (i.e., +/- 20 percent CARs) when reselling a work at auction within three years than when holding a work of art for a longer time period.
Deloitte Art & Finance 2019 report
A new market at the horizon: fractional ownership
Before buying an artwork, it is important to consider in which segment of the art market the purchase takes place, in order to understand the kind of players involved in the transaction and how many times the artwork has been already traded in the market - all factors that influence the final value of the work. As previously deepened in the LTArt’s Magazine article THE CONTEMPORARY VISUAL ART MARKET AND FUTURE PERSPECTIVES, the art market, as many others, operates in a two-tier system, where the primary market is for first-time sales, while the secondary for resale.
Nevertheless, in addition to the traditional trading models, in the last few years technology has started to play a relevant role in the buying and selling process. In this context, the art market is opening its frontiers towards online trading platforms which offer the opportunity to buy and sell artworks directly online. There are many marketplaces, like the London Trade Art’s one, which enable everyone to access to an always available selection of high-quality artworks, guaranteeing transparency on the price-setting and frictionless purchases. These platforms can operate both within the primary and secondary market, collaborating either directly with the artists or with third-party galleries or collectors.
The impact of the online sales on the art market is already tangible also in terms of economics. According to the Hiscox Art Online Report (2019), global online sales in 2018 showed an increase of 9.8% from 2017, totalising an estimated aggregate online sales volume of $4.64 billion, a figure that is expected to reach up to $9.32 billion by 2024. In this scenario, a new generation of collectors is emerging and leading the trend of digitalization: 44% of art buyers said they had bought art online in 2018 and 55% of them claimed they were likely to buy more art online in the near future.
Online channels and mobile devices, in fact, made the purchasing easier, reducing frictions and instilling confidence in the art investment processes.
Moreover, the new generations of young collectors and millennials are expressing a greater focus on investment when buying art, sustaining new purchasing models which are emerging in the last few years thanks to technological innovations and to the rapid development of blockchain applications. One of them is known as fractional ownership. According to the Deloitte Art & Finance Report 2019, technology is a driving change in the world of impact investing: the advent of blockchain technology and tokenization looks set to usher in the next generation of art and cultural impact investment models that combine fractional ownership with social impact investment (Deloitte Art & Finance report, 2019).
Fractional ownership, or co-ownership, means that, through an advanced electronic purchasing tool, multiple Users are able to buy shares of high-value artworks, becoming co-owners of them, and then to resell them online, as for any other financial investment on the stock exchange.
As reported by the Hiscox Art Online Report 2019, 46% of millennial art buyers (aged 35 and below) and an even higher share of 51% of younger buyers (aged under 30) would consider fractional ownership of art as a form of investment. New art buyers (defined as having been collecting art for less than 3 years) also showed an appetite for fractional ownership of art, with 43% saying they would consider it.
These technological trading models represent on one side an innovative and alternative method to invest in art and on the other an ally for traditional art players, allowing to facilitate sales, to make connections easier and to expand the market in a more accessible and transparent way.
Dr. Shermin Voshmgir, Director of the Institute for Crypto Economics in Vienna and author of “Token Economy”, claims that low-net-worth individuals who would usually be excluded from this investment opportunity, could now own a fraction of an expensive work of art. This is particularly valuable for small investors who have so far been unable to meaningfully invest in fine art. Fractional ownership could lead to increased demand for art investments, potentially increasing overall art prices, and by extension, the subsequent production of new types of art. [...] Tokenizing art could pave the way for a more transparent market, whereas larger pool of participants have access to a more diverse range of verified works (Deloitte Art & Finance Report, 2019).
Deloitte Art & Finance 2019 report
In conclusion, whether you are an experienced and keen art collector or an art lover looking to diversify your portfolio of investments, art collecting can represent an alternative and highly rewarding option. “ABC’s of art evaluation” aims to give you some useful advice to recognise the tangible and intangible aspects to take into consideration when interfacing the complex world of art appraisal, also through the support of the most innovative technological tools listed in this guidebook.
But remember, after all, that the evaluation of the objective characteristics of a work of art, of the biography and career of the artist and of the overall market trends are only some of the features you can rely on when buying art. The uniqueness and the intrinsic value on the basis of art investments will always bring you to involve your personal taste and to listen to that unexplainable feeling of astonishment and attachment which make art collecting so unique.
So, let also the instinct count and, more importantly, don’t forget LTArt’s motto: Share your passion!