- Turnover in the art market is at a record level
- Investing in art is a difficult task
- Equities from the likes of eBay and Sotheby's are an alternative
By Clemens Bomsdorf
Amid extremely low fixed income yields, investors not only have been flocking to stocks in recent years, but art has also been (and still is) increasingly sought after as in investment. This was pointed out by researcher Clare McAndrews from Arts Economics in her latest art market report (published mid-March by renowned art and antiques fair Tefaf), and it might be tempting to follow that trend and invest in art.
The two-and-a-half million pound bed
A recent sale that generated lots of publicity illustrates the upbeat sentiment. The three-dimensional work “My Bed” by British artist Tracey Emin, bought for GBP 0.15 million in the year 2000, was sold in July 2014 at Christie's auction house for GBP 2.2 million – an increase of roughly 1400% (ten times the Dax's increases over the period, but still a lot less than Apple shares).
On top of this comes the buyer’s premium that auction houses charge for their services. In the case of Christie’s sale of “My Bed”, it was more than GBP 350,000, meaning the total sale price was above GBP 2.5 million – or 1550% more than the original price.
Tracey Emin's bed might not have been made,
but it fetched more than 2.5 million GBP at a Christie's auction. Source: Christie's
However, investing directly into art – as tempting as the numbers sound – comes with several obstacles. But there is an alternative.
1. Illiquidity and additional cost
The above calculation only shows the price development of a certain iconic work. Since sales prices outside auction rooms are usually not public and given that it might take decades for a work as unique as “My Bed” to come on the market again, it is rather difficult to get good data on many works, let alone the whole market.
Also it should not be forgotten that the seller does not necessarily receive the full GBP 2.2 million as auction houses usually also charge a seller’s commission, which decreases the profit (as does the cost of storing the art work for several years). Both costs are not communicated and can only be estimated.
The market for art is much less transparent than the one for stocks, lacking such things (for example) as official indices. But what can be said is that the art market’s volume in 2014 reached a new record high of EUR 51 billion according to the report McAndrew wrote for Tefaf. Again, these volume figures might indicate a price development, but unlike an index, they do not mirror one.
3. Diversification difficult
Investing in the art market is also difficult for other reasons. For most people, high-class works are simply not affordable and many people who have the means either lack knowledge or only have enough money to buy very few works, hindering their diversification efforts. Hence, art for most people is seen as something fascinating, but not something bought for investment purposes.
The alternative: art-related equities
That’s not bad news, though, as after all art is mainly appreciated for non-monetary reasons. However, those who want to participate in the potential financial gains associated with the growing art market can go for a classical asset class: equities.
Share price development over the last 12months:
eBay (blue), Sotheby's (black) and Artnet (orange). Source: Saxo Bank
The art of eBay
Increasing sales volume, buyer’s premiums, seller’s commissions – who potentially profits from all this? Yes, the auction houses. After all, last year auction sales stood for EUR 24.6 of the total art market, i.e. almost 50% of it. More than ,1500 items were sold at a price above EUR 1 million and almost a hundred did cost more than EUR 10 million, says the Tefaf report.
With Sotheby’s, one of the art auction world's two major players is listed directly on the Nasdaq (the other one is Christie’s, which is owned by Francois-Henri Pinault's non-listed holding Groupe Artemis) and so is eBay, which in the future will also participate in the auctioning of more expensive art works (online, of course).
Much less well known by the broader public is online platform Artnet, listed in the Prime Standard of the Frankfurt Stock Exchange. Headquartered in New York, it differentiates itself from the eBays of the world by only auctioning art – no used jeans, computer games or the like.
According to McAndrew “the e-commerce of art objects has also gained significant momentum” and is estimated to stand for 6% (or EUR 3.3 billion) of the global art market.
Sotheby’s and eBay are particularly worth looking at these days. The former will get a new CEO starting on March 31. In the mean time, eBay is only just (re-)discovering the art business and has recently teamed up with Sotheby’s (making it even more interesting); a first joint sale will be held on April 1.
A bull market or a zebra market? Artist Damien Hirst in front of his work "The Incredible Journey", auctioned at Sotheby's in September 2008. Source:iStock
Sotheby’s has the potential for a turnaround story since, after enduring some difficult times wherein its two large investors (namely Third Point LLC and Marcato Capital Management LP) put pressure on the company, incoming CEO Tad Smith (formerly of Madison Square Garden) is set to position the company to profit from the art market's growth.
“We believe that Tad is a great strategist. He really understands brands and brand building,” said Sotheby’s lead independent director Domenico De Sole during a conference call with shareholders when announcing the CEO shift in mid-March.
Smith joins “after a tempestuous period in the company’s history,” wrote The Art Newspaper. Despite having no experience in the art market, Smith appears set to boost Sotheby’s value. During the last five years, the company saw its turnover increase by 21% to USD 938 million in 2014, while diluted earnings per share were down 28%.
In the same period, the auction commission margin fell to 14.7% in 2014 from 18.3% in 2010. The company cites the “competitive environment for high-value consignments” as the reason for falling auction commission margins, meaning sellers have to provide incentives such as lower seller’s commissions (or even none at all) to attract the sale of well-known works,
Also, auctioneers sometimes give guarantee prices. If an art work is sold below this price, the auction house loses money. Smith now has four priorities, which he recounted in a March statement.
According to Smith, the incoming CEO needs to: develop and implement a growth strategy, encourage and accelerate the adoption of technologies in the business, allocate capital effectively, and “build the processes and people, and shape the organisation in a way that makes the first three sustainable over the long term”.
Sotheby's and eBay from April on organise joint sales
at http://www.live.ebay.com/lvx/sothebys Photo: eBay
The cooperation with eBay, which will stream its first Sotheby's auction on April 1, could help the venerable auction house as it may provide a chance to further expand into the middle market, where the auction house would rely less on single customers (who, as said, sometimes demand huge fee deductions to agree on a sale). So far Sotheby's is holding online auctions on its own platform only.
The online auctions giant, on the other hand, will probably rather profit more from the strong, tony brand that is Sotheby’s than from its wealthy customers. “Sotheby’s does have [a] high-end clientele and eBay has very broad-based clientele,” said Megan Ford, eBay’s director for emerging verticals and live auctions, adding “what we’re looking to do is bring Sotheby’s inventory to millions of people on eBay. We’re more focused on that than on trying to convert Sotheby’s clientele onto eBay”.
Details about the financial side of the deal have not been made public.
It remains to be seen whether all of this this works out. After all, the companies already briefly collaborated over a decade ago. But maybe the time was simply not right back then.
One imagines that even after teaming up with online auctioneer eBay, people will still drive to Sotheby's auctions. Photo: iStock
— Edited by Michael Mckenna