by Daniel Grant
The news from the art trade has been grim
the past year.
Many art galleries around the United States
have closed their doors, and major
and regional fine arts auction houses
have watched sales revenues
and prices go down and the percentage
of unsold lots go up.
Fewer people have been looking
to buy or sell, and
that trend is likely to continue a little longer.
"Top-quality objects continue to do well,
" said Matthew Girling, chief executive
officer of London-based Bonhams,
but "the supply of very good things
has been drying up in this soft market."
As a result, "people are going to auctions
looking for bargains,"
and they are willing to pay only lowball prices.
"For the sort of people buying from us,
confidence is needed," Girling said.
"Their businesses need to be doing well,
and the economy needs to be back on track."
Then, presumably, they'll start collecting again
in the way that they had between 2005
and early 2008. Maybe.
In past years it was a truism that
the art market lagged six to 12 months
behind the rest of the economy.
Collectors splurged on art purchases
for that period of time while the stock market
plummeted or held off from buying until
the financial markets had recovered
for a half or full year.
More recently, the correlation between trends
in the stock and art markets has been higher,
according to Rachel Pownall-Campbell,
an assistant professor of finance
at Maastricht University in the Netherlands
and an advisor to The Fine Art Fund
in London, a hedge fund investing solely in works of art.
"There is more interdependence than
there used to be," Pownall-Campbell said,
attributing this in part to "people in the
finance industries who also invest in art.
We saw most recently these markets
falling at the same time and
at the same rate, in large measure."
As a growing number of economists predict
that the U.S. economy will come out
of the recession later this year (perhaps
heralded by climbing share prices
on the New York Stock Exchange
over the past few months),
the opportunity for a rebound
in the art market also could be in the offing.
One test may be seen on November 4
in New York City at Sotheby's evening sale
of Impressionist and modern art.
Sotheby's will offer seven paintings
from the Paul Durand-Ruel collection
The combined estimated value
is $8.9/12.6 million.
These artworks include Pierre-Auguste
Renoir's Woman with a White Hat
(est. $2.5/3.5 million), Camille Pissarro's
The Boieldieu Bridge and Orleans
Train Station in Rouen on
a Sunny Day (est. $2/3 million),
and Alfred Sisley's The Seine
at Argenteuil (est. $1.5/2 million).
Beginning in September the seven paintings
will be exhibited in Paris, Hong Kong,
London, and then New York City
prior to the auction.
The U.S. dollar is still low relative
to the British pound and the euro.
Possibly U.S. buyers will snap up some
or all of these paintings,
but Sotheby's hopes through these maneuvers
that foreign collectors will see them
as bargains, and that Americans
will at least spur some competitive bidding.
William Goetzmann, director of the
International Center of Finance at
the Yale School of Management,
claimed, "The key indicator to watch
is how the markets and institutions
fare at the very high end.
For example, the profits on Wall Street
and the recovery of the hedge fund
industry are good indicators that
high-end art buyers will feel
more comfortable investing in art.
The calming financial markets also
suggest that major investors
could begin to turn their
attention back to collecting."
As a caveat, however, Goetzmann noted
that it is unclear "whether the culture
of collecting may have changed
as a result of the criticism
of excessive compensation.
With bankers and hedge funds
still under criticism and scrutiny in Europe,
it may make investors from
these sectors wait until
the adverse publicity blows over."
Corporate profits for publicly owned
companies is one of the key indices
on which Christie's bases its forecasting.
The auction house also is "in touch with
our own bankers, clients who
are bankers, and contacts in different
parts of the world," according to Paul Provost,
director of trusts, estates, and appraisals
for Christie's New York.
There is no single index that follows
the art trade, he noted, but he tracks
the market for "high-end residential
real estate" as indicative
of the financial health of would-be clients.
The market for high-end residential real estate
has suffered greatly relative to "low-end housing,
where prices increased at a much higher
percentage during the boom period 1997
to 2006 and where all the foreclosures
are now," said Donald R. Haurin,
professor of economics at Ohio State
University and board president of
the American Real Estate
and Urban Economics Association.
"Prices went up for high-end real estate
during that boom period too
but not relatively as much or as fast.
Prices are probably being lowered
for these properties, but the wealthy
have delayed selling properties—if
they can delay—until prices
return to higher levels."
Major sales are slated at the auction houses
in November, but because these sales
were put together months in advance,
they are likely to represent
the worries of past months rather
than any newer optimism,
according to Donald Thompson.
Thompson is a professor at
the Schulich School of Business
at York University in Toronto
and the author of The $12 Million Dollar
Stuffed Shark: The Curious Economics
of Contemporary Art (2008).
Fewer lots continue to be offered
in the upcoming sales, "all with
as low estimates as they can manage."
Of late, the percentage of sold artworks
in these sales has risen,
but Thompson attributes this
to the fact that "so many
of the lots being offered
carry irrevocable bids
that serve as guarantees."
An irrevocable bid is one
that is promised before the sale
at a given price, ensuring
the lot will sell.
"That is one reason the lots
are being offered."
He does not expect that we will
see "price levels for art anything
like eighteen months ago.
The very best museum-quality items
will sell at 2003-2004 level prices"
only "because some wealthy
new museums" (such as those
in Abu Dhabi, Qatar) "are
priced will struggle."
There may be opportunities
in this crisis for buyers
who can sniff a bargain.
"The next two years will be
the best time to buy," said Philip Hoffman,
director of The Fine Art Fund,
"because there will be distress sales,
and some sellers are going
to be willing to take thirty percent less"
than what they might have earned
as recently as early 2008.
Sometimes, even more than 30%.
Deborah Davis, a New Jersey art advisor,
noted that she recently helped a client
who needed to raise money
sell two works from his collection—an
early 20th-century American photograph
and a lithographic print by
Pop artist James Rosenquist—for $45,000
and $6000, respectively.
That's 40¢ to the dollar when compared
with what she would have expected
in the first half of 2008.
"There are a lot of people looking
to sell these days," Davis said.
Some galleries of contemporary art
mention to her the possibility
of significant discounts, even before
she indicates an interest
in buying anything.
"They never did that in the past."
That 20th-century photograph was sold
to an art dealer, and the Rosenquist print
went to a private collector.
Davis noted that the seller chose
not to bring them to Christie's or
Sotheby's because "they don't give
guarantees anymore, and they won't take
something that isn't star quality."
(A guarantee, used as an enticement
to obtain consignments,
is a promise that the auction house will
sell the item at or above a certain price
or purchase the piece itself.)
The high percentage of unsold auction lots
over the past year, sometimes
reaching 40% or higher,
is embarrassing to the auctioneers
and damaging to the future sales prospects
of the artworks.
As a result, the major auction houses
are holding smaller and fewer sales,
turning away pieces less likely
to find buyers, and
lowering estimates to lure bidders.
Many art galleries are undergoing a degree
of retrenchment-reducing prices
or increasing discounts, holding
fewer exhibitions, maintaining smaller staffs,
and perhaps attending fewer art fairs,
especially those on other continents.
"The overhead in the gallery business
is enormous," said Roland Augustine,
a Manhattan gallery owner
and president of the Art Dealers Association
Attending the annual June Basel Art Fair
in Switzerland, for instance,
cost his gallery $300,000 for crating,
shipping, and insuring artwork,
for gallery staff travel and accommodations,
for booth design, and
for entertaining clients.
("We made back our costs," he said.)
Overall, the monthly cost of running
Luhring Augustine Gallery, with its
18 full- and part-time employees,
He estimated that the average monthly
overhead of smaller galleries with only
three or four employees
is at least $35,000 to $50,000.
In some cases galleries have been
able to renegotiate their rents downward.
There is less talk of "waiting lists"
for sought-after artists-getting
on a gallery's waiting list had often
involved purchasing artworks
from several exhibitions in order
to prove one's commitment to
the gallery-and precipitous price rises
aren't as likely for art by acclaimed artists.
"The process of restructuring the
art market will be more protracted
than anyone likes to admit," Augustine said.
The economic recovery will likely
be accompanied by some degree
of inflation, since governments around
the world, particularly the U.S.
and the U.K., have been pouring
tremendous amounts of money into
their economies through bailouts,
and stimulus efforts.
It is not clear if inflation will have
a positive or negative impact
on the art market's recovery.
"Inflation is an indicator of
an expanding economy," said
University of Chicago economics
professor David Galenson,
and the optimism generated by expansion
tends to be bullish for all markets.
In addition, at times of rising prices artworks
have been purchased as a hedge
which makes activity in the art trade
twice as likely.
Simon de Pury, chairman of Phillips
de Pury & Company, noted that
"back in the 1970's, when there was
considerable inflation, it proved to be
a good thing for the art market."
One of the winners during that period
was the British Rail Pension Fund,
which invested $100 million (2.5%)
of its portfolio into the purchase of
a wide range of decorative and fine art,
such as African tribal artifacts,
and French Impressionist paintings.
Between 1987 and 1999 the fund sold
all its art assets, and the returns
represented an annual compound
interest of 11.3%.
On the other hand, inflation that exceeds
economic growth "is a negative,"
said John Silvia, chief economist
for Wachovia, because it hampers growth
by making it more expensive
for businesses to expand.
The high cost of money limits
"the availability of credit, which affects
art buyers, as well as
home buyers and business owners," he said.
Another drawback of inflated amounts
of money paid for artworks,
according to Gianfranco Mossetto,
chairman of the department of art
and cultural economics
at the University of Venice, Italy,
is that "prices could increase
independently of the quality
of the art," especially as investors
seek tangible assets such as art
for a hedge against inflation.
Overpriced art—a new
bubble—could be in the making.
Originally published in the October 2009
issue of Maine Antique Digest. (c) 2009
Maine Antique Digest
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