The importance of demand.
In the marketplace for unique objects, demand determines pricing, so when you think about purchasing a work of art for reasons that are not purely aesthetic, you want to ensure that there will be sufficient demand for the piece in 5, 10 or 20 years. Masterpieces priced at $5 million or more make up the very top of the art market, and to see sustained buying at this level, two things have to happen: firstly, there needs to be a pool of buyers who can afford to allocate a significant amount of their net-worth to expensive art, and secondly, the population in question has to desire art at that price point.
Who are potential buyers and what is their effect on demand?
If we believe that one has to be an Ultra-High Net Worth individual (UNHW), with investable assets of $30 million or more, in order to buy masterpieces, sustained growth in the number of UNHWIs over time is one way we can begin to gauge the potential size of the market. According to the latest World Wealth Report, from 2010 to 2016, the population of UHNW individuals saw a Compound Annual Growth Rate (CAGR) of 7.4% and grew an additional 11.2% from 2016 to 2017. The composition of global wealth and consistent growth in the pool of potential buyers suggests that there should be no shortage of available capital to purchase high-end art.
A growing base of potential buyers correlates to higher demand in the masterpiece market. In 1998, twenty-nine paintings were sold for $5 million or more by the three top auction houses (Christie’s, Sotheby’s and Phillips), for a total of $322 million. Though the recent financial crisis affected the art market significantly, the rebound was swift, and in 2010, 119 paintings sold above the $5 million threshold, with $1.7 billion going towards masterpieces. Last year, 192 paintings were sold in that price range for a total of $3.8 billion. To put this in perspective, the total auction sales for those houses was $11.1 billion in 2017, so while over 30,000 lots we sold, fewer than 200 works accounted for an astounding 34% of the value.
Results from the first half of 2018 put this segment on track for a record-breaking year: 166 lots were sold by the three auction houses at a price in excess of $5 million, for a total of $2.7 billion.
Boosted by the exceptional Rockefeller sales in May, results from the first half of 2018 put this segment on track for a record-breaking year: 166 lots were sold by the three auction houses at a price in excess of $5 million, for a total of $2.7 billion. Though the Chinese market is not yet in the scope of our research, two emerging Chinese powerhouses, China Guardian and Poly Auctions, have surpassed Phillips in total sales and speak to the overall strength in demand for Art and Antiquities.
Market trends in the past decade.
Over the last ten years, the UBS Art Market Report estimates that auctions have made up roughly forty to fifty percent of the global art market, with the remaining sales occurring privately through galleries or dealers. In that same time frame, global art and antiquities sales have ranged from $40 billion to $68 billion, with the auction market making up between $18 billion and $32 billion of the total. Undoubtedly, the masterpiece market is subject to the same economic forces that govern the global economy, but while auction sales declined year over year in six time periods from 2007 to 2017, sales of works priced over $5 million have declined only three times: following the great recession from 2007 to 2009, and most recently, in 2016, due to concerns over Brexit and the devaluation of the British Pound (London is one of the most prominent sale sites for Christie’s, Sotheby’s and Phillips).
88% of wealth managers surveyed by Deloitte recommend art and collectibles be considered as part of the wealth management offering.
Is art a tangible asset?
Aside from the emotional benefits of purchasing art, those who own works that have value in the secondary market see it as a real asset that can be used to hedge against inflation and a sound diversification strategy for their overall portfolio. Economic researchers have taken various approaches to calculating the correlation of art prices with other asset classes; the value of the coefficient between their art indexes and the S&P 500 has been placed between .04 to .19, where 0 would mean that there is no association between the two and 1 means that there is a perfect positive linear relationship. It is not surprising then that wealth managers are increasingly including art as part of their holistic approach to portfolio management, and last year, 88% of those surveyed by Deloitte said that they believe services around art and collectibles should be considered as part of their offering. So while it still remains a controversial topic, art is widely recognized as a tangible asset by financial and academic institutions.
Financial institutions are increasingly factoring art into their clients’ portfolios and wealth management strategies, and the numbers relating to global wealth and the high-end art market tell us that there is no shortage of capital or willingness to purchase great works. Based on historical trends, it is a reasonable assumption that both demand and prices will continue to grow. The question then becomes: what art will continue to be in demand at the top end of the market?