Issue 29: 2015

ARTS SPECIAL

The State of the Art Market, Part II

The second in a two-part examination of what is driving art sales and where and how to find great works for your collection.

Sean Justice/Plainpicture and Ekely/Getty Images

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The global art market continues to enjoy momentum, with strong sales gains seen at art fairs and galleries, and with recent auctions producing record prices for a wide range of Old Master, Modern and Contemporary artists.

In the short term, we expect this sales trend to continue, notwithstanding economic instability in the Eurozone and Russia, and the potential for the Federal Reserve to raise interest rates. Longer term, factors such as broadening interest in art, greater transparency — due, in part, to a wider embrace of technology — and the increasing importance of new distribution channels could each substantially improve the volume of sales and liquidity, especially in the mid-price market.

The implications could be staggering, considering that less than 2% of the estimated $3 trillion in art and collectibles in the United States currently changes hands each year, according to CollectorIQ, an art research group. Yet, an increase in liquidity could drive far greater turnover. Notably, the research group estimates that an increase in annual sales to 5%–10% over the long term would represent nearly $100 to $200 billion in additional transaction volume.

While dealers have always played an important role in the arts ecosystem — nurturing careers, developing relationships with curators, placing works with collectors known for their long view on ownership — collectors are finding opportunities to participate. Here are a few of the more interesting ways.

supporting the production of a new work may establish worthwhile connections in the art world.

Collaboration

Artistic ambition has grown with the market and production costs have risen, straining the bottom line of cultural institutions, dealers and artists alike. This dynamic has created an opportunity for collectors to support artistic production and become involved in the creation of possibly groundbreaking new works, all while generating potentially outsize returns. Collaboration of this type is typically straightforward. The collector provides the artist with capital to produce a work and in return receives either a portion of the sale or, if the work is editioned, a limited reproduction; this is an attractive possibility, particularly with sculptural works of art, and might appeal to collectors who champion the artists being supported. Since production costs generally account for 10% to 25% of a work’s retail value, the upside potential could be considerable.

Secondary market

A collector can also benefit by using capital opportunistically in the secondary market, either at auction or by facilitating private sales.

Partnership

A collector might profit by partnering with an experienced and trusted gallerist to capitalize on inefficiencies in a particular market. For example, in 2001, Damien Hirst’s Naked, one of his signature medicine cabinets, was put up for auction with an expected sale price of $600,000 to $800,000, according to CollectorIQ. But the artist’s market was undergoing a short-lived “pause” and the piece failed to sell. An American collector, in partnership with a gallerist, bought Naked for less than half the expected price. When Hirst’s market rebounded, the piece’s value rose. In 2012, another Hirst instrument cabinet sold at Art Basel Miami Beach for $2.5 million.

Private sales

When an important work comes back on the market, only a handful of dealers — David Zwirner, Marion Goodman and perhaps 20 others worldwide — might possess the resources to fund secondary-market activity. For other dealers, cash flow is often tight. A collector who provides capital to facilitate private sales stands not only to build goodwill, which may translate into access to sought-after works, but to receive significant financial returns on the investment, either in the form of profit-sharing upon the successful sale of the piece or through a negotiated fixed return, typically over a period of six months to a year.

 

Strategic philanthropy

Museums and arts-related nonprofit organizations tend to make efficient use of contributed support. CollectorIQ estimates that $20 billion in annual donations helps generate over $150 billion in economic activity. Consequently, we’re strong advocates of supporting culture through donation.

Generosity can also be strategic. A collector who supports the production of a new work or underwrites an exhibition catalogue may establish worthwhile connections, possibly including relationships with key curators, leading to preferential access to tough-to-acquire works and, perhaps as important, possibly unique perspectives on new trends in contemporary art. Given that there is often a differential between primary- and secondary-market pricing for many artists’ works, this type of access could make a collector’s investment in philanthropy appear very wise indeed.

 

Art in your life

Art is one of the last and largest unregulated markets in the world. It’s an evolving business that has potential for growth and multiple ways to participate — including some that may be new to collectors. An asset that provides intellectual and aesthetic gratifi­cation, art allows us to engage with thinkers who under­stand the world in a unique way. When collectors get involved, the rewards can be life changing.

Photograph of Chris Vroom by Sophie Elgort

IMPORTANT INFORMATION

Some of the featured participants are not employees of U.S. Trust. The opinions and conclusions expressed are not necessarily those of U.S. Trust or its personnel. Any of their discussions concerning investments should not be considered a solicitation or recommendation by U.S. Trust and may not be profitable.

Projections made may not come to pass due to market conditions and fluctuations. Past performance is no guarantee of future results.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

Equities Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Fixed Income Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments, and yield and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices generally drop, and vice versa.

The global art market continues to enjoy momentum, with strong sales gains seen at art fairs and galleries, and with recent auctions producing record prices for a wide range of Old Master, Modern and Contemporary artists.

In the short term, we expect this sales trend to continue, notwithstanding economic instability in the Eurozone and Russia, and the potential for the Federal Reserve to raise interest rates. Longer term, factors such as broadening interest in art, greater transparency — due, in part, to a wider embrace of technology — and the increasing importance of new distribution channels could each substantially improve the volume of sales and liquidity, especially in the mid-price market.

The implications could be staggering, considering that less than 2% of the estimated $3 trillion in art and collectibles in the United States currently changes hands each year, according to CollectorIQ, an art research group. Yet, an increase in liquidity could drive far greater turnover. Notably, the research group estimates that an increase in annual sales to 5%–10% over the long term would represent nearly $100 to $200 billion in additional transaction volume.

While dealers have always played an important role in the arts ecosystem — nurturing careers, developing relationships with curators, placing works with collectors known for their long view on ownership — collectors are finding opportunities to participate. Here are a few of the more interesting ways.

supporting the production of a new work may establish worthwhile connections in the art world.

Collaboration

Artistic ambition has grown with the market and production costs have risen, straining the bottom line of cultural institutions, dealers and artists alike. This dynamic has created an opportunity for collectors to support artistic production and become involved in the creation of possibly groundbreaking new works, all while generating potentially outsize returns. Collaboration of this type is typically straightforward. The collector provides the artist with capital to produce a work and in return receives either a portion of the sale or, if the work is editioned, a limited reproduction; this is an attractive possibility, particularly with sculptural works of art, and might appeal to collectors who champion the artists being supported. Since production costs generally account for 10% to 25% of a work’s retail value, the upside potential could be considerable.

Secondary market

A collector can also benefit by using capital opportunistically in the secondary market, either at auction or by facilitating private sales.

Partnership

A collector might profit by partnering with an experienced and trusted gallerist to capitalize on inefficiencies in a particular market. For example, in 2001, Damien Hirst’s Naked, one of his signature medicine cabinets, was put up for auction with an expected sale price of $600,000 to $800,000, according to CollectorIQ. But the artist’s market was undergoing a short-lived “pause” and the piece failed to sell. An American collector, in partnership with a gallerist, bought Naked for less than half the expected price. When Hirst’s market rebounded, the piece’s value rose. In 2012, another Hirst instrument cabinet sold at Art Basel Miami Beach for $2.5 million.

Private sales

When an important work comes back on the market, only a handful of dealers — David Zwirner, Marion Goodman and perhaps 20 others worldwide — might possess the resources to fund secondary-market activity. For other dealers, cash flow is often tight. A collector who provides capital to facilitate private sales stands not only to build goodwill, which may translate into access to sought-after works, but to receive significant financial returns on the investment, either in the form of profit-sharing upon the successful sale of the piece or through a negotiated fixed return, typically over a period of six months to a year.

 

Strategic philanthropy

Museums and arts-related nonprofit organizations tend to make efficient use of contributed support. CollectorIQ estimates that $20 billion in annual donations helps generate over $150 billion in economic activity. Consequently, we’re strong advocates of supporting culture through donation.

Generosity can also be strategic. A collector who supports the production of a new work or underwrites an exhibition catalogue may establish worthwhile connections, possibly including relationships with key curators, leading to preferential access to tough-to-acquire works and, perhaps as important, possibly unique perspectives on new trends in contemporary art. Given that there is often a differential between primary- and secondary-market pricing for many artists’ works, this type of access could make a collector’s investment in philanthropy appear very wise indeed.

 

Art in your life

Art is one of the last and largest unregulated markets in the world. It’s an evolving business that has potential for growth and multiple ways to participate — including some that may be new to collectors. An asset that provides intellectual and aesthetic gratifi­cation, art allows us to engage with thinkers who under­stand the world in a unique way. When collectors get involved, the rewards can be life changing.

Photograph of Chris Vroom by Sophie Elgort

IMPORTANT INFORMATION

Some of the featured participants are not employees of U.S. Trust. The opinions and conclusions expressed are not necessarily those of U.S. Trust or its personnel. Any of their discussions concerning investments should not be considered a solicitation or recommendation by U.S. Trust and may not be profitable.

Projections made may not come to pass due to market conditions and fluctuations. Past performance is no guarantee of future results.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

Equities Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Fixed Income Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments, and yield and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices generally drop, and vice versa.