This article was first published in the third-quarter 2015 edition of Personal Finance magazine.
The South African art market is recovering “to more normal” price levels after suffering a setback in the wake of the global financial crisis in 2008 and 2009. This is the view of George Herman, the head of South African portfolios at Citadel Wealth Management, which produces the Citadel Art Price Index (Capi). The index was up by 3.2 percent in 2014 compared with 2013, but, he says, activity and prices are still nowhere near those of the “heady days” of the first decade of the millennium.
The Capi, which was launched in 2011, measures the change in the prices paid for South African art. (Note, this means art produced by South Africans, not all the art sold in this country.) It does so through a somewhat narrow lens. The index comprises 100 South African artists (drawn from a potential universe of about 2 500) ranked according to the number of their pieces sold at seven auction houses in South African and London over a rolling five-year period. Gallery sales are excluded.
Citadel’s panel of auction houses had 39 auctions in 2014, at which 5 192 lots were sold at a total value of R296.1 million, 11.5 percent less than the total in 2013. The average price paid per artwork was R57 051 in 2014, which was 17.2 percent lower than the average for 2013.
“Art sold at auction” may bring to mind headline-grabbing sales of paintings by artists such as Irma Stern for six-figure sums. Indeed, the maximum price paid in 2014 was again for a Stern, Zanzibar Woman, which realised just over R16 million, which was slightly up on the maximum prices reached in 2013 and 2012. However, according to Citadel, over 80 percent of art pieces change hands for less than R50 000. The latest statistics, for the second half of 2014, show that less than one percent of works sold for more than R1 million, whereas 58 percent of transactions were concluded for less than R10 000. The statistics show that 29 percent of transactions were between R10 000 and R50 000, 10 percent between R50 000 and R250 000, and less than three percent between R250 000 and R1 million.
Although the prices were down, the volume of sales rose 6.9 percent compared with 2013. Herman says the higher volumes and lower average prices are indicative of a growing market for contemporary art and the popularity of collecting beyond the traditional buyer profile. (For the uninitiated, “contemporary art” is the term for art produced by a living artist.)
“Contemporary art typically commands a lower price but is becoming much more popular globally,” he says. This trend is being driven by the tastes of the “new rich” in the United States and China, he says.
“The spectacular rise in stock markets over the past five years has created more dollar millionaires and billionaires than ever before. This new ‘upper class’ feels the need to establish themselves and lay down their markers for society to see, which they do by buying and lavishly displaying their new ‘passion investments’. As a result, every conceivable alternative asset has increased in value, with trophy items within every asset class now trading at record highs. However, this doesn’t mean that the average price of the entire asset-class universe has been raised by the sale of these trophy items, although the press coverage certainly creates that impression,” Herman says.
“The taste of the young and recently wealthy differs from the existing establishment,” he says. “Often, what the current art community reveres is considered old-fashioned by these new and often brash billionaires. New Chinese art buyers and investors favour very different categories and styles of art. This enormous force within the art market is changing and broadening the spectrum of what is considered valuable.”
An indication of the trend towards the new and exciting is the decline in the popularity of oil paintings, with prices down 4.1 percent compared with 2013. Although oil still dominates auction proceeds, the medium has been losing ground for over a decade as other media gain popularity, Herman says. Sales of oil paintings represented 72 percent of all value realised in 2014, down from its peak of 82 percent in 2011. Oil painting sales by volume represented 49 percent of all lots sold in 2014, down from its peak of 59 percent in 2001.
“It is only the meteoric rise of the Stern prices during the late 2000s that kept the proportion-by-value numbers relatively high. As these prices are fading, we can expect this statistic to decline further.”
Sculpture, on the other hand, is “becoming mainstream and attracting big-ticket prices”. As an example, Herman cites South Africa’s Dylan Lewis, who is widely recognised as one of the world’s foremost sculptors of the animal form. Lewis is one of a few living artists to have had solo auctions at Christie’s of London. At the 2011 auction, 68 of his bronzes sold collectively for more than £1.2 million.
Sculpture has been the biggest beneficiary of the move away from oil, with prices up 36.5 percent compared with 2013, followed by
watercolour paintings (26.7 percent), drawings (20.1 percent) and printing/lithography (13.7 percent). Herman says the spectacular rise in sculpture prices is partly the result of only a handful of works going on auction each year.
Citadel has sub-indices that show the price performance of the 20 highest-ranking artists and the 50 highest-ranking artists. The Capi 20 was up by 13.7 percent and the Capi 50 by 6.5 percent, showing that the best-known artists command higher prices.
“Buyers of South African art take a long time to trust the work of an artist, hence the premium that is afforded to the most popular artists. This effect became especially apparent following the market turmoil of 2008. It’s obvious that buyers consider the works of the better-known artists as ‘safer’, hence this premium,” Herman says.
Herman emphasises that reference to the top 100 should not be misconstrued as implying a qualitative judgment of certain artists. “When we set out to devise the index, we wanted it to reflect a broad spectrum of art. That was practical, in that it would represent actual trades and in doing so, emulate what we refer to as liquidity in the financial market sense. The Capi accurately reflects the trends in prices of artworks that actually trade on auction.
“It’s impossible to establish an index or methodology that gives a qualitative score or ranking to an artist. If the total value achieved by sales at auction of an artist’s work were used as the sifting criterion, Irma Stern would stand alone at the top of the South African pile. The total value of her works sold at auction over the past few years now tops R300 million, which is more than double the next artist on the list, if ranked by total value. Are Stern’s works the best? That is a subjective question that has no definitive answer. The fact that people are prepared to pay a handsome price for her works could be due to factors other than merely qualitative judgments.
“On the list of artists used to calculate the Capi, Stern is in 11th spot. This shows that the list used to calculate the Capi is not an attempt to highlight quality. The Stern example also shows that the Capi is not dominated by value, or high-priced items, but by a broad spectrum of artists. The Capi is calculated by using the number of works sold, because that reflects current price trends.”
The index is updated every six months, when, on average, three artists fall out and others are added.
Although Citadel’s biannual updates show how the Capi performed relative to the major market indices, Herman says art has unique characteristics that make comparisons with the traditional asset classes unrealistic. Art can be a store of value, but only over long periods of time, between 20 and 50 years.
Herman believes that the return to “normal” conditions in the world’s financial markets will benefit art as an asset. Following the 2008 recession, central banks stepped in to alleviate the systemic risks that surfaced around the world. Interest rates were cut dramatically and financial stimulus packages followed.
“The effect was a drastic increase in financial liquidity, which enabled banks and savings institutions to bolster their financial asset holdings immensely. This ‘wall of money’ drove financial markets higher from 2009, and the bond, equity and property markets all benefited greatly – so much so, that many bond yields around the developed world are now negative and equity markets are at record valuations.
This situation is clearly abnormal and the world needs to get back to a more ‘normal’ state. Where exactly that is and what it requires to get there, nobody knows,” Herman says.
“What we do know is that the transmission mechanism of the wealth effect has not translated the gains in financial (paper) markets to equivalent gains in hard assets (gold, art and other passion investments),” he says.
Herman says that the process of “normalisation” will start when the US increases interest rates later in 2015. This will unsettle the financial markets and increase the demand for real/physical/hard assets, including art.