The year that the bubble bursts?


Bubbles - Blondin Rikard. Image courtesy of Creative Commons

“We are not in a bubble”, said the now-former CEO of Christie’s after their May 2014 sale of Post-War and Contemporary art, which fetched an astonishing $745 million. To many, this statement, in the context of the vertiginous prices which the auction house had just realised, seemed an all-too-obvious negation of truth as the art market steamed ahead on its record-breaking path. Defeating skeptics, prices continued to rise throughout the year, with Christie’s Contemporary Art Evening Sale on 12 November bringing in a total of $852.9 million, the highest-ever total for an art auction. At the beginning of 2015, many are stepping back from these dizzying figures to reflect on whether the art market is capable of continuing its streak, or if the bubble is soon to burst, leaving casualties in all echelons of the art world. AMA takes a look at what 2015 has in store for the art market.

Auction House shakeup
The end of 2014 marked some serious changes for the two major auction houses, Sotheby’s and Christie’s. Patricia Barbizet, close advisor of group owner François Pinaut, took over after Stephen Murphy’s departure from his position of CEO of Christie’s in December, after the announcement in November that CEO of Sotheby’s William F. Ruprecht, was also to step down from his position. Despite the past year having been one of records, insider rumours spread that the re-shuffle in the management of the auction houses was in fact due to a slump in profits. Despite sales such as that of Warhol’s Triple Elvis, which sold at Christie’s for $82 million, and Giacometti’s Chariot, which sold for $101 million, profitability for the houses has been limited as competition between the two to secure pieces has driven their commission down; Sotheby’s auction commission margin was 16.5% in 2011, falling to 14.9% in the first half of 2014. Christie’s, as a private com pany, is under no obligation to release its sales results, so we can only speculate as to the reasons for the re-shuffle, yet evidence suggests profit margins have been slim, with large sales such as that of Jeff Koons’ Balloon Dog (Orange) for $58.4 million, bringing in little or no profit for the auction house. As an anonymous source told Artnet news: “You’ve got two CEOs who’ve been battling madly for market shares and their margins seem, by many accounts, to have got smaller and smaller.”

Regarding the re-shuffle, Marion Maneker, the Editor of Art Market Monitor, told AMA: “As far as the auction houses are concerned, I suspect we’ll see less movement than we expect in the leadership of either auction house. By all accounts, Barbizet’s assumption of the CEO role at Christie’s was to make slight adjustments among the senior-most staff. With that accomplished and a relatively stable strategy in place, I’d expect Christie’s to continue to emphasise Contemporary art and Internet sales with a great deal of effort going into private sales on the Contemporary side […] Sotheby’s too could wind up relatively stable especially if the Impressionist and Modern market continues to highlight the company’s strength. With Ruprecht having assumed an interim-CEO position, the board has no pressure to find a new leader until it can find someone with a genuinely new vision for an independent, publicly-listed auction house. I suspect the board will take some time to search for the right person because there is no obvious place to look for the relevant and necessary experience to lead Sotheby’s forward.”

So, despite the apparent boom in prices of artwork, it seems that there are cracks beneath the surface for the two houses, for whom 2015 will be a telling year in terms of both staff and profitability. The New York Times recently ran an article by Graham Bowley, noting the increased presence of auction house guarantees, which were ditched during the financial crisis having caused huge losses. Bowley demonstrated that the value of art sold with a guarantee has shot up in recent years — at Christie’s from under $100 million in 2010 to over $500 million in 2014. Though guarantees provide a viable way for the auction houses to ensure profits, they carry a considerable risk, as an unexpected fall in the market could mean the work is unsold, leaving the house to foot the bill. Some experts claim that the rise in works under guarantee means the houses are showing more faith in the market, yet for some it remains a risky move.

Pilar Ordovas, a London dealer, told The Art Newspaper that the two houses had “made it harder by competing against each other.” Whilst Christie’s and Sotheby’s have been concentrating on the most expensive works in the Contemporary and Modern art market, other auction houses and alternative art dealers have been slowly gaining power in the art world. Auction start-ups such as FAB (Fine Art Bourse), which launches in February, are venturing into the world of online auctions, interest in which is “persistently growing”, according to Alexander Zacke, CEO of Auctionata. Sotheby’s, who partnered with eBay, and Christie’s, who have their own click-and-buy feature, have also had to adapt to this changing market. The COO and Founding Partner of Paddle8 online auction house, Osman Khan, when speaking exclusively to AMA, affirmed that “2014 represented a tipping point for the online art market: a significant percentage of collectors have demonstrated that they are comfortable and confident buying works of art without seeing them in person, provided that the inventory is strong and the source is trusted. The growth and traction of the space continued, as buyers and sellers alike increasingly took advantage of the cost savings and efficiencies of the online model.”  With a 142% year-on-year gain in sales in 2014, Paddle8 and other online auction sites are set to have an even more profitable 2015, and pose a serious threat to their well-established competitors. In the words of Zacke: “The competition will get more intense and players who miss this trend will lose the race in the constant growing and changing market.”

Smaller houses such as Bonhams and Phillips have seen steady profits over the last year, covering the wider market as opposed to Christie’s and Sotheby’s dogged pursuit of blue-chip works. Marion Maneker, Editor of Art Market Monitor, also predicted this “greater recognition of the broader “middle” markets”. It has also been suggested by Melanie Gerlis in The Art Newspaper that these, in addition to Asian houses such as China Guardian and Poly (which is rumoured to be buying Bonhams), may see the problems in Sotheby’s and Christie’s as an opportunity to gain even more influence in the art market. As for the rivalry between the two major houses, ArtTactic’s 2015 outlook had the following to say: “Christie’s dominance in 2014 is likely to give the auction house a head-start going into 2015. 79% of our forecasters believe the auction house will be the best performer this year.”

Polarisation of the market
The astronomical prices seen in 2014 however, are suggested to represent only a fraction of the market. In an analysis of over over 10 million fine art sales in the past 100 years, Roman Kräussl, a professor at the Luxembourg School of Finance showed that only 1% of pieces auctioned in the period 1970- 2013 were sold for more than $1 million. By this logic, the inflation of prices of certain pieces has not stretched to all corners of the ever expanding art world, meaning that although there may be a bubble in prices of works by a small group of artists, it is by no means reflective of the entire industry. Clare McAndrew, speaking to The Financial Times in an article by Georgina Adam, reported that “high-end dealers report that top collectors are only interested in the work of 50 to 100 artists, overwhelmingly modern and contemporary.” ArtTactic predicts this polarisation to continue, saying that: “77% of our pool believe the $1 million plus segment of the contemporary a rt market to do well in 2015, following the trend of last year, whilst the majority of forecasters see a slower growth in the middle-market, only 35% foresee a positive trend in the $50,000-$100,000 and $100,000 – $500,000 price segment in 2015.” However, Pierre Valentin, of law firm Constantine Cannon, commented to AMA that “we could see certain auction practices drawing the attention of regulatory authorities in the US or the UK.  This could result in a public investigation which may derail the current trend of high auction prices in the contemporary art market, and renewed calls for greater regulation of the art market.” If so, auction houses could face a much greater shock than one caused by a loss of profits; their prices, and their very operating strategy, brought abruptly back to reality.

“Cooling, not collapse”
More generally, reports such as Deloitte’s Art and Finance Report 2014 stated that the outlook for 2015 from those in the art market was positive. Wealth collectors generally predicted that their clients would continue to buy art in 2015, particularly in Latin America, where the highest percentage of affirmative responses was recorded. As for collectors, none were recorded as predicting the market for US and European contemporary art would go down, with 62% predicting it would see positive growth. Other areas where positive growth was predicted were South-East Asia, Russian Art (however the recent fall of the Rouble could affect this) and African Art. However, the political situation in the Middle East is perhaps what pushed 42% of collectors to predict this area of the market would fall in popularity, highlighting the effect of political and social upheaval on confidence in the market — that the market too is affected by several external factors which often escape predict ion. Anders Petterson, Director of ArtTactic, emphasised this when speaking to AMA, saying that “economic and political uncertainty together with market speculation remain the biggest threats to market growth in 2015.”  Although confidence in the market was recorded as generally positive, the report found that experts believed that although growth would be positive, it would not be as fast as the huge surge in the market since 2009; an opinion supported by The Art Newspaper’s Georgina Adam, who predicts a “cooling, not collapse” of the market. This generally positive outlook was affirmed by ArtTactic’s 2015 outlook, in which 66% of forecasters felt positive about the global art market. This outlook, however, chose slighty different areas for growth, selecting “emerging art markets such as India, China and Middle-East”, “whilst forecasters foresee slower growth in the European contemporary art markets.” Zacke also predicted India as an emerging power in th e art market, as well as South America. Confirming the growth in China, Hadrien de Montferrand, Director of the HDM Gallery in Beijing and Hangzhou, told AMA that “the art market in China is becoming as healthy as its economy. Government measures are going in the right direction.”

Cuba libre?
Another geographical area that the market is turning to in 2015 is Cuba, which, following the announcement by President Obama that the US would normalise the United States’ relationship with the Central American country, was heralded by some members of the art world as the next ‘hotspot’ for artistic talent. The improvement in relations between the two will not only facilitate collectors who wish to travel there, but allow for the development of a more internationally-orientated infrastructure and the discovery of new talent on the island. “If you’re the 24-year-old Jean-Michel Basquiat of Cuba, nobody in the U.S. has been able to discover your work. Now, we will,” gallerist Sean Kelly told The Wall Street Journal.

2015 is set to be a crucial year for the art market. Although the outlook is positive, and there is generally confidence in the year following on from the success and profitability of 2014, there also seems to be an awareness of the ever-changing nature of the market, particularly with regard to innovate online sales methods and the discovery of lesser-known markets. Digital technology looks to further revolutionise the way in which art is created, diffused, and sold, not only pushing existing members of the art world to adapt, but encouraging a voracious appetite for art in those for whom it would have been previously inaccessible, ushering in a new type of aficionado and collector. Beneath the apparent success at the top end of the market lies some serious changes which are underway, whether they be in the structures and strategy of the most powerful auction houses or in the location of artistic production — a wave of new developments atop which members of the art market must either sink, or swim.