Art market is hotter than ever

By Deborah Brewster in New York and Peter Aspden in London

Published: December 28 2006 21:42 | Last updated: December 28 2006 21:42

When Picasso’s “Boy with a Pipe” fetched a record $104m (£53m, €79m) at a Sotheby’s New York auction in 2004, it was the talk of the town. Never before had an artwork commanded more than $100m and the deal made news outside the art world.

Two years later David Geffen, the entertainment mogul, sold almost half a billion dollars’ worth of paintings within a few months – one, Jackson Pollock’s “No.5, 1948”, for $140m – and few blinked.

The sales were merely the latest sign of a boom that has seen salerooms packed and art fairs proliferate. The year had already seen Ronald Lauder, the cosmetics heir, pay $135m for a work by Gustav Klimt, “Adele Bloch-Bauer 1”. Steve Wynn, the casino owner, agreed to sell Picasso’s “Le Reve” for $140m to Steve Cohen, a hedge fund mogul – a deal that was pulled after Mr Wynn accidentally tore a hole in the work prior to delivery.

In a fitting climax, 50,000 people descended on Miami this month for a five-day frenzy of art sales under the umbrella of the Art Basel fair. More jets were rented for the event than for the Super Bowl.

Art prices in the US rose this year by an average of 27 per cent – the steepest ever, according to Artprice.com, which tracks global auction prices. Depending on which index you consult, overall prices are either close to or above the level they reached during the peak of the last art boom in 1990. “It certainly feels like a bubble to me,” says one long-standing collector.

Michael Moses, an associate professor at New York University’s Stern School of Business, is more sanguine. “The last five years, prices have been growing faster than they have in the past 25 years. We are growing at a rate that may not be sustainable if you believe in mean reversion. However, prices are not growing as fast as they were during 1985-90, the peak of the last market boom, and that indicates that we are not at the bubble yet.”

“We may still have a year or so more to run,” says Mr Moses, who with his colleague Jianping Mei compiles the Mei Moses art index.

Many in the industry believe that the huge growth in global wealth and historically high levels of liquidity worldwide will underpin art prices for some time yet. Bill Ruprecht, chief executive of Sotheby’s, the auction house, says: “The reason people say this is different from the last boom is that in the 1980s, the market was driven by Japanese real-estate wealth. When that fell apart, the art market fell apart. Now we have Russian wealth, Chinese wealth, Japanese wealth, hedge fund wealth, entrepreneurial wealth, real-estate wealth. There is a huge concentration of wealth at the top of the economic pyramid, a bigger concentration than anyone has experienced before.”

Sotheby’s and rival Christie’s have together sold more than $7.5bn in art this year, easily surpassing the 1990 total. American buyers continue to drive the market but the new blood is from China and Russia. A man who appeared to be Russian bought a Picasso portrait for $95m at Sotheby’s this year, sparking speculation – still ongoing – as to the identity of the oligarch for whom he was acting.

Chinese contemporary art is the current hot favourite, with prices rising so rapidly that most believe this sector will be the first to fall. Hong Kong auction sales have quadrupled in the past five years, as Chinese and south Asian collectors make their presence felt. Christie’s Hong Kong art sales brought in $1.8m 20 years ago; this year the total was $364m. Ken Yeh, Christie’s deputy chairman for Asia, says: “Eventually there will be a correction but the mainland Chinese have only just started buying.”

Hedge fund managers, particularly in the US, are also big buyers. Mr Cohen a few years ago famously bought Damien Hirst’s shark encased in formaldehyde (and has asked Hirst to replace it with a new shark, as the original was deteriorating). Ken Griffin, who founded Chicago’s $12bn Citadel hedge fund, has emerged as a strong buyer of contemporary art. US museums – which, unlike their European and UK counterparts, rely on private money – have taken to recruiting hedge fund managers to their boards in the hope they will give both money and artworks.

hose who have family money also continue to spend. Alice Walton, the Wal-Mart heiress who is a big collector of American art, a few months ago offered to buy a 1875 work by Thomas Eakins for $68m before the citizens of Philadelphia rallied to keep the painting in the city. Eli Broad, the founder of builder KB Homes and a well-known collector, is setting up a museum in Los Angeles.

As prices spiral upwards, art is increasingly viewed as an asset class – a development that evokes mixed feelings. There is the usual disdain of old money for the taste of those with new money, who are perceived as favouring conceptual works. “You could sell them a plastic bowl and they would pay $10m,” sniffs one collector of American art. “They just come in and throw it around; it’s a couple of Porsches, the house in Greenwich [Connecticut] and then the artworks to go with those.”

Mr Ruprecht disagrees: “I don’t think it’s true that the new wealthy are all buying the same things. The joke is that you have to get your second Warhol by the time you are 30, but I really don’t think the taste is that unconsidered or nuanced. They are buying Old Masters, tribal works, textiles.”

Nevertheless, the rise in art prices has not been uniform. Some big names have been left behind by the boom and some genres, such as watercolours, are unfashionable. “There has been an evolution out of Old Masters and 19th-century works, and even out of American paintings,” says Mr Moses. “It is the postwar and Impressionist works that have shown the real strength.”

“Every generation sets its own rules,” says Mr Ruprecht. “The late Warhols were not appreciated 15 years ago. Certain Old Masters were relegated to back rooms because they were not the trophy names of the day. Each generation redefines what it wants.”

About half a dozen art indices have sprung up, measuring the rise in prices of sectors and artists. Art databases have contributed greatly to the transparency of the market, providing information for a fee on how often and at what price particular works have changed hands. Art funds have also been launched to invest in artworks, although few have made headway.

“Some of the hedge fund buyers think that art is an investment class. But that is an unproven thesis. Art does not produce cash flow – it has merely scarcity value, driven by cultural perceptions. That is a very different proposition from other asset classes,” says one seasoned collector.

Fears exist that increased pressure to secure a return on investment has contributed to a rise in price manipulation – although this has always been a feature of an unregulated market and most of the evidence is anecdotal. Typically, a buyer will snap up a large number of works by an artist and hoard them, then bid aggressively next time a work by the artist comes up at auction. Having driven up the price and created a feeling of scarcity, the hoarder can sell the rest at a premium.

A factor that has added spice, not to mention a steady flow of masterpieces, to the market over the past 12 months has been the controversy provoked by restitution claims. These have sought to return works looted by the Nazis from Jewish families to the heirs of the original owners.

The Nazis stored some 5m looted objects, including many valuable works of art, in more than 1,500 depots during the war, about half of which were returned by the Allies by 1950. Sotheby’s estimates that there are still more than 100,000 unclaimed works with a collective value of “anywhere between $10bn and $30bn”.

Restitution claims have accelerated in the past few years and have been responsible for some highly prized works reaching the market. A landmark was reached by Sotheby’s in London with the £11m sale of Egon Schiele’s “Krumauer Landschaft (Stadt und Fluss)” in 2003 – then a record for a restituted painting. But the impact was dwarfed by the news that four restituted Klimts belonging to the Bloch-Bauer family were to be auctioned at Christie’s New York in November.

The paintings instantly became the most significant Nazi-loot restitution cases. They had been stolen from the family in 1938 and eventually placed in Vienna’s Austrian Gallery Belvedere, but the Bloch-Bauer heirs began a protracted court battle in the US to reclaim the paintings in 2000.

The Supreme Court ruled in 2004 that US courts had jurisdiction to decide the case, but it was finally settled by an Austrian arbitration panel that ruled in favour of the Bloch-Bauers. The pre-auction estimate of $93m was smashed during a dramatic evening, with the four works raising more than $192m.

Lucian Simmons, head of restitution for Sotheby’s, says there are still important works of art missing from the second world war period but that many of the biggest cases have been settled.

“Claims grew from the 1990s, because of records becoming available in eastern Europe following the fall of the Iron Curtain and because of the ‘third-generation effect’. The first generation [of Jewish families] was pleased to come out of the war alive; the second was busy establishing itself as good Americans, Britons or whatever. Now the third generation is interested in recovering its roots and, in many cases, its missing inheritance.”

He says most cases are settled harmoniously but there are still areas of contention. In November, the Andrew Lloyd Webber Foundation withdrew from sale Picasso’s “Portrait de Angel Fernández de Soto” because of a restitution claim that was felt to have cast enough of a shadow over the picture to discourage potential buyers.

With restitution increasing, many paintings hanging in museums and in collections could come on to the market in the coming years, fuelling it still further. Says one dealer returning exhausted from Miami’s Art Basel: “I don’t see any slowdown next year. It will be a year of more, more of everything for the art world.”