Art & Finance Report 2017

Art & Finance Report 2017 5th edition

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• Strategy & operations • Strategic planning • Strategy & operations • Art & collectible funds - set-up assistance, tax, • Finance • Impact analysis • Tax - Estate planning statutory audit • Marketing & feasibility study • Art-secured lending - • Selection of third party • Tax • Finance selection of third party service providers service providers • Social & Cultural impact • Technology • Education studies • Strategy, operations and • Risk Advisory risks management • Building consultancy • Financial Advisory • AML and forensics • Statutory Audit • Statutory Audit • Family Business

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10 Art & Finance Report 2017 | Table of contents

11 Art & Finance Report 2017 | Table of contents

Table of contents

Foreword 14

Introduction 16

Deloitte Canada 20

Key Findings 21

Priorities 28

The future of art & wealth management 34

Section 1. The State of the global art market 39 Highlights 40 Art market outlook 2017–2018 56

Section 2. Art and wealth management survey 97 Highlights 98

Art and wealth management – Current situation 102

Art & wealth management services – Future directions 114

A. Private bank and family office key survey findings 2017 114

Art and estate planning 124

Private banks vs family offices – Comparative trends 2017 136

B. Art professional and Art Collector key survey findings 2017 140

Section 3. Art-secured lending 153 Highlights 154

A U.S. market update 156

Recent non-US initiatives 158

Survey findings 159

12 Art & Finance Report 2017 | Table of contents

Section 4. Art as an investment 173 Highlights 174

The performance of the art market as whole and among collecting categories 176

Art investments funds 182

Survey findings 190

Section 5. Art and technology 203 Highlights 204

A digital art world – The intersection of art, wealth and technology 206

Trends – Online art market continues to grow, but competition intensifies 210

Art data & analytics providers 212

New infrastructure developments 218

Section 6. Risk management and regulation 235 Highlights 236

Survey findings 240

13 Art & Finance Report 2017 | Foreword

Foreword

Deloitte Luxembourg and ArtTactic are pleased to present the Art & Finance Report 2017, the fifth edition of the report.

It is now six years since the first issue of We are delighted to have 34 contributions the report was published and it has been this year from 42 experts within exciting to follow and monitor how the and outside of the Deloitte network Art & Finance industry has evolved over representing different voices of the Art & the years. In this anniversary report we Finance industry. We are also delighted have brought together and compared to announce that what started as a local the findings and developments from the initiative in Luxembourg in 2011 has now previous four editions with this year’s become a truly global Deloitte initiative. findings. Adriano Picinati di Torcello Once again, we would like to express our Director - Global Art & Finance Increasing competition in the wealth most sincere gratitude to all the individuals Coordinator management industry has put emphasis and institutions that have contributed to Deloitte Luxembourg on a more holistic wealth management this report over the years, especially those model, which has become a key driver and who have taken part in interviews and Anders Petterson motivation for incorporating art-related surveys. Their collaboration and sharing of Managing Director wealth into the service offering. expertise and knowledge is truly what has ArtTactic made this report the benchmark for the Art London A lot has happened since we launched & Finance industry today. the inaugural issue in 2011. One major change over these years has been a shift in the primary focus on art investment toward issues around the management of art-related wealth, including art- secured lending, estate planning, art advisory, and risk management. What is particularly encouraging this year is that we are seeing both a confirmation of the increasing convergence between collectors, art professionals, and wealth managers on the role of art in a wealth management service offering, as well as a convergence of different stakeholder initiatives when it comes to improving art market transparency and the infrastructure around the management of art and collectible wealth. Many of these tools and services are mentioned in this report.

14 Art & Finance Report 2017 | Foreword

The economic impact of cultural But for individuals, the impact is also investment is no longer limited to the important: nowadays, investing in art has traditional sphere of the art market and its become an obligation. Investors entering evolution. this sphere must, however, be guided and informed, in particular with respect Cultural and artistic investment is to the most innovative creators among an essential driver for the economic the younger generations. It is a gamble, development of local communities as but it can be immensely gratifying from well as private companies. Additionally, it several points of view. It simply requires Aurélie Filippetti is a potential source of diversification of good knowledge of aesthetic (r)evolutions, French Minister of Culture financial investments. But it doesn’t stop and the legislative (r)evolutions in various (2012–2014) there. countries. Associate Professor, Classical Literature, Sciences Po, Paris Today, cultural investment has a multiplier Traditional banks are poorly equipped to effect within organizations. In the eight assist those who wish to embark upon such Art is the best part of our main “capitals” selected by Deloitte for a venture, and it is essential to develop the purposes of evaluating the impact of financing and evaluation networks that are lives and the only way cultural projects, we have observed that specific to the cultural sectors in question. for two souls to deeply culture has a positive influence on the These exist in the film and creative curiosity of teams and customers; the industries, but demand is outstripping communicate. "Art is the environment, through a new relationship supply. They must be expanded. shortest way from a man with utility; brand identity; social capital, by While the art patrons of today are still creating and strengthening interpersonal obliged to fulfil their traditional role, their to a man" (André Malraux). relationships; economic capital, since work has expanded in scope. This is why investments are most effective when they Italy adopted legislation on arts patronage receive adequate support; and social inspired by the French law of 2003. Nevertheless today ... organization, as well as the capacity for However, a more dynamic and inventive innovation. view must be encouraged. For the cultural institutions, the challenge of developing Cultural investment is thus a formidable strong links with families of art collectors source of change and even transformation is now of paramount importance, since the within an organization; this is apparent in enrichment of collections occurs mainly the medium term, but can even be evident through donations and inheritance. One in the short term provided that extensive clear example of this is the close bond preparation work is carried out. Moreover, between the Musée d'Orsay and Spencer cultural investment must be integrated and Marlène Hays that allowed one of the within a company or community strategy, largest donations of impressionist and and not considered to be a luxury or a fauvist paintings in the world. This was whim. only made possible by years of assistance and detailed knowledge, hand-in-hand, In France, economic studies have between the couple and the chairman of demonstrated that the economic weight of the Musée d'Orsay. cultural activities accounts for 3.2 percent of national GDP and more than 800,000 Such examples must be encouraged direct jobs. It is therefore an important and increased in the future. This is the source of development. challenge of the work of developing studies on the relations between art and the economy. This report is an example of that.

15 Art & Finance Report 2017 | Introduction

Introduction

Need for better art risk management So what are the key drivers behind the Is there a risk While last year’s report was published above trends? A combination of art during the global art market slowdown, market growth and higher valuation and this year’s report comes at a time where prices have triggered more demand for that collecting the art market has staged a significant art and more wealth allocated to art recovery in the first six months of the year. and collectibles. This in turn has forced art is just However, while the art market seems to wealth managers to take a more proactive be on the mend, a new set of challenges approach with regards to their client’s and uncertainties have emerged in the last art-related assets. This trend has been another trend? 18 months. Political uncertainty around further fueled by a shift in an increasingly the future of EU and Brexit, geo-political competitive private banking industry risk in many parts of the world, and the toward a more holistic approach to wealth fear of conflict on the Korean peninsula management. are all macro factors that could weigh negatively on art market developments in Is there a risk that collecting art is just the coming year. In addition, the art market another trend? Although there are is also increasingly feeling the pressure to fashionable aspects about buying art, for change and adapt to a new environment an increasing number of HNWIs, art and shaped by changing consumer preferences, collectibles are playing a more significant technological innovation, and new role in their lives and is accounting for a regulations. In a world of increasing larger share of their overall wealth, a trend uncertainty, the need to better understand, that is forecasted to continue in the next 10 monitor, and measure risk is becoming years. In addition to its financial attributes, increasingly obvious, which is a core theme there are also strong emotional and social running through this year’s report. aspects associated with buying and owning art—motivations that wealth managers are Art and wealth management is now realizing could be harnessed and cultivated part of a longer term trend more effectively, ultimately resulting in When we launched the inaugural Art & a stronger and more sustainable client Finance report six years ago, one third of relationship. the wealth managers surveyed said they were aware and followed the developments As illustrated throughout the report, the linked to art as an asset class and issues challenges are many, and the need for a around art and wealth management. This coordinated response across the different year, close to 60 percent of the wealth industry stakeholders is more critical than managers said the same. However, it’s not ever. We hope that this year’s edition of the only awareness that has increased over Art & Finance Report continues to provide the last years—we are also seeing real a forum for the Art & Finance industry to action, with 64 percent of wealth managers express their concerns and needs, but also saying they were actively offering services provide ideas and possible solutions to related to art and collectibles. The most how one can best address these issues. As recent survey shows an increase from 78 before, the main aim is to build a platform percent in 2016 to 88 percent in 2017 of to encourage and facilitate sustainable wealth managers saying that they think art relationships between the Art & Finance and collectibles should be included as part world going forward. of the wealth management offering, the highest registered reading since the launch of the survey in 2011.

16 Art & Finance Report 2017 | Introduction

Methodology and limitations Sample by geography The first Art & Wealth Management Survey was conducted in 2011 and included 19 private banks from Luxembourg. In 2012 the sample was increased to 30 private banks from Europe. In 2014, the survey included 35 private banks from predominantly Europe & the USA and an additional 14 family offices from Europe and the USA. In 2016, the survey included 53 private banks from Europe, USA and Middle East and 14 family offices from Europe and the USA. This year, Deloitte Luxembourg and ArtTactic conducted the research for this report between May 2017 and August 2017. We surveyed 69 private banks among which 5 are art- Family oﬃces Private banks Art professionals Art Collectors secured lenders (specialized boutiques) and 27 family offices. Adding more private USA Europe Asia Middle East Latin America Others banks and family offices from different Source : Deloitte Luxembourg & ArtTactic Art & Finance Report 2017 geographical regions could have an Section 1 of this report (market outlook the global art fund industry, combining impact on the results from one year to for different art markets) includes data and information from interviews with another. However the increasing number findings based on qualitative Art Market US and European art funds, as well as of private banks and family offices is part Confidence Surveys that ArtTactic sent public records on art investment trusts and of our ongoing effort to ensure that the out to 310 international art collectors, art art funds in China. The Chinese art fund report is increasingly representative of advisers, galleries, and auction houses industry analysis is based on conservative the perceptions and opinions of the global in June 2017. This section also includes estimates about the size and maturity of wealth management community, when it auction data analyses of different modern different art investment trusts. However, comes to issues around art as an asset and contemporary art markets, and many Chinese trust companies are no class. is predominantly based on data from longer marketing or publishing information Sotheby’s and Christie’s, but also includes about their art-related trust investment As for the previous report, we have other auction houses when they represent activities and it is not possible to know again conducted research among other a major share of the market. whether these funds have been wound up important stakeholders in the Art & early or are still active. Our estimates are Finance market, such as art collectors In order to provide a market context based on the publicly available information and art professionals (galleries, auction for the survey findings we have given a as of July 2017. houses and art advisers, art lawyers, art broad, international overview of recent insurers, art logistics, etc.). A total of 155 developments across various regional We have expanded the regulatory section art professionals (up from 126 in 2016) modern and contemporary art collecting (Section 6) this year to also include a strong and 107 major art collectors participated categories. Most of the data is collected focus on art and risk management, in in the survey (up from 94 in 2016). These from Sotheby’s and Christie’s, as they addition to new issues around regulation art collectors were from Europe, the cover the majority of the modern and in the art market. As in the previous US, Middle East, Latin America, and contemporary art collecting categories editions, we are delighted to have many Asia, and were surveyed on a variety of covered in this section, although certain contributions from leading experts in this topics relating to art as an asset class, regional markets such as China, India, field to complement each section of the Art their motivations, current and future Russia, and Africa also include auction data & Finance report. involvement, challenges, and opportunities. from other leading auction houses.

In the art investment section of the report (Section 4), we have estimated the size of 17 Art & Finance Report 2017 | Introduction

We are delighted to be able to publish a series of interviews and opinions from key figures in the Art & Finance industry:

Aurelie Filippetti Harvey Mendelson French Ministry of Culture (2012-2014) Managing Director at 1858 Ltd Art Associate Professor, Classical Literature, Advisory Science Po, Paris Celine Fressart Nisha Dhaliwal Head of Special Projects at 1858 Ltd Art Account Manager, Deloitte Canada Advisory

Alan Mudie Micaela Saviano Responsible for Société Général Private US Tax Private Wealth and US Art & Banking Investment, Société Générale Finance, Deloitte US

Asia Institute of Art and Finance in Mark Stokes Shanghai UK Family Office Tax, Deloitte UK China Javier Lumbreras Rosine Makhlouf Family Business CEO, The Charitable Museum Endowment Advisor Fund, L.P. Deloitte Private (ME) Emilie Villette Dr Tahir Hatim Business Development, Director, Director, Deloitte Islamic Finance Group Christie’s France

Bola Asiru Phillip Ashley Klein Deloitte West Africa Leader for Strategy U.S. Art & Finance Coordinator, Deloitte & Operations & Africa Art & Finance Consulting LLP Coordinator Kevin Ye Raphaël Glohr Consultant, Deloitte Consulting LLP Partner VAT at Deloitte Luxembourg Victoria Kisseleva Cyrielle Gauvin Assistant Director Financial Advisory, Tax and Art & Finance at Deloitte Deloitte UK Art & Finance Coordinator, Luxembourg Deloitte LLP (UK)

Maria de Peverelli Ben Williams Executive Chairman – Art Management, Managing Director, Head of Lending Stonehage Fleming Solutions in the UK & Nordics for J.P. Morgan Private Bank Melanie Damani Attorney-at-law, Art Services – Family Shirin Kranz Advisory, Edmond de Rothschild (Suisse) Head of Art Lending, Privatbank Berlin v. SA. 1929 AG

18 Art & Finance Report 2017 | Introduction

Adrien Chiariello Mathilde Heaton We also want to thank all the survey Senior Consultant, Deloitte Luxembourg Lawyer and art law consultant, participants—without them this report Researcher at the University of Geneva’s would not be possible. Thank you to Claude Claire Hiller Art-Law Centre and RAM’s task force Hermann from Fine Art Logistics Natural Managing Director – Global Originations, coordinator Le Coultre, Salma Shaheem, Head of Borro Middle-Eastern Markets and Joint Venture Avvv. Giuseppe Calabi Partner at the Fine Art Group in Dubai & Fabian Bocart Studio Legale, CBM & Partners Oscar N. Oneyma, CEO of the Nigerian Vice President of Analytics, Stock Exchange as well to Monica Carabajal artnet Famke Schaap Zamora, Capital Markets Manager, and her Director, Global Trade Advisory, Deloitte team, as well as Jean-Philippe Peters, Risk Yaoge Wang Belgium Advisory Partner at Deloitte Luxembourg, Business analyst, artnet for their precious contributions. A special David Heurtevent thank you also to Fabian Bocart and artnet Violaine Remacle Manager, Forensic & Restructuring, for their support in supplying valuable IN ART Managing Partner Deloitte Luxembourg annual art market performance data. We also express a special thank you to Mr. Alain Balanzategui Laura Patten Yinka Shonibare who contributed to the IN ART Board Member Specialist Leader, Risk and Financial quality and the originality of this report by Advisory, Deloitte & Touche LLP allowing us to use a series of images from Miguel A. Muñoz his own artistic creations. We wish you an IN ART Board Member Borna Emami inspiring reading. Senior Manager Marcelo Garcia Casil Deloitte Consulting LLP Deloitte Luxembourg and ArtTactic Founder & CEO of Maecenas recognize that the findings are indicative Deborah Gunn and see the limitations of these findings; Madelaine D’Angelo Senior Advisor, Faurschou Foundation however, we believe that the results reflect Founder & CEO of Arthena a broad representation of the perceptions Rebecca Jennings and attitudes that exist in the global wealth Christine Bouron Art Researcher, The Fine Art Group management and art and art collector CEO of Pi-eX Ltd community.

Dr. Shermin Voshmgir Founder, blockchainhub.net

Sandrine GIROUD Partner with Lalive, Switzerland, Board member of the Art Law Foundation and member of RAM’s task force

19 Art & Finance Report 2017 | Introduction

Deloitte Canada

The Canadian art market is relatively small Projects in Architecture’s mandate was to in size, currently sitting at around US$1.3 strategically integrate art into the design billion. However, the opportunity for of the particular space in question during growth is significant. Art hubs including the design conception stage. Nisha worked Toronto, Montreal, Vancouver, and Calgary with each developer to meet specific needs are steadily growing in size and attracting and requirements, provided strategic international interest. input for special art pieces and special considerations, and provided traditional art In the last few months, Nisha Dhaliwal consultancy services. Nisha Dhaliwal has been leveraging her passion for art in Account Manager a professional context by promoting the After returning to Toronto, Nisha’s Deloitte Canada Deloitte Art & Finance initiative, with the interaction with clients led her to notice aim to develop this service line in Deloitte that there was a gap in the market for At a time when countries Canada. Nisha received her master’s in professional services such as consulting Art and Business from Sotheby’s Institute and corporate strategy, specifically tailored are becoming increasingly of Art. Her dissertation focused on to the arts. Today, Nisha is a strategic economically and politically how financial institutions invest in art, account manager in Canada’s capital city specifically in Canada. Nisha then began of Ottawa. Nisha is motivated to bring the interdependent, promoting her own art consultancy, DART Consulting, Art & Finance initiative to life in Canada, cultural expression which is currently in its sixth year of in an innovative and disruptive fashion. operation. Her work as an art consultant She has begun compiling research on the through a cultural policy exposed her to clients and artists in Canadian art market, by interviewing key for the arts is a valuable New York, London, Los Angeles, Toronto, players in both art and finance ecosystems. Vancouver, and Calgary. DART Consulting’s She continues to make business case way to emphasize and mandate involves more than merely placing presentations to promote the launch of define what distinguishes art on a wall. DART has delivered, and the Art & Finance initiative in Toronto. Her continues to successfully deliver, custom placement in Ottawa currently positions one country from another. and strategic art-related advice to those her well, providing her with great exposure Canada continues to face inside and outside the art market. An and access to art and cultural policy on a example of a unique project Nisha led was federal level. Nisha is working closely with significant challenges in Projects in Architecture. Through DART, the Luxembourg team throughout this the arts. Its vast geography she partnered with a prominent gallery process and is already engaged in some in Los Angeles to develop Projects in pre-work with a potential anchor client. and relatively small Architecture: an initiative to make gallery- population make it difficult quality art available for new and upcoming Please contact Nisha Dhaliwal if there is developments (residential, educational, and anything Canada-centric you wish to inquire for the country to produce, commercial) in LA and surrounding areas. about in regards to the Art & Finance initiative. exchange, disseminate, and communicate works of art. It is difficult—but not impossible.

20 Art & Finance Report 2017 | Introduction

Key findings

SECTION 1 – The state of the global art and economic uncertainty as the biggest market risk to the development of the global art market in the coming 12 months. •• A new approach to art and wealth The ArtTactic art market speculation management needed: With more barometer is up 17.7 percent from wealth expected to be allocated to art January 2017, which suggests that and other passion assets in the next experts feel the current art market 10 years, coupled with a complex and recovery has reintroduced more uncertain global art market, a more speculative behavior. sophisticated and dynamic approach to managing art-related wealth is required in •• Positive outlook for the US the future. contemporary art market: Experts signal a more upbeat outlook for •• UHNWI population is expected to 2017–2018. Based on the responses of increase by 43 percent in the next experts surveyed by ArtTactic in June decade: The world’s ultra-high-net-worth 2017, 62 percent believe that the US individual (UHNWI) population grew by contemporary art market will go up in 3.5 percent in 2016, a recovery from a the next 12 months (versus 47 percent in sharp fall in 2015, according to a recent January 2016). wealth report. The total number of ultra- wealthy individuals is predicted to rise 43 •• Brexit could have a negative impact percent by 2026. on the UK contemporary art market in 2018: Much of London’s relative •• Growing demand for luxury success following the Brexit vote last year investments: 37 percent of wealth can be linked to the decline in sterling, managers surveyed in a recent report by motivating buyers from outside Europe to Knight Frank said that their clients already take advantage of the benefits of a lower had a number of luxury investments, exchange rate. However, 38 percent think such as art, wine, and classic cars. A total that the market will come down in the of 47 percent of these managers said that next 12 months (up from nine percent in these types of investments had become January 2016). more popular in recent years. •• European art market outlook looks •• Auction sales recovers in the first positive: 36 percent of the experts half of 2017 and the art market surveyed believe that the European outlook for 2018 remains cautiously contemporary art market will see a optimistic: Total auction sales at positive development in the next 12 Sotheby’s, Christie’s, and Phillips were months (up from only 14 percent in up 18 percent in the first half of 2017 January 2016). compared to the same period last year; the overall art market sentiment remains •• Chinese contemporary art market more cautious over the next 12 months. outlook turns neutral-to-positive: The The increase in sales comes on the back direction of the Chinese contemporary of a global art market slowdown between art market in 2017/2018 signals that the the second half of 2015 and throughout market is getting more positive compared 2016. to 2016. 32 percent believe that the Chinese contemporary art market will •• Heightened geopolitical and go up in the next 12 months (versus 26 economic risk: A recent ArtTactic percent in January 2016). survey from June 2017 ranks political

21 Art & Finance Report 2017 | Introduction

•• China’s focus on building a regulated •• The Middle-Eastern auction art market: The Chinese government market bucks the trend last year: attaches great importance to the Total auction sales of modern and development of cultural projects, which contemporary Middle Eastern art rose by are crucial to the soft power of China. In 11.9 percent in 2016. The first half of 2017 recent years, according to Asia Institute of was also marked by solid performance. Art & Finance (AIAF), the government has However, there are concerns about the emphasized the healthy and regulated next 12 months, with 41 percent (up from development of culture and the art 24 percent in January 2016) predicting market through the introduction of new that the Middle Eastern art market will policies. decline. Wars, terrorism, and geopolitical tension in the region were cited as the •• Sentiment in the South Asian modern main reasons for this. and contemporary art market turns from positive to neutral in the first •• Art and Islamic finance: Art has the half of 2017: South Asian modern and potential to make a good underlying asset contemporary auction sales in the first for a financing or investment structure six months of 2017 were 14 percent lower under Sharia Law. With an increasing than in the first half of 2016. Based on interest in the region around art as an the responses of the experts surveyed asset class, there are opportunities for in June 2017, only seven percent of the banks and investment houses to address experts believe this market will go up in the needs and opportunities associated the next 12 months (versus 40 percent in with art financing and investment in the January 2016). region.

•• Slowdown in the Southeast Asian •• The Russian art market sees a art market: Modern and contemporary positive start to auction sales in 2017, Southeast Asian art saw a 29.7 percent but experts remain cautious about year-on-year decrease in sales in 2016. its outlook: Despite a positive start to The auction sales in the first half of 2017 the year, only 19 percent of the experts suggest that the downward pressure surveyed by ArtTactic in June 2017 (up on this market could continue into the from 16 percent in January 2016) believed second half of the year. Only 17 percent that the Russian art market would see a of the experts surveyed believe the positive growth trend this year. market will go up in the next 12 months •• African art auction market sees (down from 40 percent in January 2016). significant growth in 2017: The African •• Uncertain outlook for the Latin modern and contemporary auction American art market: Latin American market has seen steady growth since auction sales in 2016 saw a year-on-year 2014, but sales have accelerated this year decrease of 27.2 percent following several as Sotheby’s launched its first African years of steady growth. Based on the modern and contemporary art sale in responses of the experts surveyed by May 2017 in London. ArtTactic in June 2017, 34 percent believe •• Art & Finance in Africa: Rising global the market will go up, versus 37 percent demand for African contemporary art who believe that the Latin American and improved art market infrastructure modern and contemporary art market is likely to increase the demand for Art & will go down in the next 12 months. Finance related services and initiatives in the African art market, supported by investment in art education, awareness raising, and capacity-building.

22 Art & Finance Report 2017 | Introduction

SECTION 2 – Art and wealth •• More investment and resources •• Art and estate planning: Estate management survey allocated to art-related services: planning is viewed as the most important An average of 44 percent of wealth art and wealth management service •• Art and wealth management managers reported that increasing focus by wealth managers, art professionals, industry converge: This year’s and resources would be dedicated to art and collectors. With a massive transfer report confirms that art and wealth and wealth management services in the of wealth from baby boomers to management is part of a long-term coming 12 months, up from 38 percent millennials about to occur, art and industry trend, particularly as the wealth in 2016. This is the highest reading since estate planning is likely to become an management industry moves toward a the launch of the survey in 2011, and is increasingly important area for the wealth more holistic asset management model. supported by a positive trajectory for all management industry. •• Stronger motivation to include art art-related products and services. •• Almost half of collectors surveyed within wealth management: •• Art-related wealth to be included in have yet to discuss their art-related 88 percent of wealth managers surveyed wealth reporting: Findings from this estate with their heirs: Although this year say that they think art and year’s survey show that 69 percent of the majority of collectors surveyed collectibles should be included as part the wealth managers surveyed said they have formal estate plans for their art of the array of wealth management expected their clients to want to include collection, 46 percent of collectors have solutions. art and other collectible assets in their yet to discuss these plans with their heirs, •• A more holistic approach to wealth wealth reports. although they intend to do so. management drives interest in •• Collecting art with a view to •• Family offices, especially US family art and collectible wealth: With an investment: A large majority (86 offices, seem better prepared to estimated US$1.62 trillion of UHNWI percent) of art professionals said that offer art wealth management wealth allocated to art and collectibles in their clients buy art and collectibles for services: When a family office has to 2016 and an estimated US$2.7 trillion by emotional reasons (passionate about deal with an art collection, it usually 2026, wealth managers are forced to take collecting), but also focus on investment provides the different services to protect a more holistic approach to the way they value; this was up from 79 percent in the wealth of clients allocated to the art work with their clients’ assets. This year’s 2016. 54 percent of wealth managers (up collection. The majority (61 percent) of survey findings show that 85 percent of from 51 percent in 2016 and the highest family offices (all US family offices and half wealth managers believe that the move reading since the survey was launched of the family offices from the rest of the toward a holistic wealth management in 2011) increasingly see art as a way to world) stated that their clients maintain model is the strongest argument for safeguard value. an updated inventory of their collection including art and collectibles in a wealth allowing them to administer the estate management service range. •• Art is increasingly becoming a without the collector’s input. Again, in lifestyle product: For the third time •• A majority of wealth managers offer stark contrast, only 13 percent of private since the launch of the survey in 2011, the art-related services to their clients: banks said the same. social value associated with buying art 64 percent of wealth managers surveyed was the primary motivation among art •• More wealth managers are offering said they were actively offering services collectors according to art professionals valuation services to their clients related to art and collectibles, including (85 percent of the art professionals mainly through third party providers: entertainment and client hospitality. surveyed said so, up from 80 percent All of the family offices that responded to •• Client pressure on wealth managers: in 2016 and 72 percent in 2014). This this year’s survey said that they offered 55 percent of wealth managers said that confirms the findings from previous years valuation services (73 percent said they clients were increasingly asking their suggesting that art is increasingly viewed were providing this through a third party). private bankers and wealth managers to by art professionals and collectors as a A high number (84 percent) of private help with art-related issues (up from 48 “lifestyle” product and investment. banks also provided valuation services percent in 2016). for their clients, with 67 percent providing this through a third party.

23 Art & Finance Report 2017 | Introduction

•• Private banks and family offices are art and collectibles market remains the focusing on art advisory services: biggest challenge for incorporating art 83 percent of wealth managers said they into their service offering (up from 62 offered art advisory services (this was up percent in 2016). from 79 percent in 2016 and 67 percent •• Lack of management support: in 2014), and 47 percent said the services 51 percent of wealth managers said that were delivered in-house. lack of interest internally was a major •• Collection management and wealth challenge, up from 26 percent in 2016. reporting are likely to converge: This could suggest that as interest in 78 percent of wealth managers said art and wealth management is gaining that they offered art collection services; momentum, there is a lack of leadership this was up from 59 percent in 2016. support for these types of initiatives. We are likely to see increasing demand •• Difficulties in finding and developing for integration between art collection talent and expertise: 55 percent of management software and banks’ wealth managers said that finding the existing reporting systems. This would right expertise remains one of the key offer the wealth management sector an challenges in building an art-related opportunity to be more proactive, to service offering (up from 46 percent in support estate planning, and to better 2016). monitor and protect art-related wealth.

•• More demand for services related to art and philanthropy: 72 percent of the wealth managers surveyed this year said they offer services related to art philanthropy and individual giving to the arts (gifts, donations, help with setting up foundations, etc.). This was up from 64 percent in 2016, and suggests that art is now playing a bigger role in the spectrum of philanthropic activities that clients are seeking their wealth managers’ advice and help on.

•• Lack of art market transparency remains a key hurdle: As the wealth management industry continues to grow and expand its investment in art-related wealth services, there is also a sense of heightened concern regarding the lack of transparency in the art market (75 percent of wealth managers expressed this view).

•• Unregulated nature of the art market remains a key hurdle: 65 percent of the wealth managers surveyed this year said that the unregulated nature of the

24 Art & Finance Report 2017 | Introduction

SECTION 3 – Art-secured lending SECTION 4 – Art as an investment funds were a relevant/very relevant service for their clients and 37 percent of •• US art-secured lending market •• Art market returns recover in the collectors said the same. grows an estimated 13.3 percent: last 12 months: Six out of seven Artnet The art-secured lending market in the US art price indices see positive return •• Challenges in the pre-investment reached an estimated US$17-20 billion between April 2016 and April 2017, with process: 79 percent of the wealth in 2016, which represents a 13.3 percent Impressionist Art and Contemporary managers surveyed said that due growth from 2015. Art accounting for the highest annual diligence and assessing the viability and returns of 10.50 percent and 7.45 percent credibility of the art fund was one of the •• Art-secured lending services stable: respectively. main obstacles (up from 77 percent in In this year’s survey, 67 percent of wealth 2016). This challenge is linked to other managers said their institution now •• The art fund market seems to aspects of the art fund industry and the offered art-secured lending services. struggle to gain momentum: art market, such as a lack of track record The lack of transparency around the •• Risk management a key challenge: for art funds and the unregulated nature actual number of active art funds makes Issues around risk management, liquidity, of the art market. the evaluation of the size of the market valuation, and regulation remain key difficult. The overall art fund market in •• Challenges in the post-investment challenges for the future growth of this the first half of 2017 is conservatively monitoring: 85 percent of the wealth market. estimated to be US$834 million down managers cited the lack of mark-to- •• New accounting requirements for from US$1.03 billion in 2016 and US$1.2 market valuation as a major challenge art-secured lending: New accounting billion in 2015. However, with many art for incorporating art into the wealth requirements stipulate that provisions funds operating away from the scrutiny of management offering (this was up from for credit losses will no longer have to be the public eye, these numbers are likely 77 percent in 2016). recorded with an incurred loss model, to be higher. •• New art investment products: but rather with an expected loss model. •• Chinese art fund industry declines In recent years new art investment This will have significant implications for on the back of tougher regulation: products are being developed trying to risk models and risk management with The estimated AUM for the Chinese art address many of the shortfalls associated regards to art-secured lending. investment fund/trust business has fallen with art investment funds, such as •• New developments in the European from US$1.48 billion at the peak in 2012 liquidity and price transparency. art-secured lending industry: New to an estimated US$483 million in 2016 offerings have recently come to the and US$373 million in first half of 2017. market, including the possibility of •• Art investment fund products lending transactions using high-quality remains a niche service: artworks transferred as collateral Only 11 percent of the wealth managers without taking physical possession of the surveyed offer an art investment fund artworks as collateral. product as part of their in-house offering •• Art-secured lending providers call (down from 18 percent in 2016). for more regulation: Art lenders •• A small minority of banks are suggest that regulation would create new planning to offer art investment opportunities to expand and democratize fund products to their clients in the the art market, as banks and wealth coming 12 months: The recent survey managers would be able to put their full among wealth managers shows that only weight into the market. 13 percent of the wealth managers see it as likely that they will offer their clients art investment fund products in the next 12 months (this is up from 10 percent in 2016). However, 43 percent of art professionals stated that art investment

25 Art & Finance Report 2017 | Introduction

SECTION 5 – Art and technology •• New technology could transform parts of the art industry: Blockchain •• Technology is increasingly playing could revolutionize the art industry by a key role in the evolution of the resolving questions of provenance, and art market. Art-technology startups improving transparency, copyright, and (ArtTechs) are building new digital ownership issues. Seeing the potential, business models aimed at enabling and art startups are already building real- supporting traditional art businesses, world applications based on blockchain. rather than replacing them. Technological innovations are aimed at increasing trust and transparency, but also supporting data-driven valuation methodology, building social capital and transforming the backbone of the art market ecosystem.

•• Online art sales continues to grow: According to Hiscox Online Art Trade Report 2017, online art market sales reached an estimated US$3.75 billion in 2016, up 15 percent from 2015. This gave the online art market an estimated 8.4 percent share of the overall art market, up from 7.4 percent in 2015.

•• Traditional art businesses take up the online challenge: Growth in the last two years has picked up among the traditional auction houses. Sotheby’s grew its online business (online bidding and online-only auctions) to US$155 million—an increase of 19 percent in 2016—and Christie’s increased its online activities (bidding and online-only auctions) by 34 percent from US$162 million in 2015 to US$217 million in 2016.

•• Auction and dealer markets converge online: Increasing competition is already forcing online art platforms to embrace new strategies to expand their business and diversify their income streams.

•• Data and analytics infrastructure in the art market: We are starting to see the emergence of new art market data and analytics addressing both risk and return in the art market. This is an important development and could contribute toward improving transparency, valuation accuracy, and risk management of art-related wealth.

26 Art & Finance Report 2017 | Introduction

SECTION 6 – Risk management and •• Price manipulation and other •• Reform of the Italian art market regulation anti-competitive behavior: One regulation: In Italy, a new reform aimed of the biggest perceived threats to at the existing Cultural Heritage Code is •• Call for modernization of the art the reputation of wealth managers, set to improve Italy’s competitiveness in market: 73 percent of wealth managers, collectors, and art professionals are the international art market. On 29 June 74 percent of art professionals, and issues linked to price manipulation, 2017, the Italian house of representatives 64 percent of collectors said that the insider trading, and other anti- (Camera dei Deputati) approved five art market needed to modernize its competitive behavior. amendments to a bill aimed at fostering business practices to meet the expected competition. standards of a transparent, trustworthy, •• Lack of market transparency: and developed marketplace. 79 percent of wealth managers and 62 percent of collectors see the lack of •• Self regulation preferred over transparency in the art market as one government intervention: Over of the key challenges in the art market. 77 percent of art professionals and Most of the problems outlined above 76 percent of collectors prefer a boils down to the fact that the art market self-regulated approach to establish continues to operate opaquely. trust and credibility in the art market. However, wealth managers feel that more •• Money laundering regulation will government regulation is required. A affect the art market: 65 percent mixed approach seems recommended of the wealth managers (up from 56 to support a sound growth of the art percent) felt that money laundering is market. a serious threat to the credibility of the art market. With tighter anti-money •• Authenticity, lack of provenance, laundering rules implemented around forgery, and attribution remains the the world, the art world will be forced to greatest threat to the reputation of comply with these new regulations. the art market: 83 percent of wealth managers see authenticity, provenance, •• Guidelines around money laundering and attribution issues as the greatest launched to assist art businesses: risks in the art market. Art professionals The Responsible Art Market Initiative are echoing this sentiment, with 81 (RAM) published its first set of guidelines percent saying these are major risks to to tackle the threats of money laundering the art market. and terrorist financing in the art market in January 2017. The guidelines are tailored •• Undisclosed conflicts of interest: to art transactions and focus on three 65 percent of wealth managers, 63 areas of enquiry: the client, the artwork, percent of collectors, and 69 percent and the transaction. of art professionals see issues around undisclosed conflicts of interest as a •• New regulations around the import problematic issue in the art market. of cultural goods in Europe: The new Increasing focus on due diligence in art rules could enter into force as early as transactions is called for. 2019, and are part of a broader plan to fight terrorist financing. The new rules are •• Lack of standards around aimed at bringing consistency and clarity professional qualifications in the on the types of restrictions and control art market: 65 percent of wealth measures proposed by the European managers feel that the lack of standards Commission in tackling the illicit trade in around professional qualifications in cultural objects. the art market is a major challenge, as it complicates the search and selection of individuals or firms with the appropriate knowledge and skills.

27 Art & Finance Report 2017 | Introduction

Priorities

Since the inaugural issue There have been a number of recurring The fact that several of our priorities of the “Art & Finance themes over the last six years, which also this year are related to those of previous will be addressed in this edition. They reports does not mean that there have not Report” in 2011, we have include the lack of transparency, the been developments, or that these issues identified a number of lack of valuation standards, the need for are not being addressed. Instead, this better understanding and quantification should serve as a reminder that the issues key priorities we believe of risk, and the need for an improved risk facing the Art & Finance industry revolve are important in relation management framework. Also, investment around a core set of challenges that require in better information infrastructure, all stakeholders’ attention and focus going to overcoming challenges improved knowledge-sharing between forward. and encouraging further stakeholders in the art and finance industry, and education and professional As in the previous four editions, the “Art & investment in the development for wealth managers remain Finance Report 2017” aims to prioritize key development of the key priorities this year. considerations for the future development of the Art & Finance industry, and to Art & Finance industry. We also discuss how technology and encourage dialogue and collaboration innovation can enable further growth and between the three key stakeholder groups: have the potential to address many of the wealth managers, art professionals, and art key challenges on the market, and while collectors. we have seen an increase in new ArtTech services and products, further investment We have structured this year’s priorities and better coordination between industry around three main areas: needs and current solutions are required. •• regulation

Last year, we launched a new section on •• technology and risk management regulation in the art market. This year we •• art and wealth management related have broadened our exploration of this issues topic to include more of the key issues surrounding art and risk management. It is becoming evident that regulatory issues, particularly money laundering regulations, will increasingly have an impact on the development and evolution of the market, and it is important that stakeholders in the art and wealth management industries take a proactive role in creating and coordinating the efforts to shape a better regulatory framework for the Art & Finance industry. This involves striking the right balance between self-regulation and statutory regulation.

28 Art & Finance Report 2017 | Introduction

Regulation—addressing the reputation 2. The art and wealth management of the art market industries should develop common 1. Improved transparency is essential standards and guidelines to address for the art market: One of the key reputational concerns: This year’s areas that may need to be addressed survey findings show that the lack of collectively by the wealth management art market regulation ranks as one industry and the art market is the of the top three concerns for wealth issue of transparency. As the wealth managers offering art-related services. management industry continues to The question is how best to move this grow and expand its investment in forward, and earlier studies show that art-related wealth services, this year’s the art trade might not be prepared to findings show that there is a sense of heightened concern regarding the lack of transparency in the art market. As the wealth management industry There is an opportunity for the various art-market stakeholders, in both the continues to grow and expand its private and the public sector, to drive this initiative forward in partnership investment in art-related wealth services, with wealth managers, particularly when it comes to education, information this year’s findings show that there is a and knowledge sharing, and data and research. There is a need for sense of heightened concern regarding innovation, and for better standards and guidelines, which should be developed the lack of transparency in the art market. as a collaborative effort between the stakeholders in the Art & Finance do this alone without external pressure. industry. Technology will continue to Instead of pressure coming directly from play a role in enhancing transparency the government, there is an opportunity on the art market, but it is also about for the art industry to collaborate with bringing in stakeholders who have the wealth management industry to kept a low profile in the evolution of influence and help shape new guidelines the Art & Finance market thus far. One and standards covering art and of these stakeholder groups is the collectibles in a wealth management non-commercial art sector (museums context. With more wealth managers and non-for-profit institutions). This providing art-related services to their sector’s deep knowledge and access clients, there will be an increasing need to expertise, combined with its market for the art industry to adhere to certain neutrality, could ensure that it plays a guidelines and practices, and better very important role in bringing more communication and collaboration trust and transparency to the art market between these stakeholders will through education, and the sharing of be required to ensure that these expertise, knowledge, and information expectations are aligned. It is likely with the wealth management sector. that guidelines produced in this way would be more nuanced and potentially less heavy-handed than government intervention, as wealth managers would have their clients’ best interests in mind when developing a framework.

29 Art & Finance Report 2017 | Introduction

New technology and risk management Technology will continue to play a 3. Using technology and innovation to support the growth of the Art & role in enhancing transparency on Finance industry: There is no doubt that technology will enable the evolution the art market, but it is also about of the Art & Finance industry. ArtTech startups have raised increasing amounts bringing in stakeholders who have of money in recent years: although the majority of the funding has gone kept a low profile in the evolution of toward art and e-commerce, there is a growing realization that investment the Art & Finance market thus far. also needs to go toward key enabling technologies, addressing issues such as transparency, valuation, authenticity, collection, and risk management. This is similar to how firms such as Schwab and Ameritrade revolutionized the financial investment arena by creating an online marketplace, and how crowdfunding continues to revolutionize real estate investment, investment in startups, and peer-to-peer lending. We believe that the same level of transparency, the democratization of information, and the improved access to investments that transformed the securities and real estate industry also have the potential to transform the Art & Finance industry in the years to come.

30 Art & Finance Report 2017 | Introduction

4. New specific models for art and risk 5. An increasing need for independent 6. Collection management and management are required: Given the and unbiased valuation combining wealth reporting systems need to new regulations affecting art market both expert and data-driven models: be combined: With a more holistic operations (see Section 5), increasing Valuation of art and collectibles is approach to art-related wealth, we wealth invested in art and collectibles, often considered to be subjective—an are likely to see an increasing demand and the complex nature of the global art rather than a science. Given the for integration between art collection art market, it is clear that a new risk increasing levels of wealth invested in management software and the banks’ management framework and standards art and the financial risk associated existing reporting systems. Although are required. Again, this is an area that with this, it is clear that greater there are a number of art collection will become increasingly important to standardization is required in terms management providers in the art market wealth managers, and greater emphasis of asset valuation and risk monitoring. (ArtLogic, Collectrium, Artbinder, and should be placed on investing and This has become particularly relevant Artbase to name a few), the strong focus developing better risk management, with the development of activities such on client discretion and confidentiality is due diligence, and reporting tools. It is as art-secured lending, art investment hampering the integration of these tools paramount that the art market industry funds, financial auction guarantees, etc. with existing wealth reporting. There and its expert providers (with their This does not mean that we advocate is a clear opportunity for art collection wealth of knowledge of object-specific reliance on a purely data-driven management systems to collaborate risks), together with other existing approach, but that a combination of with existing wealth reporting software third-party providers (offering services independent expert opinions alongside providers to see how passion-based such as collection management, price more historic and forward-looking data assets, such as art and collectibles, databases, forecasting data, and would provide a more transparent and could be integrated with overall wealth market performance indices), and credible approach to valuing these reporting, while simultaneously serving purveyors of fresh innovations (such non-traditional assets. The majority as a collection management system as blockchain, tagging technology, of art collectors and art professionals and facilitating the estate planning and the development of title registers) said in this year’s survey that valuation process—a service that has been rated start to combine their expertise. The was a service that should be provided by art professionals, art collectors, and challenge is to streamline the due- by the wealth management sector, wealth managers as one of the most diligence and risk management process and it is possible that this could lead vital art wealth management services. In in a fragmented industry like the art to greater standardization and better addition to the financial aspect, it is also market, although this could potentially guidelines with regards to valuations important not to forget the emotional be achieved through a credible third- (i.e., in the context of art-secured and social side of collecting art. The party due-diligence platform, which lending and mark-to-market valuations opportunity to access your collection would allow smaller, niche providers to for art investment funds). The existing online, and enjoy and selectively share “pipe-in” their knowledge, information, industry of valuers, appraisers, your art collection with others should and data—to measure and form an and providers of data and analytics be incorporated into this service. aggregated, holistic view of various should work in collaboration with This is a service that the majority risk factors. See Section 4 for further the wealth management sector to of existing collection management discussion of this topic. develop valuation standards and risk providers already offer, and the potential management tools that are better suited development of a hybrid collection/ to the financial risk associated with art wealth management reporting system and collectibles. is likely to generate significant interest in the current market.

31 Art & Finance Report 2017 | Introduction

Art and wealth management related 8. Moving from a reactive to a proactive 10. Estate planning, art philanthropy, issues art and wealth management and donations to public museums: 7. Strong leadership support is required approach: This year’s findings show that In this year’s survey, only five percent of when integrating art and collectibles the trend toward incorporating art and art collectors said that their collection in a new holistic wealth management collectible assets in wealth reporting will would go to a public museum, versus 67 model: Growing frustration is in contribute to the drive toward a more percent of art collectors, who had made evidence among wealth managers this holistic wealth management approach formal arrangements for their collection year in response to the fact that there and a much more proactive approach to to go to the family. At the same time, is not sufficient leadership support wealth invested in art and collectibles. public funding for the museum and to strategically develop art-related This is because wealth managers will gallery sector has dwindled in recent services to meet the increasing level have access to information about art- years, making the public sector more of demand from clients and embed related wealth. The ability to report dependent on private donations. Closer these services within a more holistic on and monitor art and collectible collaboration and communication wealth management model. According wealth represents an opportunity between wealth managers (and their to a recent Deloitte report,1 the and an effective way to provide value- estate management services) and public wealth management industry is under added services to clients. By raising museums’ needs could enable a large pressure to increase profit and to adapt awareness of the financial value and portion of individual art-related wealth to changing client needs, as well as risks associated with their clients’ art to end up in public museums, providing technology and innovation. The wealth and collectible wealth, wealth managers public access and the opportunity for management industry is facing a shift could develop a better understanding millions of people to enjoy these cultural from mainly providing investment of their clients’ total assets, which is treasures. advice to a holistic wealth management a prerequisite for the development model. This means looking at a client’s of a proactive and holistic wealth total balance sheet rather than only management strategy. the assets held with a wealth manager; in other words, clients are being 9. Education and professional offered services to boost their entire development for wealth managers: financial well-being. A holistic wealth As the wealth management community management model has the potential realizes the potential of art as part to open up new sources of revenue of a holistic wealth management and strengthen client relationships. strategy, more focus and investment However, this would involve the wealth in staff training and professional industry going beyond the current development will be required. Better core and building up expertise, new access to art market data, research, products and services related to art and and information could stimulate wider collectible wealth, and other passion- appreciation and interest in art-related based assets, which also requires services in the future. In order for the leadership support and endorsement wealth management industry to be from senior management. able to properly service clients’ art and collectible wealth, a significant investment in training, education, and access to market intelligence is required. As mentioned in Priority 1, we see the potential for a new type of relationship between the non- commercial art sector (museums and not-for-profit art institutions) and wealth managers. The non-commercial art sector could play a vital role in this education and knowledge-sharing process—and simultaneously add a 1 Deloitte Switzerland, “Innovation in Private Banking & new revenue source in addition to the Wealth Management - Embracing the Business Model Change” 2017 more traditional corporate sponsorship model. 32 Art & Finance Report 2017 | Introduction

The wealth management industry is facing a shift from mainly providing investment advice to a holistic wealth management model.

33 Art & Finance Report 2017 | Introduction

The future of art & wealth management How to bring passion into wealth management

Deloitte Art & Finance : Art & Finance is uniquely positioned at the intersection of three interconnected sectors

innc utur Private bankers Public museums Wealth managers Private museums Family oﬃces Corporate collectors Private investors Private collectors Art/collectibles fund Etc. promoters Art insurance companies Art trading companies Etc. Art & Finance

uin Companies selling art Art & media companies Digital art companies Technological art companies Art logistics companies Etc .

Source: Deloitte Luxembourg & ArtTactic Art & Finance Report 2017

34 Art & Finance Report 2017 | Introduction

For the past six years*, we have been monitoring the development and evolution of the Art & Finance industry, and particularly the role of art and collectible wealth within wealth management.

* The “Art & Finance Report” was launched in December 2011 and is now in its fifth edition. 35 Art & Finance Report 2017 | Introduction

One of the key findings from this year’s With an estimated US$1.62 trillion2 in art 2 Based on an estimate from the “Knight Frank Wealth Report 2017,” (six percent of global UHNWIs allocate report is the growing body of evidence and collectible wealth held by UHNWIs in assets to art and collectibles; pp. 63) and the fact that to suggest that wealth managers are 2016, and an estimated US$2.7 trillion3 by Wealth-X reported total UHNWI wealth of US$27.035 trillion in 2017, which gives an estimated US$1.62 trillion taking a more proactive approach when 2026, wealth managers seem to realize in art and collectible wealth. it comes to addressing art and collectible both the financial and emotional value 3 The ten-year estimate is based on the Wealth-X forecast wealth. Moreover, this year’s survey results attached to art and collectibles, and to of US$27.035 trillion in UHNWI wealth in 2016. We have assumed that UHNWIs wealth (US$) grows at the same represent the highest overall reading to be starting to take a more strategic and growth rate as the expected growth in the UHNWI pop- date for anticipated investment in art holistic approach to these passion-based ulation according to Knight Frank Wealth Report 2017. Knight Frank Wealth Report 2017 reports that 47 percent wealth management services over the next assets. Despite the auction market volatility of wealth managers having noted luxury investments 12 months. These findings indicate that art seen in the last two years, the global increasing in popularity among their clients. Based on this, we assume that the allocation of wealth toward art wealth management services are slowly but auction market saw total sales growth4 and collectibles rises from six percent to seven percent surely moving into the mainstream. of 319 percent between 2000 and 2016, as a global average, then an estimated US$2.706 trillion would be allocated to art and collectibles by 2026. 5 and with more wealth allocated to art 4 These sales are based on Sotheby’s and Christie’s four These results are confirmed by the fact and collectibles, this positive trend is likely main auction categories—Impressionist and Modern art, Post-War and Contemporary art, Old Masters art and that 88 percent of wealth managers (up to continue. Offering art and collectible Chinese works of art. from 78 percent in 2016) said that they management alongside other wealth 5 According to the “Knight Frank’s Wealth Report 2017,” a global average of 47 percent of wealth managers said believed that art and collectibles should be management services tailored to UHNWIs that luxury investments had become more popular with included as part of a wealth management is an opportunity to better serve clients, their clients. offering. In addition, 69 percent of the but providers also have a responsibility to wealth managers surveyed said that they ensure that all client assets are monitored expected their clients to want to include and protected. art and other collectibles in their wealth reports to have a consolidated overview of their financial and passion-based assets.

Global UHNWI Art & Collectibles Wealth 2016 to 2026 Estimates US$ 1.622 billion in 2016 to US$2.706 billion in 2026 ui I n n rt r idd t rt r n uro n ort ric rt r rt r rt r rt r rt r rt r 1n 202 US$883bn (2026)

n 7n 201 201 i n rt r 201 rt r

77n 202

atin Aerica ric n n n n rt r rt r rt r rt r

Source: Deloitte Luxembourg & ArtTactic Art & Finance Report 2017

36 Art & Finance Report 2017 | Introduction

One of the key findings from this year’s report is the growing body of evidence to suggest that wealth managers are taking a more proactive approach when it comes to addressing art and collectible wealth.

Art and wealth management Four core service areas

Typology of Art Wealth management services

Accatin eat rotectin eat roin aet anain ri

Museum endowments Art advisory Art investment Valuation Art funds Assets consolidation Stocks of art businesses Reporting P/E in start-ups Art insurance

Financing of art business eat anaer Passive portfolio management Art collection management Art risk management

Philanthropy advice Art-secured lending Art related inheritance & estate planning Securitiation

ranerrin eat onertin eat to incoe reatin a eac reatin an incoe trea

•• Client entertainment •• Art sponsoring

•• Internal education •• Corporate collection

Source: Deloitte Luxembourg & ArtTactic Art & Finance Report 2017

37 Art & Finance Report 2017 | Section 1 - The state of the global art market

38 Art & Finance Report 2017 | Section 1 - The state of the global art market

Section 1

The state of the global art market

BUTTERFLY KID (GIRL) © YINKA SHONIBARE MBE (2015), PHOTOGRAPHER: STEPHEN WHITE 39 Art & Finance Report 2017 | Section 1 - The state of the global art market

HIGHLIGHTS •• Cautious outlook for 2018: Despite the significant rebound in the first six •• Art and wealth management services months of 2017, the overall market needed in an increasingly complex art sentiment remains more cautious market: With more wealth allocated to about the next 12 months. The outlook art and other passion assets, a trend that regarding contemporary and modern is expected to continue in the coming art markets in the United States, China, 10 years, coupled with a more volatile Russia and Africa are looking more and uncertain global art market, suggest positive compared to 18 months ago, that a more sophisticated and dynamic while art markets in the United Kingdom, approach to managing art related wealth Europe, South Asia, Southeast Asia, is required in the future. Latin America, and the Middle East have •• Strong tailwind in the first half of turned less optimistic. 2017: Total auction sales at Sotheby’s, •• London and New York strengthen Christie’s, and Phillips were up 18 percent their market share in the first half of in the first half of 2017 compared to 2017: Despite the economic and political the same period last year. This was uncertainty around Brexit, London primarily fueled by an increase in auction sales based on Sotheby’s, sales of impressionist, modern, and Christie’s, and Phillips saw a US$404 contemporary art, as well as a 21 percent million increase in the first half of 2017 increase in sales of Chinese and Asian compared to the same period last works of art. The increase in sales comes year. New York maintains its dominant on the back of a global art market slow position, with 45 percent market share down between the second half of 2015 (up from 41 percent in 2016), ahead of and throughout 2016. Auction sales at London with 30 percent market share (up Sotheby’s and Christie’s across four of from 27 percent in 2016). the main auction categories6 were down 5.9 percent in 2015 and a further 35.7 •• Dealer market holding up better than percent in 2016. the auction market in 2016: The Art Basel Report 2017 reported an overall art market decline of 11 percent for 2016, while TEFAF’s art market report documented a small two percent increase Despite the in global art market sales, primarily driven by an estimated 20 percent significant rebound growth in dealer sales (offsetting an 18.75 percent fall in auction sales). Both reports in the first six highlight healthier growth in the private dealer market, and this could indicate months of 2017, that the overall volatility associated with the current auction market is having less the overall market impact on the private, non-auction art sentiment remains trade. more cautious about the next 12 months.

6 Contemporary art, Impressionist and modern art, Old Masters, and Chinese works of art 40 Art & Finance Report 2017 | Section 1 - The state of the global art market

•• Political and economic uncertainty perceived as the biggest risks to the A recent ArtTactic survey from June 2017 art market: A recent ArtTactic survey from June 2017 ranks political and ranks political and economic uncertainty economic uncertainty as the biggest risk to the development of the global as the biggest risk to the development of art market in the coming 12 months. Geo-political risks related to North Korea the global art market in the coming and Middle East, and Brexit-related uncertainties remain among the most 12 months. important political sources of risk in the art market. •• Growing popularity of luxury •• Uncertainty around Brexit could •• Speculation risks on the increase: investments: 37 percent of wealth have a negative impact on the UK The ArtTactic art market speculation managers surveyed by Knight Frank11 said contemporary art market in 2018: barometer7 is currently standing at 7.3, that their clients already had a number of Much of London’s relative success up 17.7 percent from January 2017. This luxury investments, such as art, wine, and following the Brexit vote last year can suggests that experts feel the current classic cars. A total of 47 percent of these be linked to the decline in sterling, art market recovery has reintroduced managers said that these luxuries had motivating buyers from outside Europe more speculative behavior, after a six- become more popular in recent years. to take advantage of the benefits of month market slowdown. The sharp Although personal enjoyment ranked as a lower exchange rate. However, 34 reversal in expert perceptions of risk the most significant client motivation, the percent of the experts surveyed in June and speculation calls the health of the potential for increased capital gains came 2017 believe that the UK’s post-war and recovery process into question, and in second, which implies that the financial contemporary art market will go up in the raises the question of whether the sharp aspects of luxury investments are gaining next 12 months (down from 47 percent in auction market rebound in 2017 is an in importance. January 2016) and 38 percent think that indication that we are entering a period the market will come down in the next 12 •• US contemporary art market outlook of increasing volatility in the art market. months (up from 9 percent who expected turns positive: Experts signal a more the market to decline in January 2016). •• Wealth growth recovers after a upbeat outlook for 2017–2018. Based on sharp fall in 2015 and is expected to the responses of experts surveyed by •• European art market outlook looks increase by 43 percent in the next ArtTactic in June 2017, 62 percent believe positive: 36 percent of the experts decade: The world’s ultra-high-net-worth that the US contemporary art market will surveyed believe that the European individual (UHNWI) population8 grew go up in the next 12 months (versus 47 contemporary art market will increase by 3.5 percent to 226,450 individuals in percent in January 2016). in the next 12 months (up from only 14 2016, a recovery from a sharp fall in 2015, percent in January 2016). This indicates according to a recent wealth report.9 that there has been a shift toward a Their combined wealth also increased in more positive stance on the European 2016, expanding by 1.5 percent to US$27 post-war and contemporary art market in trillion. However, the average net worth 2017, despite the political and economic of the ultra-wealthy declined for the uncertainty. first time since 2013. The total number of ultra-wealthy individuals is predicted to rise 43 percent10 to 275,740 by 2026. Predicted growth rates vary widely on a regional basis, with emerging economies still leading the way.

7 The ArtTactic risk and speculation barometer is part of a six-monthly art market expert survey conducted by ArtTactic. Respondents are asked to rate their perception of current art market risk and speculation on a scale from 1 to 10, where 1 is a very low level of risk/speculation and 10 is a very high level of risk/speculation. 8 UHNWIs are defined as individuals with US$30 million or more in net worth 9 Source: Wealth-X World Ultra Wealth Report 2017 10 The Wealth Report, 11th edition by Frank Knight, pub lished in March 2017 11 Source: World Wealth Report 2017 by Knight Frank 41 Art & Finance Report 2017 | Section 1 - The state of the global art market

FLOWER POWER KIDS (DUELING) © YINKA •• Chinese contemporary art market •• Sentiment in the South Asian modern SHONIBARE MBE (2014), outlook turns neutral-to-positive: and contemporary art market turns PHOTOGRAPHER: STEPHEN WHITE Chinese contemporary art market from positive to neutral in the first direction in 2017/2018 signals that the half of 2017: South Asian modern and market is getting more positive compared contemporary auction sales in the first to 2016. Based on the responses of six months of 2017 was 14 percent lower experts surveyed by ArtTactic, 32 percent than the first half of 2016. Based on the believe that the Chinese contemporary responses of the experts surveyed by art market will go up in the next 12 ArtTactic in June 2017, only seven percent months (versus 26 percent in January of the experts believe the market will 2016), and 22 percent believe that go up in the next 12 months (versus 40 the market will come down (versus 45 percent in January 2016) and 65 percent percent in January 2016. believe that the market will remain flat (versus 42 percent 12 months ago). •• China’s focus on cultural development and a regulated art market: The •• Slowdown in the Southeast Asian art Chinese government attaches great market: Modern and contemporary importance to the development of Southeast Asian art saw a 29.7 percent cultural projects, which are crucial year-on-year decrease in sales in 2016. to the soft power of China. In recent The auction sales in the first half of 2017 years, according to Asia Institute of Art suggest that the downward pressure & Finance (AIAF), the government has on this market could continue into the emphasized the healthy and regulated second half of the year. 17 percent of development of culture and the art the experts surveyed believe the market market through the introduction of new will go up in the next 12 months (down policies. from 40 percent in January 2016). A larger number of the experts (68 percent, up from 41 percent in January 2016), believe

42 Art & Finance Report 2017 | Section 1 - The state of the global art market

Art has the potential to make a good underlying asset for a financing or investment structure under sharia law.

that the Southeast Asian art market will •• Art and Islamic finance: Art has the •• African art auction market sees remain flat in the next six months. This potential to make a good underlying asset significant growth in 2017: The African indicates a shift toward a more negative for a financing or investment structure modern and contemporary auction stance on the modern and contemporary under sharia law. It is equally possible market has seen steady growth since art market in the region for the coming 12 that other Islamic financing structures 2014, but sales have accelerated this year months. can be used to fund art projects, such as as Sotheby’s launched its first African the renovation of old mosques or Islamic modern and contemporary art sale in •• Latin American auction sales fall in cultural properties. With an increasing May 2017 in London. 46 percent of the 2016, and experts remain divided interest in the region around art as an experts surveyed in June 2017 believe the about its 12-month outlook: Latin asset class, there are opportunities for African modern and contemporary art American auction sales in 2016 saw a banks and investment houses to address market will go up in the next 12 months year-on-year decrease of 27.2 percent the needs and opportunities associated (up from 39 percent in January 2016), following several years of steady growth. with art financing and investment in the only 12 percent think that the market will Based on the responses of the experts region. come down in the next 12 months (versus surveyed by ArtTactic in June 2017, 34 11 percent who expected the market to percent believe the market will go up •• Russian modern and contemporary decline in January 2016). (versus 25 percent in January 2016), 37 art market sees a positive start to percent believe that the Latin American auction sales in 2017, but experts •• Art & Finance in Africa: Rising global modern and contemporary art market remain cautious about its outlook: demand for African contemporary art will go down in the next 12 months Despite a positive start to the year, only and improved art market infrastructure (versus 14 percent in January 2016). 19 percent of the experts surveyed is likely to increase the demand for Art & by ArtTactic in June 2017 (up from 16 Finance-related services and initiatives •• Middle-Eastern auctions defy global percent in January 2016) believed that the in the African art market, supported by art market downturn: Total auction Russian art market would see a positive investment in art education, awareness sales of modern and contemporary growth trend this year. 46 percent of the raising, and capacity-building. Middle-Eastern art rose by 11.9 percent respondents believe that the Russian art in 2016. The first half of 2017 was also market could deteriorate in the coming marked by solid performance with 12 months (compared to 43 percent in US$23.4 million in sales, up 76.8 percent January 2016). from the second half of 2016 and 1.7 percent from the first half of 2016. However, there are concerns about the next 12 months, with 41 percent (up from 24 percent in January 2016) predicting that the Middle-Eastern art market will decline. Wars, terrorism, and geopolitical tension in the region were cited as the main reasons for this.

43 Art & Finance Report 2017 | Section 1 - The state of the global art market

STILL HALF FULL

Investors experienced a bout of nerves in the aftermath of the Brexit referendum and US presidential election, fearing that Europe’s elections in 2017 could yield similar shocks. These worries have proved unfounded so far and indeed the overall environment has been much more benign than expected.

By Alan Mudie, Responsible for Société Political mayhem was avoided in …but not in Washington and Général Private Banking Investment, Europe… Westminster Société Générale Mariano Rajoy’s minority center-right Theresa May’s inability to achieve an government has remained in power enhanced majority in June’s snap election in Spain, far-right populists failed to has added another level of uncertainty create upsets in neither the Austrian surrounding the Brexit negotiations. The presidential election nor the Dutch initial rounds of talks have shown no parliamentary poll, and recent surveys real progress on major stumbling blocks have credited Alternative für Deutschland such as the “divorce bill,” and opposition with 10 percent of voting intentions in is growing to the government’s plan to Within the UK September’s federal elections (well below achieve a clean break with the EU. In light the 15 percent registered in mid-2016). of the murky outlook, businesses have government, Perhaps most significantly, Emmanuel begun to make plans to transfer activities Macron won the French presidency with to the EU in order to ensure long-term some calls for a an explicitly reformist and pro-European access to the single market and customs Union platform. It now looks increasingly union. more pragmatic likely that Germany and France will be willing to forge ahead with much-needed The economic fallout is already becoming approach to Brexit reform of the economic and fiscal apparent. UK GDP growth in the first governance of the eurozone. half of 2017 averaged an annual rate negotiations have of around 1 percent, well below the This rather benign backdrop can in 2.2 percent pace registered in the been voiced. large part be attributed to the ongoing eurozone. Moreover, devaluation-induced improvement in Europe’s economic inflation—hitting 2.9 percent in August— performance. Unemployment continues is eating into household confidence and its steady decline, business confidence disposable incomes. has strengthened in both manufacturing and services, and consumer sentiment In the US, the boost to small business recently hit a 10-year high. This confidence that followed Donald environment is bolstered by a powerful Trump’s election has yet to be justified combination—the euro remains by progress on the president’s flagship undervalued despite its rally this year, reforms to trade policy and taxation. The monetary policy is exceptionally easy, White House has seen rapid turnover and governments have backed away from among advisers, which has added to the fiscal austerity. In addition, the recent perception of a lack of clear direction. rescue packages for banks in Spain and And the economic surprise index Italy suggest that a more pragmatic calculated by Citi hit a six-year low in early approach to solving the financial system’s summer. woes is gaining traction.

44 Art & Finance Report 2017 | Section 1 - The state of the global art market

STILL HALF FULL

However, we would not completely Furthermore, the improving outlook bonds whose coupons will be adjusted in avoid the US and the UK... has been recognized by currency line with any rise in inflation, and floating- First of all, with hope on Trump reforms traders, pushing the euro up by over rate notes where coupons are linked to at rock-bottom, any progress on 13 percent against the dollar since early base rates. healthcare reform, deregulation, or 2017. This has encouraged analysts to the tax code would come as a welcome begin to revise their earnings forecasts Regarding the corporate bond market, surprise to investors. Second, the US downward, given the eurozone’s the yield differential with government economy continues to create numerous significant reliance on international trade bonds is currently at extremely low levels, new jobs and with core inflation rising in some sectors. meaning that investment-grade corporate only gradually, it looks unlikely that the bonds offer little protection against Fed will be forced to tighten policy to the So, one shouldn’t extrapolate recent higher yields. Pockets of opportunity point where growth potential would be trends into the future. The outlook for do exist—in particular, we highlight the choked. Finally, economic surprises tend the eurozone has improved but downside attractions of the financial sector where to come in waves—after a long period risks remain. And while the challenges credit quality has been vastly improved of negative surprises, economists tone faced by Prime Minister May and under the impulse of regulatory pressure. down their forecasts opening the way for President Trump are daunting, they are We also note the improved macro a cycle of positive surprises. Indeed, the not insurmountable. fundamentals in a number of emerging Citi index has staged a strong rally since markets and the attractive pick-up in mid-June. We still recommend a moderately yields to be found in that segment. risk-on stance Within the UK government, some Fixed income markets face several The expansion currently underway in the calls for a more pragmatic approach challenges. The US Federal Reserve is global economy is above all supportive to Brexit negotiations— most notably continuing gradual normalization of its for equities, as are the pick-up in earnings from Chancellor Hammond—have been monetary policy, and is beginning to and the improvement in fundamentals. voiced. It is possible that Mrs. May’s poor shrink its investment portfolio, which Valuations are high on average, and electoral performance could encourage a expanded dramatically during the three investors should favor markets that have leadership challenge, and any inkling of a successive rounds of quantitative easing. catch-up potential, such as the eurozone “softer” Brexit might spark a reappraisal Other central banks are likely to follow and Japan. Price momentum is strong of the downside risks for sterling. suit in coming quarters, most notably the across the board, but some sentiment European Central Bank, which we expect indicators—such as implied volatility— ...while downside risks remain in to reduce its asset purchase program show signs of complacency. Well- the eurozone next year. This will put downward diversified holdings across asset classes In Italy, where there is still talk of a pressure on fixed income markets, with and investment themes should enable snap election, the populist Five Star yields—which move inversely to bond investors to capture the upside potential movement has been leading the ruling prices—rising over the next 12 months. without taking on undue risk. Democratic Party in most polls since late In this context, we prefer inflation-linked February. In Spain, Prime Minister Rajoy’s minority government could yet face a challenge from the upsurge in support for the left-wing PSOE. In addition, Catalonia has again begun to push for its independence from Spain, in a challenge to the government’s refusal to sanction a referendum. Also, there remains a risk that Emmanuel Macron’s labor market reforms could provoke widespread protest and strikes.

45 Art & Finance Report 2017 | Section 1 - The state of the global art market An art +18 percent market auction sales growth in the first six months of 2017

Although it is too early to say whether the art market is on the path to a full recovery after a recovery? challenging 2016, the signs from the first six months of 2017 suggest that buyer and seller confidence is returning to the overall auction market. Total auction sales at Sotheby’s, Christie’s, and Phillips were up 18 percent, primarily fueled by an increase in sales of impressionist, modern, and contemporary art, as well as a 21 percent increase in sales of Chinese and Asian works of art. This means that the three auction houses generated US$1.08 billion more in sales from these collecting categories in the first half of 2017, compared to the first half of 2016.

Total lots sold at auction (all categories) at Sotheby's, Christie's, and Phillips)

57k 51k

1st half 2016 1st half 2017

+US$912 million

more sales generated by impressionist, modern, and contemporary art in the first half of 2017 compared to the same period in 2016.

Impressionist and modern art auction sales saw a 62 percent increase in the first six months of 2017 compared to the same period last year; this was followed by a 25 percent increase in sales of post-war and contemporary art. Post-war and contemporary art accounted for 30.2 percent market share of overall sales in the first six months of 2017.

46 Art & Finance Report 2017 | Section 1 - The state of the global art market

Total auction sales in US$ million (all categories) at Sothby's, Christie's, and Phillips)

5.713 4.843

1st half 1st half 2016 2017

-10 percent in the number of lots sold at auction in the first six months of 2017

Despite the increase in overall sales, the number of lots sold in the first six months of 2017 decreased by 10 percent to 51,263 works of art and collectibles. This resulted in an overall increase in the average auction price across all categories at Sotheby’s, Christie’s, and Phillips of 31 percent, from US$85,000 in the first half of 2016 to US$111,400 in the first half of 2017.

Auction sales by category (n US$ million) H1 2017 vs H1 2016 (Sotheby's, Christie's, Phillips)

1st alf 1 1st alf 1

ost-ar ontemorar rt 1 oern mressionist rt 11 1

hinese sian rt 1 eels atches

ecoratie rtsl aster rnitre aintings raings merican rtroean rt th entr esign slamic nian ile astern rt 1 1 1 1 1

Source: ArtTactic 47

Art & Finance Report 2017 | Section 1 - The state of the global art market +21 percent growth in Chinese and Asian auction sales in the first six months of 2017

Millions

922 June 887

2.566 May 2.251

700 April 763

1.220 March 229

201 February 563

104 January 151

2016 (H1) 2017 (H1) Source: ArtTactic

The significant jump in sales for March 2017 was due the Fujita Museum,” which raised US$262.8 million alone. to a rescheduling of the major winter season, normally While the first quarter of 2017 saw auction sales growth taking place in early February, to accommodate the of 61.8 percent, Q2 growth fell back to a more modest Chinese New Year. This is a sign that Asian buyers are +7.4 percent compared to the same quarter in 2016. playing an increasingly important role in today’s market. This could signal that the speed of the recovery might be Contributing strongly to Asian growth in the first half of tapering off as we enter the second half of the year. 2017 was the New York Asian Art Week in March, and in particular the sale entitled “Important Chinese Art from

48 Art & Finance Report 2017 | Section 1 - The state of the global art market +31 percent growth in auction sales in London in the first half of 2017, followed by 29 percent growth in New York auction sales.

All Auctions at Sotheby's, Christie's and Phillips - By Total Sales per Location

Millions

e ork onon ong ong enea aris ilan ther

1st alf 1 1st alf 1 Source: ArtTactic

Despite the economic and political uncertainty around of London with 30 percent market share (up from 27 Brexit, London auction sales based on Sotheby’s, percent in 2016). European auction centers such as Paris, Christie’s, and Phillips saw a US$404 million increase in Milan, and Geneva ended up with a 10 percent market the first half of 2017 compared to the same period last share after the first six months of 2017, down from 14 year. New York maintains its dominant position, with 45 percent in 2016. percent market share (up from 41 percent in 2016), ahead

49 Art & Finance Report 2017 | Section 1 - The state of the global art market

Figure 1. Christie’s and Sotheby’s: Auction Sales (in millions US$) by category 2000 - 2017 (H1) CAGR (2000-2017) 9.3%

1 1 1 1

11 1 1 1

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1st Half 2017

Chinese Art Old Masters Impressionist & Modern Contemporary Source: ArtTactic

Should we expect more art market art market report documented a small months, with the economic indicator volatility in the future? two percent increase in global art market component dropping 32.4 percent in the A strong tailwind has helped major global sales, primarily driven by an estimated 20 last six months. Geopolitical factors such art auction segments such as post-war percent growth in dealer sales (offsetting as political instability in the UK and US, and contemporary art, impressionist an 18.75 percent fall in auction sales). conflicts in the Middle East, the fear of and modern art, and Chinese and Asian Both reports highlight healthier growth in terrorism, and heightened uncertainty works of art in the first six months of 2017, the private dealer market, and this could around China’s debt bubble were some adding US$1.08 billion12 in additional sales indicate that the overall volatility associated of the key concerns mentioned by survey compared to the same period last year. with the current auction market is having participants. less impact on the private, non-auction art After five years of uninterrupted growth trade. Does this mean we are facing an imminent between 2009 and 2014, the global art reversal of the market recovery? Probably market started to slow down in the second So, how sustainable is the latest auction not—the share of market experts who half of 2015, a trend that deteriorated recovery? Based on the findings of the believe the positive trend will continue for throughout last year. Auction sales at ArtTactic art market confidence survey the remaining half of the year rose from 39 Sotheby’s and Christie’s across four of the in June 2017, market confidence has not percent in January 2017 to 45 percent in main auction categories13 were down 5.9 increased in-line with the jump in auction June 2017. However, the overall decline in percent in 2015 and a further 35.7 percent sales for the first six months of 2017. In art market confidence does suggest that in 2016. fact, the six-monthly confidence indicator the pace of the recovery could be slowing has declined by 13.4 percent from the level down. These auction market trends were also seen six months ago, raising questions reflected in the wider global dealer and about the speed and sustainability of the The bigger question is whether we are auction market reported in the “Art Basel current art market recovery. starting to experience a shift in the way Report 2017,” which noted an overall art that the global art market behaves. Are market decline of 11 percent for 2016, while The confidence indicator has been affected auction market cycles becoming shorter auction sales saw a more severe 26 percent by an increasingly negative outlook and are levels of sales volatility increasing? decline last year. However, TEFAF’s recent for the global economy in the next six And is this caused by changing motivations

12 Based on auction at Sotheby’s, Christie’s, and Phillips only. 13 Contemporary art, Impressionist and modern art, Old Masters, and Chinese works of art

50 WIND SCULPTURE I © YINKA SHONIBARE MBE (2013), Art & Finance Report 2017 | Section 1 - The state of the global art market PHOTOGRAPHER: JONTY WILDE

Geopolitical factors among art buyers and sellers? With the outcome of an auction season. The recent growing interest in art as an asset class sale of Jean-Michel Basquiat’s “Untitled” such as political identified by the findings of this report (1982) for US$110.5 million (with a presale instability in the UK since we launched the first edition in estimate of more than US$60 million) at 2011, is the art market starting to behave Sotheby’s New York in May accounted for and US, conflicts in in a similar fashion to other asset classes more than a third of the overall auction the Middle East, the and investments? And could art market sale value at Sotheby’s that evening. The lot volatility be set to increase as art buyers carried both a financial guarantee and an fear of terrorism, and become more investment-oriented and irrevocable bid14. heightened uncertainty increasingly amenable to short-term investment horizons? (see survey findings The recent auction sales rebound among around China’s debt if investment/financial motivations are the top auction houses in the first half of bubble were some increasing) If this is the case, the art market 2017 could indicate that the art market and its participants need to start thinking was going through a supply adjustment of the key concerns about risk management in a different way. rather than a price correction in 2016. mentioned by survey In Chapter 6, we discuss and address This adjustment was largely caused many of the issues related to the growing by a reduction in the level of financial participants demand for art and risk management tools. guarantees offered, making the process less attractive for potential sellers of top- A new auction dynamic driven by quality art. The level of financial guarantees financial guarantees for the major auction sales by Christie’s, The divergence in sales trends between Sotheby’s, and Phillips (such as post-war the auction market and the dealer market and contemporary evening sales, dropped 14 Under an “irrevocable bid” arrangement, the auction suggests that there are different dynamics to around US$220 million15 in May 2016 house finds a person prepared to submit a bid for an and risks playing out in the two spheres. from US$634 million in May 2015, but undisclosed amount. Under normal circumstances, the financial guarantor do not bid on the lot, but offers the The nature of the fiercely competitive jumped up again to US$425 million in May seller a guaranteed amount for the artwork. In this case, auction market, and particularly the rivalry 2017. the combination of both a financial guarantee and an irrevocable bid could suggest that the auction houses felt between Sotheby’s and Christie’s, and the need to “hedge” the financial guarantee by finding a increasingly Phillips at the high end of buyer prepared to commit to bid on this particular lot. 15 These values are calculated based on aggregating the the market, has led to heavy reliance on value of lots that are flagged up as being guaranteed by financial guarantees to secure top-quality the auction houses using the low presale estimate for each lot. While auction houses are required to disclose auction supply. With the value of art financial guarantees to bidders, their hazy wording reaching astronomical levels, single lots prevents us from knowing if the guarantee is provided by a third party or by the auction house itself. can play a significant role in the overall

51 Art & Finance Report 2017 | Section 1 - The state of the global art market

Although financial guarantee levels for March evening sale and 46 percent of the post-war and contemporary evening sales sales value guaranteed for the June sales in London have traditionally stood at a this year being supported by guarantees. more modest level (between 15 percent This shows how important and integral the and 20 percent of the total sales value financial guarantee market has become based on the low estimate), there has been to the overall performance of the auction a significant shift in the level of guarantees market today. offered this year, with 33 percent of the

Figure 2. Financial Guarantees: New York Post-War & Contemporary Evening Sales (Sotheby's, Christie's and Phillips) (in millions US$)

1 1 1

68%

62% 58% 57% 56%

37%

Nov 2014 May 2015 Nov 2015 May 2016 Nov 2016 May 2017

Financial Guarantees - New York Post-War & Contemporary Evening sales % of overall sale Source: ArtTactic

Figure 3. Financial Guarantees: London Post-War & Contemporary Evening Sales (Sotheby's, Christie's and Phillips) (in millions US$)

1 1 1 46%

33%

22% 18% 19% 15% 16%

June 2015 October 2015 February June 2016 October 2016 March 2017 June 2017 2016

Financial Guarantees - London Post-War & Contemporary Evening sales (USD) % of overall sale Source: ArtTactic

52 Art & Finance Report 2017 | Section 1 - The state of the global art market

The divergence in sales trends between the auction market and the dealer market suggests that there are different dynamics and risks playing out in the two spheres.

53 Art & Finance Report 2017 | Section 1 - The state of the global art market

Art market risks: could speculation A recent ArtTactic survey from June 2017 According to the undermine the recovery process? ranks political and economic uncertainty as Since 2006, ArtTactic has monitored the biggest risk to the development of the “World Wealth perceptions of art market risk and global art market in the coming 12 months. speculation, particularly focusing on the With tricky Brexit negotiations under Report 2017” by post-war and contemporary art market. way, a new level of political and economic The ArtTactic art market speculation uncertainty is likely to dominate several Knight Frank, 37 barometer16 is currently standing at 7.3, of the world’s largest art markets in the up 17.7 percent from January 2017. This coming years. percent of wealth suggests that experts feel the current art market recovery has reintroduced more Economic outlook: global economic managers surveyed speculative behavior, after a six-month activity is picking up pace market slowdown. According to the latest report published by said that their the World Bank in June 2017, global activity The sharp reversal in expert perceptions of is picking up, and this is contributing to an clients already had risk and speculation calls the health of the improvement in confidence. A recovery in recovery process into question, and raises industrial activity has coincided with an a number of luxury the question of whether the sharp auction increase in global trade, after two years of market rebound in 2017 is an indication weakness. According to the World Bank, investments, such that we are entering a period of increasing global growth is projected to strengthen volatility in the art market. So, what are the to 2.7 percent in 2017 and 2.9 percent as art, wine, and current risks in the market? in 2018–19, in line with January 2017 forecasts. Activity in advanced economies classic cars. is expected to gain momentum in 2017, supported by an upturn in the United States. Growth forecasts have been upgraded in the Eurozone and Japan, reflecting strengthening domestic demand and exports.

16 The ArtTactic risk and speculation barometer is part of a six-monthly art market expert survey conducted by ArtTactic. Respondents are asked to rate their perception of current art market risk and speculation on a scale from 1 to 10, where 1 is a very low level of risk/speculation and 10 is a very high level of risk/speculation.

Figure 4. ArtTactic Art Market Risk & Speculation Barometer 2006 - 1st Half 2017 Where 1= Very low Risk/ Speculation and 10 = Very high Risk/ Speculation

9,0

8,0 7,0 1 1 6,0 1 5,0 1

4,0 1 3,0

2,0

1,0

Risk Speculation Source: ArtTactic

54 Art & Finance Report 2017 | Section 1 - The state of the global art market

In emerging markets and developing According to the “World Wealth Report economies, growth is predicted to recover 2017” by Knight Frank, 37 percent of to 4.1 percent in 2017 and reach an average wealth managers surveyed said that of 4.6 percent in 2018–19 as obstacles to their clients already had a number of growth for commodity exporters diminish, luxury investments, such as art, wine, and while activities for commodity importers classic cars. A total of 47 percent of these continue to be robust. Risks to the global managers said that these luxuries had outlook remain on the downside, and become more popular in recent years. include increased trade protectionism, Although personal enjoyment ranked as economic policy uncertainty, the possibility the most significant client motivation, the of financial market disruptions, and, over potential for increased capital gains came the longer term, weaker potential growth, in second, which implies that the financial the report says. aspects of luxury investments are gaining in importance. Global wealth trends: UHNWI population and wealth grows in 2016 According to the “Wealth-X World Ultra Growing client demand for luxury investments and rising Wealth Report 2017”, the world’s ultra- philanthropic engagement will have implications for the high-net-worth (UHNWI) population17 grew by 3.5 percent to 226,450 individuals in wealth management sector in the coming years, and 2016, a recovery from a sharp fall in 2015. as the findings in this report confirm, we are already Their combined wealth also increased in 2016, expanding by 1.5 percent to US$27 starting to see more wealth managers taking a proactive trillion. However, the average net worth of approach to these types of “personal investment.” the ultra-wealthy declined for the first time since 2013.

Despite the overall increase in UHNWI Growing client demand for luxury population and wealth, there were investments and rising philanthropic significant regional differences in dollar- engagement will have implications for the denominated wealth creation, with North wealth management sector in the coming America (+5.1 percent) and Asia (+3.5 years, and as the findings in this report percent) recording the only significant rises confirm, we are already starting to see in wealth in 2016. However, Latin America more wealth managers taking a proactive and the Caribbean registered a significant approach to these types of “personal fall and Africa also posted a decline. The investment.” This also dovetails with the Figure 4. ArtTactic Art Market Risk & Speculation Barometer 2006 - 1st Half 2017 Middle East remained largely unchanged, ultra-wealthy’s growing requirement for Where 1= Very low Risk/ Speculation and 10 = Very high Risk/ Speculation while Europe followed a gentler trajectory, tailored solutions in today’s increasingly with the UHNWI population and its total commoditized world. wealth coming in slightly lower than in 2015.

The stock of liquid assets (primarily cash) owned by the ultra-wealthy stood at US$9.6 trillion in 2016, according to the “Wealth-X World Ultra Wealth Report 2017.” These assets accounted for 35.4 percent of UHNWIs’ holdings. One of the key findings of the report is that abundant liquidity also reflects a continuing search for yield and underlines the enormous spending potential of the world’s ultra-wealthy.

17 UHNWIs are defined as individuals with US$30 million or more in net worth 55 Art & Finance Report 2017 | Section 1 - The state of the global art market

Art market outlook 2017–2018 In a year of political shocks and economic uncertainty, the world’s modern and contemporary art markets saw an annual contraction in auction sales of 32.2 percent, predominantly led by the fall in the US and the UK post-war and contemporary art market. RA Mirroring the volatile global backdrop, RAA there were marked regional differences in the modern and contemporary art markets. Among the 10 regional modern and contemporary art markets monitored in this report, two—the Middle-East and Africa—recorded an increase in auction sales in 2016. In contrast, 2016 was a RA RA difficult year for the US, UK, and European contemporary art markets, which suffered double-digit falls in auction sales, although these markets have been the fastest to ARA rebound in the first six months of 2017. Elsewhere, the picture was muted, with auction sales edging lower in China, South Asia, Southeast Asia, and Latin America.

RAA

56 Art & Finance Report 2017 | Section 1 - The state of the global art market

RA RAA

RA RA

ARA

RAA

57 Art & Finance Report 2017 | Section 1 - The state of the global art market

Where is the global art market heading in The same goes for the Russian art market, the next 12 months? Will the positive sales where sales take place in London but most trends in the first half of 2017 continue into buyers are from Russia or the CIS. Our the second half of the year? analysis is predominantly based on auction sales by Christie’s and Sotheby’s, although The global contemporary art market other auction houses are included as faced challenging conditions in 2016, but they represent a major share of the there are signs that buyer confidence is overall market for that particular modern returning and that the global market is and contemporary art segment. This is recovering from the 2016 downturn. In highlighted in each individual section. this section of the report, we will take a For the United States and Europe, and closer look at various regional modern China and Africa, we have used the and contemporary art markets and their contemporary art category to reflect broad outlook for the coming 12 months. market trends. However, in respect of the markets for artworks by Indian, Middle As in all previous editions of the Art & Eastern, Latin American and Southeast Finance report, our primary focus in the Asian artists, we have included the modern art market section is global trends in the art segment based on the auction category modern and contemporary fine art market. classification used by the main auction We believe that the trends emerging in houses such as Sotheby’s and Christie’s. the modern and contemporary art sector across the different regions provide a We have also added wealth trends for reliable indication of nascent trends in each of the geographical markets, when these art markets more broadly. We have available, drawing on results from research also aimed to link art market dynamics reports produced by Wealth-X and Knight to overall wealth trends to hone our Frank in 2017. understanding of the potential connections between the global art market and the global wealth management industry. The following analysis focuses on modern and contemporary art by artist origin, focusing on the United States, Europe, The global contemporary art market China, India, the Middle East, Latin America, Southeast Asia, Russia, and Africa. Rather faced challenging conditions in 2016, but than providing a comparative analysis between the different regional markets, the there are signs that buyer confidence is analysis will focus on the art market and wealth trends within each region to see returning and that the global market is how the two elements might be linked, and what this may tell us about the potential for recovering from the 2016 downturn. the Art & Finance industry.

Our art market analysis is not necessarily limited to auction sales data generated within the country or region itself. For instance, our Latin American modern and contemporary art market analysis is based on sales at Sotheby’s, Christie’s, and Phillips in New York, but the majority of the buyers in these sales are of Latin American origin.

58 Art & Finance Report 2017 | Section 1 - The state of the global art market

Figure 5. Market Share: Regional Modern & Contemporary Art Markets

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S S roe 2011 2012 2013 2014 2015 2016 1st Half 2017

Source: ArtTactic

Figure 6. Market Share: Regional Modern & Contemporary Art Market (Excluding US/European contemporary art market)

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2011 2012 2013 2014 2015 2016 1st Half

Source: ArtTactic

59 Art & Finance Report 2017 | Section 1 - The state of the global art market

geo market Wealth indicator Buy indicator Treasure assets geo market Wealth indicator Buy indicatorgeo marketTreasure assetsWealth indicator geo Buymarket indicator WealthTreasure indicator assets Buy indicator Treasure assets Table 1. Regional market trends in modern and contemporary art and 2018 outlook

Geographicalgeogeo market market WealthWealth indicator auctionindicator FutureBuyBuyArt indicator indicatormarket wealth trend TreasureTreasureCollector indicators: assets assets outlookgeo marketPercentageProportionWealth allocation indicator of clientsBuy who indicator TreasurePercent assets who believe luxury Modernauction andArt contemporary market trend Collector outlookauctionPercentage ArtallocationArt market market trend Collectoroutlookauction outlook trendArt marketPercentage trend allocationCollectorArt collector outlook Percentage outlook allocation 201623 market predicted growth in have a number of luxury investments are becoming auction sales trend 2015-201621 2017-201822 UHNWIs in the next 10 investments, such as art, more popular20 years18 wine, or classic cars19 Global trends +43% 37% 47% Although there are some Economic uncertainty has The majority of art collectors have a auctionauction ArtArt market market trend trend CollectorCollector outlook outlook PercentagePercentage allocation allocationauction Art market trend Collector outlook Percentage allocation regional differences, 8 out of 10 a dampening impact on neutral or positive outlook for the next 12 modern and contemporary art confidence in the global art months. However, the outlooks for South markets were down in 2016. market. With all art markets Asia, the Middle East, and the UK modern (except India) expressing less and contemporary art markets are positive development in the gloomier than they were 12 months ago. next 12 months.

+30% 44% 48% -30% +20% Art collector poll: market direction UP: 32% United States FLAT: 52% DOWN: 16%

+30% 39%24 49% -41% -30% Art collector poll: market direction UP: 32% FLAT: 52% United Kingdom DOWN: 16%

+12% 39% 49% -21% -3% Art collector poll: market direction UP: 36% FLAT: 44% Europe DOWN: 20%

+140% 28%25 44% -16% +60% Art collector poll: market direction UP: 32% China FLAT: 46% DOWN: 22%

+39% 32% 38% +11.9% -41% Art collector poll: market direction UP: 25% Middle East FLAT: 34% DOWN: 41%

+150% 26 28% 44% -24% -78% Art collector poll: market direction UP: 7% FLAT: 65% South Asia DOWN: 28%

+37% 46% 64% -27% -26% Art collector poll: market direction UP: 34% Latin America FLAT: 29% DOWN: 37%

+30 to +170%27 28% 44% -30% -35% Art collector poll: market direction UP: 17% Southeast Asia FLAT: 68% DOWN: 28%

+60% 33% 40% -4% +6% Art collector poll: market direction UP: 19% Russia FLAT: 35% DOWN: 46%

+19% 32% 55% +12% +0% Art collector poll: market direction UP: 46% Africa FLAT: 42% DOWN: 12%

18 Knight Frank, “The Wealth Report 2017,” 11th edition, page 67 19 Knight Frank, “The Wealth Report 2017,” 11th edition, page 64 20 Knight Frank, “The Wealth Report 2017,” 11th edition, page 64 21 These auction sales are predominantly based on sales by Sotheby’s and Christie’s, but will also include domestic auction houses for markets such as China, India, and Africa. 22 The art collector outlook for 2017–18 is based on an annual ArtTactic art collector survey conducted in June 2017. The percentage represents the change in the ArtTactic confidence indicator between 2016 and 2017. 60 Art & Finance Report 2017 | Section 1 - The state of the global art market geo market Wealth indicator Buy indicator Treasure assets geo market Wealth indicator Buy indicatorgeo marketTreasure assetsWealth indicator geo Buymarket indicator WealthTreasure indicator assets Buy indicator Treasure assets