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April 2014
ART MARKETS: A NEW ERA
CONFIDENTIAL
2
CONTENTS
Confidential | Art Markets: A New Era I ECJ Capital | April 2014
Executive Summary
Art as an Alternate Asset Class
Global Art Sales and Key Trends
Asian Art Market – A Perspective
Art Fund Industry
Key Challenges for Art Investments
Confidential | Art Markets: A New Era I ECJ Capital | April 2014 3
Executive Summary
Investment in art, which was commonly classified as ‘passion investment’, has been redefined as an attractive alternative asset
Art has a low or negative correlation with other traditional asset classes, thereby providing an appealing diversification opportunity
In 2012, artwork worth €43bn was traded globally, up nearly 2x from the amount traded 10 years earlier
Although sales are still below the peak in 2007, owing to the global recession, average transaction size has grown robustly and remains almost
1.5x that in 2002
Sales of fine & decorative art declined in auction as well as dealers markets in 2012, primarily due to lower volumes
However, both sales channels expanded more than 2x in the last decade
Buyers are more inclined toward post-war/contemporary and modern art investments which, together, accounted for 73% of global art sales in 2012
Post-war and contemporary art yielded returns of 130% and 121%, respectively, over 1998–2013, exceeding that of the global art index (105%)
The global investable wealth of high net worth individuals (HNIs) is expected to increase at a CAGR of 6.8% to US$55.8 trillion (tn) by 2015, primarily
driven by growth in the Asia-Pacific region (CAGR of 9.8%)
Hence, the Asia-Pacific region would remain the key market for growth
Asia has emerged as the growth engine of the global contemporary art market, as the continent is home to 12 of the top 20 cities by art turnover
China is the region’s strongest market, with art sales increasing 10x during 2004–12
Southeast Asia is also witnessing increasing traction
Southeast Asian art worth US$27mn was auctioned in Sotheby’s fall 2013 auctions, more than double the presales estimate of US$13mn
Increasing demand for art investments is driving growth in the art fund industry; more than a third of these funds are based in China
Key challenges in the art market are the global economic environment, valuation of art, illiquid market, high cost, volatile performance, risks to title and
authenticity, and high barriers to entry
Confidential | Art Markets: A New Era I ECJ Capital | April 2014 4
Source: JP Morgan, ECJ Capital Research
ART HAS A LOW CORRELATION WITH OTHER FINANCIAL ASSET CLASSES
During the 25 years to 2011, art (as measured by the Mei Moses World Art Index) had almost zero correlation with US equities and was negatively correlated with fixed income and real estate investment trusts (REITs)
Emergence of art as potentially strong alternative asset class improves its popularity
S&P 500 Equity Index
MSCI EAFE Equity ETF
FTSE NAREIT All Equity REIT
Barclays Aggregate Bond
S&P GSCI Commodity Index
Mel Moses World All Art
S&P 500 Equity Index 1.0000
MSCI EAFE Equity ETF 0.7128 1.0000
FTSE NAREIT All Equity REIT
0.4919 0.4440 1.0000
Barclays Aggregate Bond
0.2311 -0.1944 0.1287 1.0000
S&P GSCI Commodity Index
0.1226 0.3558 0.1723 -0.2256 1.0000
Mel Moses World All Art
0.0003 0.1524 -0.1719 -0.1788 0.1983 1.0000
Confidential | Art Markets: A New Era I ECJ Capital | April 2014 5
2007
2013 Q1
33.0%
28.2%
27.0%
26.1%
17.0%
20.0%
14.0%
15.7%
9.0%
10.1%
Equities Fixed Income Cash/Deposits Real Estate Alternative Inv.
13.8%
27.9%
15.9%
5.0%
37.4%
Jewelry, Gems, & Watches Luxury Collectibles* Art Sports Investments**
Other Collectibles***
31.6%
19.0%
16.9%
8.0%
24.4%
Art currently forms an increasing component of HNIs’ investment portfolios
ALTERNATIVE INVESTMENTS CONSTITUTE ~10% OF HNIs’ WEALTH
Source: Capgemini, Merrill Lynch, RBC, ECJ Capital Research
2007 2013 Q1
* Luxury Collectibles include automobiles, boats, and jets, among others; ** Sports Investments comprise sports teams, sailing, and race horses, among others; * Other Collectibles include coins, wine, and antiques, among others
ART ACCOUNTS FOR ~17% OF HNIs’ ALTERNATIVE INVESTMENTS
Growing economic uncertainty is leading to a rise in the share of alternate investments in HNIs’ investment portfolios
Within the alternative investment asset class, investments in art are rising significantly
Confidential | Art Markets: A New Era I ECJ Capital | April 2014 6
Source: Deloitte’s Art & Finance Report 2013, ECJ Capital Research
According to the Deloitte ‘Art & Wealth Management Survey 2013’, although non-financial elements dominate, a majority of wealth managers, collectors, and art professionals favor investments in art due to diversification benefits as against investment returns
Diversification benefits, an important driver of investment in art
43% of Wealth Managers
44% of Art Collectors
59% of Art Professionals
PORTFOLIO DIVERSIFICATION MORE IMPORTANT THAN INVESTMENT RETURNS
Stated portfolio diversification was one of the strongest arguments for
including art and collectibles in traditional wealth management
Revealed portfolio diversification was the primary motivation for
investing in art
Said they are motivated by opportunities for portfolio diversification
In the long term, the
diversification benefit
reduces portfolio risk
even though the impact
of global uncertainties
and economic
situations trickles
down to every asset
class, including art
Confidential | Art Markets: A New Era I ECJ Capital | April 2014 7
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
22.3 18.624.4 28.8
43.348.1
42.2
28.3
43.0 46.1 43.0
25.8 25.4 26.6 28.232.1
49.8
43.7
31.035.1 36.8 35.5
Global Art Market Sales (€ bn) Global Art Market Transaction Volumes (mn)
CAGR of Sales Value: 6.8%
CAGR of Transaction Volume: 3.2%
€863 €734 €917 €1,022 €1,350 €965 €965 €914 €1,224 €1,254 €1,211
Global art sales on a strong uptrend, approaching pre-crisis level
GLOBAL ART MARKET EXHIBITING STRONG GROWTH
Over the past decade, the value of art sales increased almost 2x, whereas average transaction size expanded around 1.5x
Source: The European Fine Art Fair (TEFAF), 2013, ECJ Capital Research
Art market
rebounded
significantly in 2010
and 2011,
approaching the pre-
crisis level
In 2012, deceleration
in China impacted art
sales
Average transaction
size has grown
substantially and
remains almost 1.5x
than that in 2002
Average Transaction Size (€)
Confidential | Art Markets: A New Era I ECJ Capital | April 2014 8
Sales of fine and decorative art worldwide rising significantly at auctions
ART AUCTION MARKET GROWS OVER 2X IN THE LAST DECADE
Despite growth decelerating year-on-year in 2012, auction sales remained strong
Source: The European Fine Art Fair (TEFAF), 2013, ECJ Capital Research
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
8.911.7
13.8
20.824.0
19.0
13.1
20.823.3
20.9
Global Auction Art Market Sales (€ bn)
CAGR of Sales Value: 9.9%
168.7% -45.4% 77.2% -8%
Change in Value TurnoverSales declined in 2012, largely due to lower
volumes in developed markets
CountryVolume Change (%)
2012 over 2011
Germany -13.7%
France -12.9%
Italy -18.1%
UK -11.1%
EU -11.3%
US -6.4%
China 0.03%
Rest of the World -9.4%
Total -8.0%
Confidential | Art Markets: A New Era I ECJ Capital | April 2014 9
Fine/decorative art sales in dealer sector account for 52% of global sales
DEALER SALES DECLINED, BUT SHARE IN GLOBAL MARKET GREW
Source: The European Fine Art Fair (TEFAF), 2013, ECJ Capital Research
GALLERY DOMINATES DEALER SALES, 2012
Gallery44%
Domestic fairs23%
International Fairs13%
Auctions4%
Privately8% Online
8%
Sales of
~€22.2 bn
2011 2012
23.122.2
Global Dealer Art Market Sales (€ bn)
-4.0%
Share in global art sales
~50% ~52%
Dealer sales were estimated at €22.2bn in 2012, down 4% from 2011, but, their share in the global art market grew to ~52%
Galleries remain the most important channel; however, art fairs and the event-driven market rose steadily in the last decade
Confidential | Art Markets: A New Era I ECJ Capital | April 2014 10
Buyers more inclined toward post-war/contemporary and modern art investments
POST-WAR/CONTEMPORARY AND MODERN ART OUTPERFORM
Source: The European Fine Art Fair (TEFAF), 2013, ECJ Capital Research
MARKET SHARE INCREASING (% OF GLOBAL SALES, 2012)
5.0% 10.0% 15.0% 20.0% 25.0%
€0
€1,000
€2,000
€3,000
€4,000
€5,000
Post War and Contempo-rary
Modern
Impressionist and Post Impressionist O ld Masters
* Bubble size reflects average sale price/lot in the specific category
2003 - 2012 Sales CAGR (%)
20
12
Art
Sa
les
Va
lue
(€
mn
)
Average: 15.5%
Average: €2,506 mn
43%
30%
12%
11%4%
Post War and Con-temporary
Modern
Impressionist and Post Impressionist
Old Masters
Others
41%
28%
13%
8%
10%
By Transaction
Volumes
By Value of Art Sales
Buyers are increasingly purchasing post-war/contemporary and modern art, making them the most important sales generator
Together, they accounted for 73% of total global art sales in 2012
Confidential | Art Markets: A New Era I ECJ Capital | April 2014 11
Post-war and contemporary art performing robustly
Over 1998–2013, the indices of post-war and contemporary art yielded returns of 130% and 121%, respectively, exceeding returns of 105% generated by the global index
Source: Artprice Global Indices
Ja
n-9
8
Ja
n-9
9
Ja
n-0
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Ja
n-0
1
Ja
n-0
2
Ja
n-0
3
Ja
n-0
4
Ja
n-0
5
Ja
n-0
6
Ja
n-0
7
Ja
n-0
8
Ja
n-0
9
Ja
n-1
0
Ja
n-1
1
Ja
n-1
2
Ja
n-1
3
Ja
n-1
4
50
100
150
200
250
300
350
Global Index (USD) Old Masters 19th Century Modern Art Post-War Contemporary
POST-WAR AND CONTEMPORARY SECTORAL INDICES OUTPERFORM GLOBAL INDEX
Strong demand for post-war and contemporary art driving up
higher returns
Confidential | Art Markets: A New Era I ECJ Capital | April 2014 12
Emerging economies, with rising HNIs, are key markets for growth…
ECONOMIC OUTLOOK FOR MAJOR ART MARKETS
Source: IMF World Economic Outlook, October 2013, ECJ Capital Research
SHIFTING WEALTH DISTRIBUTION TOWARD THE EMERGING WORLD
-1% 4% 9% 14% 19%
-1%
0%
1%
2%
3%
4%
5%
Australia
Brazil
China
FranceGermany
India
Italy
Japan
Qatar
Russia
Singapore
Switzerland
UAE
UKUS
2000 - 2012 GDP/Capita CAGR (%)
20
12
-20
16
F G
DP
/Ca
pit
a C
AG
R (
%)
* Bubble size represents GDP/Capita in current US$
Average: 7.3%
Average: 2.1%
High historical growth; high forecasted growth on a per-capita ba-sis
2007 2008 2009 2010 2011 2012 2015E
11.79.1
10.7 11.6 11.412.7
15
North America
8%18%
2007 2008 2009 2010 2011 2012 2015E
10.78.3
9.5 10.2 10.1 10.913.1
Europe
2%
20%
2007 2008 2009 2010 2011 2012 2015E
9.57.4
9.7 10.8 10.7 12
15.9
Asia-Pacific
26%33%
The Asia-Pacific region is expected to lead growth in global HNI wealth in
the next three years
Higher growth in emerging economies caused a relatively sharper increase in the number of HNIs and their investable wealth
Surging HNIs are likely to drive stronger growth in the sale of luxury goods, including artwork
Source: Capgemini, Merrill Lynch, RBC, ECJ Capital Research
Confidential | Art Markets: A New Era I ECJ Capital | April 2014 13
…and exhibit significant demand for art
COMPOSITION OF PASSION INVESTMENTS
High demand for art in the Asia-Pacific region (excluding Japan); ~17.3% of passion investment dollars allocated to art
Source: The European Fine Art Fair (TEFAF), 2013, ECJ Capital Research
Sotheby’s growth in recent years largely driven by new markets outside US and UK
SOTHEBY’S MAIN MARKETS
Global Asia/Pacific ex. Japan Japan
31.6% 33.5% 30.8%
19.0% 16.8%29.7%
16.9% 17.3%
12.2%8.0% 9.4%
11.8%
24.4% 23.0%15.4%
Jewelry, Gems, & Watches Luxury Automobiles, Boats, Jets, etc Art
Sports Teams, Sailing, Race Horses, etc Coins, Wine, Antiques, etc
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
US UK Rest of the World
~30% in last four years
Confidential | Art Markets: A New Era I ECJ Capital | April 2014 14
Asia emerges as a key global growth center for contemporary art…
ASIA: A MAJOR CENTER OF WORLD ART
Source: Art Stage Singapore, artprice.com, ECJ Capital Research
12 of the top 20 art cities globally in Asia
Top 20 cities by % of contemporary art
sales turnover (2012)
Asia accounted for ~45% of global revenue (US$2 bn) in contemporary art auctions during 2011–12
Around a decade ago, 80% of the art market was shared between two centers: London and New York
Confidential | Art Markets: A New Era I ECJ Capital | April 2014 15
…driving increasing cross-border art trading
ART TRADE IN MAJOR ART MARKETS
Greater wealth in buoyant economies in the emerging art market has not only improved domestic consumption but also increased imports
Source: The European Fine Art Fair (TEFAF), 2013, ECJ Capital Research
-90% -60% -30% 0% 30% 60% 90% 120%
-60%
-30%
0%
30%
60%
90%
120%
150%
180%
Austria
Belgium
Denmark
France
Germany
Greece
Ireland
Italy
NetherlandsSpain
SwedenUK
US
Switzerland
Norway
China
Singapore
Brazil
UAE
India
Russia
2010–12 Change in Art Imports (%)
20
10
–1
2 C
ha
ng
e i
n E
xp
ort
s (
%)
Rising imports of art in Asia
Decreasing art imports Increasing art imports
Net Importer Net Exporter
Confidential | Art Markets: A New Era I ECJ Capital | April 2014 16
Auction sales expand 10x in China during 2004–12…
CHINA’S ART MARKET: A TIMELINE
Auction sales in China increased robustly in the past decade; value expanded to €9.8bn in 2011 from €691mn in 2004, with average transaction size up 5x; growth decelerated in 2012, following the global slowdown
Source: The European Fine Art Fair (TEFAF), 2013, ECJ Capital Research
2004 2005 2006 2007 2008 2009 2010 2011 2012
6911,516 1,560 2,012 2,152 2,151
5,962
9,808
6,90599,797
112,616 108,923
127,851117,992
138,304
219,252
284,941
239,682
Chinese Auction Sales (€ mn) Volume of Auction Transactions
CAGR of Sales Value: 33.3%
CAGR of Transaction Volume: 11.6%
€6,924
Average Transaction Size (€)
€13,462 €14,322 €15,737 €18,239 €15,553 €34,421 €28,809€27,192
The economic dynamics
and rich cultural heritage
of art and antiques have
helped create a large
market in China
Confidential | Art Markets: A New Era I ECJ Capital | April 2014 17
…altering the structure of the global art market as a whole
THE CHINESE ART MARKET
Source: The European Fine Art Fair (TEFAF), Annual Updates, ECJ Capital Research
China’s share in global art market declined to 25% in 2012 largely due to slowing demand and fewer high-
quality, high-priced works
China; 9%
US; 35%
UK; 34%
France; 6%
Switzerland; 1%
Germany; 2%
Rest of World; 13%
2008
China, 30%
US, 29%
UK, 22%
France, 6%
Switzerland, 3%
Germany, 2% Rest of World, 8%
2011
China, 25%
US, 33%
UK, 23%
France, 6%
Switzerland, 2%
Germany, 2%Rest of World,
10%
2012
China was one of the strongest art markets in the past decade, with its share rising from 9% in 2008 to 30% in 2011
Ending the virtual duopoly held by London and New York for the past 50 years
Confidential | Art Markets: A New Era I ECJ Capital | April 2014 18
Art markets in Southeast Asian countries too growing significantly
TRENDS IN SOUTHEAST ASIAN ART
Source: ECJ Capital Research, Industry News
Sotheby’s Hong Kong Autumn 2012 auctions marked a record sale of Southeast Asian art
Sales of modern and contemporary paintings amounted to US$15.5 mn, surpassing the pre-sale estimate of US$5.8 mn and achieving the highest auction total in this category
Singapore is one of Asia’s key art markets and one of the most versatile cities in Asia, offering art from across the continent
As compared with its peers, the Indian art market is at a nascent stage, in terms of buying art
Southeast Asian art worth ~US$27mn was auctioned in Sotheby’s fall 2013 auctions, more than double the presale estimate of ~US$13mn
Art auctions in Southeast Asia have constantly grown in the last few years
Reflecting wider recognition of the art of Southeast Asian artists and global acceptance of the region’s art
Confidential | Art Markets: A New Era I ECJ Capital | April 2014 19
Growing demand for art investments drives growth in art fund industry…
GLOBAL ART FUND AND ART TRUST MARKET (AUM) TREND
Growth is largely due to the investment community’s increasing recognition of art as an asset class that offers strong potential for price appreciation and diversification benefits
2011 2012
1.0
1.6
Global Art Fund Industry AUM (US$ bn)
~69%
40.2%
59.8%
AUM of ~1.6 bn
The US, Europe, Korea,
and Brazil
China
2012
Source: Deloitte’s Art & Finance Report 2013, ECJ Capital Research
Note: Above AUM is a conservative estimate based on publicly available information; this does not include a few large funds recently announced due to lack of information
Almost 83 art funds globally have artwork worth ~US$1.62 billion in assets under management
Confidential | Art Markets: A New Era I ECJ Capital | April 2014 20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120
5
10
15
20
25
30
35
Total number of art funds coming to market in China
Total number of art funds coming to market (excl. China)
The art fund industry has emerged robustly in Asia, driven by growth in funds and trusts in China
Reflecting growing investment interest in emerging markets
…dominated by strong growth in Asia
GLOBAL ART FUND MARKET – FUNDS RAISED ANNUALLY AND NUMBER OF ART INVESTMENT FUNDS BEING LAUNCHED
Source: Deloitte Luxembourg & ArtTactic Art & Finance Report 2013, ECJ Capital Research
Estimated 83 art funds and art investment trusts in operation in 2012; of these, 58 set
up in China since 2009
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120
100
200
300
400
500
600
Actual funds raised (US$) in China Actual funds raised (US$) (excl. China)
Mill
ion
s
Confidential | Art Markets: A New Era I ECJ Capital | April 2014 21
Art offers potential for high returns along with unique associated risks
KEY RISKS/CHALLENGES FOR ART INVESTMENT
Source: ECJ Capital Research
Performance Influenced by Global Economic Environment
Although individual sectors in the art market experienced different trajectories of growth, overall performance is tied to the wider economic environment
Challenges in Valuation
Trading volumes are extremely small, making it difficult to arrive at an objective valuation
Indices such as Mei Moses have a selection bias, as they only account for auction sales
Illiquid Market
Sellers cannot always offload as required
Large bid–offer spreads make arm’s-length transactions difficult
Art investment funds typically have a lock-in period of 3–5 years
High Costs
Buyers can expect upfront payment of up to 25%
Sales tax, import taxes, transport costs, and brokerage fee add around 10% to the purchase price
Ongoing costs incurred for insurance, storage, and maintenance need to be considered (1–5% of the value of the artwork)
Risk of Title and Authenticity
Ownership risks in the art industry have evolved over time due to lack of transparency in transactions
Although financial institutions have made significant advancements in assessing the value and risks associated with art assets, proper due diligence for authenticity is often a challenge
High Barriers to Entry
Investment in quality art requires significant funds, which is a deterrent for small investors
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© 2014, ECJ Capital. All rights reserved.
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