Have you ever wondered why art isn’t a more widely-considered asset class with a greater liquidity?
In this post I explore the mechanisms which help drive (and thwart) the market here in Australia, from a perspective that you may have not yet considered.
We cannot deny that auctions are a powerful driving force in the market.
There are many benefits to selling at auction and for certain artworks, particularly those that are likely to garner broad interest, this may be one of the best methods of sale to achieve the greatest outcome for the seller. However, there is a combined loss of commission to the seller in this form of transaction.
With auction, Vendor’s Commission (or VC) is generally anywhere between 6-18% and Buyer’s Premiums (or BP) are now set at between 22-25% + GST across most auction houses in Australia. This may lead you to believe that buyers are now paying more for their auction services, but you’d be missing the fact that it’s actually the seller that pays the real cost.
Let me explain…
When buying at auction, the buyer will generally decide how much they want to pay for an artwork and factor the Buyers’ Premium into their total end figure. As the Buyers’ Premium increases, the buyer will generally compensate by reducing the hammer price that they are willing to go to and the seller therefore receives less of the proceeds.
Added to this, auction specialists will generally set enticingly low estimates on artworks and estimates are published without the Buyer’s Premium included. This is designed to encourage spirited bidding at the sale and help drive up the price. The lower the estimates, the more attractive to buyers the artwork will be. The more attractive the artwork is to buyers, the more buyers will be encouraged to bid, ultimately driving up the hammer price. There is sound reasoning behind these methods when an artwork is going to be highly desired, but with the costs associated with the combined commissions the seller is actually more likely to receive 30%-40% (BP + VC) less than what the buyer is actually going to pay, no matter whether the sale result is weak or bullish (unless a 'scaled commission based on result' is pre-negotiated).
This is where I need to get a bit technical, but stay with me:
Take for example an artwork bought at auction for $100,000 hammer. Here, the Seller receives $86,800 after taking out the standard VC rate of 12% + GST. The Buyer pays the total sale price of $124,200 including the standard BP rate of 22% + GST. The auction house receives a combined commission of $37,400.
When it comes time for the Buyer to sell (factoring in the same VC of 12% + GST) the artwork would need to sell for a hammer of $143,100 in order for the owner to break even and receive the original $124,200 outlaid. This would be a total cost of $177,714 that any new buyer would have to pay at auction, including BP.
This example shows that the first 43.1% of actual growth in an artwork (which may take 5 to 10 years or more to appreciate) is consumed by the auction model. Then add the copyright and 5% resale royalty into the mix and it becomes more like 50% increase in value needed - just to break even.
This got me thinking - there has to be a way for art collectors to buy and sell, without being charged at both ends, whilst enjoying the thrill of collecting - especially when an artwork gains in value.
Let me run you through my model using the same example but using my flat rate of 20% + GST paid by the Seller only:
When the same artwork sells through my platform for $124,200, here the Seller receives $96,876 after commission. The difference is $10,076, or an uplift of 11.6% in benefit to the seller.
When it comes time for the Buyer to sell, in order to break even, the sale price would need to be $159,200 – an appreciation of only 28.2%.
Combine this with the fact that generally there is an added value in buying an artwork discreetly (as explained in my previous post The Fastest Growing Market Sector Nobody Talks About).
Of course, there is one factor that I simply cannot equate in the above formulas - that at auction there are no ceiling prices set for any artwork. There are reserve prices set so that an artwork cannot sell lower than a set price, but there is no limit to what that artwork can reach if more than one bidder has their mind set on it. Auctions do have the potential and opportunity to break through previously set benchmarks, but in the current market, we are simply not consistently seeing this happen.
Increasingly, I am seeing that sellers are looking to trade privately for these very reasons.
My hope is that the art market continues to grow in strength as more people are drawn to the many rewards of collecting. What I’ve tried to illustrate in this post is that my business model was designed to encourage a wide audience, strong participation and liquidity by keeping the costs down but maintaining a high level of flexibility and service.
If you’d like to know more about buying and selling art, both privately and the auction market, contact me for complimentary advice.
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