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Big Rewards in Trophy Art, but Sellers Wary

Christie's in New York City.
Adam Jeffery | CNBC
Christie's in New York City.

If you're a big league art collector, the two-hundred new billionaires on the Forbes 400 list of the world's wealthiest people amounts to one thing: more competition. As the spring art season gets underway with art fairs in New York this week, the hunt for big trophy art pieces is especially fierce.

"The hardest thing right now is to find great material," said art consultant Abigail Asher of Guggenheim, Asher Associates. "There's far more demand than there is supply."

Newly-minted millionaires and billionaires from Russia and Asia swelling the ranks of global collectors, are helping to drive prices for trophy paintings by Modern masters like Picasso, and big-name Post-War and Contemporary artists like Francis Bacon to set new records.

Art Advisor Kim Heirston, who specializes in contemporary art, said big collectors are reluctant to sell now, but if they do their expectations are high when it comes to auctions.

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"A lot of times I'm hearing the question, 'Kim, if I sell this what am I going buy with it?'" said art advisor Kim Heirston, who specializes in contemporary art. "The other thing that I'm hearing is, 'Bring me an extraordinary offer.'"

It is very much a seller's market, and the auction houses are working harder than ever to coax collectors to sell, offering bigger sales guarantees.

Sotheby's reported its sales are up more than 30 percent year to date, but in its most recent earnings release also said the competition to win over trophy works has seen "such consignments often earning thinner auction commission margins."

Sotheby's and Christie's have now raised their buyer's premiums ahead of the upcoming spring sales in May.

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Trophy Art Outperforms Stocks

While the auction houses are squeezed and buyers are paying more, sellers are seeing especially strong profits on Post-Ware and Contemporary works, according data on the recent winter auctions complied by Jianping Mei and Michael Moses of Beautiful Assets Advisors.

Compounded annual returns for Post Ware pieces sold at auction last month averaged 9.8 percent, according to Mei and Moses, compared to 5.9 percent gain for the S&P 500 over the same period of time. Some of the biggest gains came from works held around five years or less.

The unpredictability of the auctions still make for the biggest rewards, but also the biggest risk.

Last October, musician Eric Clapton sold an abstract Gerhard Richter painting for a record $34.2 million at Sotheby's in London. He'd paid $3.4 million for the work at auction just after 9/11.

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Yet, just one month later at Christie's in New York, an abstract Richter painting owned by Sac Capital founder Steve Cohen, which had been estimated to fetch $15 million, failed to sell.

Is a the sign of a top in the market for artists like Richter? Abigail Asher said no. She explained Cohen's piece was priced overly aggressively, at a point when too many Richters flooded the market.

"The Richter market is strong, it's just you have to be careful," she said, "and do your research on the value of the picture."

Some dealers are wondering whether Cohen, among the major collectors over the last decade, will be in the market this spring. Apart from the disappointment on the Richter, his hedge fund is under mounting pressure from federal probes into the firm's trading practices.

No Sale? No Problem

But if big league collectors like Cohen aren't selling, they can still cash in on their big trophy works..

"Art is being treated as more of an asset class," said Kim Heirston. "The rise of institutions that are lending against art work collections, that are providing greater liquidity and flexibility in the market, is helping that."

The auction houses themselves are increasingly big players in the loan market, and seeing better returns on financing than on auctions. Sotheby's Financial Services reported a 47 percent increase in revenues in 2012, while nearly doublings its loan portfolio balance.

Why would they want to encourage leveraging? Because chances are those big art trophy hunters are using the cash to buy more.

"People keep chasing the great things," Abigail Asher said.

-By CNBC's Bertha Coombs; Follower her on Twitter @coombscnbc

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