The science behind valuing art. December 2017

Transcription

1 The science behind valuing art December 2017

2 2 The science behind valuing art Art scales new highs The recent world record set by a painting by Leonardo da Vinci ( ) again stirred up everyone's curiosity on the valuation of art. Salvator Mundi, the long-lost painting of Jesus Christ commissioned by King Louis XII of France more than 500 years ago, was sold at Christie s in New York on 15 November 2017, for US$450.3m, including auction house premium. Salvator Mundi is believed to have had an interesting journey of changes in ownership over the last 500 years. The painting was owned by King Charles I of England in the mid-1600s. King Charles I died in 1649, and shortly thereafter the painting was used to settle part of his massive debt with the painting being valued around US$40. It reappeared in 1958 at a Sotheby s London auction, where it sold for around US$60 (since it was thought to be a work of a student or follower of da Vinci). It was bought by a consortium of dealers, including Alexander Parish, for US$10,000 at an estate sale in the US in 2005 badly damaged and partly painted-over. The art dealers restored the painting extensively and documented its authenticity as a work by da Vinci. It was first unveiled to the public at the National Gallery in London in Yves Bouvier, a Paris-based art dealer, acquired it from Sotheby s in a private sale in 2013 for about US$80m and sold it to Dmitry E Rybolovlev, a Russian billionaire, for US$127.5m in the same year. The painting was sold by Dmitry Rybolovlev for US$450m on 15 November 2017 and is believed to be headed to Louvre Abu Dhabi, a museum established in November This development has triggered a need to better appreciate the factors impacting art valuation. This publication seeks to be an initial step as we try to jointly explore this vast subject. Growth in the value of Salvator Mundi by Leonardo da Vinci CAGR over 59 years ( ) is 31% US$127.5m Bought by Dmitry Rybolovlev US$80m Bought by Yves Bouvier 59% 37% US$450m Auctioned at Christie s, New York, on 15 Nov % US$60 CAGR*: 12% US$10,000 Bought by Alexander Parish *CAGR = Compound annual growth rate Source:

3 The science behind valuing art 3 Art valuation Art valuation is the process of estimating the value of works of fine art. Fine art is distinguished from other art forms in which the aesthetic or intellectual expression is more prominent than the utilitarian purpose. In the context of this paper, fine art largely refers to paintings and drawings (also referred to as artworks) but is otherwise also intended to include sculptures, photographs and prints. As such, art valuation is more of a financial rather than an aesthetic concern, although an effort is made to factor in some of the subjective variables. Many of the methodologies that are applicable to other assets (such as the discounted cash flow method) may not be suitable to this unique asset, which largely derives its valuation from the visual impact it has on a buyer, who is driven as much by subjective emotional considerations as by economic ones. There are various approaches toward art valuation, depending on the number of factors considered in the valuation. Before delving into the topic, it is pertinent to appreciate the components of value of an artwork and the value discovery continuum of the artist. Components of art value The following equation sums up the various components of the standalone value of an artwork. These are exponentially enhanced by the value ascribed to the artist s brand. Value of Art = (Artistic value + Social value + Commercial value) ^Artist s brand Factors Artistic value Social/ Cultural value Commercial value Physical attributes Artist's influence Representative work Quality Exposure Condition Documentation Demand/Supply The largest determinant of value is the "brand" of the artist. The build-up of this value over the lifecycle of the artist is captured on the following slide. Artistic value is standalone value embedded in the artwork and includes its quality and significance. Social value is determined by the level of influence the artwork has created in the minds of the populace. Commercial value is largely determined by the extrinsic attributes of the artwork, which have a bearing on its economic value. Source: The Getty Research Institute s Art & Architecture Thesaurus. Refer Link nd=fine+art&logic=and&note=&english=n&prev_page=1&subjectid=

4 4 The science behind valuing art Value discovery of an artist The process of value discovery of an artwork is intrinsically linked to the evolution of the artist, in his or her creative journey as well as the response from the art market. 1Bedrock value of the artwork emanates from basic execution skills of the artist - such as color application, strokes and understanding and depiction of anatomy in figurative works. It increases further with inherent progression of the artist s personality (experience, deeper knowledge, creativity, sensitivity) and improvement in quality of the artwork (concept, technique, consistency, signature style). 2The process of value discovery is further accelerated by focused promotion of the artist by leading art galleries and/or promotion houses and addition of artworks in prestigious collections. 3 Price discovery in auctions/ concept shows Value 3A quantum leap in the price occurs when the artist starts indulging in concept shows and his or her works start featuring in auctions. 2 Premium created by promotion 1 Intrinsic value Background Qualification and awards Color application Movement and stroke Understanding of anatomy Technique Creativity Sensitivity Group shows Signature style Experience Consistency Solo shows Personality Experimentation Time

5 The science behind valuing art 5 Approaches to art valuation Benchmark value: This is an objective form of valuation used to determine the current market price of an artwork, by benchmarking it with the value of a comparable artwork. An effort is made to ensure that the comparable artwork is as similar as possible to the artwork being valued in terms of size, medium, age and subject, and necessary adjustments are made to account for the differences. The valuation is done by valuation experts based on artwork images and available data, without examining the original artwork. Appraisal value: A more advanced approach of art price determination is art appraisal. This is more complex and therefore a more expensive procedure. In the benchmark value, the artwork is taken to be what it appears to be, and hence neither the artwork nor related documentation is examined. However, in an appraisal, the appraiser will require that the collector provide as much of the following as practicable: Color prints of photographs of the painting, displaying the front as well as the back All available documentation for the work, in particular related to its provenance (record of ownership) References of the artwork in any publication, auction catalog, catalog raisonné of the artist etc. Details of any restoration carried out on the work in the past, including the report issued by the restorer. The appraiser, in most cases, will also inspect the artwork. An intensive analysis (historic, stylistic, forensic, scientific etc.) is done to establish the authenticity and provenance of the artwork, besides ascribing value to many of the subjective parameters. Factors Benchmark value Appraisal value Size Medium Year of creation Subject Quality and rarity Condition Authenticity and provenance

6 6 The science behind valuing art Benchmark value The most practical method for valuing art is to benchmark the value of the artwork to prices of other comparable artworks by the same artist, which have been transacted at transparent values in the open market (auctions or online marketplaces) or prices from other secondary markets sources (galleries, dealers, artists), or in their absence, to similar values of works of comparable artists. In either case, the price needs to be adjusted for size to arrive at base art value, which is further refined to give effect to various factors that enhance/ dampen the value of the artwork. Transaction/Impact costs are not considered, which may vary depending on the desirability of the specific work as well as the economic and liquidity conditions prevailing in the art market. Art value = (Comparable art price x Size adjustment) + Value enhancers - Value dampeners Base art value is derived from the price of comparable artwork, as adjusted for size. Note: The artwork being valued and the comparable artwork are assumed to be in good condition and with reasonably strong documentation (authentication and provenance). As increased by Value enhancers in artwork being valued (vis-a-vis the comparable artwork) Size (significantly smaller representative works command premium) Medium (water color on paper) Older work of artist oeuvre Signature style/creative subject As reduced by Value dampeners in artwork being valued (vis-a-vis the comparable artwork) Much bigger size Atypical medium (conte on paper) Very recent work More realistic work trades at a discount

7 The science behind valuing art 7 Example of computation of benchmark value In order to understand the above equation, we will consider and evaluate the artworks of a leading artist from South India. Artwork to be valued: Title: Untitled Medium: Acrylic on canvas Year: 2016 Size: 36 x 48 inches Area: 12 sq. ft. 2. Adjust the size for price: We can see the size of the artwork to be valued is half the size of the comparable artwork, hence the value of the artwork to be valued should be half the price of the comparable artwork, i.e., INR4,008,312 / 2 = INR 2,004,156. Alternatively, we can calculate the value of the artwork by multiplying the per square feet value of the comparable artwork with the per square feet size of the artwork to be valued, i.e., INR167,013 x 12 sq. ft. = INR2,004,156 Methodology to be followed: 1. Identify the comparable artwork: We found it comparable to the following artwork: Title: Untitled Medium: Acrylic on canvas Year: 2002 Size: 72 x 48 inches Area: 24 sq. ft. Auction price: INR4,008,312 Auctioned in: July 2016 Price: INR167,013 per sq. ft. 3. Identify value enhancers and dampeners: Given the works are closely comparable in quality and subject (assuming that both are in similar conditions), the estimated base art value would be INR2,004,156. Given that the work, despite being half in size, is not very small in the absolute sense, no adjustment is warranted for size. However, the work is much more recent, which may justify a minor discount of 5% (since it is still the same subject). Hence, the valuation range could be INR1,900,000 to INR2,000,000. It is pertinent to know that this artwork was auctioned in December 2016 for INR1,922,496. The above discussion centres around a market intermediaries approach towards valuation. The largest influencer of value is the perceived value to a buyer and the charismatic power of artworks on those who would possess them. Collectors generally feel an emotional connect towards a work or collection, which in turn creates subjective personal value. The weight assigned by each buyer to that subjective measure may vary for instance, a buyer acquiring works for a speculative motive may not share the collector s emotional investment. Also, a buyer s decision is significantly influenced by many non-economic value measures such as the extent to which the buyer likes the work or it speaks to the buyer. Another potential factor impacting transaction valuation is the seller s reasons for selling a particular work and/or the buyer s reasons for buying, both of which are mutually independent. The most common triggers for a work coming to the market are the so-called three D s: death, debt and divorce.

8 8 The science behind valuing art Highest priced paintings: Indian (Besides pricing, selection of artworks is done to ensure variety of relevant artists) S. no. Artist Artist lifespan Title Size (inches) Price (US$m) Price per sq. ft. (US$) 1 VS Gaitonde Untitled 55 x ,932 2 FN Souza Birth 48 x ,656 3 Raja Ravi Varma Radha in the Moonlight 58 x ,190 4 Tyeb Mehta Mahishasura 59 x ,690 5 Akbar Padamsee b1928 Greek Landscape 52 x ,915 6 SH Raza La Terre 74 x ,651 7 Amrita Sher Gil Untitled (Self Portrait) 18 x ,796,923 8 MF Husain Untitled 38 x ,572 9 Subodh Gupta b1964 Untitled 66 x , Manjit Bawa Untitled (Gaja Lakshmi) 76 x ,897 It is also interesting to note that most Indian artists are from the 20th century, whereas many of the international masters are from earlier periods.

9 The science behind valuing art 9 Highest priced paintings: International (Besides pricing, selection of artworks is done to ensure variety of relevant artists) S. no. Artist 1 2 Leonardo da Vinci Willem De Kooning Artist lifespan 3 Paul Cézanne Paul Gauguin Jackson Pollock 6 Mark Rothko Rembrandt Pablo Picasso Roy Lichtenstein 10 Gustav Klimt Title Size (inches) Price (US$m) Price per sq. ft. (US$) Salvator Mundi 26 x ,227, Interchange 79 x ,925,151 The Card Players When Will You marry? 38 x ,422, x ,200, Number 17A No 6 (Violet, Green and Red) Pendant portraits of Maerten Soolmans and Oopjen Coppit Les Femmes d Alger (Version o ) 82 x 104 (consolidated) ,039, x ,298, Masterpiece 54 x ,148,148 Adele Bloch- Bauer II 75 x ,127,659 The tabulation of the top works auctioned by artists from India and the rest of the world demonstrates the relative undervaluation of Indian art, even at the top end of the market.

10 10 The science behind valuing art Contact details EY Aura Art Development Pvt. Ltd. Valuation and Business Modelling EY Valuations and business modelling has the largest integrated valuation practice in the India with over 1,500 valuations over the past five years and 100 dedicated professionals supported by Global resources. The team comprising of CAs, CFAs, MBAs, Chartered Engineers, ASAs, MRICS, Economists etc. have a cumulative experience of more than 300 man years. EY has been ranked as the #1 advisor for valuations for Mergers/public transactions, consistently through on account of the deal count. Key services offerings: Business Valuations and Intangible Valuation Tangible Asset Valuations Real Estate Valuation Financial Modelling Economic Modelling and Advisory EY is a category 1 Merchant Banking Entity, registered with SEBI. Activities of Aura Art Development Pvt. Ltd. Aura Art Development Pvt Ltd is one of India s leading fully Integrated Art House, offering, interalia, Art Infrastructure Solutions for Collectors, Corporates, Government & other Institutions. Key services offerings: Documenting and Mapping Collections Tagging Artworks in collaboration with tag8 Valuation and Insurance Advisory Conservation and Restoration Trusteeship and Warehousing CSR Initiatives Rishiraj Sethi CA, CFA, Director, Aura Art Development Pvt Ltd Chief Strategist, Aura Art Office: rishiraj@auraart.in 126, TV Industrial Estate SK Ahire Marg, Worli Mumbai Navin Vohra Partner and Leader - Valuations and Business Modelling, EY Office: navin.vohra@in.ey.com Parag Mehta Partner, Valuations and Business Modelling, EY Office: parag.mehta@in.ey.com Amish Mehta Partner, Valuations and Business Modelling, EY Office: amish.mehta@in.ey.com Sorabh Kataria Partner, Valuations and Business Modelling, EY Office: sorabh.kataria@in.ey.com

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