How are prices created on the art market, and what should you consider if you want to expand your investment portfolio with works of art?
Collectors such as Eli Broad, Alice Walton, and the Swiss artist Maja Hoffmann are leading the way: an art collection can be a lucrative investment. The secret lies in the ability to see through the opaque labyrinth of art pricing.
But how do these prices come about, and what should you consider if you want to expand a portfolio with works of art?
From the Studio to the Market
Pricing for art starts with the artist. Take Damien Hirst, for example: he rated his famous «Spot Paintings» according to size and number of points. Artists often use the «artist key», a formula that refers to the size of the artwork (height x width x factor x), as a guide for pricing.
For example, considering a painting measuring 60 x 50 centimetres (height x width) and a key of 2.5, each work of this size costs 7,500 francs, if defined accordingly by the artist.
However, the price may be out of the norm if the artwork is shown as part of an important museum exhibition or included in a well-known catalogue raisonné or art book.
The Power of Galleries
Galleries such as the Gagosian Gallery or the Swiss gallery Hauser & Wirth play an essential role in the pricing and marketing process. They calculate prices based on the artist's key, the artist's reputation, the art market, and the quality of the artwork.
In doing so, they often handle complete marketing for the artist, which means organizing the exhibits, showcasing the works, and nurturing the relationship with potential buyers. In addition, galleries play a crucial role in the certification of artworks, an important aspect for later sales.
Buying directly from the artist can be problematic depending on the artist, so buying through a gallery is a commonly chosen option. Galleries typically retain about 50 percent of the sales prices – a significant proportion that should be taken into account when making an investment decision. Nevertheless, galleries continue to play a significant role in the success of the artists and often do the necessary development work.
Price Development Through Art Fairs and Auctions
At global events such as the Art Basel art fair or auctions by Sotheby's, Christie’s, or the Swiss auction house Koller, prices can fluctuate greatly. This is where the highest bid wins – and with a successful sale, an artist's market value can increase.
Auction houses typically charge fees of about 25 percent from both the buyer and seller, plus surcharges, taxes, and duties.
Record Sums for Works of Art
The record-breaking 2017 sale of Leonardo da Vinci's «Salvator Mundi» for $450 million shows the potential of art investment. It remains the most expensive painting in the world. Another example is Andy Warhol's portrait named «Marilyn Monroe», which was sold for the price of 170 million at Christie's New York auction in May 2022.
However, the actual selling price was many times higher. 15 percent of the sum as a surcharge and an additional eight percent VAT. Thus, the owner paid a total of 195 million dollars plus additional taxes for «Shot Sage Blue Marilyn».
Before purchasing art, it is advisable to compare similar works, check their provenance and seek the opinion of independent experts. Art is a volatile market and profitability is highly dependent on trends.
Not Like Other Markets
The art market doesn't work like other markets. Many decisions depend on subjective factors: personal interest, liking the artwork and available assets for acquisition. Promises of returns on works of art should always be considered with caution.
Pricing in the art world is complex, but the potential profits can be considerable. With in-depth knowledge and a well-thought-out strategy, investing in art can become a profitable element of a portfolio.
