South African Art: How it gets its value. And why it’s cheap.

So yesterday, I explained why I think that the art market is an investment powerhouse that is only due to get stronger. Basically, for two reasons:

Increasing Wealth Inequality; and
The power of asymmetric information.

Asymmetric information is my favourite part of the story. I love an informationally inefficient market-space where you can be on both sides of a transaction.

But that aside, I believe that there is something particularly special about South Africa’s contemporary art market. In order to explain why I’ll need to start with a basic outline of the art industry. The Art Industry will have to correct me if I’ve gotten it wrong.

To begin with: Contemporary Art

Before I get going: when I talk about the “Art Industry”, I am not referring to all art produced by South African artists.

This weekend past, I went to the Johannesburg Art Fair. Specifically: I went three times. And from what I saw there, and from the discussions I had, and from the talks I listened to, it appears as though an artist can do one of two things:

Test the boundaries – in terms of subject matter/technique/both/etc; or
Sell out.

Pieces produced by artists in the first category become part of the body of work collectively known as “contemporary art”.

The second category is anyone that is not a contemporary artist, as dictated by people in the know. That is: if your work could be sold in…*shudder*…. a furniture shop, or in a gallery that specialises in wildlife paintings, then you won’t be invited to an Art Fair.

Personally, I think that’s a bit snooty – I quite love wildlife art. But if I can offer an analogy, it may be a lot like the foodie world:

Talented contemporary artists: are the molecular gastronomists, the high-end chefs, the secret bistros and all things fine-dining and deliciously extraordinary. The food is not necessarily to everyone’s taste – but it’s not meant to please every palette.
Bad contemporary artists: are the establishments that generally get shut down owing to lack of patronage. Of course, you do get those that are supported by rich parents and friends in the hopes that they will one day produce good food – and there’s lots of fanfare and branding in the interim – but the food critics are rarely deceived after a visit. Ahem. Conor Mccreedy, ahem.
Wildlife artists (and the like): are the large chain restaurants. The food is reasonably priced and pleasantly seasoned. It’s generally quite profitable because of its mass market appeal – but it’s not the stuff that legends are made of.
Furniture store artists: are fast food outlets. The work is produced en masse. It’s cheap. Although a real foodie would rather starve.

And in case it’s not clear, because my art friends are all of the food critic varietal, I’m going to talk quite specifically about the Contemporary Art scene.

An Introduction to the Art Industry

The key players:

Artists (obviously)
The Galleries (the primary market)
The Auction Houses (the secondary market)
The Big Collections (museums, large corporates, highly-esteemed private collectors)
The Bigger Money (the large art funds, the billionaires)
The Smaller Collectors (the private individuals)

Within that, you also have “The Experts”, being those people that have studied art for years (its history, its techniques, its movements, etc), and have assiduously developed a refined eye.

Again with the analogies: I think of this “refined eye” as similar to the refined palette of a sommelier: they’re able to taste a vintage, and tell you where the grape was grown, and in what year, as well as the components of the blend, and what flavours you should be picking up. I, of course, won’t get all of that – but if an expert starts to point a few things out, I might develop a deeper appreciation for the wine I’m drinking.

I’ve not separately identified the “Experts” – because you’ll find them sitting in all those categories. Many of the art academics in universities are also prominent artists. The experts curate the art galleries and the collections. Experts also run the auction houses, and form part of the body of collectors. They’re the bones of the art world: providing structure for movement. The rest of us are the muscle (that’d be the collectors) and the fat (the collectors that are more interested in the investment than the art – too much of it and you start to get coronaries).

How I see those key players interplaying

Artists produce new work and sell it to galleries (and/or galleries sell the works on behalf of artists);
The galleries then hold exhibitions to on-sell the art to collectors. They also try to place the art in prominent collections.
Once the galleries have sold the art – trade in those pieces then has to take place on the secondary market. So the collectors also buy and sell art through the auction houses (there are other players in the secondary market – but auction houses are the important component here).
When the artists produce more work, there is an informational feedback loop that takes place: prices for their new work will depend on what happened with their work in the primary market (how quickly did it sell and at what price and to whom), and what is happening with their work in the secondary market (how are their works faring at auction, who is selling them, who is buying them, and why are the works being sold in the first place, etc).

Whence cometh the value?

Firstly an observation – given the way that the market operates, I think that you’ll find the expert opinion is pretty pervasive:

Experts run the galleries – so they’ll price the works they prefer higher than the works they dislike.
Experts run the large important collections – so they’ll buy the works that they believe are “important” and “strong” from the artists that they believe are “going somewhere”.
Experts run the auction houses – so they’ll make estimates based on their expert opinions, providing price-anchors for everyone that’s not an expert (and I do love some behavioural economics in the mix).
And while we’re at it – most of the large art investors are hardly about to spend millions of dollars/pounds/rands without consulting an “expert” (although, I’ll admit, arrogance could probably supersede that for some).

So when we talk about price-setting in the art world, it isn’t that subjective. At every point, you have these “refined eyes” playing the pivotal role in both the selection and the pricing of a piece of art. And what is amazing is how consistent that “eye” can be. It’s trained to look at technique and subject matter and originality and so on.

Again, just like food critics have general consensus on the quality of food prepared by a particular chef (based on his/her use of ingredient, combination of ingredient, originality, presentation, etc), there is general consensus on works of art. Even if a critic doesn’t necessarily like the piece, that doesn’t change his opinion on the strength of the work, or its importance, or what it should be priced at given the stage of the artist’s career and the artist’s prominence in a particular movement and/or cultural period.

In some ways, it’s a bit like pricing a share. Any trained financial analyst will look at a company and be able to tell you whether a share in that company is over-priced, fairly-priced or cheap. How do they come to that opinion? Well they certainly look at the financials and past performance. But they also consider the growth trajectory of the company, the industry and the economy; they look at the quality of management and margins and capital investment. Those are all fairly subjective things to look at – and yet somehow, you usually get general consensus, with a few outliers that the market ignores.

So to summarise, when talking about the “value” of a work of art, that value is driven by a number of factors:

The artist – or, rather, how the artist is regarded by art experts (usually indicated by how often the artist is reviewed in professional art publications).
The presence of the artist in significant collections (of the famous art museums, in particular) – because that is a clear indicator of just how widespread the expert regard for an individual artist actually is.
The strength of the work – because all the way along, experts in the primary and secondary markets will be judging and evaluating that work based on how representative that particular piece is of the artist’s work and/or the artist’s work during a particular phase of their career.
The demand for the artist – although, again, I would think that this is a bit of double-counting – because high expert regard and having the art in significant collections tends to generate the demand for the artist.

Of course, you get exceptions. But generally speaking (and to be clear, “generally speaking” is sufficient when you’re talking about diversified investments), a good work from an artist that is well-regarded and featured in prominent collections is going to be a fairly valuable item to own.

At that point, it’s really a question of deciding whether that value is fairly represented by the price that’s presented to you. And for that, there are two options:

Ask an art critic (because they’re in touch with the art world, so they’ll have a fairly good idea of what is, and what is not, a good price); or
Try and see what that artist is doing at auction for yourself.

Probably better to do both.

Coming Back To The South African Art Industry

The South African Art Industry, in many ways, is still rapidly growing. But in particular, there is not an especially developed market demand for the art. That is: investors continue to treat art investment as more risky and more subjective than it actually is.

That perception = depressed prices for art sold locally

Meanwhile, the international market has a growing interest in South African art.

Take the US as an example. In the late 1980s, you had all this university endowment boycotting against apartheid. Boycotting that was driven by student action. That is the kind of cause that creates deep vested interest in South Africa and what it produces.

The students of the late 1980s are now in their mid-40s and early 50s. Just about old enough to be real investors in the art game. Wealthy investors that were once deeply involved in the anti-apartheid cause…

So it should come as no surprise that anti-apartheid artists like William Kentridge do so well in New York. And yet you find his work still going relatively cheaply here Johannesburg.

You know what else isn’t surprising? It isn’t surprising that you get articles in the Business Day saying that there is increasing international interest in South African art, and that South African auction results are starting to cruise high above estimates.

It makes me want to say “Come on, South Africans. You are missing out!”

Get out there and make friends with the art world. Because they can tell you what to buy and when to buy it. They can also tell you what not to buy, and that’s important too.

Also, it’s a far more satisfying spend than a new Audi.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.