Valuing art - Citadel Art Price Index launched

Econex used data collected by art assessment company AuctionVault since 2000. The index is based on sales by the most prominent auction houses in South Africa and one international auction house and will track sales by the top 100 artists as ranked by volume of pieces sold. The list of artists may change over time as preferences change.

The auction houses are Bonham's of London, The 5th Avenue Auctioneers, Ashbey's Galleries, Bernardi Auctioneers, Russell Kaplan Auctioneers, Strauss & Company and Stephan Welz & Company.

Various art price indices are published internationally, with the Mei Moses Art Index, Art Market Research and Artprice.com being the established benchmarks. Due to the heightened interest in art, as an investment amongst its client base and in line with its philosophy of really understanding the various asset classes, the company wished to remove subjectivity and thus demystifying the asset class.

Alternative asset class

Citadel CEO, Neil Brown, said at the launch in Johannesburg on 19 October 2011, "The index will allow us to look at changes in the industry over time and assess art as a real alternative asset class, comparable to others. The purpose of the index is not to value particular artworks or artists, but to provide a view of the industry as a whole and the price fluctuations that are achieved over time."

He noted that the company would not be providing clients with advice on the purchase of any art works, as most such purchases are based on personal taste and preference for particular styles or artists. "If buying art is seen as an investment decision, we want to be able to offer sound information about our assessment of the industry and an understanding of what the asset class might do over time."

Model approach internationally accepted

"Artworks are heterogeneous assets, with a variety of physical and non-physical characteristics that make an artwork unique, including artists' reputation, the material used, the period during which it was produced and subjective traits like painting styles. The price of an artwork, to some extent, depends on these characteristics. The hedonic price index model approach, which we used for the Index, estimates (econometrically) the value attached to each one of the characteristics that are deemed to be significant in the determination of the price," says Cobus Venter, director at Econex.

He noted that artworks as assets are difficult to quantify and compare over time. "As a consequence, indices of art prices are always controversial and susceptible to biases. The hedonic approach, a particular statistical model, is the preferred methodology and accepted practice internationally as it provides the most robust results.

"This model allows us to take as many of the underlying characteristics of an artwork into account as possible, which helps to ensure that we are not comparing apples to oranges."

Matching other investments

"As with any asset class included in the portfolios of serious investors, investment in art has experienced periods of volatility and at times is outperformed by the more traditional asset classes such as shares and bonds. Yet record prices achieved at auctions for South African art in recent years has shown that astute buyers and collectors can expect solid returns," said Citadel head of SA Investments, George Herman.

According to the Index, art prices (API) achieved at auction tracks the JSE All Share Index quite closely over the period (see graph). Both indices recorded large real returns from 2004 to 2007, with negative real returns in the next few years. "This shows that both broadly follow the economic cycle," he added.

This first publication of the Citadel Art Price Index was finalised with the most current auction data at the end of September 2011.

Source: Econex calculations