The June 23rd “Brexit” referendum decision for Britain to leave the European Union will have long-term consequences, both for the economies involved and for the art market. Only the final terms negotiated by the U.K. and the E.U. will determine what these will be. There are some near-term outcomes we can predict with some certainty.
The immediate fallout from the Brexit vote was widespread uncertainty, resulting in wild economic swings. Within 24 hours the British pound hit a 31-year low against the dollar. The U.K.’s FTSE 100 stock index dropped almost 8%. The following Monday, S&P cut Britain’s credit rating by two full notches, to AA from AAA. The weeks that followed saw continuing turbulence, until market insiders recognized that the declines were almost certainly an overreaction. They bought, and profited from others selling.
Both currency and stock markets have recovered somewhat; the swings are expected to abate. There has been no noticeable short-term impact on the high-end art market. The economic wellbeing of art buyers around the world has a greater impact than anything else on the art market’s short term success. And the wellbeing of art buyers has not changed post-Brexit vote.
What to expect
The process of negotiating U.K. withdrawal from the E.U. will not start for months, and will play out over several years. As of yet, it is not even clear what needs to happen before Article 50 of the Lisbon treaty (the Article that triggers separation talks) can be invoked by the new Prime Minister: Can Theresa May do so unilaterally, or must there be an act of Parliament authorizing the triggering of the article? If the answer is Parliament, it is possible, if unlikely, that the Conservative Party majority of MPs would vote against Brexit. It is also possible that Article 50 will not be invoked this year. The E.U. cannot invoke the article and start talks, only the leaving country can do so. As long as Britain delays, and for two or more years after that, we have status quo.
Only after Article 50 is triggered will a formal discussion of the terms of withdrawal begin. A two-year period for negotiations is mandated in Article 50. But talks might drag on past that period because of the number of conditions to be covered and because Britain will want a deal that lets it remain in the single market while being able to control immigration. E.U. officials say that the latter condition, nullifying the “free movement of persons,” is off the table if the U.K. wishes to remain within the single market. Even if Theresa May were to invoke Article 50 when she assumes office on Wednesday, that two-year period takes us into the second half of 2018. Until then, all existing E.U. regulations remain in force.
In the interim there will be uncertainty about whether U.K. businesses producing for export should shift to other E.U. countries, and whether foreign buyers should start to replace U.K. products. There will be job loss in the banking and currency trading sectors, and some in fund management and insurance. The trend line for anticipated economic growth has lurched downward. Mark Carney, Governor of the Bank of England, said that Britain was suffering “economic post-traumatic stress” from the referendum and that a moderate downturn remains possible. For the art market this might mean a short-term decline in high-end art purchases by U.K. residents who now see art as more of a luxury—and a much sharper decline at the lower end of the market. Some consignors may also choose to sell in New York rather than in London.
Other than that, there is no obvious reason purchases of high-end art in the U.K. at auction or from dealers should be affected. The June 28th Sotheby’s contemporary sale in London achieved £52 million and an 87% sell-through rate, with bidders from 41 countries. Collectors in high-end auctions think of price in terms of dollars, and secondarily in euros, so the decline in the value of the pound doesn’t matter much. Collectors at U.K. auctions can easily translate values, or see the current bid in their own currency on the auction house’s electronic board.
U.K. purchasers at London sales typically represent only 5-10% of total turnover; that percentage includes purchases by expats living in the U.K., and by all these financial sector folk in danger of losing their jobs. Many Eastern European and Middle Eastern buyers will still prefer London over New York.
Nine things we can predict about the art market following the Brexit vote, in no particular order of importance
In the very near future the Bank of England will cut interest rates and ease lending requirements to help promote economic recovery. Monetary policy will not offset all the negative fallout from the Brexit vote. It will make it easier and cheaper to borrow in the U.K. to purchase art or other investments. There may be less lender tolerance for leveraging, offsetting lower rates a bit. If you are optimistic about the future of the art market and can lock in financing, this may be an excellent time to invest.
London will continue to be desirable as a primary residence location for non-domestic billionaires (many who are major art purchasers). A new government will do nothing to make the city or its tax advantages less attractive. London is a major center for professional and financial services because of the rule of law, and attractive because of its cultural life and quality of infrastructure. The Brexit vote did not change any of this.
Post-Brexit, London will be an even stronger auction market compared to Paris and the rest of Europe, and perhaps to New York. Britain will be free of E.U. regulations, particularly the Artist’s Resale Rights levy (ARR). This had final implementation in the U.K. in 2012, after six years of strong resistance by the government. ARR entitles creators of original works of art to a royalty each time a work is resold through an auction house or dealer for more than €1,000. It is levied at 4% on sales between €1,000 and €50,000, declining to 0.25% on sales at more than €500,000. (The royalties cannot exceed €12,500.) ARR continues for 70 years after the artist’s death.
Charging ARR has put the U.K. at a distinct disadvantage for art sales compared to dealers and auction houses in New York, Switzerland, or Hong Kong, which do not levy the charge. According to one report, the U.K.’s global art market share in post-war and contemporary (the sector most affected by ARR) fell from 35% in 2008 (the first stages of ARR were implemented in the U.K. in 2006) to 15% in 2013.
However, the U.K. Parliament never passed a law enabling ARR; it was imposed as an E.U. directive. Post-Brexit, the ARR is expected to disappear. Count on the new U.K. government wanting to avoid ARR to recover U.K. art market share and to even the playing field with New York.
Also count on government support post-Brexit, and perhaps before, for one of the airports in London—possibly Luton—to be the location for the next major “extraterritorial” duty-free warehouse for storage of high-end art and other valuables. The U.K. needs a site to compete with Luxembourg, Geneva, Singapore, and Beijing.
The uncertainty that followed the Brexit vote led to a great deal of money being transferred to U.S. treasuries and other investments deemed “safe” havens. Whether it will lead to more money invested in high-end art is not clear. Art advisors say they are optimistic. When financial markets are in turmoil, art is seen as a good store of long-term value, and a hedge against inflation and changes in the relative value of currencies. For iconic works, there’s a chance to to peg the purchase price against the future value of the U.S. dollar. Brett Gorvy, worldwide chairman of post-war and contemporary art for Christie’s, offered one of his typically enthusiastic quotes: “People come into the market because they want to go with hard assets, things they can trust more.” Actually, some come because they love the artwork. For a few others, he is right.
The new financial fragility of the E.U. means that investors are going to be concerned about high-debt, high-risk member countries—notably Greece and Portugal, but also Spain and Italy. Borrowing for art purchases against assets in these countries may be more difficult and expensive. Expect these national art markets to languish for a while.
The one category of high-value secondary art that might be affected post-Brexit, because of the fall in the value of sterling, is art where the primary market is British buyers. Consignors may choose to wait for the pound to stabilize and uncertainty to decline. The obvious category is U.K. art of the 20th century. Some commentators have predicted that sales of Old Masters will also be affected, but in that category, U.K. buyers are a small but significant portion of the total market.
E.U. capital funding for the arts is significant for British museums, and if lost, it is not likely to be immediately replaced by the U.K. government. Money will be saved because Britain no longer contributes to the E.U. In the short run, however, this money is more likely to be used for an economic stimulus package, to cover welfare costs, or to pay down debt.
In periods such as that following the Brexit vote, art investors minimize uncertainty by purchasing works by better-known artists and in more traditional styles rather than buying work by emerging artists. Traditional works are seen as more likely to be safe stores of value, even if the upside profit potential is less. There is a consensus in the art market that this “flight to the better-known” will be the case at least over the next year or two.
Don Thompson is an economist at the Schulich School of Business, York University in Toronto, and author of The $12 Million Stuffed Shark, The Supermodel and the Brillo Box, and the forthcoming The Orange Balloon Dog, all books about the contemporary art market.