• U.K. accounted for 21% of $64 billion global art sales in 2015
  • ‘Everyone I speak to is shell-shocked,’ says one dealer

London art dealer Simon Lee spent Friday morning in a state of disbelief, having woken up to the news that the majority of his countrymen voted to leave the European Union in a historic referendum on June 23.

“Everyone I speak to is shell-shocked,” said Lee, who owns a gallery in Mayfair. “There was such consensus to remain in the art community. Proves what a bubble we live in.”

A lot is at stake for the world’s second-largest art market, anchored by London’s vibrant international art scene. In 2015, the U.K. accounted for 21 percent of the $64 billion global art trade, following the U.S., according to a report by the European Fine Art Foundation. The pound plunged to the lowest since 1985, global stocks plummeted and Prime Minister David Cameron resigned, saying he’d serve another three months, after a 52 percent majority rejected his pro-EU campaign.

“There is a huge amount of uncertainty ahead, and markets don’t like uncertainty,” said Pierre Valentin, the partner in charge of the Art & Cultural Property Law Group practice at Constantine Cannon in London. “The art market is not different. I expect there would be repercussions.”

Auction Impact

An exit from the EU may lead to the contraction of art imports and exports and a decline of sales and philanthropic giving to cultural institutions, said market participants. London art fairs also could be hurt. European cities like Paris and Berlin may seize the opportunity to expand as major art centers.

The impact of the vote on exchange rates and global financial markets could affect contemporary art auctions in the U.K. capital next week. Also under pressure is Masterpiece London, an international fair set to open June 29, with 154 exhibitors ranging from rare-clock specialists to contemporary-design galleries. While speculators will be looking for deals -- the pound fell 8 percent against the dollar on Friday -- others may sit out the volatile period.

A lot of American, Asian and Arab clients “with dollars and euros in their pockets might think they are in Toys ‘R’ Us,” said Rudy Capildeo, senior solicitor at London-based Goodman Derrick LLP, whose clients include artists, collectors and galleries. “I am sure there will be a lot of people who will come to London hoping to pick up bargains.”

British and European collectors, though, may pull back. 

“They will stop buying, stop selling in the next 12 to 18 months,” said Valentin. “A lot of collectors are also business people. Their businesses will be affected. They will be enormously distracted. Art collecting will probably not be something they will have time for.”

Contingency Plan

Not everyone will have the luxury of waiting. Lee, the gallery owner, said that a client contacted him Friday to discuss selling art to raise cash as part of his contingency plan that could also involve closing a U.K. office.  

The pound’s decline could prompt consignors to withdraw lots from auctions next week at Christie’s, Sotheby’s and Phillips, said Capildeo.

“If you are a non-pound seller, the volatility won’t work in your favor,” he said. “People are worried they won’t get a good price for their works.”

On Friday morning, his law firm had four canceled real estate deals in London, with prices ranging from 1 million pounds ($1.4 million) to 5 million pounds, he said. So far, no art transactions have been affected, he added.

Currency Hedging

Francis Bacon’s  Version No. 2 of Lying Figure with Hypodermic Syringe from 1968.
Francis Bacon’s Version No. 2 of Lying Figure with Hypodermic Syringe from 1968.
Source: Christie’s

Catherine Manson, a spokeswoman for Christie’s, which is holding a 250th anniversary auction June 30 featuring a Francis Bacon painting estimated at 20 million pounds, said no pieces have been withdrawn since the vote.

“For now, it is business as usual,” she said in a statement. “Once the political process becomes clearer, we will align our business and operations with any new the legislative framework.”

Michael Goss, Sotheby’s chief financial officer, said in a statement that the auction house doesn’t expect the referendum to have much impact on its financial position because it is “well-hedged against currency fluctuations.” Phillips declined to comment.

Expensive Divorce

The U.K currently charges 5 percent as a value-added tax on art imports, the lowest rate in the EU. If the British government decides to increase the tax in an effort to raise funds, it could lead to a drop in imports. It’s also unclear whether art exports from Britain would continue being allowed into the EU without tax levies.

“As long as they keep free circulation, the art market will continue to thrive in London,” said Daniella Luxembourg, co-owner of Luxembourg & Dayan gallery in Mayfair.

Paris, which charges a 5.5 percent value-added tax on imports, could gain ground as the major center of the art trade in Europe, dealers and lawyers said.

Whatever happens, it will take months, if not years, to sort out the regulatory details.

“London will continue to be a very prominent art market center although with the uncertainty caused by the referendum it could suffer,” said Valentin, the art lawyer. “This divorce will cost a lot of money, and there will be less money available for culture.”

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