RVs: Maximising realised residual values against an increase in supply

Richard Parkin, Director, Valuations & Analysis, Glass’s, looks at how an increase in supply is affecting RVs.

Over the next 12-18 months, the fleet industry expects the number of 3-4 year old cars being remarketed by its members to increase, as the effects of low fleet sales during and immediately following the recession finally come to an end.  Accordingly, many are increasingly nervous about the impact this will have on residual values (RVs).

Most in the industry agree that strong RVs have been enjoyed in recent times, and great performances have been made when compared to prudently-set forecasts made some three years ago.  Shortage of supply has enabled vendors to sell anything in any condition through auction as independent dealers starved of stock battled to get any used vehicles for their forecourts, even if refurbishment was required.  As a consequence, the difference in auction price between cars in very good condition versus those in need of some fairly significant body repair is now at a low point.

Ultimately, the supply of vehicles into UK wholesale channels is somewhat predetermined, driven by the number of vehicles sold into fleet historically as well as new car sales volume – itself dictated by budgets set in the preceding year. 

Latent demand is somewhat linked to affordability, and so price is the arbitrator between these drivers of supply and demand.  As supply increases then, it will be the less desirable vehicles at auction – those in poor condition – that will become more difficult to sell.  Vehicles in pristine condition will always sell well as trade buyers can turn the stock quickly, and so heavier discounts will be sought if work needs to be done, pushing up the average difference in prices between vehicles in pristine versus poor condition.

And so opens an opportunity.  Where fleet companies have not contemplated refurbishing vehicles prior to auction in recent times, falling realised prices for poor condition vehicles may make this once again economic.  In a similar vein, fleet companies may rightfully pass on some of those costs to the former drivers in the form of higher penalty charges for damage.

In summary, as supply increases, condition will become of increasing importance to RV performance and steps should be taken in order to ensure that this is mitigated.