Leasing companies urged to take ‘cautious’ view on residual forecasts

Contract hire and leasing companies are potentially risking residual value suicide by, in some cases, writing new business based on current used prices even though cars will not be defleeted until at least 2016, it is claimed.

Some residual value forecasters believe used car prices have peaked and there is concern that some contract hire and leasing companies are “buying business” with ultra competitive monthly rentals linked to the view that second hand prices will not slip over the next three or four years.

“This not a good idea at all,” said Glass’s chief car editor Rupert Pontin. “I would urge leasing companies to be cautious.”

It is a view echoed by Daren Wiseman, valuation services manager at Manheim Auctions, who said: “Although the average values achieved during September and October have been very strong, there is a need to be realistic when analysing the figures in the longer term. Data from the Society of Motor Manufacturers shows that registrations were up 12.1% in September, which means that more vehicles will enter the auctions over the coming months. Looking at fleet volumes at auction confirms that stock levels are rising marginally and this will inevitably have an impact on values.”

Of course, it could be that leasing companies have money set aside from residual value windfalls gained over recent months to offset losses, but Mr Pontin said: “UK new car sales have increased for 19 months in succession and the used car market will be made to swallow the volume and that is likely to be at the expense of values.

“The strong residual values that we have seen have been due to restrictive supply. Money achieved now will not be the same in three and four years’ time and some leasing companies may find that the view being taken now could come back to haunt them.”

Average values achieved for ex-fleet and lease cars at BCA overcame a mid-2013 dip to break the £9,000 (£9,182) for the first time this autumn and almost £850 higher than 12 months ago. The 10.1% year-on-year rise has come amid continuing stock shortages and a slight dip in average age and mileage to 39.8 months/44,700 miles.

The present new car bonanza is being fuelled by manufacturer discounts and production changes to shift volume to the buoyant UK market and away from struggling European markets.

Mr Pontin continued: “There is a very real danger that residual values will be under significant pressure but it is almost a certainty that they will be lower than they are today.”

Consequently, he said: “Now is the time to review at what level residual values are being set, and to start planning very carefully how these cars will be remarketed.”

Lex Autolease the UK’s largest contract hire and leasing company reviews its residual value forecasts quarterly and Ben Newton, head of pricing, says in the short term used car prices will drop slightly due to the signficant 10.8% rise in 2013 new car registrations propped up by manufacturer discounts.

As a result, the deals available can, in some cases, make a new car better value than a used model for consumers, even though household disposable income continues to be squeezed with wage/salary inflation failing to keep pace with the cost of living.

“Used values, while historically strong, are still being propped up because new car registrations three and four years ago were so low and that supply shortage will continue into 2014. Consequently, short-term values will not drop much although any fall will be due to consumers opting to take deliverey of a new car over a used model,” explained Mr Newton.

The Society of Motor Manufacturers and Traders is forecasting year-on-year new car sales increases of 10% in 2013, 0.8% in 2014 and 1.4% in 2015 and those rises will inevitably impact on optimistic residual value forecasts booked by leasing companies in 2016 and beyond. However, Mr Newton added: “The big variable is the state of the economy going forward.”

Record monthly values have been achieved seven times in the fleet/lease sector over the past 12 months, but whether that trend continues will be determined by stock availability and buyer confidence, according to Simon Henstock, BCA UK’s operations director.

He explained: “There has been a growing sense of general economic optimism over recent weeks and that feel-good factor has definitely been apparent in the wholesale used car markets. Availability of good retail-quality stock will remain critical, however, if dealers are to meet the needs of their customers.

“However, supplies of fleet and lease vehicles are likely to remain constrained, a consequence of the reduced new car sales to the business sector following the onset of the financial crisis in 2008.”

Crystall ball gazing into 2014, Mr Henstock said: “January often brings an uplift in activity, and this is typically sustained until the Easter period, which usually represents a watershed in demand. Whether or not we see the sustained price evolution we have experienced over the past 24 months will largely depend on stock availability and buyer confidence.

“Longer term, economic confidence is the key factor. Recent indicators suggest the economy is improving and employment levels remain high and this may tempt even more retail buyers to consider changing their current vehicle for a ‘newer’ used car.  But we must not lose sight of the fact that many families continue to struggle with rising costs while wages are static or even falling in real terms.”

If residual values fall, the big unknown is how far. Mr Pontin admits it is difficult to predict with much depending on the strength of consumer spending and economic recovery.

Dylan Setterfield, CAP’s senior forecasting editor, says even though new car volumes are rising resulting in an increase in the number of cars reaching the second hand market, sales remain “significantly below” the pre-recession years.

Consequently, he said: “Used vehicles are likely to remain in relatively short supply overall for some time to come so we do not expect to see significant decreases in three or four-year-old values in the next 12 months.”

Mr Setterfield added: “Our research has shown that three and four-year-old prices are more closely linked to level of fleet registrations (+5.4% in 2013), either overall or for the individual vehicle sector and these will also tend to be driven by business need rather than the availability of offers.

“Although the offers currently being generated by leasing brokers may be applied to vehicles due to return to the used market in three or four years’ time, these will remain a relatively small proportion of the overall leasing segment and may not even represent incremental volume - they may have replaced registrations which would have been processed through other channels in the absence of the incentives.”

Optimistically, Tim Maffey, leasing asset management leader, GE Capital Fleet Services, believes that values could rise even higher in 2014 as increasing new car volumes will take time to percolate through to the used market.

He explained: “Overall used car sales have been pretty stable since 2009. Indeed, since then, the number of vehicles in the up to six-year-old bracket has fallen by two million, so potentially those increased new car registrations could simply pull us back towards a more normal level of supply and have a limited effect on values.

“Clearly, we still need to monitor the situation if manufacturers start forcing more new car registrations, which remains a risk if Europe as a whole shows signs of further economic deterioration, but we believe that the short term residual value outlook is still generally positive.”

The optimism is shared by Mr Wiseman, who said: “Despite the increase in market volume generated by good quality de-fleeted company cars and the seasonal influx in part-exchanges following the September plate change, we’ve continued to achieve some staggeringly good values for defleeted stock at auction during the autumn period. In October, we’ve seen a rise of up to 20% for certain vehicle segments, compared to average monthly supply.

“Looking to early next year, I think we will see an increase in demand from buyers, with a corresponding uplift in values. This is because buying patterns have changed in recent years. Historically, values fell in the last quarter of the year, but we saw a strong December in 2012 and expect to see another strong performance this December making it a good time to shed stock and take unwanted assets off their balance sheets. It’s much more normal to see a steady final quarter to the year, with a slight uplift in values.

“Unless there is a big shift in the global or UK economy, the overall trend is likely to see a steady supply of vehicles matched by a steady demand. This will ultimately see prices remain relatively stable, within the usual seasonal fluctuations.”

Indeed, James Hopkins, LeasePlan’s head of remarketing, also believes that used car values are “likely to remain high” over the next year with good quality marques with the right specification unsurprisingly retaining most value.

But, he warned: “There may be a challenge to the high value of used vehicles from manufacturers looking to increase uptake of new vehicles and therefore attracting buyers who might otherwise opt for a used vehicle. The success of these incentives could play a big part in shaping the used car market in the coming year.” 

While today’s used car market is “bland” in terms of model variation, over the coming months a wider selection choice should emerge but, conversely, some manufacturers will see their residual values dip.

In recent years premium badge German manufacturers have seen their sales rise rapidly and Mr Pontin predicted used values on Audi, BMW and Mercedes-Benz models could all suffer.

As a result, Mr Pontin urged vehicle manufacturers to shift their focus from “short term gains” to the used car arena and the creation of robust and aggressive remarketing strategies.

Nevertheless, Alex Wright, managing director of Shoreham Vehicle Auctions, believes, leasing companies will generally remain “on a winner” in 2014 with the “extreme winners” being the vehicles that are a bit different with sensible mileage and specification which nobody else has got.

He specifically highlights sub-five-year-old diesel-engined estate cars with air conditioning and under 60,000 miles on the clock as being “the sort of vehicle that could blow the doors off as nobody has them”.

Meanwhile, he added: “Cars that could find it challenging to sell could be ex-rental one-two year olds with high mileage as this is becoming an ever more competitive piece of the market, especially if vendors don’t have a full service history to support the vehicle.”

Almost 200 delegates to the recent Vehicle Remarketing Association (VRA) conference were split as to what might happen to car residual values over the next 12 months.

Just over a third (37%) said they thought prices would fall between 1-3%, while 8% of delegates predicted they would reduce by over 3%. However, one in five (20%) felt they would increase by between 1-3%, 3% felt they would increase by over 3% and 23% of delegates predicted no change in prices from 2013 despite the expectation that the supply of one to four-year-old cars in the market could rise from 7.5 million in 2013 to 8.04m in 2014, according to Autofutura.

VRA chairman John Davis said: “That small increase in supply should be more than soaked up by wholesale buyers, in particular the growing number of dealers setting up and expanding their own independent multi franchise used car businesses, and private motorists buying a new used car for the first time since the start of the recession.

Therefore the general used market should be relatively stable once again in 2014, except for the usual seasonal and regional trends. To put this into perspective the 2014 volume is still well short of the 2005 peak of 10.25m used cars where an oversupply of cars caused a market price drop across the board.”

BCA ex-fleet and lease car data year-on-year

Remarketeers have historically talked of the “seasonaility” of the used car market, notably in respect of 4x4s and convertibles.

However, analysis by Glass’s suggests that vendors who continue to follow that trend maybe costing themselves money.

In recent years the increase in models into the 4x4 and lifestyle SUV sectors has bought affordability to the mass market, according to Glass’s chief car editor Rupert Pontin, who says that the flexibility and running cost implication of models such as the Nissan Qashqai and Audi Q3 means that they can be used all year round.

Similarly the convertible market has also “flattened out” due to vehicle technology such as electrically operated roofs and folding tin-topped variants making almost every model an “everyday car”. It is a view supported by rivals CAP, which said it detected that convertible values had “not dropped off a cliff” as they typically had in past years.

Therefore, said Mr Pontin: “The trade as a whole must consider the possibility that we have seen the last of the major seasonality and value changes in both these market sectors. Over the next two years, the blip of seasonality around 4x4s and convertibles will go and they will become vehicles that sell throughout the year.”

“This naturally impacts on the remarketing of these cars, auction houses and wholesale outlets have historically been instructed by vendors to hold stocks of these vehicles until the perceived top selling months. In future, this strategy may in fact cost the vendor money when compared to instant defleet and sale.”