RV collapse 'changed the world'

The leasing industry enjoying a residual value windfall worth hundreds and perhaps thousands of pounds per vehicle as record used car prices makes a mockery of forecasts made in the depths of recession.

However, the market is divided as to whether used car values will remain at current levels through 2013, although reductions are predicted over the next three years (turn to pages 38, 39 and 40 for the long-term view).

KeeResources managing director Denis Keenan believes there will be a further moderate increase in used car prices in the next few months, but the return of seasonality in the autumn will signal the start of the decline in used car values.

“History used to be a good residual indicator, but 2008 changed the world,” said Keenan, reflecting on the difficulty in setting residual values.

“Fiscal policy is so volatile in the UK that consumer confidence can be killed very quickly. Cars that are over-priced now can suffer a 10% fall very quickly.”

It is that fear of the unknown that worries contract hire and leasing company bosses the most.

Two factors that have had the biggest impact on the used car market this century are the start of the banking crisis in 2007 and the resulting fall out which led to a shortage of credit and the global recession in 2008, and the introduction of the Supply of New Cars Order Act in 2000.

The Act made it unlawful for a supplier of new cars to discriminate unjustifiably between fleet customers and dealers purchasing outright with respect to discounts for the supply of similar volumes of new cars.

Both issues “murdered” residual values, according to one industry figure, leaving contract hire and leasing companies with defleeted cars and few buyers. As a result used car values plummeted and so did vehicle leasing company profits.

“In both cases we were trying to sell cars that no-one wanted and we lost fortunes as a result,” said Nick Hardy, sales and marketing director of Ogilvie Fleet.

Of course the used car market is now transformed and, as data from CAP and auction giant BCA highlights, used car values have never been so good.

But, the expectation in some quarters is that the seemingly inexorable month-on-month rises in the values of ex-fleet and leasing company cars is about to hit the buffers.

Dylan Setterfield, senior editor, forecasting CAP, is predicting a 7% decrease in residual values this year based on annual increases in new car sales and a higher number of ex-company cars returning to the market.

If that reduction seems a lot then it needs to be remembered that in the 12 months January 2008-January 2009 values fell 30% and put some leasing companies lacking financial strength out of business.

“We have reached a price plateau,” argues Hardy, highlighting the risk and reward nature of the vehicle contract hire and leasing sector.

“The used car market will not get any stronger and will probably weaken and, as a result, residual values will drop back very slowly. They have reached their natural high point.”

In responding to last year’s FN50 report published by Fleet News, Ogilvie Fleet was one of many leasing companies that predicted ‘no change’ in residual values over the following 12 months. Half-way through that period and Hardy believes a small reduction could be in the offering.

“I don’t think the decline will be significant, but residual values will reduce as new car sales increase slightly as forecasted by the Society of Motor Manufacturers and Traders (SMMT).

The SMMT is forecasting new car registrations of 2.057 million units for 2013, up 0.6% on the 2012 total, and 2.111 million units for 2014, up 2.6% on the 2013 forecast. A further revision is expected in April.

However, Ian Nicholson, finance director of Venson Automotive Solutions, which also predicted residual value stability in the FN50 survey sees no reason to change that view.

“Values are holding up,” he said. “Supply is not quite keeping up with demand as a result of new car sales falling off a cliff in 2008, so there remains a shortage of good quality vehicles in the ready-to-retail market.”

‘Conservative’ values fail to reflect market

Figures compiled by Fleet News from a sample of new models launched in the UK around four years ago reveal the buoyancy of used car values being obtained by leasing companies.

Using data from CAP, the figures highlight that ‘clean’ prices are in some cases thousands of pounds higher than the residual value forecasted by the organisation four years previously.

For example, the CAP ‘clean’ valuation (February 2013) of a Volvo XC60 2.4D SE Lux was £4,200 higher (50.9%) at four years/80,000 miles than the residual forecast four years previously.

Similarly, the CAP ‘clean’ value of a Ford Kuga 2.0 TDCi Zetec was £3,650 (66.4%) higher than the forecasted residual value in February 2009.

Ian Nicholson said: “Leasing companies are riding a little bit of a wave at the moment because values have hardened due to supply shortages. However, we believe the residual values set by CAP post the crash were conservative.”

Dylan Setterfield from Glass’s, said: “No one forecast what would happen to the market. Used car prices increased more than 20% February 2009-2010 and have kept rising.

“If that rise had have been forecast then those making it would have been laughed at. It was not a reasonable possibility.”

However, one of the aims of the recently-appointed Setterfield is to enhance CAP’s product suite and its intelligence gathering. He said: “We want to be more open and transparent and show how we arrive at the forecasts made."