RVs 'could drop 10%'

Vehicle contract hire and leasing companies are 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.

Successful residual value crystal ball gazing is critical to the vehicle leasing sector as it is the mechanism by which the typically cautious contract hire companies make much of their profit.

However, as if to prove just how difficult residual value predictions are, 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.

While leasing companies maybe excitedly counting their profits now, it should be remembered that losses were being racked up when the recession struck in 2008 with some companies forced out of business because they lacked cash reserves.

CAP calculates that residual values could fall by up to 10% by the end of 2015 excluding the impact of new models. That is slightly less than the average over three-years if excluding the impact of new models.

Meanwhile, Glass’s is predicting a ‘relatively stable’ outlook and KeeResources is calculating that average used car prices will fall by 3-5% to 2016, although the company warns that higher than officially forecasted new car sales could trigger double digit reductions.

Reflecting on current ex-company car values, KeeResources managing director Denis Keenan said: “An extremely buoyant used market, almost by definition, has traditionally been one that is over-cooked in risk terms.”

A raft of factors impact on successfully forecasting the used market value of any model at the end of its contract period, but the most significant influencer on residual values is vehicle supply and demand.

Dylan Setterfield, senior editor, forecasting CAP, says 75% of residual value movement is due to a small number of factors such as new car supply and demand, GDP, inflation and unemployment rates.

He said: “The size of the used car market is pretty consistent, but the biggest influencer on price is supply and demand. There could be future shocks which will impact on values, but we don’t know what they are until they happen.”

Andrew Jackson, head of analytics at Glass’s, said: “Shortage of new vehicle sales through 2008/9 has skewed the used car market and that has resulted in the surge in prices that we have seen. But that surge has now stabilised, but we are in a new reality.”

That reality must now take account of changes in the size and specification of new vehicles that have yet to be defleeted in any major volume so that impact on used car values remains to be seen.

Jackson explained: “Downsizing has become a major issue in the new car market. B, C and D sector cars are getting larger and specification, leather upholstery for example, that was typical of the E sector is now found in cheaper models.

“We are investigating how much impact those changes will have and whether the arrival of non-traditional specification in popular used market segments will keep values high over the coming years.”

Meanwhile, Keenan said: “The diversification of product that we are witnessing with new niche models being launched by manufacturers helps support average residual values over time.

“Additionally, as visual lifecycle changes are occurring at ever shorter intervals, a degree of residual value protection is being inherently built-in. Models age less through their lifecycle when this is done well, thus holding used desirability away from the value-drop cliff we have seen in the past.”

He also highlighted the improvements in build quality, additional specification - notably safety features - and environmental technology most obviously manifesting itself in improved MPG that, he calculated, were all contributing to residual value improvements of 6-8%.

It is a view shared by Jackson who said: “The launch of a revised model does have a negative impact on its predecessor. However, the model evolution is not as stark as it was 10 years ago so in that respect there could be a case to investigate a change in the established depreciation curve, although there will be no radical flattening out.”

Despite Keenan’s long-term view that new car prices will fall, he 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 Mr Keenan who, reflecting on the difficulty in setting residual values, added: “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.”