Jonathan Minter talks to key players in the prestige and classic car finance market about their experiences with customers during good times and bad
Owning a flashy car, or possibly a few flashy cars, is often as synonymous with success in life as a nice house or a personal wine cellar. Whether it’s used as a status symbol, a fun toy or a luxury item, as long as there have been cars there have been those around the world willing to pay a bit extra for added prestige, comfort or speed.
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On a global scale, prestige cars have been doing well since the recession. In California, a Pebble Beach auction in August sold more than $400m (£244.25m) worth of prestige cars including a 1962 Ferrari 250 GTO which went for $38m, making it the most expensive car ever sold at auction.
In the UK, prestige cars continue to sell comparatively well, and in the first eight months of the year Jaguar, Audi, BMW, Maserati, Mercedez-Benz, Porsche and MG all had increased market share of the rapidly growing total UK new car market.
At the same time, Finance & Leasing Association figures have shown a consistent year-on-year rise in the use of finance to purchase cars in the UK. Year-on-year, the total value of finance increased by 21%, and the number of cars bought on finance increased by 14% for the 12 months to the end of July, for example.
Alphera Financial Services director Andy Gruber notes that this rise in finance as a way to pay for cars has not been limited to the standard car market. Gruber says: "The use of motor finance is not restricted to everyday users. Many prestige manufactures also find buyers are more willing to consider favourable credit terms. The stigma of taking out motor finance has well and truly disappeared, in favour of recognition of using the right financial tool to meet individual circumstances."
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By GlobalDataAccording to Andy King, co-founder of prestige broker and finance provider Oracle, a better use of capital is often the main reason for a prestige buyer to purchase a prestige car on finance. He says that, while in some cases buyers can afford to pay in cash, financing frees up this capital for more efficient uses, such as investing in property or in stocks and shares.
A second reason King suggests is that, as cars typically depreciate, buyers prefer to pay the depreciation on a monthly basis, as opposed to taking the entire loss upfront.
Gruber agrees, and says that this is more applicable to the prestige market than other motor sectors due to the client base.
Prestige car buyers may have access to good investment opportunities," Gruber says. "It does not necessarily make sense to use cash to buy a depreciating asset when the alternative of paying monthly instalments and investing the rest of the money at a more favourable rate is available. This is especially the case when the cost of borrowing money is so low."
The wealthier nature of the clients is reflected in the fact that Tony Howe, managing director of broker Supercar Finance, says that accountants referring clients to them is a real source of clients.
Tax-efficient
One key difference between standard car finance and prestige is that it is often more tax-efficient to register a car in a private name as opposed to a company name. According to management consultant Colin Tourick, leasing is often the preferred method for company cars due to strong VAT-related benefits not present if the car is bought outright.
This is less applicable for prestige cars, though he says: "If you buy a very expensive car that blatantly exceeds the type of vehicle your business needs, HMRC may deny you your full capital allowances."
"They will argue," he says, "that the choice of car has more to do with personal choice than the needs of the business. A very expensive car that’s bought ‘on the business’ but rarely used for business purposes is likely to be denied full capital allowances."
This isn’t always the case, however, as he notes if a car is used for substantial levels of business mileage you’re more likely to be granted full capital allowances without restriction.
Renaissance managing director Hugh Sigrist describes the tax treatment of prestige cars as something of a "minefield".
As such, he says, Renaissance always advise its customers to seek third-party advise from an accountant on the tax situation regarding the car, and what they can and can’t allow.
Discussing the tax system in place for these cars, Sigrist says "If you have a car through the business, it’s taxed as a benefit. So a very expensive car through a company would be taxed as a benefit on the value of the car. And that’s related to value, to CO2 emissions and so on. And that could potentially be a huge amount for these cars. So what tends to happen is a lot of people buy cars outside of their business in their personal name."
Enthusiasts
It’s perhaps ironic that such a complicated tax system exists for what are essentially luxury items for well-off motor enthusiasts. Howe at Supercar Finance says he has clients with more than 10 expensive cars in their garage, saying: "The market is a much more emotive market than for typical cars used to get you around."
Due to the fact that prestige car buyers tend to be interested in cars, it means the topic is often discussed between them, making word of mouth an effective marketing tool for those in the industry.
"It’s very much a business where one owner of a Porsche will know a number of other people that own similar cars," Howe says.
"When a car is moved on, it tends to be to like-minded people. They go to other dealers selling similar cars and you build relationships with those. So once you’re in that world, you tend to pick up repeat business with very similar high net worth customers.
As a result, most of Supercar Finance’s clients are long term, and this passion also helped the market during the recession.
"The type of customers we have are not going to be told what they can and can’t drive," Howe continues.
"You can do what you want with car tax, and things might be tight, but they still want that nice car."
According to King: "Things certainly paused for a few months during the credit crunch while clients and banks re-evaluated their business plans moving forward." He points out, however, that the typical Oracle high net worth individuals, those either earning over £150,000 after tax or with assets, not including residential property, worth over £0.5m, restructured debt levels throughout the recession or refinanced their cars and collections."
He says: "Certainly people suffered across the board, and we had a handful of clients who had a very tough time. But for some, even if their wealth halved, they’d still be relatively wealthy." As a result Oracle transacted less business involving cars worth over £150,000, but wrote more in the under £100,000 range.
For Howe, after an initial worry that his decision to base his brokerage increasingly on the prestige motor market, he found the "emotive nature" of the industry helped keep the company clear.
Although he says business levels declined by about 25% at the height of the recession, the bigger problem for the broker market was funders pulling out of the prestige area. "This may not apply to everybody," Howe says, "but we were more concerned about where we were going to place the business as opposed to where we were going to get it from."
Since the recession the prestige market has begun to improve as capital and credit have returned to the economy. At Aphera, Gruber notes there’s been an increasing choice of prestige, super and hyper cars for prospective buyers to choose from, fuelling demand for finance in the sector. Gruber says: "The improving economy and growth in sales of new models, such as the McLaren P1 and Porsche 918, is likely to generate even further growth in the prestige finance sector."
For Howe at Supercar Finance, each of the past four years has been the best year for his business, while King at Oracle notes that everyone in the market, including the manufacturers is doing very well at the moment.
Tailored products
While the tax implications and the prices of the cars may vary, Gruber tells Motor Finance the biggest difference for prestige car finance is the tailoring of the product. "Every customer circumstance is different and so we do see greater individualisation in the underwriting," he says.
King points out that, despite many of his customers being able to afford a £1m Ferrari, many would not be able to walk into their local sofa shop and buy a sofa with interest-free credit.
"As soon as you’re over £60k, it’s a different league. We have to spend a lot of time doing credit applications for clients. It’s not an onerous process, just a 10 to 15-minute phone call, and with that we can build a picture for our funder. And that gets a manual underwriter comfortable doing that particular lend," he says.
Sigrist at Renaissance echoes these views and notes that all this makes automatic underwriting systems far more difficult. He adds: "You really need to understand the customer because you really need to understand what a customer is going to do with it, compared to a typical online underwriting system, where it would come through and there would be no dialogue."
The three main finance products for prestige cars are PCP, HP and lease purchase, and according to King, there’s a fairly even split among the three, with certain cars and client requirements lending them to certain products.
An example King gives is that a client looking at a £50,000 car on straight HP will be paying several thousands of pounds each month, but for the same monthly payment on a balloon-based product such as PCP or lease purchase, the client could afford a much more expensive car.
However HP would be better for a client seeking not to pay cash because it is the lowest interest cost option. Similarly Sigrist notes HP is popular with clients seeking to keep the car in a collection or for a long period of time.
This is where needing to know a customer can become so important. As a large number of the loans are to a high value, they are currently exempt from the Consumer Credit Act, and therefore customers are able to get unregulated HP. However early settlement for this is expensive, especially due to the high numbers involved in prestige cars generally.
As a result, Sigrist says "It’s not as simple as ‘I want to buy an £800,000 car; can I have that so I can buy it?’ You need to find out their plans; are they going to keep it; is it going to appreciate, etc."
Similar complications occur when valuing cars where CAP and Glass’s valuations don’t always apply.
Both Renaissance and Oracle get independent evaluations completed on any potential cars. According to Sigrist this involves 20-page reports on classic cars, which include a range of information, including what renovation work has been done, and whether it’s been done by an authorised agent.
They also produce fore-sale values as well as market values: "Some of these cars have a very high value if you can afford to wait for the next auction, which may be six months away, but it’s going to be considerably less if you need to sell the vehicle quicker." Sigrist says.
While this may take more time than an automated underwriting facility, as long as time expectations are managed, this does not cause a problem, says Howe. "People don’t expect a £150,000 Ferrari to be underwritten in 10 minutes," he says, "As long as they are aware of what’s going on, then there aren’t the same time constraints associated with this industry."
New markets
The end of the recession ushered in two new areas for the prestige market. For one, the market has become flush with rich non-UK citizens, whose flamboyant automobile tastes regularly make headlines in daily newspapers.
Often these cars are rented from specialist companies, and this has provided a new area for traditional motor funders to become involved, while mitigating some of the risks.
According to Sigrist, these rental companies target wealthy customers who come to the UK for a few months a year, or have lots of assets based out of the UK in, for example, trust funds. Often it’s difficult for them to prove their creditworthiness in the UK, and it’s easier for them to pay a premium and rent expensive vehicles than buy one.
Leasing companies are able to benefit from the market by underwriting the rental company, allowing the rental companies to buy the cars to rent to wealthy individuals. "In order to do that they often have to pay an awful lot of money on their insurance premiums because there’s a lot of risks. And they’ll do their independent checks on customers." Sigrist says.
A second market that’s been booming lately is the classic car market. Here, low interest rates have left many looking for new areas to invest their capital. Howe compares the current classic car market to the housing market in London in the sense that no one knows how high the market can go, and how long the boom can last.
Howe says: "The speed of increase is unprecedented and quite scary. Is it leading to another crash? No one knows because you’ve got a different market compared to the last time the classic car market crashed and you’ve got different players."
While the people Motor Finance spoke to are wary of predicting if, or when, a crash in the classic car market could happen they are unanimous in their belief in the current strength of the prestige car market. This appears to be slightly above how the UK car finance market is performing overall, as cheaper credit allows for cheaper borrowing, low interest rates make saving capital less appealing, and the wealthy appear to get wealthier.
As Howe says: "It’s a very competitive industry, but if you do it properly, and you’ve built good relationships, then there’s plenty of business to go around."
