By Louise Wallis, director at the National Association of Motor Auctions (NAMA)
Rising new sales volumes and the growing use of PCPs over the last four years are combining to create an inevitable rise in used stock levels. The concern has been that this increase will place pressure on residual values. This, in turn, would place pressure on the guaranteed minimum future values (GMFVs) that finance companies have been able to use, which in turn have helped maintain sales momentum.
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Maintaining equilibrium in residual values is an essential part of the remarketing model. There is an almost symbiotic relationship between the two and all parties – manufacturers, retailers, finance and leasing companies and consumers win by keeping the value of used cars balanced.
Inevitably, the turnaround in the fortunes of the retail motor industry has meant that some industry watchers have been ready to forecast an adjustment in values. They have expected that the supply of stock will outstrip retailer demand. So far, it has not happened. This does not change the dynamic that suggests a realignment of values is inevitable. To ignore the risk represents an unwelcome game of Russian roulette. The market, that is, manufacturers, finance and leasing companies, and remarketing organisations need to work together to mitigate the risk. Across our NAMA membership, the trend is to increasing supply. However, this is largely being matched by increasing demand. The demand curve was certainly helped by the return of stock funding monies to the motor retailer customer base. Retailers were able to increase stock and to reduce the age of their forecourt parc. However, this honeymoon impact has now past and, it seems that what we now have is genuine demand from trade buyers.
In light of encouraging demand, the risk to residuals may not seem to be that apparent. Recent sales at NAMA member auctioneers have seen record average monthly values achieved in the fleet and lease and part exchange sectors. Nearly new values have also risen and as a result, used cars have risen to record high prices. Nevertheless, caution needs to be maintained. The market for older and poorly presented stock is not so buoyant. The option available to all vendors is to manage their used stock more carefully in the case of fleet businesses and to invest in better preparation as a vehicle goes to auction. The results of preparation are clear, better values and better conversions. This extra investment is good for the vendor and good for residual values.
Managing the remarketing of stock is one area where the trade can help residual values; at the front end of the purchase cycle a slight softening of GMFVs may also be appropriate. A slightly less bullish approach to future values may push monthly payments up, but in the longer term it could help to support a level of equity that will encourage retention and help ease an unwelcome level of pressure on future values. As an industry, we must all recognise that a fall in residual values and the inevitable knock-on impact on confidence is in nobody’s best interest. <
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