Despite representing just a small proportion of the motor finance market, prestige finance, and the economic forces that affect it, have a visible impact on the wider trends seen in the industry. Chris Lemmon writes.
The financial strength of the customer base means the prestige market sits in a bubble, somewhat unaffected by market and economic forces.
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In the face of Brexit uncertainty, the prestige sector has maintained its position of strength – with new players and products driving competition and innovation.
“The prestige used car market is currently very strong,” asserts Nick May, head of premium captives at Alphera Financial Services, BMW Group’s independent motor finance division. “Finance penetration continues to grow, continuing the trend we have seen over the last couple of years.
“Despite the uncertain economic and political outlook in the UK, we have witnessed a growth in finance penetration for both new and used prestige cars during this time, as more customers are choosing to finance high-end vehicles than ever before.”
This echoes a wider trend in the market, with both Magnitude Finance and JBR Capital reporting successes in the first quarter of 2019 – when Brexit uncertainty was arguably at its height.
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By GlobalDataHead of the prestige division at Magnitude Finance, Tim Marlow, says his firm was surprised by the recent growth, stating that it had expected some disruption from the ongoing economic turbulence. “In the first three months of this year, we have achieved record-breaking figures. It has been extremely busy for us, and there does not seem to be any loss of confidence,” he notes.
With this in mind, the prestige motor finance industry appears to have navigated the Brexit headwinds well, maintaining a position of strength in a similar fashion to the way it fared during the financial crisis of 2008. High net worth individuals (HNWIs) dominate the customer base in the sector, and therefore have the greatest influence on how the market performs.
“The prestige car sector operates differently to the wider car industry due to its different dynamics, trends and reactions of HNWIs,” explains Kirk Franks, head of national sales at Alphera. “When it comes to personal wealth and personal expenditure, this customer base seems to have more financial confidence in the current climate, despite ongoing political and economic uncertainty.”
Although there is apparent ongoing strength across the market, Charles McLeod, founder and managing director at Prestige Car Finance, believes there has been hesitancy in recent months as both businesses and consumers remain in the dark about Brexit eventualities.
“There is a huge amount of pent-up interest,” he notes. “People are quite concerned about the future and what is going to happen. It is all about confidence: if you have not got confidence, you will not go and buy yourself a nearly new Range Rover.”
Shalom Benaim, chief executive at JBR Capital, agrees that demand could be higher, and hopes the conclusion of the Brexit saga will release that pent-up demand in the market. Since the Brexit-related disruption stepped up last year, JBR has observed a decrease in the number of used car purchases. “This is because high-end used car purchases tend to be more impulse purchases,” Benaim explains. “For new car purchases, buyers generally order the car six to nine months in advance.”
New Year, New Players
Despite this disruption to the used car market, Benaim notes that the prestige market as a whole has seen growth over the last 12 months – which has attracted interest from outside players. “We have also seen more companies and manufacturers trying to get into the prestige market, with higher-end models,” he adds. “More dealers are becoming interested in selling prestige cars, given the better margins on offer.”
Franks also observes the growing interest in the prestige sector, stating: “With a greater choice of used and nearly new prestige cars in the marketplace, we have seen an increase in the number of businesses setting up or expanding operations in the prestige arena.”
With new players entering the market, competition has intensified. New products and cars are being launched with attractive finance terms, while a new range of propositions have been developed to cater for the specific needs of the HNWI customer base, helping to stimulate demand in the market.
Customers in the prestige market have also enjoyed a string of new model launches in recent months, further driving demand in the sector. Neil Davies, chief executive of Close Brothers Finance, notes the particular launch successes of the Lamborghini Urus and Performante Spyder.
May agrees that this has had a positive effect on the market, adding: “New models or derivatives launched by these manufacturers have resulted in significant growth in finance contracts on new and used luxury vehicles in recent months, through an offering of finance products that are bespoke to each brand.”
Increased Visibility
In addition, consumers now have a greater understanding of available finance products in the market, offering increased accessibility to high-value vehicles, according to Franks.
He explains: “Prestige car buyers are now enjoying ever-greater choice and flexibility in their choice of finance products. Combined with a growing range of finance options, these vehicles are now more affordable than ever for many buyers – giving them access to cars that previously may have been out of their reach.”
Awareness appears to be the order of the day in the sector, with industry participants agreeing that a broader consumer understanding of the products available to them has enabled a greater level of service.
Marlow expects consumers to be “a little more clued up on finance options” in the future. He says his company, and others in the industry, are prioritising the education of customers on how to secure the best finance deal for them. As a result of such increased visibility and understanding, Marlow believes consumers can be more confident and flexible when selecting the right finance option for them.
With flexible subscription models growing in popularity across many aspects of consumers’ lives, it is not surprising that the market is seeing an increasing number of people turn to new car finance models. “People are leaning more to a pay-as-you-go society, and new finance products certainly mimic pay-as-you-go,” observes Benaim.
Subscription models, where consumers pay for monthly car usage rather than outright ownership, are starting to gain traction in the mass market. The prestige customer base seems like it would be a good fit for the subscription lifestyle – with the opportunity to switch to newer models at short notice becoming easier than ever.
Porsche has identified the new model for mass adoption in the next 10 years, rolling out its Passport subscription app with the tagline: “Drive a Cayenne on a Monday and a 911 on a Friday.”
Asset-based Lending
The possibility of high-end cars appreciating in value is also helping to keep sales afloat in the prestige market. Franks believes that such cars are treated as an investment opportunity by HNWIs, who benefit from an asset that may well appreciate in value over time.
Asset-based lending on owned prestige cars has remained steady, with many HNWIs choosing this method as a way of financing vehicles.
“The reason for this is because they want to keep cash liquid, enabling them to look at other options,” says Davies. “They understand how to make their assets work for them, which is why they still use finance.”
May also believes that asset-based lending is an attractive proposition for HNWIs, who benefit from a more preferential rate of return and can seek other investment opportunities. “HNWIs often choose to keep their money in the bank or invest in other ventures, instead of locking their funds into any one single asset. Asset-based lending lets them be smarter with their money, and better manage risk rather than affordability,” he explains.
The speed and ease of asset-based lending also plays a role in its popularity. Releasing equity in assets is often a much simpler undertaking than releasing equity in property, according to Benaim, who hopes the asset-based lending trend continues as JBR Capital is now “developing routes to market for this method, as well as opening up awareness”.
Rebalancing
The most significant change seen in the market over the last 12 months, according to Davies, has been the noticeable reduction in values of high-end cars achieved at auctions. “We have seen a rebalancing of the classic motor finance market,” he explains. “The very high-end cars are not realising the prices their owners have been asking for them; values are down by 4-5%. What we are seeing, however, is people leveraging existing collections.” As a result, Davies says levels of funding in 2019 have remained flat when compared with the previous year.
McLeod also notes the significance of the reduction of sale prices on vehicles in the prestige market, stating that there are “some remarkably good deals on new cars at the moment”, with better deals increasingly available at the more prestige end of the market.
Affordability
The Financial Conduct Authority’s (FCA) recent review into the motor finance industry called into question affordability assessment practices in the industry. The prestige market, however, remains confident that suitable measures are in place to protect consumers from defaulting on payment plans, and welcomes the report as a step forward for the industry.
“It’s a very sensible document that outlines the FCA’s concerns in some areas of the motor finance industry,” says McLeod. “I think, as an industry, we need to tighten up on a few things.”
Benaim agrees that stringent affordability checks are crucial to the industry, and hopes the new document will help to eliminate irresponsible lending in the market.
“Customers may be a bit put off by the extra questioning and documentation, but I do not think it should have an impact. Those who can afford it will still be able to obtain finance.”
Brexit? What Brexit?
The prestige sector has done well to avoid disruption during the negotiation phase of Brexit, but remains in the dark – along with the rest of the UK – on the final implications of the withdrawal agreement. Continued ambiguity surrounding the outcome of Brexit has resulted in the prestige market deploying a ‘sit and wait’ approach, reacting accordingly when the terms are agreed.
The general consensus of the market is that a no-deal Brexit would ultimately lead to an increase in the price of prestige cars. The government confirmed this in a recently published 1,477-page document, outlining tariff plans in the event of a no-deal Brexit. The proposed measures include a tariff of 10% on cars imported from the EU, with additional fees for specialist cars and some car parts.
Marlow notes that Porsche has already indicated the additional costs faced in the event of no deal would be shifted onto the consumer through higher unit prices. However with the strength of the customer base and demand of high-end vehicles, Marlow does not anticipate much change in the market. “If Brexit does not go well and prices do rise, people will continue to buy cars because many buyers are already in the circle of finance,” he notes.
Benaim adds that an increase in car prices could provide new opportunities to the prestige finance market, as consumers may explore finance options to account for the extra costs. “However, if the desired car is still too expensive, people may move down a notch,” he says. “If you were looking to buy a Ferrari, you might end up buying an Aston Martin; if you were interested in an Aston Martin, you may go down a notch to Jaguar.”
Finance Favourite
Porsche remains the most popular brand in the prestige arena, notes Marlow, with around 20,000-30,000 units sold in the UK each year – significantly more than any other brand. “The sheer volume of sold units means we can finance more of them. The other prestige brand doing very well is Range Rover; huge volumes are being sold.”
Ferrari was touted as the most successful brand with regards to finance penetration rates. “With Ferrari, obviously in terms of volumes, they sell fewer cars than most others. However, many Ferrari owners keep their finance within the Ferrari network.”
The prestige market bubble appears to be stronger than ever. New players are entering the market to grab a slice of the pie, which has helped to drive competition and innovation across the board. A host of new finance options, coupled with increased consumer visibility, has provided buyers with opportunities to purchase prestige marques that may have previously been out of reach.
Optimism remains in abundance across the sector, as businesses seek to manoeuvre the potential effects of Brexit to work in their favour.
