Despite a politically tumultuous year, auction houses recorded another year of strong values and volumes. Jonathan Minter investigates why this was, and how long the good spell can last
2016 was one of the more unpredictable years in recent history. The vote to leave the EU, the election of Donald Trump, and the sheer quantity of celebrities who passed away are all examples of why 2016 could be considered a volatile year in a number of respects.
Go deeper with GlobalData
In comparison to the wider world, then, the car market had a relatively smooth ride. Although growth slowed in comparison to 2015, the new market still finished the year at record volumes, and statistics point to the used car market having had a good year as well. The same was true for motor finance, with penetration continuing to grow.
Behind this, the vehicle remarketing companies also had a good year, on the back of a good 2015. According to Martin Potter, group operations director at Aston Barclay, not only did volumes increase, but values also performed very strongly.
He notes: “We keep saying every year that used car values can’t hold up as well as they have been, every year for the last four or five years, and every year we still keep getting amazed by how it does.”
He notes that demand has remained high and, despite an increase in supply, there is not currently an oversupply of vehicles coming through to auction houses.
One notable factor he brings up is that the year did not see the usual seasonal peaks and troughs the industry expects, noting that Aston Barclay’s conversions were at 75% in November 2016, whereas normally the number would be lower that late in the year.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataPotter gives a number of reasons for this consistency, for example noting: “Easter was early, which helps because when Easter is late and it coincides with those May Day bank holidays, the market tends to slow down. That’s at a time when volume is at its highest, so you get these big blips where supply and demand go the wrong way.
“This year, because Easter was early, we got it dealt with and out of the way, and there was a big enough gap for the market to carry on and recover before these holidays.”
Even the Brexit vote only caused a “five-minute blip” he notes, adding that nothing really happened and people just carried on. Any effects are more likely to be felt in 2017, when the government gives a better idea of what Brexit really means.
John Mitchell, UK group sales director at Autorola UK, also notes that Brexit has the potential to derail what has been a good spell for the industry. He describes 2016 as a “solid” year, with Autorola seeing record results.
Although he admits what the government ends up doing with regards to Brexit in March has the potential to “throw a spanner in the works”, he adds that he does not think it will. Instead, he says: “We think we’ll see a similar position in terms of pricing in 2017. We are not overly concerned about market supply; we think it will be very similar to 2016.”
Louise Wallis, head of business development at the National Association of Motor Auctions (NAMA), says that while Brexit has not had an impact so far, one result of it that might cause issues is currency fluctuations – though at the moment this has not had an impact. Wallis adds that NAMA has a reasonably confident outlook for the future.
Regardless of what format Brexit takes, and what impact it has on the UK economy, there is currently a general belief that UK new car sales are due to fall slightly next year from the historic high in 2016.
This is unlikely to have a massive impact on auction houses for three years, which is the typical age of a vehicle when it reaches auction. And even then, practitioners are keen to point out that the drop will be from a historic high, and a slight drop would still mean a relatively good year for sales.
Much of the growth of the last three to four years has been the result of PCP sales in the private sector, and as this product first started to become popular, questions were asked about what impact it would have on the remarketers.
According to Simon Henstock, BCA’s chief operating officer for UK remarketing, a lot of what was said was scaremongering. Instead, he says: “The simple fact is that rising new car sales – however they have been funded – have stimulated the used car market, which had been short in stock for a number of years.
“There are always issues of supply and seasonality to consider in the wider used car market, as well as model mix and specification. This is where the remarketing sector has a critical role to play in managing stock back into the marketplace in an orderly fashion, and delivering the necessary buying power at every price point.”
Potter notes that part of the reason for this is the PCP stock gets spread around the market. Some vehicles end up in dealer forecourts without going through auction houses; however, Potter notes, it still increases the numbers of part exchanges in the market because drivers are turning stock quicker. Others will end up back at the finance houses, resulting in auction houses seeing them.
He adds: “I don’t think it’s going to be quite so easy for those dealerships to phone the customer and say: ‘You’ve had the car now for 18 months; I can put you in a new one and make your monthly payments about the same.’ I think those days are starting to change, and finance houses will probably have a bit more on their plate as a result, which will end up at our door. But that hasn’t happened yet.”
Manheim is starting to see an increased number of PCPs coming back, however managing director Tim Hudson notes that these numbers are still due to increase.
He explains: “While we’re seeing vehicles, in the context of the overall proportion of vehicles, while it is material, it has not swayed things to the extent that it’s impacting values.”
Hudson and Mitchell outline two possible impacts that PCP might have on the remarketing industry in the near future. Hudson says that while it has not impacted values, it has created a richness of vehicles in that segment.
Explaining further, he notes that the shorter-cycle vehicles tend to be fairly generic. In comparison, former PCP cars come with a greater variation in specifications and colour. This can make them a bit more interesting and attractive, and that can have an impact on sales values at auction.
Summing up, he says: “Compared to your base vehicle in base stock coming back from an ex-rental deal, what we’ve got is cars people have owned and enjoyed, and typically the quality of car is also higher.”
The other side to this might be if a glut of the same model of vehicle returns to market at the same time.
Generally, Mitchell does not see PCP as a huge issue, unless all of a model of car come back at the same time. One example he gives is of the Golf R, which was an early adopter of the personal lease, as well as the BMW M1350. He says: “We’ll have to wait and see, but those cars could certainly be affected. Clearly if there is too much supply, it will outstrip demand, and that will have residual value effects.
“I think because of that, dealers could end up with old stock, because if they haven’t got the right colour Golf R, then they are going to be stuck with them.”
For Mitchell, then, PCP is not an inherent problem, though he is wary that a glut might be possible in 2017.
He has a similar view on pre-registrations. He notes: “It only really affects the used market if the pre-registrations are done at such aggressive prices from the new car dealers that it affects the late and low market.”
Upcoming changes to the Vehicle Excise Duty might cause this, he notes, as soon cars over £40,000 will incur an extra tax. Mitchell speculates that some manufacturers might reduce prices of cars which normally cost £41,000 or £42,000 down to £39,995, to avoid the consumer paying tax. Where this might impact the used car market is if this causes the premium market to start pre-registering vehicles more aggressively in March, in order to clear stock in time for the tax changes.
Electric vehicles
Although the numbers of electric and alternative fuel vehicles (AFVs) remained relatively small in 2016, nevertheless they grew substantially, and the general expectation is for this to continue into 2017 and beyond. Although the numbers are even smaller in the remarketing industry, they are starting to come through, and this is providing a challenge.
Wallis notes one of the challenges is that consumers buying cars aged two or three years often just look at the traditional fuel of petrol and diesel. She adds: “There have been concerns over things like batteries and battery life, how long they’re going to last, and what condition they will be in when they come up for resale.
“While new cars have had quite heavy subsidies on them from the government, the used car market hasn’t got the same benefit.”
To put these numbers into some sort of perspective, Manheim reported selling around 600 AFVs on 2016, a number the company expects to grow in the future.
Hudson says: “You have to find a market for them. There is not a used vehicle market for electric vehicles, so it is about generating that new market.
“We might be looking at a new generation of buyers coming in here – your generations Y and Z have probably got different views. So you need to think, how do you access those kinds of people? That’s going to be a big thing to occupy the market over the next year or so, as those numbers increase.”
Even once a market has been found, Hudson notes that electric cars can add extra complexity to the process.
Electric vehicles require sites to have plug-in points to ensure they have access to power, and also require slightly different management as battery engines have different requirements.
There are also extra complications with the sale, with some electric vehicles leasing the vehicle and the battery separately. Finally Hudson also points out the fact that consumers are dubious around the second life of
batteries.
Finally, range is still an issue for used electric vehicles. While some modern electric vehicles are pushing ranges of 200 miles or more, remarketing houses are still just seeing vehicles with much lower ranges
Hudson notes: “Because the tech is moving so fast, we might find there will be challenges with cycling the early vehicles, because there are limitations which come with them.”
Despite this, he adds that Manheim has not found any significant problems in remarketing these vehicles, and they are seen as a major opportunity with Manheim.
For the past few years, the growth of online auction houses has been a key topic for the industry, and in some ways this is still the case. Each of the remarketing companies Motor Finance spoke to reported large growth in online offerings.
At the same time, the general impression is many of these offerings have reached a level of maturity, with a grading system offered by NAMA, responsive websites commonplace and, increasingly, the use of videos to help give potential buyers more information.
As the importance of online continues to grow, the vast majority of the industry will continue to improve their online offerings, even if most major players now already have a broadly decent digital shop.
At the top end of the market, both BCA and Manheim have looked to broaden offerings to buyers and sellers, to offer what Wallis terms “cradle to grave” services – including vehicle appraisal, preparation, transportation and other areas of logistics.
One example of this was BCA’s acquisition of Paragon Automotive, which BCA’s Henstock notes represented a significant step in the company’s strategy to offer a comprehensive suite of services to customers “that follows the life cycle of a vehicle”.
With 2017 just beginning, the industry is looking on with optimism. While new car sales may have slowed down over the course of 2016, the remarketing industry had another good year.
That said, at some point values will come under pressure or level off. People have predicted values would do this for a number of years now, only for values to remain strong.
The question is, will 2017 be the year when the pessimists are finally right?
