The steep drop in residual values (RVs) over the past year may
finally have bottomed out – in some parts of the used car sector,
at least. This is the view of data provider HPI, whose latest Used
Car Valuations Index shows that depreciation is slowing in certain
segments, such as 12 month-old city cars, superminis and small
cars. “Encouragingly, three year-old city cars and superminis are
also beginning to see the rate of depreciation level out, offering
small signals of hope for the market,” HPI says.
However, the overall RV picture is nonetheless “grim”: “Three
year-old petrol cars have reported the greatest and most worrying
decline, increasing from 27 per cent to a shocking 30 per cent,”
HPI reports.
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Auction house BCA’s latest Pulse RV report, meanwhile, shows
that in October 2008 the average used car achieved £763 less at
auction than one year ago (see chart), while Manheim’s Market
Analysis report found that the average wholesale used car selling
price, at £6,002, was 4.4 per cent down in October compared with
September. October’s fall in fleet sector prices – of 10 per cent
compared with September – was particularly steep, Manheim points
out.
A further sign of how bad the situation is for lessors: data
company CAP, whose Monitor provides widely-followed benchmark used
car prices for the motor trade, is undertaking a major
reforecasting exercise, which will lead to lower guide prices for
nearly all segments, with larger, thirstier vehicles to be
particularly hard-hit. Editorial manager Mark Norman says: “All
evidence currently suggests that the bulk of significant
adjustments will be focused on larger-engine vehicles as market
sentiment continues to favour smaller, more economical cars.
“Future residual value forecasts for the latter are therefore
little changed, or stable at present.”
Lessors’ reaction
The severity of the downturn in RVs is underscored by CAP’s
decision to undertake a reforecasting exercise, and has caused
major problems for lessors left with the prospect of remarketing
ex-lease cars in a very tough market, with little chance of
achieving the prices they had hoped for when calculating the terms
of the lease several years ago.
Roddy Graham, commercial director of leasing company Leasedrive
Velo, says CAP’s move was “a massive over-correction to Monitor
rates which have been far too high for the last two to three
years”, and that lessors which had relied exclusively on Monitor
values “will be enduring a very difficult time now and for the
foreseeable future”.
Leasedrive Velo, he observes, has “always taken data from a wide
range of sources and engaged the expertise of outside experts to
complement our own in-house experience when reviewing this critical
area of the business”, which has led to “realistic” pricing.
“Accordingly our current exposure to the unprecedented condition of
the used car market, although not pleasant, is not as potentially
terminal as many of our competitors’ [exposure],” Graham adds.
Andrew Cope, chief executive of Zenith Vehicle Contracts concurs:
“CAP Monitor is only a guide and like a lot of other leasing
companies, we take information from many other areas, not least
from our own performance on sale.”
Head of pricing at ING Car Lease, Jim McNally comments:
“CAP’s recent re-alignment clearly means there is pressure on
margins on disposal; however, we have taken extra steps over and
above our general attention to detail to ensure that when a vehicle
is presented at auction it is as […] retail-ready as possible. We
have also investigated new channels for disposal which are more
direct routes to the retail market, so we can seek better returns
over and above trade values.”
Future hopes?
Data company EurotaxGlass’s reports that 2009 may bring relief
on the RV front for lessors, giving “cautious grounds for optimism”
for a modest recovery in prices. Any recovery will be seen first in
used car sales, with new registrations lagging behind, although
fleet sales are expected to remain “lacklustre, at least until late
next year,” EurotaxGlass’s says.
Editor Adrian Rushmore notes: “Economists are agreed that the
inflation rate has probably peaked, and that by the middle of next
year the economy will be almost inflation-free. In the short term,
this move will be helped by declining fuel prices and further falls
in the Bank of England base interest rate, making a tangible
difference to consumer’s household finances.
“As these pieces of good news are drip-fed into news bulletins,
it is quite possible that the knock-on effect will be to inject a
little buying enthusiasm into the minds of consumers by the first
quarter of next year. It is also worth remembering that many have
deferred purchases of replacement cars during 2008, so there could
be some limited release of pent-up demand helped by a realisation
that prices will be at an all-time low.” But the outlook for fleet
registrations is less hopeful, Rushmore believes. “Companies are
feeling the financial squeeze and, once they make policy decisions
around their business activities, they tend not to reverse them
very quickly. Given this situation, it is very difficult to see
fleet sales improving in the foreseeable future.”
THE FLEET VIEW
Andrew Cope, Zenith:
“The used car market has seen significant falls to sale values
in the last six months, to the tune of 15 per cent plus, and in
general used car values have been on a downward trend for about 18
months. So, the statement by CAP Monitor really is old news
“I would suggest that largely the market has already discounted
most of this residual value downturn into current quoting. In fact,
in many ways I think the most tricky times are behind us, in that
we no longer have the uncertainty in the banking sector in quite
the same way.
“Everybody has acknowledged we are in recession, so it’s not about
fear, liquidity is returning to the market, interest rates are
falling rapidly and the amount of used car stock, we believe, will
start to thin.”
Roddy Graham, Leasedrive Velo:
“We are suffering on two fronts at the moment:
Firstly, [there is] an over-supply of used cars in the
market due to bumper new car sales in 2004/05, volumes which are
flooding the market. When you overlay this with a global banking
crisis of unprecedented scale with a total lack of liquidity in
global banking it is not surprising that used car values are
dropping. With too many cars and no money to lend to the potential
buyers the most basic rule of economics prevails: supply outstrips
demand, so prices go down.
“You could look to the surprising reduction of 1.5 per cent in
the bank base rate as a potential saviour – clearly not to be, as
the first action taken by banks and other mortgage lenders was to
withdraw their base rate tracker mortgage offers. There is still a
massive shortage of liquidity within the banks, [whose] lending
rate is set on how willing they are to lend money to each other. A
base rate of 3 per cent is meaningless when banks are charging each
other nearer 5 per cent.
“As we know, new car sales volumes have cratered this year and
projections for next year range from 1.6m to 1.85m units. On this
basis, and using the supply and demand economic rule, we will have
a much stronger used market in 2011 and beyond. That of course
assumes that the global financial markets have stabilised and
balanced liquidity has returned to the banking system. If that has
not happened, then none of us will still be in business to worry
about it.”
