Last month I wrote about how the
contract hire market is being affected by the credit crunch. Some
companies had told me it was affecting them badly, others that it
was barely affecting them at all and some others were positively
upbeat. Then a client mentioned that some lessors’ prices were
increasing sharply whilst others were unchanged. This made me
realise that nobody really knew what was happening in the market;
my conversations with half a dozen clients might not be
representative of the market as a whole.

Colin Tourick

To get an idea of what is going on out there, I emailed the MDs
of 40 contract hire companies, asking two questions: Do you think
the credit crunch is affecting the industry generally and is it
affecting your company specifically? The respondents – 25 in all –
overwhelmingly answered yes to both questions. Many also explained
how the crunch was affecting them specifically. I sent the results
to Motor Finance just in time for last month’s print deadline, so I
won’t dwell on the results here. The point I want to focus on now
is the consistent message respondents gave about the decline in
used vehicle values.

Wiping out profit

As every lessor knows, if they plan to make, say, £650 over
three years on a particular lease, this can be wiped out at a
stroke if the used vehicle market can only deliver a sale price
£650 below the residual value.

The property market is experiencing significant price falls and
a sharp reduction in sales. However, most householders can avoid
the effects of the house price falls by simply choosing to do
nothing for now. This option is not available to vehicle lessors.
Ex-lease cars have to be sold. So what can the poor lessor do?
Actually, quite a lot.

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Might you offer special deals to encourage clients to hold on to
their vehicles for an extra year? The used car market may be
healthier then. Even if it isn’t, set the extension rental
correctly and you’ll recover more capital than you’ll lose in
additional depreciation.
In my experience, if the price is right and the marketing is done
correctly, about 12 per cent of company car drivers will buy their
ex-lease car. Otherwise this 12 per cent can fall to 5 per
cent.
If a vehicle has to come back from the client the next step is to
decide if it has to be sold at all. Can it be put out into your
rental or demo fleet?

If it has to be sold do you have to send it to auction or can
you find another sales channel what will deliver better prices,
such as sale to traders, dealers, joint venture sales with dealers,
etc.?
And finally, if the vehicle has to go to auction, it is wise to
present it well and to offer it on the best sale terms possible.
Valeting is essential. And a vehicle sold with a one-hour warranty
or ‘on an engineer’s report’ will sell for more than one that is
just sold ‘as seen’.

Colin Tourick MSc FCA FCCA MICFM, www.tourick.com

 

 Motor Finance Issue: 45 – July 08
Published for the web: July 25 08 15:1
Last Updated: July 28 08 12:16