Retail meltdown: Residual values

Residual values (RVs) have taken a
pounding over the last 12 months (see graph 3). According to
auction house Manheim’s latest Market Analysis, the average selling
price of a car at auction in November 2008 was 15 per cent lower
than in the same month last year, while some segments – especially
luxury models and 4x4s – have fallen by much more than that. This
is bad news for finance companies.

 

Peter de Rousset-Hall observes: “RVs are a huge problem: Leasing
companies will have a tough time [as cars come off-lease]. Dealers
will have a tough time selling used stock and getting any return on
it. Captives will have a tough time with the guaranteed RVs in
place. Voluntary terminations [VTs] will go up. Customers will also
do quality complaints rather than admit they can’t afford a
vehicle, which will damage brands’ public reputations.”

Black Horse, meanwhile, is not as exposed as other lenders to
losses on ex-lease cars, as “the vast majority of our business is
hire purchase”, says Chris Sutton of Black Horse.

Where RVs are hurting the company, however, is on repossessed
cars: “If it gets to the stage where we have to move to repossess a
car, we are not getting the returns there that we expected.” But
it’s not all bad news, he explains, as a used car transaction “more
often than not” involves a trade-in, and while the value of the car
being traded in will have decreased, so too will the price of a
used car, “meaning that the overall impact on the sum being funded
is minimised”.

The key, de Rousset-Hall says, is to “do anything you can to
stop cars coming back” – even if it means extending contracts.

“Everyone needs to have a car, so if a customer in a PCP or a
contract hire deal comes back looking for a replacement car, the
monthly payment will by definition be significantly more than the
rental on what he’s currently driving – why not say he can stay in
his current vehicle at a reduced rental? As a funder you can take
some of the money you are saving on the RV loss and use it to fund
a reduced rental,” de Rousset-Hall advises.

BMW Financial Services’ Richard
Schooling agrees with this approach, as it makes sense for both
finance companies and for dealers. “We want to maximise and protect
the value of second-hand stock for dealers. As part of that, if
someone comes to the end of an agreement with us, we will help to
keep him in the car if it makes better sense, which has the added
value of helping to protect RVs.”

Toyota Financial Services’ David Betteley adds: “We’re very
committed to selling as many ex-lease cars through the dealer
network as possible. Used car volumes sold by our dealers have held
up very well, and are roughly in line with last year’s volumes, and
with a used car finance penetration rate in the mid-20s there’s a
lot of room to expand. If, as we all hope, used car values are
about as low as they can go, it could be a very good time to invest
in this side of the business.”

Part of the fall in RVs is due to new car price deflation, which
has reached near-farcical levels in some cases, with examples of
“buy one new car, get one free” offers widely publicised in the
national press.

The very strong new car market in 2004, which saw nearly 2.6m
registrations, is also casting a shadow over the used market, as
many of the now three-year old cars come back to market, causing a
glut in supply.

However, next year could see new car prices rise again, predicts
Betteley. “I think 2009 will see the return of new car price
inflation, which will have a welcome knock-on effect on used car
values. The current weakness of sterling means that importing cars
into the UK is not profitable, so manufacturers will either have to
restrict the supply or raise prices.”

This would help finance houses and dealers alike. Schooling
comments: “The used car market is built around confidence, and
there are far too many people talking it down, leading to a vicious
circle of negativity. If we do see new car price inflation, that
should pull up used car values. The way we have seen used car
prices drop by 20 to 40 per cent – this does not represent the true
value of the vehicles, and is neither realistic nor
sustainable.”