Delegates at Tuesday’s Fleet and Finance Summit, held at Birmingham’s Malmaison hotel, were treated to a thought-provoking event that featured a series of interesting speakers.
BusinessCar Editor Paul Barker chaired the conference that was presented and run in association with RV experts Glass’s. Tristan Young reports.
Personal contract purchase: a ticking time bomb
Residual values will decrease in the next two years and return to pre-recession levels, according to Richard Parkin, associate director at Grant Thornton.
Speaking at the conference, Parkin said that due to increased volumes of cars sold on personal contract purchase schemes and their shorter first-keeper life, residual values will drop back between 10-15%.
While PCP schemes are a retail buyer finance tool, their influence on the market in terms of volume over the past few years has been so dramatic that it will impact residual values in several areas, so should not be ignored by fleets operating in the same car-age market.
Although the schemes are usually advertised as three-year deals, Parkin’s research shows that around 40% of them are changed at around the two-year mark, which means more vehicles are sold to the same number of people.
Parkin also pointed out that around 80% of new retail car purchases are completed with a PCP scheme and that customers expect their car to be worth 10% more than the agreed guaranteed minimum future value (GMFV) at the end of the finance term.
“PCP schemes have become popular because they offer low monthly payments and residual values have been above forecasts,” said Parkin. “This outperformance of forecasts has allowed dealers to terminate existing customers’ PCPs early and put them into a new car, bringing forward sales and effectively selling more to the same customers.”
He added that this was because over the past three years GMFVs have not risen in line with residual values. Also, new car pricing has only risen 3.3% in that time against RVs that are up by well over 10%.
“Some sources suggest early renewals constitute up to 40% of PCP sales; if this were the case then circa 250,000 new car registrations in 2014 were to early-renewing PCP customers,” said Parkin.
“My first prediction is that residual values will gradually decline by 10-15% over the next 24 months because supply in the three-four-year segment will increase and demand will remain broadly flat.
“As a consequence, average RVs should fall back to 2007 levels after allowing for used car price inflation over the period.
“My second prediction is that private new car sales volumes will fall by 200,000-300,000 units from 2015 levels.
“Falling RVs, coupled with rising GMFV figures, will reduce equity and therefore the ability to renew existing PCPs early,” said Parkin.
He added that the lack of equity, or even negative equity, at the end of a PCP contract period may force lenders to extend contracts, and therefore the replacement cycle: “However, current strong pound-euro exchange rates will enable manufacturers to increase support, softening the impact in the short term.”
Parkin’s final point, resulting from the first two, was that because franchised dealer groups would gain a much larger percentage of their used car stock from PCP trade-ins, independent used car retailers would be the ones bidding for ex-fleet vehicles at three years. With less competition from franchised retailers, the independents would have more choice and only pick the best-condition vehicles.
Therefore, the price difference between a National Association of Motor Auctions (NAMA) Grade 1 car would be significantly greater than one at Grade 5. This difference would make vehicle refurbishment a necessity and even profitable.
What is a PCP finance scheme?
A PCP scheme is a finance product. The acronym stands for personal contract purchase and typically involves a deposit, a monthly payment and a final payment.
However, the final payment, often referred to as the guaranteed minimum future value (GMFV) can be avoided by the customer if they simply hand the car back to the finance company or retailer. Equally, if the car – at the end of its term – is worth more than the GMFV, then this amount ‘belongs’ to the customer and can be used as a deposit for their next car.
However, if the car is in reality worth less than the agreed GMFV then the risk or loss is carried by the finance company.
In recent years, with strong residual values, smart dealers (often under pressure from manufacturers to register more cars) have realised that there can be a healthy amount of equity in the car at around two years and will sell customers a new vehicle on a new PCP at this point.
In addition, car manufacturers wanting to push their product into the market will either offer very attractive finance offers for a PCP scheme, or offer some kind of deposit contribution – essentially a discount on the new car.
Fleet to drive new car sales
New car registrations will end the year 5% up in 2015, driven mainly by fleets, according to Rupert Pontin, head of valuations at Glass’s.
Pontin predicted the market would hit 2.6 million new cars this year thanks to strong fleet growth that is currently running 15% ahead of 2014. He also said that while retail sales were only just up year-to-date on 2014 figures, personal contract purchase growth would continue in 2015 as car manufacturers needing to sell the cars they were building and put attractive finance deals in place in the UK.
He highlighted that household spending was also improving and looked set to continue rising.
“The increase in fleet sales is particularly encouraging and signifies strength in the UK economy, which is an extremely positive message for both the UK and Europe,” he added.
Speaking ahead of voting, Pontin said he did not expect the General Election to have an immediate impact on the market no matter what the result: “I don’t believe we will have another election in 2015 and I think there will be stability on economic matters no matter who’s in government.
“All the parties have to cut costs; they’ll just do it in different ways. And it will be September before any impact will show because very soon after the election it’s the Parliamentary recess and they all go on holiday.”
Pontin said he expected all parties to look at tightening benefit-in-kind taxation with the knock-on impact that more user-choosers may switch to cash-for-car products.
Clocking set to rise
Clocking by individuals is expected to rise as more and more private buyers buy on personal contract purchase schemes and then exceed the contracted mileage, according to Rupert Pontin, head of valuations at Glass’s.
Pontin believes that as buyers focus on getting the monthly payment as low as possible they are underestimating their annual mileage. And rather than pay hefty penalties for going over this agreed mileage they are clocking their cars before trading them in.
“We have experienced this trend, but as yet don’t have any firm figures on how big the problem is, or will become,” said Pontin.
“Generally speaking, there has been little difficulty with this type of activity in recent years, but there is no doubt that examples of clocking are on the increase and there is a strong chance that this will become a widespread problem as the volume of PCP cars returning to the market steps up.”
Pontin claimed that due to the tough penalties handed out to dealers that clock cars, incidents of clocking in the ‘trade’ are very low. However, he believes private individuals don’t see it as a high risk. Couple this to the fact that it is not illegal to adjust the mileage on a car – only to misrepresent the mileage – and the numbers doing this will increase.
GlassForecast concentrates on accuracy
Fleets should not be making a profit on their disposals, according to Andy Cutler
of Glass’s.
He instead advised fleets to make sure their residual value forecasting was as accurate as possible so that savings could be made at the start of a contract to immediately help the business.
“It’s better to be more accurate at the front end than to be making money on disposals,” he said.
Speaking at last week’s Fleet and Finance Summit, he added: “Make your disposals person work for their money.”
Cutler (pictured above) said that Glass’s new GlassForecast product aimed to be the most accurate residual value tool available.
He highlighted that it was the first service in the industry to deliver future residual valuations on 0-12 month old vehicles, and the only data source capable of delivering expertly derived monthly future valuations, as well as the first system to explain and detail every adjustment in the forecasting process.
Warning: watch out for car tech challenges
Fleets have been warned that the adoption of plug-in electric cars still faces several challenges before they are more widely accepted.
Rupert Pontin, head of valuations at Glass’s, said at the conference that there were still barriers such as the level of investment needed by car makers, charging point infrastructure, technology needs and customer understanding.
“If the customer doesn’t understand what they are buying then they will have a bad experience and not only never buy one again, but also tell far more people about the bad experience than if they’d had a good experience,” he said.
“There is a particular problem on the sales floor of the used car retailer,” he highlighted. Pontin pointed out that used car sales people are just interested in the sale and not if the car is right for the buyer, and said: “This could change the overall sector.”
He also added that there was little in the way of online comparison tools for customers looking to buy an alternative-fuelled car, so they could judge which would be best for their needs.
Used car PCPs could help residuals
Used car PCPs could help deal with the numbers of high-quality, younger used cars coming back to the market sooner than predicted from early termination new car finance deals, according to Auto Trader’s head of motor finance Paul Harrison.
While new car PCPs now account for around 80% of retail registrations, used car PCP schemes
are used by very few used car retailers.
However, Harrison, speaking at the Fleet and Finance Summit, said: “Used car PCPs will come up in popularity as consumer trends come into alignment with the offer.”
Harrison pointed out that consumers are increasingly exposed to paying monthly for goods and services and used cars could be the next step. Should used car PCPs take off it could help the residual values in
this market.