REMARKETING: The last leg
29 October 2018
Author: Jack Carfrae
With the fallout from WLTP, and conflicting figures around supply and values, it's hard to know what's in store for the used car market for the rest of the year. Jack Carfrae asks the experts.
By now, you've probably heard enough about WLTP and, given that it only kicked in this month, its relevance to the used car market is questionable. However, the ripple of the new testing regime and its subsequent production snarl-ups has left many dealers unable to source new vehicles, instead raiding second-hand stock to keep their forecourts flowing.
That extra demand is almost guaranteed to bolster already strong used vehicle prices, but there have also been some curious figures surrounding the market, specifically with ex-fleet models. BCA's monthly Pulse report for July reported a 0.8% reduction in ex-fleet and lease values, despite near universal growth for months on end. They bounced back in August with a 1% year-on-year rise but, also in July, the National Association of Motor Auctions (NAMA) reported a 2.3% drop in the volume of ex-contract hire models, and a simultaneous fall in values and stock levels, albeit from differing sources, isn't usual for the used car market.
At the risk of getting bogged down in statistics, they are pointing in different directions, and with the seismic shift of WLTP also wielding its influence, the picture for the rest of the year is muddled.
"I'm not surprised to hear that volumes have gone down within the wholesale sector; I can understand that," says Rupert Pontin, director of valuations at Cazana, "it's simply because people aren't changing their vehicles due to WLTP."
That chimes with NAMA's point about the reduction in ex-lease vehicles, "Despite more units being sold across auction channels in July, the volume of cars between 2.5 and 4.5 years of age fell by 2.3%," adds head of NAMA Louise Wallis. "These would typically have been ex-contract hire and lease cars, where purchasing new vehicles has been delayed because of uncertainty with new vehicle emissions testing."
BCA credited July's slight fall in prices to the unusually warm weather that month, claiming that retail used car buyers simply steered clear of forecourts when conditions and the holiday season allowed. COO Stuart Pearson adds that typical seasonal factors have continued to shape the market's ensuing behaviour.
"In September, we have seen the usual seasonal inventory dip as we await the plate-change vehicles entering the market, and this has only added to demand in this sector, as buyers compete in-lane and online. Also, there are historically some supply and demand pressures as we move into the last quarter and approach the end of the calendar year."
The end of year slowdown in used car purchases is a typical seasonal affair but it's actually the last thing certain remarketing specialists are expecting to happen in 2018. Alex Wright, managing director of Shoreham Vehicle Auctions, reckons the final quarter of the year is set for bumper sales.
"I predict that, around October, we are going to see a reduction in volume.
"No one's prepared to give discounts on new cars, so that means the nearly new prices are going up. The nearly new stuff will be very close in price on retail to actual new models.
"Everything is pointing to a very strong market for the rest of the year. Combined with the leasing companies not having the volume coming off, because they've got contract extensions due to WLTP, this is all a cocktail for doing very well."
Pontin believes the stock shortage is likely to cause values to at least stabilise for the rest of the year, "I have a feeling that we're going to see some continuing stability in pricing because the new buyers, the leasing companies, are saying they'll order cars based on what they are able to sell to their customers. One, their customers are still concerned about what WLTP is and don't necessarily understand what impact that will have on them. And two, there is still a shortage of new car stock."
Wright claims the choked supply has led to greater desirability for older vehicles, the types of which, under normal market conditions, would traditionally be the preserve of independent, rather than franchised, retailers.
"We saw this before, when prices dropped in 08/09," he says. "No one was buying new, so suddenly, certain franchised dealers, who normally wouldn't touch anything any more than a year old, were buying four-year-old product and sometimes even five. They would seek out good-quality stock wherever they could because they realised that had to change their dynamic. We are seeing those main agents back in the used market buying strong, therefore, anything under five years old/50,000 miles will stay desirable. This will also boost the rest of the age and mileage profile and keep the market incredibly strong across the board, all the way through to the end of this year and the early part of next.
"And one thing that could be a bit of a bombshell coming up is, if the leasing companies aren't doing the cycles, we end up with more older, higher-mileage vehicles, which we had in 2011, 12 and 13. That could happen again."
As good as that sounds for anyone defleeting in the coming months, there is a longer-term note of caution. Clean air zones are due to come into effect in five UK cities - Birmingham, Nottingham, Derby, Leeds and Southampton - before the end of the decade, while London's Ultra-Low Emission Zone is to kick-in on 8 April next year.
Modern, Euro six diesel cars and vans are in the clear, as is anything with a Euro four petrol engine, so fleets with stringent, traditional three-year replacement cycles should be unaffected; however, diesel vehicles old enough to be categorised as Euro five (vans are likely contenders) will, no matter how strong the used market, suddenly become a lot less desirable, particularly if they're sold anywhere near the cities in question.
"The bit that's coming up to bite us is that, in April 2019, we will see the first Ultra-Low Emission Zone in London and other cities are following suit," says Wright, who thinks it's a good idea to dispose of affected vehicles sooner rather than later. "From a fleet point of view, do you want your vehicles to be extended when you can still sell Euro five quite happily because most people are oblivious to what's coming up? That's when, as a remarketer, we could have challenges of vehicles that are dropping in value, and there's no hiding place in an auction if they're undesirable or suddenly not wanted."
It's something to bear in mind for next year's defleet policies, particularly for anyone who knowingly has a significant number of pre-Euro six diesels. For now though, fleets can bask in strong values for the rest of this year - and likely into early 2019, as the consensus is that the absence of supply will more or less guarantee rock-solid values for the next few months.
"The used car market through the rest of this year and certainly through next year is going to be a really good, lively place, because with the low availability of new vehicles, there's going to be less opportunity to do business and therefore less profit," says Pontin.
"Couple that with the fact that there is a general decline in new car sales, because there are less vehicles coming to the UK market - it's now more profitable to sell them in other European countries - and we're seeing less of a new car market full stop.
"The dealers need to find a way of making profit and that will come through trading in the used car market. Consumer confidence levels are at their lowest level for 12 months, so now, with used car finance propositions as they are and the perceived value in money for an ex-fleet vehicle, I think that's kind of where the market could be, so just make sure you're well aware of what's going on in the retail market."