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Short-cycle surplus poses biggest threat to residual values

Date: 14 January 2014   |   Author: Jack Carfrae

A surplus of daily rental and short-cycle business from vehicle manufacturers is the biggest immediate threat to used vehicle residual values in 2014 according to a leading leasing company.

Pendragon Contracts claims a spike in unprofitable short-cycle sales has the potential to damage RVs and curb the record values currently enjoyed by used cars.

Speaking to BusinessCar, the firm's divisional managing director, Neal Francis, said: "Where there is already pressure on used car values in the market today is on short cycle. So, for example, there's been a 20% increase of supply of vehicles into the rental sector, and the daily rental sector average holding period has declined [in 2013].

"Why? Because you've got motor manufacturers falling over themselves to offer the vehicles. So for short-cycle stock, values have actually started to fall already."

Francis claimed that manufacturer rental volumes had increased across the board, despite regular assertions from senior personnel that rental would remain low and controlled.

He continued: "It's there in their own stats. Every single one of them [manufacturers] has done more [rental] than they budgeted to do.

"I would say at this stage it's more likely there will be vehicles available in the open market than the market will take the resale value on, and less going through the controlled channels.

"One or two manufacturers are saying they will not do as many buy-backs in 2014 as they have done [in 2013], so therefore those vehicles will be more prone to going into the open market rather than the closed market."

Director of valuations and analysis at RV specialist Glass's, Richard Parkin, told BusinessCar that he believed that strong prices on 'true fleet' vehicles were likely to remain for the foreseeable future.

"Because of the lack of wholesale supply of three- and four-year-old cars, they have tended to sell for more than would otherwise be expected," he said.

"If anything, [the eventual drop in values] will be a bit like a slow puncture. It will come down but it will be over time. There will be no big bang."

Parkin also claimed that pre-registration and personal contract hire (PCP) deals in the retail market are the biggest issues with shorter-cycle vehicles, and that manufacturers have been dabbling less in daily rental.

"What [the manufacturers] have been doing is tactically making their dealers pre-register surplus cars rather than push them into short-cycle fleets.

"The reason for doing that is the impact is slightly less than daily rental because they can guarantee the condition of the vehicles."

He continued: "The UK market has been waking up to PCP deals. It's always better to try and sell volumes here because it's easier to disguise the discount.