February 2004

In general, demand in the used car market continues to be strong while supply is limited due to the relatively low level of new vehicle sales in recent years. Consequently used vehicle sales remain a profitable line of business for most dealers and for the members of the Southern African Vehicle Rental and Leasing Association (Savrala). However, not all vehicle segments benefit from this improved demand for used cars equally.

According to Savrala president, John Broadway, two trends are prevalent. “Firstly, in the new car market there has clearly been a buying-down pattern towards affordable cars that now have more powerful engines and extra luxury features. Most of the cars in the “small” and “medium” segments have standard features such as air-conditioning, power steering and air bags and represent approximately 65% of the total new passenger car market.

“Secondly, with new vehicle prices rising as steeply as they have in the past few years – certainly prior to 2003 – many private buyers, including allowance receivers, have opted to purchase a used vehicle to reduce costs but not lose out on features. Used car buyers today continue to look for vehicles with safety, reliability and comfort at reasonable running and fixed costs.”

He adds that these parallel trends naturally affect the residual values of vehicles at the time of their resale at end-of-rental/lease in different ways.

“There has been a marked improvement recently in the profits earned against the residual values that were set on small and medium cars three to five years ago. Due in part to demand driven through the “added value” of additional features, in the main, it is as a result of the spike in new vehicle price increases in 2002 of around 17%.”

The sustained current demand in the used car market has helped in supporting healthy resale margins for leasing companies in their small and medium vehicles fleets in particular. On the other hand, the year-old 2003 daily rental vehicles that will be sold as soon as the season is finished will probably not retain as much value as they did last year.

“It is important to appreciate, however, that while the current good times in vehicle resale are driven by events of the past, the residual value future simply cannot be predicted on the basis of today’s “good” trends,” adds Broadway.

“In forecasting resale values, both leasing/fleet management and rental companies need to take into consideration a number of factors including the forecast of new vehicle price increases, new model introductions, obsolescence as well as supply and demand.”

According to statistics compiled by Savrala’s leasing/fleet management members, very popular small cars such as the VW Polo, Toyota Corolla and Tazz and Opel Corsa are forecast to hold more than 50% of their 2004 purchase price after four years – having done 120 000km – in the second hand market. Similarly, many of the diesel derivatives recently launched into the medium to luxury segment are also expected to retain more than half of their 2004 price as their supply is limited and there is growing demand for diesel vehicles in the used market.

In some vehicle categories of residual value prediction, the Savrala statistics indicate the possibility that current residual value assessments by Savrala members exhibit an optimism that may prove unfounded in due course. Residuals have been increased year over year by as much as 3%, a trend that appears to contradict the logic of all fundamental analysis.

Broadway advises that a user of a leased vehicle should therefore ensure that their supplier is not being unduly optimistic, effectively trading a future residual value loss for a cheaper monthly rental – and a contract – today. “The simple economics of business dictate that the leasing supplier that under-prices a lease today will be compelled to ‘recover’, somehow, over the duration of, or at the end of, the lease contract and this may well lead to friction and distrust between fleet operators and fleet managers.”

More generally, he says there are some trends in the recent Savrala statistics that are illustrative of changing relative buyer patterns:

• On average, super luxury, sporty and exotic cars probably will retain comparatively lower residual values than other vehicles. While residual percentages have remained reasonably stable on these vehicles over the years, they can be expected to drop slightly in the short term and will continue to soften because of recent new vehicle price reductions,
• Resale values in the pick-up market are relatively stable generally and are favorable for the single cab pick-up in particular. Generally, double cab pick-ups are regarded more as leisure vehicles and therefore tend to compete in the wider passenger car market. Although double cabs offer some flexibility in application, they remain under pressure and are not retaining value particularly well in the used car market.
• Similarly, 4×4 pick-ups (both single and double cab) are experiencing a poor run in the used car market, mainly because there are plenty of them on dealership floors at asking prices that do not reflect their resale values,
• Over the past five years, demand for half-ton pick-ups has escalated strongly and the features in these cars have also been upgraded. Due to their low average running costs, the half-tons are popular as a normal passenger car in a household with occasional loads when the need arises. This has ensured strong resale values for end-of-lease vehicles currently.

The latest economic developments, the reductions in interest rates and the stronger Rand, do not have a direct affect on resale values in the short term concludes Broadway. “While lower interest rates do assist in holding the costs on fleets, and the stronger rand does affect the prices of imported cars and parts, the actual new vehicle price increases of below 2% in 2003 and predicted below 5% in 2004 mean that vehicle resale values may well fall by as much as 10% per year off current levels.

“This means that unless current residual values are very carefully and sensibly set, the margins on resale of ex-lease vehicles in 2006 and beyond will be under severe pressure, bearing no resemblance at all to the current ‘good times’ “.