Monthly lease rates on new vans could rise if residual values on old, high mileage models are hit hard by dealers turning their backs on them, it is claimed.
Dealers have been forced to gravitate to buying such vehicles, which are often in poor condition, because late year LCVs are in such short supply.
However, according to George Alexander, chief commercial editor at Glass’s Guide, short cuts have been taken in servicing and maintaining such vans, frequently appearing at auction with 120,000 miles on the clock, to the extent that they have ‘hidden faults’.
“Dealers are grappling with having to pay good money for such older vans with higher mileage and then finding not only that the preparation costs are far higher, but also that their outlay on rectifying subsequent faults can soar,” he said.
“Consequently, it is likely that a proportion of those trade buyers who have been dipping a tentative toe into the older van pond might soon decide that discretion is the better part of valour and return to stocking younger, lower mileage LCV stock. This would be a shame as, providing they are bought right, there is a good profit in such old warhorses.”
Nevertheless, Mr Alexander warns: “Vendors would soon feel the pain as the residual values for such stock would be hard hit. In turn, this would result in higher lease rental rates for customers on new LCVs. Accordingly, it is in everyone’s interests that service and maintenance requirements are not only adhered to, but carried out without any corners being cut.”
However, that view was disputed by Lucy Hill, Hitachi Capital Commercial Vehicle Solutions’ head of operations, who said: “Even when one of our fleets extends the life of a van it will be still serviced and maintained religiously. Sometimes servicing and maintenance is undertaken before it is needed to ensure they vehicle stays in tip top condition and is completely reliable.
“We believe that even when these vehicles reach the used market buyers can be confident that they will have excellent provenance and even at 100,000 miles plus will have plenty more life left in them.”
She continued: “Currently traders are buying older vans as the majority of the buyers are predominantly SMEs and that’s all they can afford. Many aspire to a new van but they simply can’t afford one or can’t get the appropriate credit needed. So generally we don’t agree that lease rates will rise on this basis. But we would recommend traders asking extra questions or requesting extra provenance information when doing their homework on buying any older vehicle before they even get to bidding stage which will help them avoid buying a ‘lemon’.”
Ben Newton, head of pricing at Lex Autolease, said: “Dealers are stocking these older vehicles due to a shortage of supply caused by the small number of new registrations. Demand for new LCVs is closely linked to macroeconomic factors and given the fragile state of the economy, we expect the number of new LCVs entering the market to remain low. Although dealers may prefer to stock a higher proportion of newer vehicles, the reality is that they will have to rely on older vehicles for some time to come.”
Alex Wright, managing director of Shoreham Vehicle Auctions and chairman of the National Association of Motor Auctions’ commercial vehicle committee, doubted that the problem highlighted by Glass’s Guide would be widespread as buyers would generally follow vendors that had a reputation for well-maintained vehicles.
“If a buyer has a good experience with a vendor then they will return again and again; and if not, because a number of vehicles were found to be poorly maintained, they will simply stop bidding or bid far lower to accommodate for the poor level of maintenance,” said Mr Wright.
“Consequently, demand for older or higher mileage vans is unlikely to fall as vendors are aware well serviced and maintained vehicles will always have a following and attract a premium in the open market. These vehicles will always be in demand as they are fit for purpose for the right individual.”
Ken Brown, editor, CAP Red Book LCVs and Motorhomes, said finding good quality stock continued to be a major issue for professional buyers with van duplications and poor condition remaining a significant factor.
The extension of fleet replacement cycles meant that vans being disposed of were generally older - CAP reports the average age/mileage of auction entries at 62 months/84,477 miles - and that inevitably means vehicles have incurred more damage.
“Increasing age, up an average of one month, since the half-year, and mileage, up by around 1,300 miles, means that we expect the shortage of clean low mileage stock is unlikely to improve in the short term,” said Mr Brown.
Stock levels, he said, appeared “relatively healthy”, but there was a limited mix and an over-supply of some models that in turn forced market prices down.
However, data from the Office for National Statistics that showed the UK economy was “on the mend” having grown 0.6% in the second quarter of 2013 could spell rising demand for new as well as used vans and with that a price spike.
Mr Brown said: “The LCV sector is the backbone of Britain. As the general economic picture improves we can expect the van market to similarly move. Prices remain artificially high versus model age and mileage, but this year they have followed the usual peak and trough cycle and there is nothing on the horizon to upset that pattern. That suggests that into September prices will rise.
“The recent favourable news about the economy and a reduction in unemployment - - will increase demand for both new and used vans.”
However, Mr Brown warned that there were many dynamics at work in the market and funding remained an issue for some businesses for vans costing more than £5,000.
“Businesses usually have cash available to buy sub-£5,000 vans, but above that price funding is usually required and in some cases that remains an issue,” he said, while also highlighting that once vans passed 60,000 miles interest in them waned with the exception of Mercedes Sprinter and that was reflected in market prices.
George Alexander, chief commercial editor at Glass’s Guide, agrees that used van buyers have become “fussy” about age and mileage. He said: “Most consider 40,000-50,000 miles to be good news, and think that lower mileage carries too great a price premium whilst higher mileage brings too many problems.”
Warning that LCV numbers at auction were “uncomfortably” high with too few buyers, Mr Alexander said: “Too many vendors still fail to fully, or even adequately, prepare their used vans for sale which is costing them dearly. The fact is that, on the vast majority of occasions, the first sensible bid received will prove to be the best and often be several hundreds of pounds above what is subsequently offered.
“Far more positively, those switched on vendors who follow best practice are consistently achieving high conversion rates together with strong returns whilst building strong reputations.”
Mr Wright added: “The overall market in the last three months and indeed the last 12 months shows that we are experiencing the first green roots of the economy recovering.
“The used LCV market is replicating the same recovery pattern from the last recession as the price of vans is going up as demand also rises, all of which is directly related to small businesses starting to do well again.
“I think we’re at a ceiling because if people have to start paying more for their vehicles they will simply look to buy new.”
Vehicle condition coupled with average mileage remaining above 80,000 and average age rising to 62 months means that van values have cooled over the last few months, according to Manheim.
Tim Spencer, commercial vehicle manager at Manheim Remarketing, said: “Since a record high of £4,417 back in March, we’ve seen LCV selling prices reduce month-on-month down to their current level of £4,062 (July 2013).”
Despite that 8% drop in five months, Mr Spencer says the overall wholesale van market remained strong with prices £85 (2.1%) ahead of 12 months ago despite an increase in average age of four months.
Since April there has been a significant increase in the number of vans entering auctions. That, said Mr Spencer, was “good news for the wider economy” and added: “This means that popular, clean vehicles will still attract interest, but poor quality stock in high volume is likely to remain difficult to sell.”
He continued: “As business confidence continues to grow across the UK economy, albeit gradually, we see more new stock coming into the wholesale LCV market during the last few months of 2013. This is a positive reflection on the way the industry is feeling and will possibly put a check on the significant van price rises we saw in the last quarter of 2012.”
At BCA values in the fleet and lease LCV sector fell by £171 in July to £5,782, a fall of 3.1% compared to June. However, year-on-year values remain well ahead, up by £753 (15%) - with average age (42.7 months) and mileage (69,593) down over the year.
Duncan Ward BCA’s general manager - commercial vehicles, said: “Trade buyers are continuing to focus on the very best retail vehicles which are routinely making exceptional money, while vans in poor condition may struggle for attention.
“Sellers should consider adjusting valuations now on poorer condition vans with a view to remarketing them before volumes begin to rise and buyers have more choice from mid-September onwards.”