Fleet News

Residual values downturn looms

THE UK's leading contract hire and leasing companies are forecasting the lowest residual values for a decade, according to exclusive research obtained by Fleet News.

The forecasts are for the residual values (at three years and 60,000 miles) of cars joining contract hire fleets today.

The companies' pessimism stems from fears that over the next three years chronic oversupply of the new car market will force down prices in the used car market. Fleet News has seen aggregated residual value forecasts of 27 leading leasing companies, covering a car parc of more than one million of the 30 most popular fleet vehicles.

Last month, average three- year/60,000-mile residual value predictions among these leasing companies collapsed to below £5,000 for the first time since pre-1994, according to figures from industry analyst Yewtree.com.

Its monthly survey reveals average expectations for used car values have plummeted by 22% from a high of £6,340 in November 1998 to £4,975 today.

The forecasts serve as a dire warning for outright purchase fleets that the worst ravages of residual value falls may not be over. One leading contract hire firm suggested that every £100 fall in the residual value forecast of a car could push up leasing rates by 0.5%.

Recent reports have mooted a potential recovery in used car prices, following a two-year savaging that caught out both leasing companies and outright purchase fleets, forcing them to make massive provisions against losses.

Towards the middle of last year, confidence in the used car market began to return, but as the scale of new car sales became clear, leasing companies have become certain the worst is yet to come in the used car market.

Steve Taylor, managing director of GE Capital Fleet Services, said: 'The situation is slightly improving from previous falls, but it is still a deflationary environment. Clearly, a necessary change in residual values leads to a change in the cost of providing a lease.'

Gavin Keer-Keer, finance manager, business development, for Interleasing, added: 'Car sales are normally cyclical, but there has been a sustained car market of more than two million vehicles, with 2.5 million sold last year. Even selling 2.35 million cars this year is too many.'

One factor which has exacerbated the problem is low interest rates, which have allowed traditional used car buyers to move up to a new car. CAP Motor Research has estimated that the value of three-year/60,000-mile models will rise this year, but then decline by 2% in 2004 and 3% in 2005.

However, Len Clayton, chief executive officer, global full service leasing at General Motors Acceptance Corporation, the owner of Interleasing, has already warned of an expected 5% fall in residual values for three-year-old cars this year. He added that in 2003, used car values would fall by a further 3% and then again by 2% in 2004.

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