Fleet News

Fleet industry warned over RV timebomb

The fleet industry could be sitting on a residual value timebomb because some leasing companies are over-estimating the future values of their cars.

Many leasing firms are still using the record used values of the last 24 months as a guide to what will happen in the next couple of years.

However, rising interest rates could lead to less used car buying activity, affecting leasing firms’ financial results which, in turn, will lead to higher leasing rates for fleet customers.

Ian Tilbrook, managing director of ING Car Lease, said: “Fleets want competitive prices but also continuity of pricing and the actions of some leasing firms are a danger to that.

“This practice of setting inflated residual values could be extremely damaging to the sector, particularly at a time when money markets are in turmoil and there is a distinct lack of clarity as to the highs and lows of interest rates and inflation.

“As well as the risk to financial figures, such an erratic pricing trend is set to lead to reduced used car prices and will in turn affect customers.

“Customers want a reasonable level of certainty and leasing companies setting exaggerated residual values are threatening this.”

Industry analyst CAP has warned that artificially inflating future residuals as a way to guarantee improved competitiveness in the current market leaves businesses at risk of future shocks.

Jeff Knight, CAP Monitor forecast manager, said: “Such a short-term approach to writing new business is not only unwise from a business perspective, it is also irresponsible.

“This is because when cars do come back and fail to meet their original target values it may generate unnecessary alarm in the used marketplace.”

Although the strategy of setting high anticipated residuals is not new, many industry analysts believe it is a policy that leads to a “boom and bust” cycle that harms confidence in the market.

Adrian Rushmore, managing editor, EurotaxGlass’s said much of the momentum behind the record prices of recent months has been the increasing price of new cars.

He said: “The trend of recent years is for customers to be more attracted to the more expensive premium brands, and cars with higher specifications.

“Measuring the performance of residual values in percentage terms shows that the three-year RV position is gradually deteriorating which means that the cost of ownership is also going up.”

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