Prestige car finance is a relatively small proportion of the overall car finance sector, but it is an area where people will spend large amounts on a single purchase. This means that – even more so than in other car finance markets – customer care is key, writes Chris Farnell
As Peter Brook, managing director of prestige car finance company Oracle Finance, says: “Prestige cars are mostly discretionary purchases.
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“They are things the customer wants rather than things the customer needs. So we need to ensure that making a deal with us is enjoyable, otherwise they will not go ahead with the purchase or they will go elsewhere.”
Achieving this means that car finance can be far more complicated for the financiers themselves, as they make efforts to smooth the paths for their customers.
A Bespoke Approach
“Whilst the majority of products are very similar to the general car finance market, we find that the level of detail required is much greater as client needs can be more sophisticated,” explains Tim Marlow, divisional head for DSG Prestige.
“We regularly transact deals with seasonal payments, interest only or enhanced balloons to cater for the prestige clientele and do have other options available to the mainstream finance houses.”
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By GlobalDataJBR Capital co-founder and chief executive officer Darren Selig agrees: “The prestige market differs from other car finance markets in a number of ways, primarily due to the differing customer profile and the specialist nature of the vehicles being purchased.”
Selig should know. JBR Capital operates in the £50,000-3m prestige car sector, which represents only 2% of the total vehicle finance market. However, as Selig goes on to describe, it is a sector that requires a far more manual, holistic and commercial approach to underwriting.
“The volume that consumer lenders focus on is the other 98% of the vehicle finance market, which attracts much lower loan balances and are underwritten using computer auto-scoring with two-minute decisioning times,” he says. “The consumer lenders do a wonderful job and understand their sector well, but are bound by computer-decisioning rules which allow underwriting with little or no manual human intervention.”
That approach is fine for the lower end of the market where consumer payment habits are handled en masse and in a usually predictable fashion.
“However in the high-end vehicle sector the customers often do not structure their lives or financial affairs in the same way as a typical consumer, making it far harder to underwrite on purely a computer-scoring methodology and it often requires us to really get under the skin and truly know the customer,” Selig explains.
A Prestigious Market
However, it is not just the customer’s finances that require bespoke attention. The prestige car market in general is an unpredictable one.
As Marlow points out: “On a daily basis we have to negotiate the residual values we require, as the standard market valuation tools – CAP or Glass’s – simply do not work in the prestige sector.”
This is particularly applicable to areas such as classic cars and limited production runs, where values are more likely to push upwards than down.
Many in the sector are also keeping a close eye on broader economic changes. As with seemingly every market sector in the country, the biggest stories are about Brexit and the general election.
“The unsettled economy has continued to keep interest rates at all-time-low levels and eventually this will start to change, but I don’t believe it will for the foreseeable future.
Whilst this uncertainty may have been an issue last year, we have not seen any reflection of this currently, but is certainly something to monitor,” Marlow says.
Similarly, Selig, while cautious, has not yet seen a detrimental impact to this sector following Brexit.
“Brexit and general election fears do not seem to have translated into lower sales in the prestige market, and generally we continue to see a robust market. At JBR Capital, lending in the sector has grown by over 50% year-on-year,” he notes.
Brook echoes his comments, adding: “The market has remained remarkably robust over the last few months, considering Brexit and all the political upheaval.”
In fact, if anything the outlook is glowing, with Marlow telling Motor Finance: “We have seen it go from strength-to-strength, with the average balance gradually increasing across our portfolio as we are asked to look at more high-value deals.”
Just because the market is doing well, however, it does not mean it is not changing. Selig observes: “The classic car growth story has generally plateaued. Investors who bought into the sector in 2015-16 to make a quick buck have sold and exited, leaving the real car enthusiasts as the key buyers, which should hopefully bring some stability to the exponential price rises of recent years.”
Selig is talking about the surge of interest, globally, in classic cars over the last couple of years. It has been one of the top-performing investment classes, resulting in what Selig refers to as “mouthwatering” prices for the most highly sought-after cars.
“Will these cars continue to rise in value, hold or potentially depreciate?” he asks. “Only time will tell.”
Knowledge is Power
Time may well tell, but until it does those in the prestige car finance sector have to rely on an in-depth and constantly growing foundation of knowledge to inform every decision, especially as they are often sailing in uncharted waters.
“There is no CAP guide or rulebook to follow for residual value-setting when it comes to modern-day classics, or classics, or indeed a lot of the niche high-performance current-day cars such as Pagani or Koenigsegg,” Selig admits.
“Prestige car finance is a highly specialist end of the sector and requires an in-depth knowledge and understanding of the vehicles themselves and values – or at least knowing who to call on for specialist valuation advice,” he continues. “Otherwise, as a lender, you are potentially at risk of getting your hands seriously burned if the finance deal turns sour.”
Added pressure comes from the growing contingent of new lenders who are attracted to the easy money to be made in the sector but have little or no experience of the asset class or what is really involved in underwriting customers who do not fit the typical mould.
“One of the key elements is understanding the provenance of a particular vehicle, and how that impacts a future sale value,” Marlow explains.
“Ultimately we also have to assess the covenant of the clients to ensure they can afford the level set, which negates against some of the risk for our lenders also.”
Success in this sector depends on knowledge of the vehicles and the market, especially when dealing with aficionados. However, it also depends on building strong client relationships.
“We are still seeing the strongest retention rates,” Brook says. “A big part of the reason for that is that we ring all of our customers three times a year, and it is not a sales call. It is to check in and make sure everything is okay with the agreement and their vehicle.
“During that time they might have bought a Ferrari or a Bentley but only heard from their Ferrari or Bentley dealer once. Because we have that regular contact they ring back in to us regularly. They see us as their broker,” Brook continues.
“So even right at the beginning of the purchase they might be thinking of their next purchase and calling us to ask what other people are doing. It is a nice position to be in, but it took 10 years to get there.”
Regulation
JBR Capital has made heavy investments in people who have knowledge of the prestige car sector.
Selig explains: “We have invested heavily in people with sector knowledge as well as technology, and continue to train all our staff to ensure we continue to be the leading experts in our field with unrivalled internal knowledge and expertise.”
But knowledge of the vehicles and the market as a whole is not the only knowledge that is necessary in the prestige car finance sector. Like all sectors of the motor finance market, prestige car finance has been subject to a shifting regulatory environment, and knowledge of and compliance to those regulations is essential.
“Regulation is definitely the biggest challenge,” notes Brook.
“There is a certain backlash in the press for PCP [personal contract plans] and PCH [personal contract hire]. Due to misreporting what is actually a great product these are getting a very bad reputation.
“The retail part of the industry is yet to wake up to the new regulating environment. Without a full audit trail you are looking at legal challenges at later dates.”
Brook advises companies to look at their processes from an outside-inwards perspective. “Make sure you and the financial backer have funds you cannot be accused of mis-selling,” he advises. “You need an easily accessible audit trail that can prove beyond doubt no mis-selling has occurred, that is absolutely vital.”
This is particularly crucial in the prestige car finance sector where the sales process has to be, by its very nature, rather more bespoke than in other car finance sectors.
“We have a fluid sales process, but there are four or five parts where we use a set script that is time- and date-stamped to allow us to pull those calls down from the cloud at a later date,” Brook says.
“If we get challenged we can pull an audit trail together very quickly. In a car showroom environment that is nigh on impossible, and that will lead to real difficulties moving forward.
“Car finance needs to be sold in a controlled environment because courts will side with the consumer unless the retailer can prove otherwise,” Brooks notes.
“We have good strong consumer laws to protect consumers but it can be misused by paralegals and lawyers looking to build another industry around that.”
Looking to the Future
Everyone Motor Finance speaks to in the prestige car finance sector is optimistic about the market’s future.
Selig believes the market is set to continue its growth, with the enthusiasm for classic and prestige cars not showing any sign of diminishing.
“We all dream of owning the car on our bedroom walls as a teenager, but as the demographics change and a new younger generation enter the market, interest in the 1980s cars will continue to grow and the 1960/70s classics will become a tougher market,” he tells Motor Finance.
“Electric cars and hybrids will become more of a feature as manufacturers continue to use supercars and hypercars to showcase their new developing technologies.
“The future is exciting, but again new technologies and value rises in 1980s cars will pose underwriting and valuation issues for inexperienced lenders and a growth opportunity for those willing to embrace change.”
Marlow shares Selig’s optimism, but as well as the enthusiasm for classic cars, Marlow sees a great deal of opportunity in the new models being released.
“When you look at specialist marques such as Pagani, Bugatti and Koenigsegg they are all introducing new model ranges with price tags into seven figures,” he says.
“Add this to the main supercar brands such as Ferrari, McLaren and Lamborghini, and they are also pushing up the prices – with most starting in excess of £200k now. It proves that the demand is clearly there for this nature of car.
“Even the likes of Range Rover, which plays a significant part in most of our clients’ stables of cars, are now priced at over £100k across several models, so we see a buoyant future in the prestige world,” Marlow adds.
“The new introductions have a positive knock-on effect in the used market too. As the elite want the latest models, it provides greater supply in this secondary field – all of which leads to increased opportunity for the prestige finance specialists in the market.”
Brook shares the optimism of his colleagues, but warns against the market resting on its laurels.
“There is a lot hanging in the balance,” he warns. “Prestige car finance is a small part of the industry, but I feel very confident.
“Our sector went through the largest stress testing of the market place in 2008 to 2009. What we learned is that if you stick with your underwriting criteria and don’t push for larger residuals and lower deposits you will survive and thrive. I think we learned a lot from that scenario, and have been taking a different perspective on risk.
“If the market is stress tested again, I think we are in a much better position than we were in 2008 and 2009,” Brook concludes. <
