Future residual values will not be adversely affected by the return of vehicles financed through PCP deals according to CAP, the UK car value and industry forecasting experts.
In a statement Dylan Setterfield, senior editor at CAP Gold Book has tried to play down fears in the industry about the potential damage PCP part-exchanges may cause to residual values.
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Setterfield said: "We do expect there to be more PCP part exchange vehicles coming to market going forward, but we do not expect there to be enough volumes to adversely affect the market in the short term."
There had been some concern that, with the rise in popularity of the finance product, many of the vehicles registered over the past few years would flood onto the used market and drive down residual values for new vehicles. In their statement CAP, however, made clear that they believed the number of vehicles due to be returned was being overstated.
"For vehicle sectors where new car supply is a significant factor in used car price changes, increases in registrations have already been incorporated into our forecasts. However, it is also important to emphasise that the increase in PCP is not synonymous with new car sales growth," said Setterfield before continuing, "A lot of the growth in PCP is cannibalised from other sales channels, whether that be other credit options or outright purchase."
In addition Setterfield stated that there is a misconception as to how the vehicles will be returned to the market.
"There is also a fear that these vehicles will ALL come back in 3 years’ time and some observers have been peddling scare stories to this effect.
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By GlobalData"The reality is that manufacturers are putting offers together on a wide range of durations and the vehicles will come back at different intervals.
"Most of them, if renewed with the same manufacturer, will come back at around 6-12 months before the scheduled contract end date and will form a staggered chain of used car supply."
John Leech, head of automotive at KPMG UK was one of those who earlier this year saw problems in the residual markets caused by PCP offers. At the time he said: "The danger for car manufacturers and used car dealers is that the supply of three year old cars is starting to ramp up and, maybe in a year or two from now, will exceed demand leading to a potential residual value price crash and increased risk of loan default by consumers,"
Industry in agreement
CAP’s point of view was backed however by many in the industry. Steve Gowler, managing director at the Renault Nissan Alliance’s UK financing arm RCI Financial Services, said in a statement to Motor Finance: "I agree with CAP. We are doing a similar number of PCP contracts now to that which we did before the financial crisis in 2007/2008. When those vehicles came to the end of their contract periods in 2010/2011 we did not experience any particular issues. This is because the future values or balloons on PCP’s are set at a level that should ensure the customer retains some equity in the vehicle at the end of the contract which in turn means that the vast majority of PCP vehicles are part exchanged with a dealer for a new vehicle with the equity forming the deposit for a new finance contract. The dealers then retail those used vehicles from their forecourts. Very few PCP vehicles are actually returned to the finance companies."
In addition Simon Henstock, operations director at vehicle remarketer British Car Auctions (BCA), responded to the CAP comment and said: "The market has been short of two to four year old, retail quality one-owner cars for the past 24 months and that has been instrumental in average values rising by around a third over that period of time. Residual values have effectively been at record levels for an extended period of time as demand has outstripped supply for the best quality used cars."
He urged some caution, however, and added: "The language being used in discussing PCP returns – floods, oversupply – needs to be considered in terms of the wider used car marketplace where motorists buy some seven million plus units every year. The reality is that the market has strength in depth to absorb growing volumes as demand picks up alongside what appear to be improving economic conditions,
"There are always issues of supply and seasonality to consider, as well as model mix and specification and this is where the remarketing sector has a critical role to play. The effect of the returning PCP volumes on wider residual values will depend on managing these cars back into the marketplace in an orderly fashion. As always, attractive, well-specified ready-to-retail cars in good colours will generate the best returns for sellers, whatever the conditions may be."
