When used car prices have been at record highs for two years, how do you accurately forecast the future value of a car that you put on your fleet today?
Fleet Auto News spoke with industry experts to understand how Fleet Managers should approach this process in 2022 with the continued uncertainty in the economy, disruptions to new vehicle supply chains and the emergence of zero emission vehicles.
Jeremy Wheelahan, Operations Director at SG Fleet
The current used car market values are unstainable and will normalise over the medium term once the supply chain disruptions have eased. We need to consider which of these macro factors will remain over the longer term when determining residual values.
Paul Oliver, Principal Consultant at Fleet Advisory
I think it’s an unprecedented time for Residual Value forecasting – a ‘perfect storm’ of significant considerations. Firstly, the combination of Supply Chain issues that are impacting new vehicle production, resulting from COVID, the war in Ukraine, material shortages etc. Increasingly, it seems that these are not short-term problems but will potentially change the manufacturing landscape from now on. While Used Vehicle values are now at an all time high, it’s difficult to see how this is sustainable.
Then, from a medium to long term view we need to consider the availability, takeup and market valuation of Battery Electric and Fuel Cell Electric Vehicles while anticipating the impact on Internal Combustion Engine vehicles. This will include new vehicle brands that we are not as familiar with. I’m not sure there has ever been a time where have been so many variables to consider.
Tanim Ahmed – Head of Business Intelligence & Product at Datium Insights
We expect that supply constraints will continue to remain for the next 12-18 months, in large part due to the semiconductor chip shortage. As a result, used car prices will likely remain elevated over this time period before easing gradually in 2024.
For RV managers, the approach should be two-fold – using current prices to set positions for 1-year and 2-year RV’s and transitioning to setting 3-year to 5-year positions to be closer to pre-COVID prices.
While we don’t expect prices to ever go back to pre-COVID levels, due to the high level of uncertainty our view is to retain a cautious approach to longer term RV positions.
Dereck Cooke, National Group Leasing Manager at Fleetcare
When determining a residual value policy, several factors are taken into consideration. These include, life cycle of the model / variant, current sales volumes, equipment / option level, vehicle use and historical data.
The challenge today is how much of an influence the inflated used vehicle prices are, how long will the supply constraints will continue to impact new sales and how these factors will impact future values. Will supply issues be sorted in 2022 and we will see a return to normal market conditions for used cars?
We can account for the current market conditions based on the term of the contract. If the expectation is that used vehicle prices will return to ‘normal’ within 12 months, then short term leases could reflect a higher than usual position.
Given all of the above the most important rule when determining a residual value position is simple, the residual value is how much the car is worth not what the selling price is. When keeping this as a guiding principle we can move with any market conditions and influences.
Frank Agostino, Managing Director at Fleet Network
In the current market choosing the right car for your novated lease can reap serious rewards. A common misconception is “it’s not my car”. Ultimately it’s your vehicle. If the car is worth significantly more in the market than the residual value, then the difference is yours to keep once the car is sold. Employee’s that choose the right car in a novated lease, treat the sale as a tax free payment at the end of the term.
For example, a new 300 Series Toyota LandCruiser with a purchase price of $105,000 drive away would have an approximate residual value of $30,000 at the end of the novated lease. If the employees sells the car for $70,000 they are eligible to keep the $40,000 difference.
Wayne Moore, General Manager, Trade at SG Fleet
Historically market prices on used vehicles are directly related to the supply of new vehicles coming into the market. Over the last 6 – 7 years, the number of new vehicles declined, even before the current supply issues exacerbated the situation. The car park for used vehicles year-on-year is constantly diminishing, putting pressure on market values and causing an upward trend.
New vehicle prices have been stable in recent years, keeping Residual Values (RVs) reasonably static. Now, new car prices are rising as inflation starts to bite, affecting production and world supply chains. Some economists predict the second year of higher-than-expected inflation, putting further pressure on RRPs. The latest global forecasts are that global new vehicle production won’t fully recover until 2024/25 at best.
Governments worldwide are increasingly going green and pressuring OEMs to drop (Internal Combustion Engines) ICE engines for fully electric vehicles (EVs). The challenges here that need to be considered include the infrastructure grid to support EVs and the number of semiconductor chips required by EVs compared to an ICE vehicle. These disruptions worldwide have and will continue to put pressure on fuel prices across the globe.
Adam Morrison, Managing Director, Interleasing
Forecasting residual values in five years’ time is difficult at present. This is due to a host of reasons, including delays in vehicle acquisition which can take up to 12 months. While the vehicle supply shortage is expected to correct well before 2027, some residual flow-on effects are likely as the exit point for consumers is going to be higher due to a spike in funding prices.
Also, if you’re selecting a 5-year residual value today, with the potential 12-month wait time, you need to consider what the value of a 5-year-old car is in six years’ time. Electric vehicles are also part of the consideration, as their future market value is somewhat unknown and will in part be determined by forthcoming government incentives and technology advancements.”
