Tim Cattlin writes ...

Over the past three years much has been written about the potential ‘black hole’ of supply for the used LCV market, created by low registrations in the dark days of 2009. Risk managers and forecasters have had to balance the potential for a ‘dry spell’ in the auction halls with the prospect of economic recovery, how quickly this will happen and at what rate (and, naturally, the effect this will have on residual values being achieved).

A glance at CAP Red Book values for a three year old 60,000 mile Transit 280 SWB van show clearly the spike may be occurring.

September 2010               £4800

September 2011               £4800

September 2012               £5575

September 2013               £5900

March 2014                         £7025

April 2014                            £7100

So, with this value at a 10 year (and probably all time) high the question we at CAP are being asked is ‘have we reached a ceiling?’ and ‘when (and if) will values start to ease?’ 

Most forecasters (ourselves included to some degree) under-called how the critical balance of supply and demand would manifest itself in market prices. Indeed, a senior contact in the leasing industry said to me recently ‘If you would have asked me to predict current market I'd have been way off’. The rationale of a slow economic recovery combined with a gradual rise in the supply of used vehicles being presented for resale gave grounds for a relatively conservative outlook and an expectation that one factor would outweigh the other. What has actually occurred is a higher than expected demand stimulated by a rosy economic outlook and much faster than anticipated growth. As a result the pent up demand from the cautious used van buyer has been released onto the traders pitch.

What are the prospects for the market softening? Comments from our trade contacts indicate that for them it can’t come soon enough.

‘I need prices to fall – I’ve only so much capital so I’m now stocking fewer vehicles ’

‘The punters won’t pay any more so my margins are lower’

‘I dare not buy too much as I’ll be exposed if values fall through the floor’

However the leasing industry are rubbing their hands with returns being  generally way above what was provided for when the business was being written three or four years ago. We understand that there is some tactical early de-fleeting activity being undertaken to take advantage of current market conditions.

We’ve noticed in the last month or two that auction entry numbers are rising significantly. Whilst this can always be distorted by unsold stock being recirculated from what we are witnessing this isn’t a dominant factor. We also don’t think that vehicles being brought to market prior to their original ‘’end of contract’ date are a major contributor to these numbers. Perhaps at this point we should look at the historic level of registrations…

2009       186,386

2010       222,915

2011       260,153

2012       239,641

2013       271,073

(source – SMMT)

The assumption is that given the relative strength of registrations in 2011 (combined with the fact that fleet operators who chose to extend contracts on existing vehicles rather than commit to new lease agreements are now resuming their replacement programme) the supply level of used LCV’s will continue to increase. There is also an argument that the pent up demand for used vehicles will at some point be satiated and that demand will start to ease.

Taking all these factors into account CAP is anticipating that the market for used light commercial vehicles will remain buoyant for the next few months but with an easing of values becoming evident later in the year. Quite how pronounced this softening will be remains to be seen.  A pivotal point may well be the usual quiet period over the festive period and we will be watching carefully to see if the usual strong recovery in January is quite as pronounced.

Tim Cattlin is the forecast editor of CAP Monitor - Future Residual Values for commercial vehicles