6 Dec 16

Residual Values could be on downward spiral across Europe

Since 2010, Residual Values (RVs) have consistently trended upward across Europe and have now recovered to pre-crisis levels. But this could very well be the end of the sunny season, warns Dean Bowkett: “A downward cycle is now looming”. 

Bowkett, automotive consultant and editor of the recently published ExpertEye European Automotive Report Q3 2016, foresees that “once RVs start to head downward in a typical cyclical pattern, the industry starts to suffer, with leasing companies failing to achieve contract-end RVs in the used-car market”.

The ExpertEye report looks at both new-vehicle and used-vehicle sales in certain key European markets, providing a macro-economic and socio-political context for their present state and future evolution. Some highlights:

  • New-car sales in Europe (EU28+EFTA3) for 2016 will be almost 15.3 million, up 7.6% over 2015. However, the -1.8% fall in July sales was the first strong indicator of a slowdown, with the estimate for 2017 new-car sales now downgraded to by one-tenth of a percentage point to +5.1%, meaning Europe will just equal the record-breaking 16 million sales of 2007. A new record is foreseen for 2018, with 16.3 million new cars sold. A Europe-wide decline is expected before the end of 2019, however. 
  • That being said, some new-car markets are likely to decline already in 2017 – Switzerland, the Netherlands and the UK among them. Nevertheless, the Brexit vote and the subsequent slide of sterling has – counterintuitively – had a positive effect on new-car sales in the UK, by allowing OEMs to offer bigger incentives without harming their bottom line. As a result, the expected drop in new-car sales of -5.4% has been revised upward to -4.2%.
  • Brand-wise, Renault was the fastest grower in Q3, taking over from Fiat, which slipped into third place after Mercedes-Benz. The brisk sales of the Captur exemplify Renault’s commercial success in switching to a more SUV-oriented product lineup, while Mercedes-Benz has built on the success of its A Class with some aggressive pricing. Jaguar meanwhile saw its sales rise 75% over 2015 YTD thanks to the success of its reasonably-priced F Pace. 
  • With new-car sales actually falling vis-à-vis the rise in Europe’s population, the pent-up demand for new cars means that RVs for used cars will continue to rise - for now. Throughout 2017, they will continue to rise across most of Europe, although at various speeds – unless forced into negative by political shocks such as electoral wins for antiglobalist and populist forces. 
  • On a segment per segment basis, RVs for small and medium cars are trending down; they remain strong for executive models and MPVs; and are trending up for SUVs. 
  • On a country per country basis, the market average for RVs is 38.5% in France, 38.2% in Germany, 37/1% in Italy, 43.3% in Portugal, 40.6% in Spain, and 35.7% in the UK. 
  • In France, the continued popularity of SUVs explains their position at the top of the RV list. Best-performing brand is Porsche, with an above-market RV average of 52.8%, followed by Land Rover (46.9%), Mini (46.0%), Jaguar (45.9%) and Audi (45.4%). Even Dacia is performing above average (41.4%). For next year, Bowkett sees room for a two-percentage-point increase in petrol RVs in France, and a one-percentage-point increase in diesel RVs. 
  • In Germany as well, Porsche, Land Rover and Mini are at the head of the RV list, but the rest of the top ten is populated by the Mazda, Volvo, Skoda and Dacia – among others. And while the compact segment is the best seller in Germany, it doesn’t make the segment top ten for RVs, which is dominated by SUVs. In general, German RVs could go up by up to 2 percentage points over the next 18 months, unless the outcome of the general election next year proves to be a destabilizing influence. 
  • The electoral defeat of Italian PM Matteo Renzi in the recent referendum and his subsequent resignation might herald a period of sustained instability in Italy, with consequences for the automotive market. Paradoxically, Italy’s political upset could have beneficial effects on RVs, Bowkett posits. 
  • In Portugal, RVs are so high that there is little room for improvement – although the projection is indeed for RVs to edge up a bit further still over the next year or two, unless the vehicle import tax is abolished, which could se RVs fall considerably, as prices equal out with those in Spain. 
  • In Spain, meanwhile, although RVs have increased by 1% in Q3, further increases over the next few years are expected to remain flat, in line with inflation, although the removal of the aforementioned Portuguese import tax could push up Spanish RVs by an extra 1 or 2%.
  • The UK lives under the shadow of the self-imposed Brexit. But the imminent economic collapse, predicted by some Remainers, has not materialised and an economic recovery remains underway, albeit at lower growth rates than previously predicted. The cheaper pound is having both positive and negative effects on the vehicle market, but British RVs pictured: a second-hand car lot in Mapperley, Derbyshire) are definitely on a downturn, with a drop of anywhere between 2 to 8 percentage points likely over the next three years. 

“Assuming Europe does not fall into yet another crisis period, we still believe RVs have hit a plateau across most of Europe and will continue to fall in the UK. But the next twelve months are the most politically uncertain in a generation and there is clearly a 25% risk of a 10-12% fall in Residual Values across Europe some time over the next two to three years”, Bowkett concludes.

ExpertEye’s entire European Automotive Report Q3 2016 is downloadable for free at the ExpertEye website.

Image: Alan Murray-Rust, CC BY-SA 2.0

Authored by: Frank Jacobs