Analysis
11 Dec 18

Private lease, the logical next step

Private lease is fast gaining ground across Europe. Despite the formula’s focus on the end-consumer, corporates have a big role in popularising private lease. And stand to benefit greatly from it.

If you’re a business, you lease cars. If you’re a private consumer, you buy one. That accepted wisdom has been overturned by private lease, which extends benefits of leasing from the corporate to the private market. 

Tricky definition

“Defining private lease is a bit tricky, because the formula can have elements either of a financial lease, where the customer owns the vehicle, or an operational lease, where the lease company retains ownership of the vehicle,” says Octavian Chelu, principal consultant for fleet and leasing at Frost & Sullivan. 

A financial lease implies that the customer obtains the ownership of the vehicle in question, with an interesting (if risky) possibility of benefiting from the residual value of the vehicle when selling it on. Operational lease often includes a bundle of services (from service and maintenance to insurance). 

“The distinction between financial private lease and operational private lease is also market-specific. In the Netherlands, for example, private lease tends to be operational, while in France and the UK it can be either an operational or a financial lease. So, a correct definition of private lease would be: a dedicated vehicle financing solution tailored to private consumers. That sounds a bit abstract, but considering the various formulas, it’s the best one.”

Consumer perspective

From a consumer perspective, private lease makes a lot of sense. It eliminates the major burden of ownership: having to pay full price for a new car. It maximises the benefits of leasing: the consumer gets a vehicle for one fixed monthly fee. 

The private lease formula appeals especially to younger consumers – the so-called millennial generation – who are used to paying a fixed fee for a bundle of services, for example for their smartphones or audiovisual entertainment. Indeed, figures from the Netherlands show that at least 30% of private lease contracts are with drivers in the 18-to-35-year-old age category, around 20% of which have never previously owned a car. 

Logical next step

For suppliers of traditional leasing formulas, private leasing is the logical next step to generate growth. “Basically, private leasing takes off in mature leasing markets, where the corporate segment has been explored to saturation,” says Chelu. Bank-based suppliers offer private leasing as an additional service, and lease companies benefit from their existing networks to expand their offer to include individual customers. 

Private lease first gained popularity in North America and arrived in Western Europe about half a decade ago. In three key European markets (UK, the Netherlands, Italy), the private lease share of the total car market has grown from 0.9% in 2015 to 2.1% in the first five months of 2018, figures released by Dataforce show. 

In total volume, that corresponds to an annual increase of around 50%. While still marginal in most markets, private lease has already gone mainstream in a few. In the Netherlands, it’s achieved 10.6% of the total market in the first five months of 2018.   

According to Dataforce, the vehicles most popular with private lease customers fall into two categories: either mini-sized cars (VW Up!, Fiat 500, etc.) or SUVs and similar larger-sized cars. 

IFRS16

With the introduction of new accountancy rules, some experts predict that private lease could grow even faster than before. 

The new lease accounting standard that will enter into effect in January 2019 is called IFRS16. One of its consequences is that lease customers will be required to put all leases (including operational vehicle leases) on their balance sheet, where before they were booked 'off-balance'. The impact on profit and loss balance sheets could be significant. 

While IFRS16 applies to only a small segment of companies – mainly large, multinational ones – it is often these companies that have large vehicle fleets, which means it will have a major impact on the fleet industry.

Perfect opportunity

IFRS16 may restrict the financing opportunities of companies and is likely to accelerate the shift from company cars to employee-centred mobility budgets. That is the perfect opportunity for companies to offer their employees a private lease contract.

Strictly speaking, private lease does not require the involvement of corporates. This is the B2C channel: between supplier and end-customer. But companies can serve as ‘matchmakers’ between their employees and suppliers of private lease solutions. This is the B2E channel: the customer gets extras by virtue of being an employee. 

Everybody wins

Everybody wins: employees get access to a clever formula for individual mobility, suppliers get access to a substantial number of potential clients, and employers can add an incentive to their benefits package that can become crucial in the ‘war for talent’. 

As mobility budgets increase in popularity, corporates could become the main vector for the further expansion of private leasing. In that formula, employers turn from offering company cars to providing a budget for employees to spend on mobility as they themselves see fit. A flexible and clearly costed formula such as private lease may prove to be one of its most popular components.

Authored by: Frank Jacobs