UK residual value outlook revised downwards

03 July 2019

UK residual value outlook revised downwards

3 July 2019

By Neil King

Residual values (RVs) have been showing signs of struggling in the UK since March 2019 and, accordingly, Glass’s, the UK arm of Autovista Group, has revised its RV outlook downwards.

High historic new car volumes have buoyed used car supply in the UK but this had been absorbed by resilient used car demand and so residual values (RVs) had been performing well. However, 2016 was a record year for the new car market and with the extension of many lease vehicles last year, used car volumes are especially high. As the new car market has been in decline since 2017, the resulting lower supply should ultimately ease the pressure on residual values (RVs) going forward.

Poor auction results

Jayson Whittington, Chief Editor of Glass’s, comments that ‘there has been a recent market correction [in the UK] following challenging wholesale auction market conditions, resulting in larger than expected monthly guide movements. There has been more depreciation than last year for both petrol and diesel cars. Alternative fuel vehicles are bucking this trend, however, with electric vehicles (EVs) in particular going up in value.’

Discussing the reasons behind the recent weakness in RVs, Whittington said that ‘I think the main reason for the weakness is related to a large supply of cars. Three years ago, the new car market saw record registrations. It would be fair to assume more would therefore come back into the used car market. Additionally, many lease vehicles were extended last year, with many now coming to the used market as new car supply issues ease following the disruption caused by the implementation of WLTP.’

Revised outlook

In line with the recent weakness, the overall RV outlook has been reduced by one percentage point (pp) in 2019 in both the 12 month/20,000km and 36 month/36,000km scenarios. The outlook now calls for a 1pp reduction in 12/20 RVs and a 2pp drop in 36/60 RVs in 2019 and is the weakest in the EU5.

Residual Value Outlook, June 2019, EU5, 36months/60,000km, 2019-2021

Source: Autovista Group

Petrol and diesel values after 12 months and 20,000km are both forecast to fall by 1pp in 2019. Diesel is also expected to lose 1pp in the 36month/60,000km scenario in 2019 but petrol stands to deteriorate by 2pp. This may seem counter-intuitive given the tarnished image of diesel but the fuel type remains attractive for cost-sensitive used car buyers and, moreover, the dramatic decline in registrations of new diesel cars in the UK since 2016 is limiting their supply and supporting RVs.

Although the overall 2019 outlook and the forecast for RVs of petrol and diesel cars has been revised downwards, RVs for hybrid electric vehicles (HEVs) have been revised upwards by 1pp in 2019 in both the 12month/20,000km and 36month/60,000km scenarios. Moreover, the RV outlook for battery electric vehicles (BEVs) has been increased by 5pp in both scenarios. This follows phenomenal improvements in the RV% of BEVs since the start of the year, up by 6pp and 10pp in the 12month/20,000km and 36month/60,000km scenarios respectively.

Uncertain RV impact of Brexit uncertainty

The deterioration of new car demand is at least partly attributable to Brexit uncertainty but this has bolstered used car demand as many consumers tighten their belts and opt for used cars instead of new. Used car sales were down by just 0.6% in the first quarter of 2019, according to the latest data provided by the Society of Motor Manufacturers and Traders (SMMT).

In contrast, new car registrations have been falling dramatically in the UK as a result of new car price increases due to a weakening of the pound, a reduction in manufacturer new car support and the ongoing Brexit uncertainty. The drop in demand has been exacerbated by a sharp decline in new diesel car sales as a result of negative press coverage as well as higher vehicle excise duty (VED) rates and the 4% benefit-in-kind (BIK) rate for company cars that do not meet the RDE2 standard.

Following declines of 5.7% in 2017 and a further 6.8% in 2018, total new car registrations in the UK were 3.1% lower year-on-year in the first five months of 2019. It remains uncertain, however, whether the ongoing Brexit uncertainty is now also having a negative impact on used car demand in the UK and, in turn, residual values.

Autovista will continue to monitor developments but even if this is the case, we still assert that the used car market will be the UK automotive sector’s growth generator in 2019. Furthermore, the forecast the UK new car market is still in line with the Autovista forecast published back in January.