Lease deal prices - sustainable?

[Ari]

There's been a lot of talk about PCP (I think they're called) deals on PH over the last couple of years (the ones where the car has a guaranteed end value so you're just repaying the depreciation rather than the whole car). Much of it about how it's often better/cheaper to take a PCP than buy used.

Which, if true, creates an interesting quandary. PCP deals hinge on retained value. The more a car is reckoned to be worth at the end of the deal, the lower the payment. If everyone is PCPing instead of buying used, then surely it will increase sales of new cars and slow down sales of used. Which has to depress used values as, in order to sell used cars instead of PCP'd new ones, the price has to come down quite a bit. Which surely will impact on PCP payments as guaranteed future values drop?

I ask because the Mercedes SLK has been a bit of a PCP darling, with some amazing deals being offered since the new model came out nearly three years ago, presumably due to strong residuals.

I've been watching used values with interest, since I like the SLK a lot (hairdresser, homo, blah yawn blah). And they've been plummeting! Right now there's a 62 plate at a Mercedes dealer with sensible miles for £18,890! And it's the 'right' colour (silver with black interior) and has the 'essential' options (auto, leather, heated seats, air scarf) so it's not like it's an oddball spec.

These cars are £33,000 new basic! £37,000 to that spec. Appreciate people don't pay list, but even so that is one hell of a drop! About half new list price in under two years, these used to hold half their value over three! Put it this way, it's dropped 50% (from list) in almost half the time it took a couple of years ago (typically these were worth roughly half after three years and 30,000 miles).

Which, if you take it to the natural conclusion, begs the question. Are the sort of PCP deals available today (such as an SLK for £299/month) possibly sustainable? Or are a lot of people who've opted to PCP rather than buy used going to be in for a shock come renewal time?

[anonymous-user]

A shock come renewal time as the deal is likely to cost more next time around?
( if the car is worth less than the GFV estimation you'd just give it back...)

[pb1695]

The people who have opted for a PCP will not be affected as the future value is guaranteed, therefore the only loss will be with the supplying finance house. The only potential impact will be that there is no equity left at the end for a deposit for the next lease.

The cheap PCP deals however are often not because of expected high residuals, but due to large manufacturer support at the front end, this is then put into the deal to reduce the finance payment rather than being shown as a discount. More recently, many finance deals are advertised with a dealer deposit / manufacturer contribution, which is in effect just another form of discount.

Edited by pb1695 on Wednesday 4th June 15:53

[jdw1234]

What happens when interest rates go back up?

[trickywoo]

pb1695 said:

The people who have opted for a PCP will not be affected as the future value is guaranteed, therefore the only loss will be with the supplying finance house. The only potential impact will be that there is no equity left at the end for a deposit for the next lease.

The cheap PCP deals however are often not because of expected high residuals, but due to large manufacturer support at the front end, this is then put into the deal to reduce the finance payment rather than being shown as a discount. More recently, many finance deals are advertised with a dealer deposit / manufacturer contribution, which is in effect just another form of diso.

This.

In your example the £37k sticker price won't be anywhere near the price paid by the company offering the PCP.

[Dracoro]

Indeed, in fact the sticker price is utterly irrelevant.

[daemon]

PCP deals are used on new cars by manufacturers to bolster new car sales. Any cars handed back at end if term are sold back to the dealer network or at auction.

The trick come end of term is to not get hung up on an exact car but see what manufacturer is offering the best deal

[Ari]

Sorry, I've not explained myself well.

I don't mean people will be shocked at what their car is worth at the end of a PCP - clearly it can be worth 1p and they can still hand it back regardless. More that, if finance companies are having to factor in getting much lower resale prices for stock coming back, surely they will reflect this in new PCP deals. Ergo, when Mr 2 Year PCP hands his SLK back at the end of 2014 he might be in for a shock when, instead of £299/moth it is £499/month (say).

Regarding list prices. Yes, totally get that finance companies don't pay list. However as a marker to how a car has depreciated, the fact that its dropping to half list price (irrespective of discounts PCP companies get) in half the time that it did is surely significant of the effect cheap PCP's are having on used prices? Which brings me full circle to the question, if used prices are being hammered, will PCP companies be able to keep offering such low monthly payments?

After all, there's only one person actually paying for the depreciation and that is the customer. More depreciation - more for customer to pay - higher payments surely?

[daemon]

Then people just move on to another manufacturer who want to buy market share with a strong pcp deal.

I think its a fine balancing act but the manufacturers usually know what they're doing

[anonymous-user]

Surely most of those SLKs are likely financed by Merc's inhouse finance company

So it doesn't necessarily have to worry about GFV as much as an external finance provider would

Merc HQ is just interested in a) market share and b) that the overall deal from production to used market is something close to what it wants

I haven't looked at the details, but Daimler had a good Q1 apparently, from http://www.daimler.com/ir/q114e

April 30, 2014 - 1st Quarter Interim Report 2014

Net profit almost doubles in first quarter of 2014

Total unit sales of 565,800 vehicles at record level in first quarter

Revenue up by 13% to €29.5 billion

Disproportionately high increase in Group EBIT to €1,787 million (Q1 2013: €917 million)

Net profit of €1,086 million (Q1 2013: €564 million)

Significant growth in unit sales and revenue expected

Group EBIT from ongoing business anticipated to be significantly higher than in 2013

Dr. Dieter Zetsche: “Our strategy is paying off; our investments are bearing fruit. We made a good start to the year, as expected.”

[daemon]

JPJPJP said:

Surely most of those SLKs are likely financed by Merc's inhouse finance company

So it doesn't necessarily have to worry about GFV as much as an external finance provider would

Merc HQ is just interested in a) market share and b) that the overall deal from production to used market is something close to what it wants

I haven't looked at the details, but Daimler had a good Q1 apparently, from http://www.daimler.com/ir/q114e

April 30, 2014 - 1st Quarter Interim Report 2014

Net profit almost doubles in first quarter of 2014

Total unit sales of 565,800 vehicles at record level in first quarter

Revenue up by 13% to €29.5 billion

Disproportionately high increase in Group EBIT to €1,787 million (Q1 2013: €917 million)

Net profit of €1,086 million (Q1 2013: €564 million)

Significant growth in unit sales and revenue expected

Group EBIT from ongoing business anticipated to be significantly higher than in 2013

Dr. Dieter Zetsche: “Our strategy is paying off; our investments are bearing fruit. We made a good start to the year, as expected.”

+1

[blank]

JPJPJP said:

Surely most of those SLKs are likely financed by Merc's inhouse finance company

So it doesn't necessarily have to worry about GFV as much as an external finance provider would

Merc HQ is just interested in a) market share and b) that the overall deal from production to used market is something close to what it wants

Exactly. It probably costs Merc under 50% of list price to make the car. So they can rent it to someone for three years at £399 per month, then sell it again for pretty much what it originally cost them!

[BHC]

blank said:

Exactly. It probably costs Merc under 50% of list price to make the car. So they can rent it to someone for three years at £399 per month, then sell it again for pretty much what it originally cost them!

The margins are less than that, but your point is correct. These mammoth manufacturers are financing it themselves and then selling around build cost. They would love to sell every car for cash at list price, but then they would have a tiny amount of buyers, so they do it this way.

[blank]

BHC said:

blank said:

Exactly. It probably costs Merc under 50% of list price to make the car. So they can rent it to someone for three years at £399 per month, then sell it again for pretty much what it originally cost them!

The margins are less than that, but your point is correct. These mammoth manufacturers are financing it themselves and then selling around build cost. They would love to sell every car for cash at list price, but then they would have a tiny amount of buyers, so they do it this way.

Are you sure the margins are less?

I have a GM financed Astra and the 'finance value' is less than 50% of list and I would have thought a more expensive Merc would have better margins.

[BHC]

blank said:

BHC said:

blank said:

Exactly. It probably costs Merc under 50% of list price to make the car. So they can rent it to someone for three years at £399 per month, then sell it again for pretty much what it originally cost them!

The margins are less than that, but your point is correct. These mammoth manufacturers are financing it themselves and then selling around build cost. They would love to sell every car for cash at list price, but then they would have a tiny amount of buyers, so they do it this way.

Are you sure the margins are less?

I have a GM financed Astra and the 'finance value' is less than 50% of list and I would have thought a more expensive Merc would have better margins.

I don't know exactly what the margins are at the moment, but in the past they weren't that much. I'm not in the industry now.

Yes, a Mercedes has higher margins than a Vauxhall. That's partly because Vauxhalls have lower list prices and partly because GM only sells that amount of cars because of high discounts. With GM, the list price is calculated with the knowledge it will be discounted so of course they can finance to that level.

Also, remember that while Vauxhall is theoretically in profit, Opel isn't

[Miner49er]

Listening to a US car show recently, a country where leasing is the norm; they were discussing new cars available at $49 per month!

[underphil]

JPJPJP said:

Surely most of those SLKs are likely financed by Merc's inhouse finance company

So it doesn't necessarily have to worry about GFV as much as an external finance provider would

Merc HQ is just interested in a) market share and b) that the overall deal from production to used market is something close to what it wants

I haven't looked at the details, but Daimler had a good Q1 apparently, from http://www.daimler.com/ir/q114e

April 30, 2014 - 1st Quarter Interim Report 2014

Net profit almost doubles in first quarter of 2014

Total unit sales of 565,800 vehicles at record level in first quarter

Revenue up by 13% to €29.5 billion

Disproportionately high increase in Group EBIT to €1,787 million (Q1 2013: €917 million)

Net profit of €1,086 million (Q1 2013: €564 million)

Significant growth in unit sales and revenue expected

Group EBIT from ongoing business anticipated to be significantly higher than in 2013

Dr. Dieter Zetsche: “Our strategy is paying off; our investments are bearing fruit. We made a good start to the year, as expected.”

I'm sure that year on year in recent times their % of cars made that are leased has been going up significantly

are you sure that they are not accounting for this in a way that has some fairly large assumptions regarding future values of these cars? - allowing them to recognise higher revenues that is realistic ; and show some nice profits ; and collect some sweet annual bonuses

[BHC]

underphil said:

I'm sure that year on year in recent times their % of cars made that are leased has been going up significantly

are you sure that they are not accounting for this in a way that has some fairly large assumptions regarding future values of these cars? - allowing them to recognise higher revenues that is realistic ; and show some nice profits ; and collect some sweet annual bonuses

That would be akin to mark-to-market accountancy. And yes, there is a lot of that unofficially. However it's not as blatant as mark-to-market as there are real, proven assets in play.

[POORCARDEALER]

gives them and the dealer network a good supply of used cars which they can control the market with

[gizlaroc]

Remember, if Mercedes finance are hiring these out they can claim any vat back on the purchase price, and they can write off the purchase against any profits, this suddenly makes a £37000 car far cheaper, with just the vat removed it has cost them £30800, that is before negotiating a discount, now if someone on drive the deal can get 20% on one car I bet they are getting 30+ on 500 cars.
So £37k -30% = £26000 less the vat = £21500.
As long as you get £21500 back at the end you have broke even, charge £299 a month for it with 9 months down and you have got £9870 for it over 2 years, meaning you only need it to be worth £12500 at the end, it will however be worth around £20k, meaning you have made around £9000 on one of the 500 cars.

The answer to whether this is sustainable is "Yeah, as long as people are stupid enough to 'always pay cash and not fall for credit' of course it is."

When everyone catches on to it they will have a problem though.