Is Brexit bad for leasing?
Everyone always says how leasing is “recession proof”, but is it Brexit Proof? Yes, no, maybe! We’ll that’s probably as much as anyone really knows about Brexit in general at this point, but I’ll try put some sense around Brexit from a leasing perspective and in simplistic(ish) terms.
So, to understand the impact, we need to look at the main components of a lease. (Want more info on how leasing works?). The key things to a great lease are:
- Low purchase price
- Low interest rate
- High residual (re-sale) value
Vehicle Purchase Price
What will Brexit do to the price we pay for our cars and vans? On face value Brexit will push up the price we pay. Why? We’ll that side is pretty simple; its exchange rate. Poppycock and codswallop, I hear Boris cry, Britain’s building hundreds of thousands of cars a year!! Well, yes, that’s true, however they aren’t British companies, or British components etc. and all the money they use is in Euros, Dollars, Yen or Won, so a weak Pound means costs go up, whether you’re bringing in parts or cash.
Is that that then? No, of course not, the UK is the 2nd biggest car market in the EU at 20% of all sales, just behind Germany. And the politicians were right when they said the manufacturers can’t afford to lose that. That’s because an efficient factory is a busy factory, so it’s critical they keep churning those cars out. And if they build them they have to sell them, even if they have to reduce their margin to do so.
The final piece of the puzzle here is the rest of the EU market. Since the 2008 crash, the European car market has been struggling. The recovery has been fragile, whereas the UK has seen record numbers of registrations for the last few years now. What we’ve seen is that the manufacturers have pushed more of the cars to us in the UK to offset their poor sales in the EU. To do this, they have increased their discount levels (particularly on leasing discounts) to make their product more competitive.
What’s the bottom line then? In the short term, we’ll see some increases, but pricing should then come back to a more normal level.
Happy days, we have record low interest rates! True indeed and they should stay reasonably low for a while too. Box ticked, let’s move on. Well, not quite! As with car manufacturing, most of our leasing industry is now foreign owned, which means their money isn’t in pounds, shillings and pence, hence there is an impact with exchange rate.
Braver men then me will forecast the future sale values of cars and vans we’re buying now, but will be sold when we’re in our brave new world!
There is a lot of science to setting residual values, but the reality is that statistics and formulas, don’t control what happens in the wider world and what someone if prepared to pay for something on the day it sells, so it’s all a bit finger in the air anyway. The simple reality is that values of used cars and vans are driven by supply and demand.
Demand increases, so prices increase. Demand drops, so prices drop. However, that’s what’s happening now and we’re trying to predict the future.
The new and used car and van markets are closely linked. Vehicles have a life cycle and have to be replaced and they are either replaced with a new or used vehicle. If you combine the number of new and used sales each year, it’s pretty much flat. If discounts are good on new cars, sales increase, which means less people buy used and vice versa.
All of this means, that whilst there will always be fluctuations in the used car market, it generally picks up quickly from any drops.
I’m not an economist, but I have been doing this for nearly 20 years and seen the good and bad times as a customer, a broker and a senior manager at leasing companies.
Brexit will have some short-term impact; however, the world will still keep on turning and aside from the odd knee jerk reaction here and there, I think that leasing will remain pretty stable. And the advantage of dealing with Vehicleflex is that we have access into the top leasing companies in the country and all manufacturers, so we’ll always be able to offer the best value no matter what. So why not get in touch now to find out how we can help you.