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Driving forces

Finance - Features

Thursday, 21 December 2006

Adrian Rushmore explores the factors that affect the value of fleet vehicles.

The restructuring of benefit in kind (BIK) tax legislation in April 2002 - where, among other changes, personal liability for running a company car became linked to the vehicle's CO2 emissions - has led some to opt out of company-run fleet programmes. Nevertheless, the company car remains a popular mechanism for rewarding employees, as well as being a vital tool for those who need to travel as part of their work. Consequently, effective control over company fleet costs remains a critical challenge for those charged with managing corporate finances.

Whether fleet cars are company owned or subject to contract-hire or lease agreements, the cost of running any vehicle over a typical three-year period will be greatly influenced by the rate at which it depreciates. So, which vehicles currently perform best in residual value terms and what are the characteristics influencing prevailing patterns of depreciation in today's car market?

Niche strength

Predicting residual values has always been a fiendishly tricky business. Image counts for an awful lot in the UK and the darling of today's new-car market can all too easily become the unhappy reject of the motoring world in three years' time.

For most organisations, the typical company car is a conventional saloon or hatchback. However, most of these cars are now outperformed in residual value terms by niche models, such as convertible cars and sports utility vehicles (SUVs). It therefore makes sense for companies buying their own fleet vehicles to extend the choice of cars offered to employees to these slow depreciators, thereby maximising their return when the car is eventually sold. Similarly, these cars can often bring the benefit of lower monthly contract hire rates.

The convertible sector demands particular attention at present, given the arrival of many new models onto the market and the growing popularity of these vehicles among new and used-car buyers. There was a clear surge in sales of new convertible cars in 2005, driven largely by growing demand for vehicles with a folding metal roof. In 2001, sales of all new convertibles represented 2.4 per cent of the total UK new-car market but by June 2005 the figure had climbed to 5.2 per cent.

An important consideration for de-fleeting a convertible car used to be that spring and summer were the best seasons to sell the vehicle due to the warm weather conditions. However, one by-product of the current rapid rise of cars with a folding hard-top - often referred to as coupe-cabriolets (CCs) - is that convertible sales are slowly becoming less concentrated around the summer months.

For new conventional soft-tops, such as the BMW 3 Series Convertible, Audi A4 Cabriolet and Mazda MX-5, March remains the key selling month, with the last three months of the year the quietest. However, while March is still the high point in CC retail activity, these cars are now widely perceived as more of an all-weather choice, so registrations are more evenly spread throughout the year, bringing greater seasonal stability to residual values.

Budget brands demand rethink

Rapid depreciation has long been presented as one of the most compelling reasons for not buying a new company car from a budget brand such as Hyundai and Kia. Today, this argument no longer stands up to scrutiny. Budget manufacturers have made significant strides in improving the residual value performance of their cars, so much so that they often rival, or outperform, volume brands including Ford, Volkswagen and Renault.

Budget marques have succeeded in cutting rates of depreciation on their cars in four ways - by targeting niche markets (such as coupe and SUV); increasing awareness of their value-for-money proposition among prospective buyers; adopting European styling with greater attention paid to fit, finish and quality of materials used; and by avoiding an over-supply of their vehicles within the used-car market. However, this last characteristic has been achieved rather more by luck than judgement.

Examples of budget brands boasting strong residual values are becoming increasingly commonplace. Analysis from spring 2005 indicated:

The Hyundai Coupe has built up a loyal following, now reflected in 54 per cent retained value after three years, compared with the Ford Puma at 48 per cent.
In the recreational 4x4 market, the Hyundai Santa Fe holds on to 56 per cent of its original list price after three years, now level-pegging with the Land Rover Freelander. Kia and Hyundai are making a concerted assault on this market - Kia with its Sorento and the new Sportage; Hyundai with the Terracan, Tucson and Santa Fe. The indications are that limited volumes combined with the inherent strength of 4x4 residual values will endow these new models with impressively low levels of depreciation.
In the large MPV sector, the Kia Sedona now enjoys a residual value of 59 per cent after three years, while the Volkswagen Sharan is at 52 per cent and the Renault Espace stands at 43 per cent. What started as a budget offering in the sector is quickly becoming the class leader.

Selecting the right options

To aid saleability there are certain inevitable 'must haves' on any fleet car options list, as well as things best avoided. More often than not, yesterday's best-selling option is today's standard fit and this invariably influences what buyers expect to see on used models.

The best current examples are alloy wheels, air-conditioning and CD players. These features are appearing as standard fit further down the ranges of new models and used cars are already proving harder to sell if they are absent. Satellite navigation is getting lots of media attention at the moment, as the technology matures and finds its way into a greater number of highly-specified, top-of-the-range vehicles.

Paint colour has also always had a major influence on the residual value of used cars but it seems this has never been more true than for today's prestige-brand vehicles. Making an unwise colour choice when purchasing a new upper-medium prestige car (BMW 3 Series, Audi A4, Mercedes C-Class, etc) could now mean it loses as much as an extra £2,500 off its trade value after one year and 12,000 miles.

In residual value terms, the best-performing colour in the upper-medium prestige sector is now metallic black. Silver used to hold the top spot but the large number of silver prestige cars on UK roads has meant the colour has now fallen back, albeit to a level that still commands a monetary benefit over most other metallic colours.

The average one-year-old metallic-black upper-medium prestige car is now worth around £200 more than silver. At the other end of the spectrum, an upper-medium prestige car in white typically has a trade value up to £2,500 less than a car of the same specification in silver.

The impact of colour choice on residual values can be even greater in other prestige car sectors. For example, the depreciation figures identified in the table on page 147 are around 20 per cent greater in the large executive car sector, including BMW 5 Series, Mercedes E-Class and Audi A6.

There are some extreme examples of how much money can be lost through poor colour choice. Buy a luxury roadster, such as a Mercedes SL-Class or Porsche 911, in white and you can easily expect a trade value after 12 months that is £5,000 lower than if it was specified in a desirable metallic.

Table 1. Prestige upper-medium colour choices - the residual value winners and losers at one year old

Forthcoming BIK changes

From January 2006, employees choosing new diesel-powered company cars that comply with the Euro IV emissions standards will no longer be exempt from a three per cent BIK tax surcharge.

However, in practice, there is unlikely to be any noticeable shift in demand away from diesel. Taking into account typical 36-month fleet replacement cycles, the bulk of those drivers due to replace their diesel company car in 2006 are likely to be already well used to paying the three per cent surcharge because their existing car will not have been Euro IV compliant.

Awareness of the BIK changes is not high, and even those who are anticipating higher tax contributions may nonetheless still prefer diesel power for its economy and driving dynamics. During the past five years, the diesel share of the new car market has climbed steadily and the trend is clearly still pointing in a very positive direction with no sign of peaking, regardless of the new BIK changes.

Biography

Adrian Rushmore is Managing Editor of EurotaxGlass's and head of the company's market intelligence service in the UK. EurotaxGlass's is a provider of business data, analysis, services and solutions to automotive organisations in Europe.