As we approach the end of the month we’re also reaching the end of the first quarter of the year. To give you an insight into the leasing industry we’ve got our director Spencer Blake to give an expert opinion on what’s happened in the leasing sector so far this year and what he expects to happen in the coming few months.
What’s Changed in Leasing Since 2022?
This year has started out as a challenge for all businesses in the retail sector, ourselves included. We found that the retail sector was slow to pick up in the New Year and it seems consumer confidence is very fragile at the minute which means that any negative press related to the UK economy in general and the car industry, in particular, can have a detrimental impact. We’re feeling this in a reduction of the number of new enquiries from potential customers and the number of new orders that are actually being placed as customers pause in the process following the release of any bad news. We did see an improvement in February and early March in the situation but have noticed enquiry levels slowing again towards the end of this month following the latest budget and further increases to the interest rate.
Another noticeable change we’ve seen is an increase in the number of applications that funders are declining. Their decision is based on affordability rather than credit worthiness and rising costs across the rest of consumers’ lives, particularly housing costs, has led to some customers who might have been approved for a lease this time last year now not being approved. I think that this is now at a stable level as most of the adjustments that funders needed to make for future baseline living costs have now been factored in and are established in their processes, the only possible issue I could foresee is if the Bank of England is forced to continue with interest rate rises if inflation fails to start dropping.
As a business, we do not just offer personal and business leases and we have seen other areas remain strong, with demand for fleet management, fleet maintenance and our Salary Sacrifice programmes remaining consistent.
In the automotive sector more generally, we’ve seen an improvement in supply with a number of our manufacturers having factory lead times for the majority of their models back at pre-Covid levels of 12-20 weeks.
There’s also been some improvement in the discounts offered from manufacturers and dealers which has helped to stimulate the market with more attractive lease rental prices for customers.
Changing Consumer Confidence
We’ve seen consumer confidence change a lot over the last quarter, it seems to be fluctuating more than the previous quarter and is particularly reactive at the minute.
Whenever there is uncertainty in the economy as we have right now with the cost of living, rising inflation and interest rates it always has a knock-on effect to consumer confidence which impacts enquiries and consumers committing to leases. Any negative press around rising interest rates, inflation, banks in crisis, and supply shortages are all having a detrimental impact on the consumer’s outlook and their willingness to enter into a new lease agreement.
We’ve also seen a reduced demand for electric cars, with the rising cost of charging making them less appealing to customers.
I think that leasing will remain an attractive way of funding a new vehicle for a lot of drivers so we will still see customers looking for lease deals, but the vehicle that they lease needs to represent value for money. We are seeing more customers who are happy to switch brands if the deal is right, and I expect this will continue to be more commonplace in the next quarter.
Mercedes Left the Leasing Broker Sector
The Mercedes-Benz Group announced their decision late last year that they would no longer be selling their Mercedes models via the leasing broker channel, instead choosing to focus on their own in-house finance solutions. This move happened at the start of January and since then they have only allowed a few tactical deals which means that we are limited in the Mercedes stock available to us and other brokers.
A move away from leasing brokers has meant the Mercedes leases available on the market are less competitive than they previously have been against other brands.
Here at Xcite Car Leasing, we are looking to fill the hole left by Mercedes with other brands. This has meant we’ve been working to secure better deals with some of our other dealership contacts as well as helping our customers find similar models from other manufacturers.
We have noticed that customers seem to be less brand conscious now than they have previously and other factors, namely the cost and features available, have become more important in the decision-making process. We’re even seeing our renewal customers who have previously been in Mercedes switching to alternative brands.
Mercedes is the first manufacturer to nearly completely remove itself from the leasing broker channel and it will be interesting to see how this works for them. I have heard that a number of other brands are watching the situation closely but many see it more as an opportunity to win Mercedes renewal clients and grow their own market share rather than follow suit.
Electric Cars Have Become Less Appealing
We’ve found that the demand for electric cars has softened, which I don’t thinks is surprising considering the rising cost of electricity and changes over the past six months to both vehicle and charger grant availability and eligibility.
However, I think for business fleet customers we’re seeing the shift to electric vehicles (EVs) continue to accelerate which is positive. The much lower BIK rates that are offered on electric vehicles still make them an attractive option for drivers of company cars and those in salary sacrifice schemes.
In the leasing industry, there’s speculation that the residual values on EVs are due to take a significant hit in the next quarter, due to a weak used EV market and this combined with the higher purchase price will lead to higher rentals compared to an equivalent petrol or diesel model. I expect that this coupled with increased charging costs means we’ll continue to see the trend of personal leasing customers shift away from the EV market in the immediate future.
Tesla’s decision to reduce the price of its cars has also had a negative impact in the leasing sector. Tesla has been a popular brand in the leasing sector and by reducing the cost of the new models they have had a negative impact on the price of a used model which has left funders unexpectedly financially exposed. Part of the calculations that go into determining the cost of a lease is the resale value of the car at the end of the contract, the resale value of EVs in general is low (due to older batteries and improvements in tech we’ve seen since the car was first sold) and by reducing the cost of a new Tesla the manufacturer has further reduced the return lease funders will get for Teslas currently being leased.
Leasing Vehicle Stock in Q1
Over the past few months, we’ve seen supply improve in general. As mentioned earlier some manufacturers now have a large percentage of their line up back to the pre-Covid factory lead times.
I think a lot of this is from improved supply but there is also an element of weaker demand meaning more availability, with more vehicles available now than has been the case in the last 12 months.
Hybrid vehicles continue to have extended lead times and this is likely to be the case over the next quarter due to supply shortages.
Whilst stock for cars is improving light commercial vehicles (LCVs) continue to have longer lead times and with the demand for them remaining steady we expect the new vans to continue to have a long lead time for several months.
What’s Coming Up in Q2?
I think supply will continue to improve in the next quarter and we’ll see more manufacturers reaching their pre-Covid lead times and factory production schedules. If supply continues to improve then I’d hope to see an increase in support from manufacturers which translates into cheaper deals for our customers and will help drive enquiries.
More support from manufacturers combined with stable economic data and no further global shocks is what I hope for as it will give us a nice steady three months.
However, I see retail demand remaining volatile. Having said that if an offer is compelling then there will still be opportunities to sell vehicles.
I think that other areas of our business like fleet vehicle procurement and salary sacrifice will remain strong, but if the economic outlook doesn’t show signs of improving in the next quarter then we may see softening demands in these sectors as well.
We are working with our partners to ensure we have attractive lease propositions to offer our customers in retail, fleet and salary sacrifice over the next quarter.
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