Vehicle values hit the floor
Dealerships on verge of bankruptcy as consumer debt piles up
MORE THAN 350 gleaming cars are parked in Hall 5 of the National Recreation Centre, south of Johannesburg. Crowds are swarming around the assembled BMWs, MercedesBenzes, 4x4s, Corsas, Yarises and half-tonners. It’s a side the automotive industry would rather not show – an auction of repossessed vehicles.
Some 6 000 vehicles repossessed by banks are now entering the market each month. That’s up between 30% and 70% on the number of repossessed units last year, depending on which bank is reporting – and not all do. The crowds are there for bargains and there are plenty of those.
Clive Lazarus, of Park Village, responsible for last week’s massive auction, says while it’s still predominantly traders who attend auctions, private buyers are increasingly being lured by basement prices of at least 30% below retail. Park Village auctions 150 a week. “The public are more aware of auctions and finance is now available on the floor – 15% to 20% of our sales are financed.”
Lazarus says the cars on auction are from across the spectrum, although it’s seeing more luxury and exotic cars arriving from liquidators. Says Lazarus: “Prices achieved by fuel-guzzling SUVs have dropped substantially – everyone is looking for small, affordable runabouts. Those vehicles still sell, though not many will be left on the floor after a day’s auction.”
Says Darryl Jacobsen, MD of Burchmores, the company in the McCarthy stable: “Private buyers now make up 57% of the total, up from only 29% a year ago. Prices are at least 30% below retail.” Burchmores, which also has ticketed off-the-floor sales in showrooms that can hold 1 000 vehicles apart from auctions, sold 8 690 vehicles in the year to June. That’s up from 3 601 two years ago. “Although we sell voetstoots, you can buy a warranty. We’re seeing the same calibre of car – just more of them,” says Jacobsen. “We auction anything from R25 000 student cars to R500 000 luxury vehicles.”
In recent weeks Ferraris and Aston Martins have come under the hammer at various auction houses in Gauteng. It’s too soon to detect a trend. According to Beeld newspaper a recent auction saw a 2006 model Aston Martin Vantage V8 going for R950 000 against a sticker price new of R1,7m. A 2005 Ferrari F430 F1 with just 7 700km on the clock was auctioned for R2,3m. New, this Italian stallion will set you back R3,5m.
However, it’s too soon for the average Corolla or Polo driver to experience any schadenfreude. It’s still the middle-income household that’s suffering the most and for many the ability to restructure their debt simply isn’t there anymore.
Marcel de Klerk, Absa executive in charge of vehicle and asset finance, says “most of the bank’s repossessions come from people in the salary bracket of R15 000/month or less. The majority of vehicle repossessions have a market value of less than R120 000. There’s an up-tick in repossessions from people in the R40 000 salary bracket but it’s not significant.”
Absa is also realising around 14% less on repossessed cars on auction than a year ago – another indication of the bargains to be had. Another reason for the increase in repos is that some consumers are even cancelling their car insurance to improve their cash flow. (De Klerk’s advice is simple: “Don’t do it.”)
Absa is SA’s second largest vehicle finance house, with a 27% market share. Consumers in arrears have evened out over the past three months, says De Klerk, which bodes well for the number of repos for the rest of the year. However, the bank is seeing more bad debts from small- and medium-sized companies, a stable sector until recently.
Chris de Kock, sales and marketing director at WesBank, SA’s largest vehicle finance company claiming 36% of the market, says it has also seen a stabilisation in arrears. “The repo numbers are beginning to bottom out. Arrears are tapering off as consumers cut spending and rearrange their debt.” De Kock says their current repossession numbers of 2 200/month are still lower than the percentage of the bank’s book being taken back in 1998. “We don’t expect the repossession numbers, as a percentage of our book, to climb to the levels we saw
10 years ago.”
The National Credit Act, which received much of the blame at the time the new vehicle market first began to tank, have had some unintended consequences. Designed to curb reckless lending and ensure consumers are able to afford debt taken on through a better and more stringent vetting process, the introduction of the Act has also seen finance repayment periods becoming longer.
De Klerk says repayment periods for the majority of vehicle finance deals after the Act is now 60 months. Repayment periods of 72 months and longer aren’t that uncommon in the industry anymore. Add to that deals structured with balloon payments of up to 40% and no deposit and people simply “can’t get out of their cars”. They owe more on the vehicle than dealers are able to give them for it.
De Kock says at the height of the boom years the average period of finance before a vehicle was traded in was 24 months. Now it’s closer to 33 months and will probably peak at 40 months.
Anesh Kassen, in charge of BMW’s used car division, says the single biggest issue for dealers is trade-ins. “In a snap poll of our dealers we see prices on trade-ins on average 15% below trade and then selling for roughly 12% below retail. Late models are still moving – but it takes a clever salesman to do a deal. Older vehicles will sit on the lot. Whereas before dealers would be willing to carry stock for 30 to 60 days, now they only acquire a vehicle if they already have a customer for it.”
Kassen says a one-year-old BMW 3-Series with maintenance plan could once be had for 18% to 20% less than a new one. Now that’s closer to 25%. “Things aren’t going according to the book.”
“The book” is the bible of the trade – The Auto Dealer’s Guide, from TransUnion Auto (formerly Mead & McGrouther). Based on actual transactions concluded on new and used vehicles, it’s a good indication of what you can expect to get if you trade in your old
vehicle at a dealer or sell it privately. However, current conditions in the industry are extremely volatile and the circumstances of many consumers dire enough that any price will be accepted to get out of a deal.
Mike von Hone, of TransUnion Auto, says traders are so “gun shy and so full of stock that from being 10% to 15% behind book, it’s now around 25%. We don’t lead the market, we reflect it.” TransUnion is in the process of reducing the time between when a transaction is concluded and when it’s reflected in the guide down to 40 days from 90 days currently. Von Hone says there are indications that transactions are proportionally moving in favour of used versus new vehicles and that rates of depreciation are beginning to flatten. “It’s early days though.”
According to Statistics SA the value of new vehicle sales declined 5,2% compared to last year to R26,17bn while the value of secondhand cars decreased only 0,9% to R14,58bn.
Ed Gassner, chief of AA Autobay, which facilitates private sales between individuals, says its transactions are up 50% from April this year, albeit from a small base. The company hooks up 180 to 190 buyers and sellers a month. “We’re picking up customers who have gone to dealers and found the price offered simply too low. Price is critical now. We recommend customers don’t go over trade value as a maximum, but many are going for 30% to 40% below trade.”
AA Autobay has experienced an increase in customers offering expensive cars, but they’re not selling. “A big family car can go for R100 000 below book. It’s very scary for sellers, unless it’s a cheapie,” says Gassner. AA Autobay itself has gone through tough times, laying off staff after “the bottom of the market fell out in November”. Gassner says it calls up customers every month about pricing, as things change so rapidly in the current market. AA Autobay, seeing the increased popularity of car auctions, has started up an advisory and vehicle check service for those interested in buying at auction.
Private buyers lured by basement prices. Clive Lazarus
Mike von Hone
Chris de Kock
Marcel de Klerk