Ve­hi­cle val­ues hit the floor

Deal­er­ships on verge of bank­ruptcy as con­sumer debt piles up

Finweek English Edition - - Cover - FRIK ELS

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.

frike@fin­week.co.za

Private buy­ers lured by base­ment prices. Clive Lazarus

Dar­ryl Ja­cob­son

Mike von Hone

Chris de Kock

Anesh Kassen

Brand Pre­to­rius

Mar­cel de Klerk

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