HGV leasing was hit hard by recession, but the market is gradually regaining strength and long-term prospects for the sector are positive. Vicky Meek reports.
Many sectors were badly affected by the recession, but HGVs have suffered more than most. As sales of goods have dropped in most categories, the demand for HGVs required to deliver those goods has almost fallen off a cliff over the last two years.
In 2005, there were nearly 59,000 new truck registrations (of trucks over 3.5 tonnes) in the UK, according to the Society of Motor Manufacturers and Traders (SMMT); last year, registrations fell to just over 34,500. The figures for this year so far show a further drop: by October, there had been just 27,600 registrations, a fall of 9.8% on the year to date in 2009.
“Road haulage is highly sensitive to overall economic conditions, especially GDP growth or declines” says Alex Baldock, managing director of Lombard. “HGV usage dropped 12% in 2009 and road usage shrank for eight consecutive quarters – it’s an unprecedented decline.”
This clearly has an impact on the amount of HGV leasing business being written. Market participants report that customers have been finding any means they can to conserve cash, and replacing expensive HGVs has been high on their savings list.
Mike MacDougall, head of commercial vehicle sales at Hitachi Capital Commercial Vehicle Services, says: “Many companies have been extending the leases and contracts on their existing HGVs. They are putting off the decision to buy new trucks because it is such a big commitment.”
The latest statistics from the Finance and Leasing Association (FLA) show that commercial vehicle finance levels fell 13% in the 12 months to September 2010 to £3.2bn, although this figure includes light commercial vehicles, such as vans, which have proved more resilient to the recession.
Yet despite the current gloomy picture, many in the market believe business is starting to pick up and will continue to do so over the next few quarters. One factor in this is an increase in confidence and visibility on the economic environment.
Allan Ross, managing director of broker First Independent Finance points to the latest Bank of England inflation report, which predicts an ongoing improvement in the UK economy as well as a global trade recovery.
Ross says: “As confidence improves, demand for HGVs will rise. Ageing fleets cost a lot in maintenance bills and so customers will have to weigh up the benefits of holding on to their current assets or renewing. The UK is also part of the global economy and so any increases in exports or imports will be to the benefit of the logistics industry, as will the increase in trade over the internet. The goods sold online have to be delivered somehow.”
Some leasing companies are starting to see a recovery in business levels.
“Over the last months, we have seen an improvement in the market,” says Thies Engering, global new business development director for transportation at De Lage Landen. “We certainly haven’t reached the peaks of 2007, but pent-up demand for HCVs is coming through now.”
While customers at the beginning of the year had been attracted to the rental markets, they are now looking much more seriously at buying new HCVs.
Engering says: “Earlier this year, many customers were looking at short-term rental. And many of the rental companies had unused equipment that they were hiring out at low prices. The capacity has now gone and so we’re seeing a shift towards acquiring.”
There is also demand from customers that might not previously have considered leasing.
“We are seeing some new customers come through who are looking for alternative forms of finance to buying outright, particularly in areas such as HGVs, which have high capital values,” says MacDougall.
“They are seeing pressure on their funding lines from banks, which are looking to reduce risk, compounded by the fact that some may have had a dip in trading performance.”
Expectations of increased business in this area is prompting some asset finance houses to step up their efforts in commercial vehicle leasing. BNP Paribas recently recruited Keith Sangwin as head of dealer accounts to build its van and HGV leasing business.
Sangwin says: “We want to increase our penetration in this market. We see this as an attractive asset to be involved with.”
Lombard is also keen to stress its interest in the sector.
“We are currently setting up an HGV and coach specialisation,” says Baldock.
“We understand the asset and how to value it, so we can tailor products around our customers’ needs as well as ensure we manage our risks. We have the full backing of our parent, unlike some other asset finance houses.”
The new specialist unit is expected to be up and running by early 2011.
However, business is unlikely to resemble that of the heady years of a couple of years ago when finance was cheap.
Sangwin says: “The market had been so competitive that it wasn’t sustainable. If you look at the cycle of the business, the margins and profits over five to ten years made a lot of leasing businesses unviable and so you’ve seen some players come out of the market altogether.”
Bank of Scotland, Bank of Ireland and Alliance and Leicester are among the largest to have quit.
Those that remain are cautious.
Engering says: “There is wariness. Transport suffered a lot of risk cost and banks have now identified this area as a risk market, they are handling it with care.”
Increased finance costs mean that pricing has gone up and margins for some players have reduced.
“The availability of finance is poor at the moment,” says MacDougall. “This means many medium-sized leasing players are finding that their products are not as competitive as they could be. They face the choice of passing these costs to customers or lowering their margins to hold on to business.”
Manufacturers have upped their list costs for HGVs to compensate for lower volumes.
MacDougall says: “Manufacturers have increased prices to increase margins. They have reacted differently from previous recessions during which they carried on building a lot of vehicles and then had to sell at distressed prices. Yet this time around, they were quick to stop production and reduce inventory and so the distressed sales didn’t happen.
“However, customers remember what happened last time and expect a reduction when renewing their existing contracts, but the discounts aren’t there.”
For those wanting to buy in bulk, the market may be rather more attractive.
Phil Snewin, co-founder of T&L Leasing, which spun out of Bank of Scotland in 2009, says: “The published price lists have shown a marked increase. Yet the manufacturers are under pressure to attract large contracts and so are offering significant discounts to some customers. This means they are doing all they can to ensure their captives write a lot of their business to secure additional margins to make up for these discounts.”
The types of lease being written in this area have also seen a shift. Larger companies with big fleets, such as supermarket chains, continue to seek operating leases because of the convenience and possibly reduced cost of outsourcing and they are generally able to secure these types of deal.
The options available to smaller companies are more limited as leasing businesses are now looking much more closely at customer risk profiles and are wary of residual value risk.
“There is still a take-up of operating leases and contract hire. But this has changed,” says Snewin. “This is partly driven by the non-captive financing companies not wanting to take on as much risk. And those writing operating leases are being much more realistic about pricing in residual value risk.”
For their part, customers are also more wary of operating leases, based on recent experience.
Snewin says: “Many suppliers have become much more stringent on their return conditions. They are interpreting them for their own advantage in terms of recharges, especially when customers are not buying new.”
Overall, it looks as though the HGV lease market is set for a recovery, albeit a gentle one, with HP leases dominating the smaller end of the market and operating lease products continuing to be written at the top end.
With finance still in short supply and a focus on risk profiles among asset finance providers, plus the spectre of a double-dip recession among lessees, a return to brisk business seems remote in the short term.
See also: Secondary markets