Supplementary evidence from the BVRLA (ELV125)

Used BEVs

BVRLA briefing paper.

The dynamics of the used market

Prices in the used market are, as with all markets, driven by demand and supply. However, there are some complexities around how the automotive sector functions that are worth exploring.

When individuals or firms lease a new vehicle, they are effectively paying the difference between the leaseco’s acquisition price and the value it expects to realise on the disposal at the end of the lease term. This structure is mirrored in the most popular way individuals buy new cars, personal contract purchase (PCP), where monthly payments cover the difference between the purchase price and the guaranteed future value at the end of the arrangement. This relationship links very closely the affordability of new vehicles to their ability to command a good value on the used market. The steeper the depreciation curves the higher the monthly costs for firms or individuals to access new vehicles. 

A second complexity in this relationship is the challenge of calculating future residual values (RVs). Given leasing and PCP deals tend to run for between three and four years it is very challenging for firms to predict exactly what vehicles will be worth at their disposal. The more instability in the market the harder it is to accurately predict RVs. The response to a lack of certainty is to build in buffers to RV forecasts that will protect the lender from future falls in value. This creates a relationship between price instability in the used market and higher monthly costs for the new vehicles.

Thirdly, the flow of vehicles from new to used is not direct, there are many actors involved. Typically, when a vehicle is leased to a firm or individual it is returned to the leaseco at the end of its term. After some remarketing activities, these vehicles are moved from the leaseco to an auction house. The auction house will mostly sell the vehicles into the trade. Vehicles will be bought by the full gambit of traders, from small operators who will look to re-sell into the trade to franchised dealer and car supermarket groups. Vehicles will then be marketed towards end customers, an intensive process with the vehicles perhaps having cosmetic repairs and then photographed, listed on sales sites and social media and displayed on forecourts.

Dealers have limited financial and physical capital, they want vehicles to move fast, minimising their advertising spend and opening up new spaces on their forecourts. Pricing is a complex challenge for dealers, they need to price to sell, to keep the churn, while retaining margin. If prices or demand drops dealers will need to decrease values on the forecourt, leaving them out of pocket. Likewise, if demand is slow and vehicles require a greater advertising spend or longer time to sell it will reduce the dealers' profitability.

This flow-through creates two tiers of demand that sustain the market. Dealers need to buy at auction and consumers need to buy at dealerships. If trade prices are too high or volatile dealers will stop buying at auction. For the market to function dealers need to clear the auction lanes at prices leasecos expect and then be able to sell on to customers rapidly at the prices they set.

The challenge of used BEVs

The sector has decades of experience understanding how seasonality, wider economic factors, model and brand characteristics, mileage and condition impact the value of petrol and diesel vehicles, for BEVs the sector is relatively data poor. The market is very small, young and with limited model variance. In comparison to ICE very few BEVs have been defleeted by the sector and most of these have been a few specific makes and models. Across the used market very few vehicles are over five years of age. Much is still being learned.

The product also has several elements which may make it unique. Perceptions about battery health, availability of public charging, Government policy, creation of zero emission zones and the wider societal appetite for the green transition are all exogenous factors that could impact BEV demand. Again, these are all factors where the sector does not have deep experience.

The uncertainty around BEV values has worsened as they have been extremely volatile so far. From political announcements to fuel crises, all have impacted used BEV demand. Unlike some other innovations used BEVs are not consistently beating the old technology (ICE) in consumer weigh ups. BEVs are facing a difficult adoption curve across all parts of the automotive market where they are not heavily incentivised. 

The combination of, limited data, not yet fully understood differentiating factors and price volatility all build pressure on a firm to predict values cautiously.

Current situation

2023 is the first year where supply has entered the used BEV market in any real volume. It was in 2020 that the benefit-in-kind tax rate changed, and company car drivers started to shift to BEVs at scale, the single most effective intervention to date. These vehicles are now starting to enter the second-hand market. The immediate impact of the increased flow of BEVs has been a sharp decline in the value of BEVs. Demand growth has not matched supply. While there is a significant upfront premium on the cost of new BEVs, used BEVs now sit close to parity with comparator used ICE vehicles. Price cuts on new products also helped drive this decline as cheaper new BEVs reduce the attractiveness of used BEVs and drive down prices further.

The price decreases over the year have also sharply impacted dealers. Many saw their margins vanish as vehicles on their forecourts rapidly depreciated. In response to falling prices and increasing days to sell some dealers stopped stocking electric vehicles and fleets held onto vehicles rather than put them through auction lanes. Many leasing companies extended leases or even leased vehicles as used BEVs, in addition to storing vehicles rather than sending them through the lanes. These efforts have slowed the exponential increase in supply, stabilising prices, albeit at the close to ICE parity level.

Not all BEVs are performing equally. Manufacturers have been at different stages of their transition to BEVs and producing products with vastly varying performance and prices. There are some vehicles which are clearly more desirable on the used market than others. While this is normal in the used trade, given the relatively small number of BEV models its impact on the entire market is more pronounced.

How will things change?

The used BEV challenge has only just begun. We know that there has been a close to exponential increase in the volume of new BEVs purchased since 2020 and these are now flowing into the used market. As used BEVs shift into the hundreds of thousands it will be far harder for supply to be slowed down if demand does not keep pace.

Similarly, as vehicles age, we will see them shift through the ownership chain in meaningful numbers. Most used buyers purchase vehicles older than three years, and this is not an area which has seen much used BEV volume yet. Given the makeup of BEV products, which is predominately premium, there are risks that structurally there may not be enough demand for the product from the usual used buyers.

Long term viability

All these factors present a real threat to the used BEV market. If there is parity or below at the back end and a price premium at the front end, new BEVs will remain deeply expensive. Similarly, if prices are not predictable dealers, funders and manufacturers face challenges with long term viability of the transition. It is critical that used buyer demand for BEVs can be assured as their volumes rocket and the product ages. There may well be a role for Government intervention in securing consistent demand.

About the BVRLA

The BVRLA represents over 1,000 companies engaged in vehicle rental, leasing and fleet management. Our membership is responsible for a combined fleet of four million cars, vans and trucks – one-in-ten of all vehicles on UK roads.

BVRLA members represent the demand-side of the automotive industry, buying around 50% of new vehicles, including over 80% of those manufactured and sold in the UK. In doing so, they support almost 500,000 jobs, add £7.6bn in tax revenues and contribute £49bn to the UK economy each year.

Together with our members, the association works with policymakers, public sector agencies, regulators, and other key stakeholders to ensure that road transport delivers environmental, social and economic benefits to everyone. BVRLA members are leading the charge to decarbonise road transport and are set to register 400,000 new battery electric cars and vans per year by 2025.

BVRLA membership provides customers with the reassurance that the company they are dealing with adheres to the highest standards of professionalism and fairness.

The association achieves this by reinforcing industry standards and regulatory compliance via its mandatory Codes of Conduct, inspection regime, government-approved Alternative Dispute Resolution service and an extensive range of learning and development programmes.