Overview of the LCV Leasing Growth Market
Even in an age of economic uncertainty, light commercial vehicle (LCV) leasing has been a dependable option for asset finance providers. Christopher Marchant speaks to leasing companies specialising in the sector, profiling customers and examining resilience in light of factors such as Brexit, emissions regulations and competition in the marketplace.
As with any area of the asset finance industry, an accurate profile of the types of customer who are leasing is key to sustaining growth in the LCV sector. According to Mark Richards, head of equipment and logistics at BNP Paribas UK: “Typical businesses include plumbers, builders, carpenters – people who are owner-operators of the business, very much the ‘small’ of the SME sector.
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“Predominantly, the transactions that BNP Paribas conducts in the LCV market are for one or two vans at a time.”
Richards notes the effect of the ‘click and collect’ economy on leasing, in which independent, single-van business attached to large multinational retailers such as Amazon specialise in ‘last mile’ delivery, often focused on a single postal area. The mass increase in online orders in the last 10 years has had a corresponding effect on package delivery and, accordingly, the leasing of vans specifically for this purpose.
Julian Humphreys, chief revenue officer for Maxxia Group in the UK, gives a breakdown of the demographics most receptive to LCV leasing: “There is strong demand for LCV leases across all sectors, both private and public. In the private sector we have clients as small as sole traders and as large as UKwide distribution businesses. For some large organisations, where distribution is at the heart of their business, the correct financing arrangements for their large LCV fleet can make up a very considerable part of their overall financial wellbeing. At the other end of the scale, you can have small businesses totally reliant on the effectiveness of just one or two vans for their entire income stream. Here, being able to ensure mobility and the minimum of vehicle downtime become of paramount importance.”
According to figures from the Society of Motor Manufacturers and Traders (SMMT), the 357,325 van registrations in the UK for the year 2018 was the fourth-best year on record. In the typically slow month of February, there were still 14,384 LCV units registered in 2019, a year-on-year rise of 1.8%.
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By GlobalDataGROWTH IN LCV LEASING
A consideration for all leasing providers regards whether this growth will continue. Mark Anderson, vehicle finance director at Academy Leasing, a group company of 1pm, has not seen any slowdown in demand. “There is also cautious optimism about the market growing and 1pm’s position within that,” he notes.
According to Paul Kirby, commercial vehicle director at Leaseplan: “The market has grown steadily over the last five years, and has returned to the levels we saw immediately before the 2008 financial crash.
“What’s really important, if the sector is to see continued growth, is flexibility. The leasing industry needs to continue to adapt its offering, as this will allow businesses to change their vehicle requirements with their evolving needs.”
ELECTRIC VANS
In April this year, London introduced the Ultra Low Emission Zone (ULEZ). The 24-hour ULEZ regulations replaced the T-Charge to tighten standards and deter the most-polluting vehicles from entering the zone, meaning a £12.50 (€14.55) daily charge for diesel LCVs that do not meet the Euro 6 standard.
These changes stem from a government desire to reduce NOx pollution in urban areas. Shoreham Vehicle Auctions reports that used electric car and van demand has escalated, with the Nissan e-NV200 van having appreciated in value year-on-year by around £1,000. However, there is still concern in the LCV leasing sector regarding the viability of electric replacing diesel as the dominant form of power behind vans.
Richards says: “Cost and product availability are still a concern. Originally, when Renault came out with its electric proposition, the batteries were leased separately from the vehicle, and that created issues that took time to resolve.
“Regardless, legislation is going to force people to go down this road, obviously by the nature of diesel emissions. While BNP Paribas is yet to see a significant increase in the takeup of electric vehicles, that is not to say there is not support for it. Electrified vans are well within the funding policy, and there are a number of manufacturer partners that are promoting the concept heavily.”
Anderson also approaches the market with both hope and a level of scepticism for the immediacy of any mass electric van adoption. “Electric vans are quite new; there are not a lot of them out there and, as a result, the awareness is not great,” he says. “They are also very expensive, and ultimately, if anything is going to prevent these things from taking off, it is going to be the cost. Manufacturers need to get their costs to a level where companies realise they can save money.
“Electric vehicles must be able to do a large mileage, while not being prohibitively priced against vans with internal-combustion engines. Things will improve moving forward with regards to cost, but at this moment in time it is a lot of talk with very little coming to fruition.”
The take-up of electric vans may require more than emissions regulation, with infrastructure such as charging points also something that requires careful consideration from the perspective of a commercial enterprise looking to purchase LCVs.
Kirby notes a further issue for the leasing of electric vans: that of a limited supply of the vehicles themselves. “Manufacturers have a very important role to play in ensuring that the right vehicles are available at the right price point,” he notes. “Ideally, we would see manufacturers committing to guaranteed volumes for the UK market.”
WLTP
Arriving a year after its disruptive introduction to the new car sector, Worldwide Harmonised Light Vehicle Test Procedure (WLTP) regulations are being rolled out in the LCV sector. Like the low-emission zones being introduced in a number of European cities, this development is forcing the sector to adapt.
Anderson says: “I certainly hope manufacturers have learned lessons from the car WLTP situation that the industry is still feeling the effects of now. Perhaps the sector will get its act together early and have things done comprehensively, so it does not affect supply like it certainly has in the car world.”
BREXIT
Following WLTP and government emissions regulations, another ongoing potential
disruptor for the LCV sector, especially in the UK, is the ongoing status of Britain’s intention to leave the EU. While Brexit’s impact on car manufacturing has been studied
at length, how it may impact vehicle leasing has been less considered.
“Given that the date and form of Brexit remains entirely ambiguous, the key word here is ‘prudence’,” says Humphreys. “This doesn’t necessarily mean the tightening of access to asset finance, it simply means that we need to work together with our clients to assess what likely impacts different forms of Brexit could have on their business, and take a sensible view of how this could affect their finance arrangements.
“Other than that, we obviously monitor the likely effects on vehicle residual values very closely, as this is an important aspect of our own business model. However, with strong demand for used LCVs, it is unlikely that we’ll see too adverse an effect in the short
term.”
Richards notes that LCV leasing companies must be well attuned to wider economic signals, adding: “We are seeing an increase in our cost of debt and an increase in the
propensity for default.
“It is a consideration in the overall LCV market, and how the manufacturers are going to manage their stock flow to their dealers. There is a degree of concern both around
that and relative stock availability as we go forward.”
TELEMATICS
Technology is also having the power to revolutionise the LCV leasing sector. Most pointedly, this can be seen through telematics, in which data on the car’s performance can be continuously sent digitally to a central hub.
Richards sees telematics as especially prevalent in the contract hire market. “The company can monitor driver behaviour, and use fleet visibility, where available, to assess the location of the vehicle at any point in time,” he explains.
“That gives consumers greater vehicle utilisation and co-ordination with the person who is potentially receiving the delivery or the goods, as they can be told approximately when they are expected to be there.”
Humphreys adds: “Telematics has been a major discussion point with many of our LCV clients for a number of years now. This subject is being somewhat overtaken by the broader topic of vehicle connectivity, as all vehicles, including LCVs, acquire technology
that allows them to communicate with not only their transport manager, but also other vehicles and the environment around them.
“Maxxia is seeing increasingly sophisticated uses of these systems and the data that is being collected. Benefits such as mileage recording, predictive maintenance management and route planning have been commonplace for many years now, and have delivered very significant benefits to LCV fleets. There is now more of a focus on the monitoring and changing of driver behaviour to improve the overall efficiency of the fleet and to assist in the reduction of accident rates.”
SECTOR COMPETITION
On a surface level, LCVs may be seen as one of the most tempting hard assets to lease, being both an easily understandable item and a business-critical asset for many of the
commercial enterprises that acquire vans through finance. However, both regulation
and a resulting increase in competition present their own hurdles.
Anderson says: “It has always been a highly competitive market. A lot of companies actually do not provide vans, they are purely car brokers, for they feel they are not suitably equipped to provide commercial vehicles for their clients.
“It is a real specialism with vans, with all the makes and models and types and sizes available. We find, in our business, that people are car and van experts, but most people tend to be one or the other.”
Richards is also unsure of the potential accessibility of the LCVs compared to other hard asset markets. “You have got to be fairly nimble in terms of your ability to process the number of transactions that van leasing is typically involved in on a monthly basis,” he
cautions. “If there is a new-entrant finance house that is relying entirely on manual non-systemised credit decisions and having to touch every transaction on a manual basis, it is a market that will challenge purely due to the number of transactions.
“The barriers to entry are relatively low, but they are increasing, and most leasing companies want each of their brokers to be accredited by the [British Vehicle Rental and Leasing Association] BVRLA. This can require a compliance department, but it would not be a completely straightforward thing for a one-man band. It could be a struggle to get the lenders.”
Humphreys identifies another advantage for LCV leasing: “LCVs and vans are essential business tools. There is usually a very clear revenue stream attached to these assets and
this means that they will be one of the last items that the business would want to lose
if they are facing difficult times. Therefore, despite the relative ease of disposal of leased LCVs, default rates are certainly no worse than for any other asset type.”
BUMPS IN THE ROAD?
LCV leasing may be facing an unprecedented number of challenges from all angles, yet it is imperative to remember that this is still a growth market. For those companies willing to build an infrastructure around the leasing of this asset, there can be continuing rewards.
Rather than an industry in reverse, van leasing may be better prepared than almost all other areas of vehicle finance for the challenges and opportunities ahead.
