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If VAT induces a fear of buying, try leasing a car

Financial leasing services could be the big thing in UAE auto retail, say industry sources

Dubai: If the cost of buying a new car is a worry, then give leasing it a shot. UAE dealerships are all set to upgrade – or update - their financial leasing services to try and ease the reluctance of buyers over the higher costs they will have to bear after VAT’s implementation.

This could bring about the biggest change in mindsets across the automotive retail sector and among consumers as well, industry sources say. “People here love to own everything they want, and that’s why car leasing is something many have shied away from in the past” said Michel Ayat, CEO of AWR Automotive. “In the US, just about everyone goes in for leasing contracts, where at the end of three years, they decide to buy or go in for an upgrade.

“This will soon become the case in the UAE as well – that could be one of the changes VAT will bring on. I will say next year will be when financial leasing finally takes off in the UAE.

“There will be a certain period of time when with VAT new car sales could see some loss of activity. With financial leasing programmes, car dealerships could pick up some of the slack.”

It will impact new car sales in the traditional concept. Financial leasing will come in and take care of the slack.”

Even without VAT, many local dealerships did have some sort of financial leasing programmes. AGMC has one going with BMW in Dubai, and building up sufficient thrust. 

What this does is fairly straightforward – instead of committing to a full ownership, they can enter a contract for three years or so and paying monthly installments on them. “Financial leasing is a way to convince the consumer not to pay full VAT upfront on a car purchase,” said a market source. “For a Dh100,000 car, a leasing contract means monthly payments of Dh1,500 and a VAT component of Dh80. That becomes more manageable for a cost-conscious buyer. 

“But local banks have to start thinking how to cooperate better with auto distributors to expand the leasing model. Banks as yet are still not taking this step.”

For auto retailers, it will be a most crucial first quarter in 2018. The 5 per cent VAT could have the most impact at the entry and mid-level tiers. But there will be pressure at the higher end as well – car owners going for the latest premium model may not want to fit in as many trims and accessories as they did in the past. Those trims and accessories are where premium carmakers and their dealers can flesh out their margins.  

Dealers will be hoping that the current model year versions in the showrooms will still bring out enough buyers. Or those wanting to lease. Either way, if the deal gets done, it is one less car in the showroom. With the retail market in such a squeeze, that’s a big plus in their books.

 

Leasing comes with later benefits for dealerships

 

•             A typical lease transaction is for three years, at the end of which the user can upgrade or buy the model he is using. But there is good business to be had from those models which are returned at the end of three years. Local dealerships are getting quite aggressive on their pre-owned car sales programmes, and in many instances represent a significant chunk of their revenue stream.

•             The leased models would have done only three years and typically under or about 80,000 kilometres, which immediately qualify them for the pre-owned car offers from these dealers. Plus, these vehicles would have done their servicing and maintenance through the agency, and that means complete control of the vehicle history. 

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