Dubai:Car buying in the UAE used to be such a straightforward transaction. Head for the showroom, lock your eyes and mind on a model of your preference, get the paperwork done for bank financing in a few minutes and drive off. Yes, it was as simple as that.

Then came the Central Bank regulations early last year doing away with 100 per cent financing on car purchases and life in the local automotive retail business was never going to be the same. Prospective buyers had to put up 20 per cent as down payment and getting the rest through bank finance became a more complicated process. And there were even rejections whereas earlier just about anyone would have got 100 per cent financing on the spot.

As Rajesh Krishnan of Liberty Automobiles says, “The normal practice is after the customer has paid 20 per cent down payment, the dealer applies to a bank for finance on behalf of the customer.

“If the bank rejects the application, there is nothing a dealer can do. The rejection rate has been close to 15 to 20 per cent, but is now coming down.

“It could be due to flexibility from banks and greater awareness among customers about bank requirements.”

But dealerships, at least some of them, have come up with a transaction scheme that would ease the payment burden for a new owner.


Lower monthly instalments


This is how ‘Personal Contract Purchase’ programmes made their debut in the UAE. What it offered was the option to pay a lower monthly instalment — over a period of two or three years — than was the case in traditional financing. This way, the impact of the Central Bank requirements — which came into effect from May 1, 2011 — would be eased a good deal.

Al Futtaim Motors came out with its ‘Choice’ initiative for Toyota, and Arabian Automobiles Co. introduced ‘Freedom’ for the Nissan line-up. Al Futtaim Honda too launched a PCP initiative and, more recently, there was Al Habtoor Motors for Mitsubishi. And, according to feedback from some of the dealerships, the uptake has been between 10 to 20 per cent of vehicles purchased through financing.

“We have managed to reach a penetration of around 20 per cent of the business financed and about 76 per cent of the total business is financed,” said Mark Kass, regional managing director at Al Futtaim Honda.

“PCP offers help to the customer to go for a higher end car which he might not have considered or for a higher end grade of his preferred model. He could also easily replace his car every two or three years without worrying about the resale price and many more benefits.

“The customer profile is mainly expatriates who have a better understanding of PCP, while Emirati buyers continue to have a small share although we have made some inroads in the northern emirates. Mind you, a good chunk of Emirati buyers continue to purchase cars in cash which obviously is a big reason for the low share.”

But a percentage in the high teens would still represent relatively slow going a full year down the line. It is interesting to note that only a handful of dealerships — essentially those representing the volume brands — have got the PCP programmes on offer.

But that has changed with Al Futtaim Motors extending it to its Lexus dealership as well. “This will be popular with those customers who need flexibility, low monthly instalments and guaranteed future value for the vehicle at the end of the agreement,” said Saud Abbasi, general manager at Al-Futtaim Motors – Lexus.

“This type of finance is ideal for customers who have the opportunity to drive a more expensive model for a similar budget and purchase a new vehicle every 24 or 26 months. It also protects the customer against market conditions.”


Prestige brand

But does a PCP programme sit well with a prestige brand? “There is no reason why a PCP scheme would not be of benefit,” said Pascal Persoon, general manager at Autodata M. E. “In fact, it would be a very good source of stock for their used car departments.

“It is also a way of gaining conquest sales from volume brands as the repayment option on a PCP scheme is usually much lower than normal finance.”

Dealerships will be emphasising the point of lower financing costs loud and clear. That would indeed be the hook to draw in more buyers down the line.

The automotive retail industry in the UAE has been tradition bound for the better part of the last two decades. Car buyers had come to accept access to 100 per cent financing on purchases as a birthright. That it is not so was brought into sharp relief in May 2011.

“Some brands in the US and UK markets seeing around 60 per cent of sales transacted using the PCP method,” said Andrew Squires, general manager of national sales and marketing at Al-Futtaim Motors Toyota. “The product is just new to the UAE and within the Al Futtaim family of Automotive we see penetration levels of around 18 per cent.”

PCPs now offer a compelling solution to local buyers, even if it is a road less travelled. Going forward, one can expect heavy traffic on this one as well.