New Zealand capital investment expected to top NZD$60 billion

Capital investment expected to top NZD$60 billion Article Image

Forecasts based on the Equipment Demand Index suggest capital expenditure by New Zealand businesses will reach NZD$60.7 billion this year, a record for the country and a 7.0 per cent increase on the previous year.

Overall, the Index results show New Zealand’s upbeat economy is having a positive effect on demand for assets. Moreover, more businesses are starting to lease, rather than buy equipment, helping to achieve a more efficient capital structure.

According to this quarter’s results for the Index, 87.2 per cent of New Zealand businesses intend to increase their asset base this quarter.

There are two key factors which businesses cited as their main reasons for this, the first was, ‘confidence in the strength of the local economy,’ at 51.2 per cent. The second was, ‘desire to expand their business,’ with 36.0 per cent stating they are in expansion mode.

The desire for some to expand their business is reflective of business’ confidence in the New Zealand economy, and with economic growth has steadily increased year-on-year since the 2008 recession, they have good reason to be confident.

Hospitality, property and agriculture were the most bullish of all the sectors surveyed, with hospitality taking the lead at 60.0 per cent. As the government look to take steps in changing their immigration policies, will confidence from hospitality firms begin to wane if visa holders, who often make up a large portion of hospitality staff, are no longer able to work in the industry?

The least confident industries surveyed were manufacturing, construction and wholesale. This, unfortunately, could end up being a trend which continues into 2018 following Cadbury’s announcement that they will be closing their Dunedin factory.

A total of 48.6 per cent of upper corporates intend to acquire assets this quarter, followed by 47.4 per cent of SMEs. At the other end of the scale, and for the second quarter running, lower corporates came last at 44.3 per cent.

Capex on the rise

On a more positive note, results from the Index suggest a healthy capital expenditure program this quarter in New Zealand.

Statistics New Zealand’s data shows ‘gross fixed capital formation’ reached NZD$56.8 billion in 2016, up from NZD$53.9 billion in 2015.

Extrapolating from this data and drawing on results from the Index, it is predicted gross fixed capital formations will reach NZD$60.7 billion this year, which would represent a rise of 7.0 per cent on the 2016 numbers.

Nearly half of respondents (46.0 per cent) intend to increase their capex this period, by a substantial 17.0 per cent, on average, compared to 43.2 per cent who intend to leave their capex program the same. Simultaneously, 10.8 per cent indicated their capital expenditure program was reducing.

Results from this Index show 40.0 per cent of respondents intend to use their own equity, 6.8 per cent down from the previous round.

Alternative finance gathers pace

New Zealand businesses have traditionally relied on their own resources to fund asset purchases. However, there are signs this bias is shifting. Results from this Index show 40.0 per cent of respondents intend to use their own equity to acquire assets which is 6.8 per cent down from the previous round.

However, the percentage of businesses that use finance in their asset procurement program has risen from 27.1 per cent to 29.9 per cent. Although this is only a small increase, this shows that businesses are either beginning to shift their mind-set in regards to managing their capex, or because finance providers are increasing their penetration of the market. Either way, this is a positive move for New Zealand businesses as more capital is released into the economy.

As the economy continues to forge ahead and new opportunities progress, now is the time for businesses to reconsider the best way to finance their growth before their competitors do.

NB. The research and publication of the Equipment Demand Index was conducted under Maia Financial’s previous name, Alleasing.