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29 May 2017

Equipment leasing on the rise despite global uncertainties


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Equipment leasing on the rise despite global uncertainties

Global equipment leasing

For the fifth consecutive year since the 2008 recession, leasing volumes have been increasing around the world, and data so far suggests that the climbing equipment leasing trend is likely to continue, according to the White Clarke Group Global Leasing Report.

New leasing business volume in the top 50 countries increased by 6.5 per cent in 2015 to reach a total of more than US$1 trillion, the report showed, with many countries seeing a dramatic increase in asset finance volumes.

Americas

By far, North America is the world’s equipment largest leasing market which saw volumes increase by 10.7 per cent in 2015, as stated in the White Clarke Report.

Combined, the USA, Canada and Mexico reported new business volumes of US$374 billion which was 15.0 per cent higher than Europe, the second largest region with US$322.8 billion.

The US market has been boosted by the introduction of new financial instruments, which have led the US Equipment Leasing and Finance Foundation to extend its scope beyond pure leasing and hire purchase. This gives more businesses more diverse options to choose and if popularity continues, will help businesses to free up capital. However, with the current political climate, the local economy could change business sentiment and reverse any progress made.

Latin America saw the biggest percentage rise of any global region, recording 28.9 per cent growth in 2015, although the report’s authors noted data from South America can be unreliable.

Asia Pacific

China’s equipment leasing market, the second largest after the USA at 22.2 per cent of world volume, expanded by 26.0 per cent, despite the Chinese Central Bank cutting interest rates five times through the year, which made loans cheaper and far more attractive.

The Chinese market appears to be maintained by a diversification of funding sources and the Chinese State Council’s introduction in 2015 of policies to support leasing. This could be the reason why China has remained the second largest market in the world for asset finance through leasing and hire purchase despite experiencing the lowest growth in GDP in 25 years.

The composition of China’s market is shifting with the automotive industry becoming a more prominent player. Traditionally, the infrastructure and manufacturing sectors have dominated but now auto finance is beginning to take considerable market share.

Business across Asia as a whole increased by 14.4 per cent. Notably, Japan’s asset finance market is rising after a significant decline of 17.0 per cent in 2014 and has resulted in small and medium-sized enterprises, not large corporates, taking the lead in using alternative capital solutions, for two consecutive years.

Volumes in Australia and New Zealand were flat in local currency terms. The strengthening US dollar meant this translated to a decline when expressed in US dollars, and has moved Australia from sixth to seventh place in world volume rankings. Despite moving down a position in volume rankings, it’s not all bad news. According to the White Clarke Group APAC report, which provides more information on Australia than the Global Asset Report, general equipment finance increased by 2.8 per cent in 2016 compared with 2015, whereas fleet leasing saw a greater increase of 21.4 per cent over the same period.

In this year’s global report, chattel mortgage – now recognised by White Clarke as a form of hire purchase – has been noted as playing an increasingly important role in equipment finance. This is further good news for the Australian market, particularly as many industry experts predict growth over the next 12 months.

Europe

Europe as a whole, accounts for 33.2 per cent of the world’s equipment finance volume.

Healthy economic conditions in the United Kingdom and Germany underpinned Europe’s overall performance when it came to financing assets. Of all the countries that make up the EMEA region, the report found that it was the UK and Germany which, when combined, account for almost half of the Eurozone’s leasing business. There was some decline in a number of other European countries which reflected the weak state of the domestic economies.

The UK market was driven by IT equipment leasing, which increased by 38.0 per cent with Automobile finance in second place.

White Clarke is forecasting “steady growth and bright prospects” for the UK this year, although the effects of Brexit are unknown and it’s likely regulations will change. This unknown climate could continue for the UK for the next two years as the UK is expected to officially leave the EU on 29 March 2019. However, this is only if all negotiations continue to go to plan.

The UK Finance and Leasing Association does not expect new accounting standard IFRS 16, to affect the market, the report notes.

In Germany, auto finance makes up 71.0 per cent of the market. Unlike many other regions where machinery and office equipment and IT systems normally dominate as the most common assets to finance, these assets run a distant second and third on the list.

Although road vehicles make up the majority of equipment financed, businesses in Germany appear to have a very different view of financing their equipment compared to many other countries across the globe. Instead of exhausting their own capital or senior debt, businesses prefer to use finance leasing, which, according to the report, is the most common arrangement in Germany. Almost half of equipment finance takes this form with operating leases accounting for 39.0 per cent of the market, while hire purchase makes up 13.0 per cent.

The overall outlook for equipment leasing

Overall, the outlook for the global leasing industry looks positive. Growth is expected in each of the four largest markets: those of the USA; China; the UK; and Germany, which together, make up almost three quarters of global leasing volumes.

The rise in popularity for asset finance is not a coincidence, nor, I suspect, a one-off event. The role of government and banking promoting alternative capital solutions is an apparent theme in this report as demonstrated with Japan’s ‘Revitalising Strategy,’ launched under Japanese Prime Minister, Shinzō Abe’s administration which favoured leasing as a way to promote technology. This is also seen in Taiwan as regulatory changes were made to introduce flexible financing as a way to ease capital shortages for SMEs. More examples can be read in the report.

Although Australia and New Zealand’s results may appear flat, businesses in both countries remain confident, particularly within mining, hospitality, property and agriculture, according to our latest Australia and New Zealand Equipment Demand Indexes.

Despite economic uncertainties arising from Donald Trump’s election as US President and Britain’s withdrawal from the European Union, businesses appear to feel fairly confident. As the report notes, Brexit and Donald Trump’s presidency could lead to instability and although it’s too early to determine the effect these events will have in the medium term, it will undoubtedly play a hand in business sentiment.

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