The public sector catches on
An equal footing in CEE
The market for leasing in Europe now eclipses that of the US as companies, consumers and the public sector increasingly favour the product over loans, much to the delight of banks.
THE POPULARITY OF leasing as an alternative to loans has grown so rapidly over the past few years in Europe that the continent has now overtaken the US as the product’s biggest market.
According to industry body Leaseurope, the volume of new leases originated in Europe in 2005 was €270 billion, up 14% on 2004.
The growing popularity of the financing method in central and eastern Europe and in the property sector have been strong contributors to this growth. Real estate leasing in 2005 grew by 25% from the previous year, accounting for €47 billion of new business volume.
Leaseurope estimates that about 16% of all investment made in the 32 countries from which its membership is drawn is now made through leasing.
It’s not just companies that are turning away from traditional lending; the public sector is doing so too. Leasing by public authorities increased by 16% in 2005 as indebted municipalities and local governments sought off-balance-sheet financing methods to maintain services without accumulating further debt. Siemens Financial Services estimates that public sector leasing in Germany more than doubled between 2001 and 2005.
“Leasing is one of the hidden jewels in European banking,” says Philippe Delva, chairman of Fortis Lease Group in Brussels. “The appetite for leasing is growing everywhere. In terms of penetration, Europe still lags behind the US by about 10 years but the market is rapidly catching up. The penetration rate in Europe is just 17% compared with 27% in the US, which suggests that there is still plenty of further growth potential.”
Delva continues: “That the leasing pie is growing much faster than the economy as a whole can be seen as part of the broad shift in the financial world away from plain vanilla credit towards asset-based financing.”
36 reasons to lease
More and more companies are discovering the advantages of leasing.
“There are no fewer than 36 good reasons to opt for leasing,” says Alain Vervaet, CEO of leasing at ING Wholesale Banking, in Amsterdam, “but I’ll narrow them down to two angles for you.
“The first is more important for SMEs and mid caps. The main advantage for them is that it is probably easier to get lease financing than bank financing, simply because the leasing company is the legal owner of the asset, which is important in terms of credit assessment, as a good asset can offset the risks of lending to a more risky client.
“The second reason, which tends to be more important for large companies, is that leasing is a structured product that can offer off-balance-sheet financing even under IFRS and Igaap, so that they can invest without affecting their balance sheet.
“There is also an outsourcing element to operational leases that can be attractive. A leasing company can provide services too so that all the client needs to worry about is making use of the asset.”
For some businesses the advantages of leasing over a conventional bank loan are overwhelming.
“There are certain sectors where leasing is nearly always the best solution,” says Fortis’s Delva. “Take a hotel group wanting to start a new hotel for example. The financial advantage of owning the property would be any capital gain after 15 years or so that arises from the hotel possibly improving the value of real estate in the area. But it is very expensive for a hotel group to try to own all its hotels, and they can still enjoy this advantage through a lease with an option to buy at the end. If the value of the property goes up, they exercise their option; if not they don’t. It’s a much better solution.
“For other companies, it’s about transforming a fixed cost into a variable cost,” explains Delva. “Once you get over the idea that it’s necessary to own a car or a photocopier you can turn the asset into a variable cost.”
The growth of leasing in Europe is also benefiting from a statistical boost as a result of the inclusion of central and eastern European countries in the European Union or their moves towards accession.
“I think the whole leasing market in Europe has benefited because of the joining of CEE countries,” says Gertrud Meisel Ortner, member of the board of Immorent, the specialist real estate and equipment leasing business of Erste Bank, in Vienna. “Ten years ago the statistics were drawn from just 20 member countries, today it comes from 30. The inclusion of countries such as the Czech Republic, Slovakia, Bulgaria and Romania has had a big influence because the economic growth and the demand for investment in these countries is much greater than in western Europe.”
Although the inclusion of the fast-growing economies of central and eastern Europe flatters the statistics to some extent, growth is strong even in mature markets such as the Nordic region, where leasing increased by almost 31% last year.
“Leasing is developing much faster than economic growth,” says Stefan Källström, CEO of Nordea Finance in Stockholm. “Part of the reason for this is that branch networks are increasingly being used to offer leasing products and that knowledge of leasing among customers has increased too.”
Finance and leasing companies are also cooperating with equipment vendors to offer leasing at the same time as they sell their products.
“What you can see is that with vendor partnerships, leasing is the product you work with,” says Källström. “More and more suppliers of different equipment now offer leasing when they sell their products. It’s very convenient for customers to have financing offered at the same time as they buy and most suppliers are now offering financing in combination with their core products today.”
Whereas hire purchase agreements were once primarily for less wealthy consumers, today even the very rich are comfortable with leasing. Leasing bankers casually estimate that about half of luxury yachts are leased rather than owned.