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September 13, 2018updated 05 Sep 2018 10:33am

Germany: optimism high; expectations scaled back

By Paul Golden

Mixed messages across the wider economy have done little to dent confidence in the German leasing industry, with growth in equipment investment expected to boost leasing volumes in 2018. Paul Golden reports.

The most recent business sentiment report issued by the IFO Institute – Leibniz Institute for Economic Research at the University of Munich reports that overall business confidence in Germany declined marginally in July.

The economy continues to expand, albeit at a slower pace, while companies were slightly more satisfied with their current business situation but scaled back their expectations slightly.

In manufacturing, the index fell for the sixth consecutive month as a result of far lesspositive assessments of the current business situation, but remains significantly above its long-term average. Demand picked up, but at a slower pace than in the previous month. In the services sector, the business climate improved due to increased demand.

However, traders were increasingly sceptical about their six-month business outlook, a trend that was particularly evident among retailers. In construction, however, the business climate index hit a new record high with its sharpest increase to date.

Contractors significantly revised their assessments of the current business situation upward, and were also more optimistic about their expectations.The IFO Institute’s 2017 investment indicator, which is jointly released with the Federation of German Leasing Companies (Bundesverband Deutscher Leasing- Unternehmen – BDL), showed a 2.3% increase in equipment investment last year.

For 2018, current forecasts point to an increase in economic output of around 4%. In view of excessive capacity utilisation, growth in equipment investment is expected to accelerate to around 5%, meaning that after several years of decline, the investment rate is now rising.

German leasing companies financed €67bn (£60.1bn) of business in the real estate, machinery, vehicles, IT equipment and ‘other assets’ segments last year, up 6% on the figure for 2016.

The overall share of the equipment investment market accounted for by leasing increased to more than 24%.

However, BDL president Kai Ostermann warns that the upbeat mood generated by this growth has been dampened by low interest rates. “Persistently low rates of interest are having a markedly adverse effect on incomes and expenses, and this is severely hampering the ability of the leasing sector to serve German businesses as an efficient investment partner,” he says.

He warns that red tape must be reduced, and that a tax framework that is fit for purpose must be created, with an overhaul of the fiscal depreciation tables overdue.

“The ordinary useful life of assets acquired by companies is much shorter than allowed for in these tables, not least because of digitalisation,” Ostermann adds. “We feel the time has come for the reintroduction of the declining-balance method of depreciation. It reflects the change in the value of an investment over time more accurately than the straight-line depreciation method.”

The BDL believes regulators should take greater account of the low levels of risk associated with leasing transactions. Among the changes it has requested are that leasing companies should be decoupled from the new requirements that the Financial Supervisory Authority has imposed on large banks, and a reduction in the amount of regulatory red tape the leasing sector has to comply with.

BDL data for the first half of this year shows that the leasing sector increased its financing of new equipment by 5% compared with the same period last year. “Following record performances in 2016 and 2017, the sector’s new leasing and hire purchase business continued to grow in the first six months of the current year,” says the association’s chief executive, Horst Fittler.

Leasing companies have always promoted the introduction and dissemination of new technologies in the markets they serve, and leasing provides solutions that are particularly well suited to current challenges and demands, he adds.

“Shorter innovation cycles, energy-efficiency measures, environmentally friendly transport solutions and the ongoing digital revolution are all necessitating massive investment,” says Fittler.

“Leasing companies are particularly well placed to help their customers realise their investment ambitions.”

He identifies competence in the assessment of investment objects and marketplace expertise as key factors in the success of the German leasing industry, and says leasing companies are developing new financing, utilisation and service packages that are a perfect fit for the business models emerging from digitisation.

The surge in demand for production machinery is described as particularly impressive: compared with the same period last year, this segment grew by 13%. New car leasing increased by 4% in the first six months of 2018, and in terms of car numbers, there was a 2% increase in leasing compared with the same period in 2017.

According to the Federal German Motor Transport Authority, there was a 2% fall in new commercial registrations in the first half of this year. So, if companies have invested in new vehicles, they have increasingly been using leasing to finance these investments.

Fittler sees the supplementary services offered by leasing companies – maintenance and inspection packages, damage management and so on – as key advantages that are prompting German companies to opt for leasing.

The upturn in IT leasing, which for a long time was either in the doldrums or a loss maker, is also welcome news, he continues. “Compared with the same period in 2017, new business acquired through the leasing of office equipment, PCs, servers and IT equipment in the first half of 2018 increased by 4%.

“That is a good result given the current state of the IT sector, for as well as the constant erosion of hardware prices, the migration to cloud computing continues.”


The main engine of growth in 2017 was vehicle leasing, with passenger cars and commercial vehicles accounting for 77% of all leasing business transacted. Leasing companies continued to punch above their weight in the automotive sector, and again increased their share of the market: around 40% of all newly registered road vehicles are now leased, and vehicle leasing increased by 8%.

Leasing companies also increased their share of the machinery sector last year. New business acquired in this part of the market – the second-largest leasing segment – was up by 6%.

Fittler is less upbeat on the subject of the German government’s support for the lease finance industry, reiterating the call for the government to put in place improved framework conditions for investment.

Asked to outline the biggest challenges facing the German leasing market over the next 12 to 18 months and the steps the BDL is taking to encourage growth in leasing activity in Germany, he responds by saying that the investment backlog that has built up over the years must be closed. “Business confidence in Germany is positive, but all eyes are on China and the US, and therefore investments are being partially postponed,” he explains.

“A sustained drive to promote investment is needed – if the German government’s ‘Industry 4.0’ plans to revolutionise the production landscape are to be realised, and the German economy is to assume a leading role in a highly competitive international marketplace, immense investments will have to be made.”

While there has been no more than moderate growth in investment in equipment, Fittler notes that companies in Germany have increasingly been investing abroad. Clearly, there is a need for incentives to encourage companies to invest in Germany, he adds. “We remain convinced that the introduction for an unlimited period of the decreasing balance method of depreciating assets would be the best way to kick-start investment activity. What is more, this method of writing off an asset provides a more accurate reflection of that asset’s value at any given time during its useful life.

“The leasing industry in Germany is characterised by small and medium-sized companies, so the leasing industry needs a regulatory system that is appropriate to these businesses,” continues Fittler. The leasing industry is also feeling the effects of sustained low interest rate policies. Persistently low rates of interest are having a significant effect on leasing companies’ incomes and on the costs they are having to shoulder.


The BDL sees potential for growth in the process of digitisation, which is increasing the pace of innovation. The leasing industry is perfectly placed to realise these investments on behalf of its customers, says Fittler.

“However, the methods allowed for the writing off of software and capital goods against tax must be adapted to take account of these shorter cycles of innovation,” he adds.

The equipment leasing penetration rate – which reached an all-time high in 2017 – was maintained during the first half of 2018, explains Daniel Kipper, vice-president, sales for Grenke Germany and Switzerland.

“Business expectations for the upcoming months are stable, although the sectors of manufacturing and services – which are the largest customer groups in leasing – are developing differently,” he says.

“In the services sector, companies are more optimistic about the coming months, whereas in the manufacturing space, the IFO index has fallen slightly as expectations have declined again.”

In its 2017 survey of the German lease market, Leasing Life noted that the operational leasing market for small and medium-sized enterprises is relatively immature in Germany.

Asked whether this market has developed further over the last 12 months, Kipper observes that the German lease market is quite traditional, and for that reason, operational leasing is not very popular.

“Stakeholders are always careful to have control over their acquisitions and investments,” he adds. Earlier this year, Leasing Life reported on ratings agency Moody’s warning that Germany’s decision to allow city authority bans on diesel vehicles posed a risk to auto finance companies in the country.

It said the ruling by Germany’s Federal Administrative Court, giving city administrations the discretion to ban diesel cars, had added to uncertainty over diesel’s future, which was impacting demand and could lead to a “pronounced falloff” in residual values.

The agency referred to the auto finance segment’s reliance on lease contracts, and noted that fear of far-reaching diesel disincentives had reduced the appetite of German drivers to own even the latest generation of diesel cars.

According to Moody’s, this will require close monitoring by the large captive finance firms of German automakers, who are particularly exposed to the residual values of younger-generation Euro 5- and Euro 6-compliant diesel cars, which also form the backbone of corporate car leasing fleets.

A number of German leasing companies have already made plans to reduce their exposure to diesel in the wake of the federal court ruling. For example, Sixt Leasing said it would substantially reduce diesel car volumes in both the retail and fleet segment, as well as halve the portfolio of diesel vehicles not covered by a buyback agreement with suppliers.


According to Kipper, it is still too early to say how the auto finance market will be affected by the decision to give city administrations the discretion to ban diesel cars, especially since it is not clear how they might implement the federal administrative court’s decision.

“Discussions on driving bans currently focus on diesel vehicles that only fulfil the old Euro 5 emissions standard, or even lower,” he continues.

“However, the newer Euro 6 emission standard was introduced as early as September 2014 for new vehicle types, and from 1 September 2015 it has covered all new vehicles. Current diesel cars would probably not be affected by the driving bans, so for now this is not an issue.”

Kipper also says that there is no sign of a change in policy from the German government in relation to its rejection of industry demands for the reintroduction of declining-balance depreciation.

Asked whether business confidence has been shaken by political uncertainty at home and in other parts of Europe, he acknowledges that there is growing uncertainty in the market regarding international trade policies. “But even so, our core markets showed above average growth, and we achieved double-digit growth in Germany,” concludes Kipper.

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