Strong exports to China and buoyant business confidence are leading to growth and optimism in New Zealand’s asset finance industry, writes Grant Collinson.
New Zealand’s asset finance market experienced a strong 2014 driven by a boom in its construction and transportation sectors, buoyed by a growing consumer and business confidence, and increased demand for its top exports.
A major exporter of goods to China, New Zealand enjoyed growth in its dairy and forestry industries, the country’s number one and three exports respectively, in 2014 and this has had a marked effect on asset finance in those sectors.
UDC Finance, the asset finance arm of ANZ New Zealand, the country’s largest bank by market share, saw strong growth in 2014, indicative of the market as a whole, including a significant increase in business volume to the forestry sector.
The company posted a 20% increase in net profit for the year to 30 September 2014 to NZ$51.5m (32.1m) and saw new lending across the business up 18% to NZ$1.34bn. With a 63% increase in business volume over the period, the forestry sector had a major part to play in UDC’s performance.
Demand for timber
Tessa Price, chief executive of UDC, puts that increase, the company’s largest sector growth, down to strong demand for timber into China and sees that high demand continuing.
"By 2020 there is an additional 120 million people that are going to be urbanised [in China] – that is a significant number of dwellings that need to be built," she says.
Data from New Zealand Trade & Enterprise showed export of forestry products totalled NZ$3.7bn in the 12 months to October 2014, with close to a quarter heading to China. Having enjoyed two decades of steady growth in its forestry industry, New Zealand is the world’s third-largest exporter of timber behind Russia and the US.
The forestry industry also helped GE Capital New Zealand to achieve what general manager for commercial, Mitch Booth, calls a "strong growth year" in 2014.
Booth says the forestry sector saw "very strong" capex during the first half of 2014 thanks to strong exports to China, but also an increase in timber demand from New Zealand’s domestic market.
In addition, both Booth and Price point to increased mechanisation in forestry as having helped growth in asset lending to the sector.
"Changes in the industry," says Booth, "are resulting in increased mechanisation of tasks that were historically completed by manual labour.
"This change is driven by a range of factors including production efficiencies, health and safety, and shortage of a skilled and motivated workforce."
Contributing to the demand for timber within New Zealand, growth in the country’s construction market has translated to growth in demand for finance for construction equipment, particularly in Auckland, New Zealand’s largest city, and in the Canterbury region in the east of the South Island, according to Booth.
Construction growth in Canterbury is heavily influenced by rebuilding projects in Christchurch and the greater Christchurch area after the devastation caused by the February 2011 earthquake.
According to The Stronger Christchurch Infrastructure Rebuild Team, the body responsible for infrastructure rebuilding in Christchurch, there are 147 projects currently under construction, valued at NZ$119.7m with a further 77 projects valued at NZ$250.5m at the design stage. The same body estimates the total value of infrastructure work in the rebuilding at NZ$1.53bn.
Meanwhile, the Canterbury Earthquake Recovery Authority predicts a total spend of between NZ$6.97bn and NZ$7.92bn on public sector construction projects from August 2014 to the end of 2020, with the greatest concentration of projects scheduled for the latter half of 2015 and 2016.
However, a major agricultural area, Canterbury has also experienced large spending on irrigation projects and farming intensification which has boosted the construction sector, says Booth.
"Auckland, he adds, "is benefiting from major infrastructure projects as well as a generally strong civil construction environment.
"The civil construction sector in provincial New Zealand is more mixed, with, at times, some pockets of construction demand."
UDC Finance has also felt the effect of New Zealand’s construction boom, reporting a 15% increase in business volume in the sector for the year.
Alongside forestry as a major boom export industry, New Zealand’s agriculture industry contributed to a positive 2014 for the asset finance market.
Business volumes to the sector were up 13% for UDC Finance, and GE Capital reports high equipment sales figures into the industry for 2014 reflecting a "strong dairy market in the 2014 season in terms of both production and price, a generally robust market for beef and lamb, and also marked improvements in the wine industry," according to Booth.
Number one export
As New Zealand’s number one export, accounting for just over 30% of all export in the 12 months to October 2014, the impact of the dairy market of economic performance is significant. According to New Zealand Trade & Enterprise 95% of dairy production in New Zealand is destined for export and, as with forestry, the Chinese market is vital.
Just under a quarter (22%) of all exports leaving New Zealand are destined for China – NZ$10.9bn in the 12 months to October 2014 – and dairy accounts for one-third of that total.
However, a recent significant reduction in the dairy price will have a negative effect on industry confidence going into 2015.
Fonterra, the largest dairy firm in New Zealand, accounting for 90% of all New Zealand’s milk supply, dropped its expected milk price in the final quarter of 2014 from NZ$5.30 per kilogram to NZ$4.70 per kilogram, down from $8.40 per kilogram 12 months earlier.
Industry economists have predicted in the New Zealand press this could lead to a NZ$2.8bn hole in the South Island economy alone where the dairy industry has been expanding rapidly.
Another indicator of general strong economic performance in New Zealand, and a contributor to asset finance growth, can be found in the transportation sector. In this sector, UDC reported a 14% increase in business with a 51% increase in car lending alone.
For GE Capital’s Booth, who says transport asset sales are at record highs in 2014, this represents a "catch up period after a number of years of slow sales".
"The industry is responding to a generally strong economy, and a degree of capex that was delayed while business dealt with uncertainty about road user charge taxation changes."
The New Zealand Transport Agency introduced changes to its road user charge tax system for heavy vehicles in July 2014 which saw new rates based on vehicles size, weight and type introduced.
For Booth and Price the buoyant transport sector is the result of a generally strong economy and increased consumer and business confidence which is having a positive effect on the asset finance market as a whole.
Quarterly statistics from the New Zealand Transport Agency show car registrations up 22.5% year-on-year for the third quarter of 2014 at 189,755 vehicles. The same report shows 53% year-on-year growth in New Zealand’s truck fleet and a 44% growth in the light commercial vehicle fleet to the third quarter of 2014.
In general, New Zealand has enjoyed an economic recovery many major economies would be envious of having recorded quarterly GDP growth every quarter since the start of 2011, and only two quarterly falls since the second quarter of 2009.
Price says: "There is really good confidence across consumer and business and this is really driving growth and people to replace their assets.
"If you look around you can see it everywhere you go, the trucks and cars on the roads – there’s a lot of activity in New Zealand at the moment.
"Growth in truck sales bodes well for the economy, reflecting a need for capacity to deliver to strong consumer demand.
"Business confidence, fed by this ongoing strength in the economy, is also seeing more firms deciding to go ahead now with purchases that were previously on hold," Price adds.
One company taking advantage of this renewed confidence is ASB Finance, the asset finance arm of ASB Bank, New Zealand’s third-largest bank by market share.
A relative newcomer to the market with five years of trading in asset finance, Steve Jurkovich, ASB executive general manager corporate, commercial and rural, tells Leasing Life ASB saw a 70% increase in equipment lending in the year to 30 September 2014 and that growth has continued into the fourth quarter of the year.
Like Booth and Price, Jurkovich puts this growth down to an increase in capital investment resulting from increased business confidence across the country. However, ASB has also expanded into sectors outside the major capital intensive industries in 2014.
Jurkovich says: "ASB’s asset finance customers traditionally draw from a range of industries including transport, forestry, contracting and construction. Increasingly, the bank supports a wide range of alternative industries with its asset finance products, for example: tourism, hire, aviation and manufacturing."
Jurkovich acknowledges a degree of growth is due to ASB being a newcomer to the market and says the increase in business levels are "underpinned by existing ASB customers moving their asset finance business away from third party providers" with the bank utilising its existing banking services to differentiate in what Jurkovich describes as a "crowded and competitive market".
This analysis of the market chimes with Booth’s perspective, who says the asset finance industry has become "mainstream" in the last 10 years and is increasingly provided by major banks.
"In recent years equipment finance has become a very mainstream way for companies to fund their assets," he says.
"Equipment finance is offered by all major banks and lenders in New Zealand to businesses, from the very small to larger corporates. This is quite a change from 10 years ago when equipment finance was a speciality product offered by non-mainstream funders.
"This change has increased the capacity of New Zealand businesses to purchase machinery without the need to leverage other business assets in order to do so. The appetite of the funders has also changed; 10 years ago 25% deposits were the normal expectation from firms looking to take out equipment finance, now 100% funding from lenders is the norm."
Booth also notes a difference between the asset finance market in New Zealand and those of Europe and US. With the major industries of agriculture, forestry and construction dominating the market, the small-ticket sectors such as office equipment are far from mainstream, he says.
"Generally we are still orientated towards heavy machinery in primary industries; the small-ticket, office equipment, and fixture and fit-out markets are not as mainstream in NZ as in European or US markets."
A recent report from Statistics New Zealand, the government statistical agency, showed requests for finance at reasonably mature level across key industries and overall.
According to the Business Outlook Survey for 2013, the most recent report available, 36% of all agricultural businesses sought debt finance of some kind in 2013 with acceptance rates at 97%. The figures were similar in the transportation industry, at 30% and 97%, respectively.
And, in line with growth in the asset finance market, the forestry industry had the highest level of requests for finance with 55% of forestry businesses seeking debt finance in 2013, with a 90% acceptance at what the study calls "acceptable terms". Requests for finance in these industries either saw growth or remained flat compared to the previous year.
The study found requests for debt finance overall were at 24%, with the highest percentage (28%) among larger corporates employing 100 or more employees.
Looking ahead to 2015, UDC’s Price is confident of continued growth in the market describing a "really positive outlook going into the future" across New Zealand’s business community.
ASB’s Jurkovich shares Price’s confidence and expects growth in commercial asset finance to continue into 2015. He points to a continuation of the factors driving growth in 2014, namely increased mechanisation in forestry, growth in residential and infrastructure projects in the construction industry and strong vehicle sales figures, as helping to maintain growth over the next 12 months.
However, he does acknowledge the lower dairy payout at the tail-end of 2014 will having a chilling effect on spending in the agricultural sector.
GE Capital’s Booth also sees barriers to growth in 2015 and strikes a more cautious tone.
Booth says any future uncertainty over the road user charge regime could result in a second period of delayed capex in the road transport sector. And he suggests increased pressure on the dairy industry to "mitigate the downstream environmental effects of intensification" could reduce the number of major irrigation projects.
Booth says: "We expect the market to flatten somewhat when compared to 2014. We have seen a degree of capex catch up in the transport space so further strong growth is unlikely.
"What’s more, the farming and forestry industry do face some economic headwinds with significantly reduced export prices in the dairy and forestry sector in particular."
However, with a long way still to go in the Christchurch rebuild and "strong demand" continuing in Auckland, Booth says the construction market will probably be an exception leading to more asset finance growth in the sector.