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  1. Analysis
June 11, 2019

The UK: holding strong in uncertain times

By Asena Degirmenci

With the asset finance market experiencing a healthy start to the year, Leasing Life considers some of the factors that have contributed to this encouraging market performance, and what the market may hold for the remainder of 2019.

Data from the Finance & Leasing Association (FLA) indicates that asset finance new business – primarily leasing – grew by 9% in January compared with the same month in 2018.

The most dynamic sectors were IT equipment and plant and machinery, which were up by 45% and 26% respectively, while commercial vehicle finance volumes increased by 21% over the same 12-month period.

“Over the last five years we have seen steady growth, and in the last three years in particular, the broker channel has played an increasing role in supporting funders,” notes Simon Goldie, head of asset finance at the FLA. “This has been driven by a range of factors, including new entrants into the asset finance market choosing to access that market via intermediaries.”

New Business

Invigors partner Richard Ryan notes that new business was up by only 3% in 2018, but adds that this has to be seen in the context of business investment shrinking by around 5% over the year, with a further fall of nearly 3% forecast for 2019. He also refers to the ongoing growth of the broker channel, observing that new business volumes grew by 12% in 2018. With new business through direct and sales finance channels flat, the broker channel increased its share of UK asset finance from 17% in 2013 to 20% last year.

“With plenty of funding sources available, brokers have been particularly active in the vehicle finance sector with many now focusing on short term rental in response to business uncertainty,” says Ryan.

“Brokers also appear to be increasingly focused on specialist asset sectors in order to sustain growth, with niche markets such as fitness and wellbeing, recycling equipment and specialist or structured loans areas.”

Although consumer finance for new cars grew by 3% in 2018, business finance fell by 8% and it is likely that both sectors will see a decline this year, according to Ryan; by contrast, growth in equipment finance has been relatively strong. He continues: “Finance for IT equipment, agricultural equipment and production equipment posted healthy gains. Despite the decline in the new car market, finance for commercial vehicles grew by 7%.”

While Ryan says it is difficult to determine the specific reasons for growth in these sectors, flat overall sales figures support the hypothesis that leasing is an attractive form of finance in times of uncertainty, encouraging the uptake of short-term rentals for vehicles and equipment as companies seek to maintain flexibility.

“In areas such as IT, demand for comprehensive service contracts covering the full lifecycle of the asset will continue to grow, as evidenced by the recently announced partnership between BNP Paribas Leasing Solutions and asset management specialist 3Step IT,” he adds. “This requirement is likely to extend to other asset classes.”

Demand for asset finance is being fueled by businesses seeking to expand their productive capacity. In the first quarter of 2019, over a quarter (26%) of UK SMEs invested in new machinery and equipment, showing that the ability to purchase new equipment and machinery plays a crucial role in business growth, notes Ian Wilkins, managing director leasing at Bibby Financial Services.

“The level of competition continues to grow rapidly, particularly with the wave of fintech businesses entering the market,” he adds. “We have also seen increased use of automated underwriting, as appetite grows among funders to support soft asset deals.”

Wilkins refers to strong demand for refinancing transactions in the construction and manufacturing industries. “Firms in these industries are often reliant on the purchase of high-class, specialised machinery. Over a third of SMEs in both the manufacturing and construction industries invested in new machinery and equipment in the final quarter of last year.”

Regional Variation

In terms of regional variations across the UK, he says he is seeing consistent levels of growth and demand for asset finance across the UK, with a particularly strong uptake in London, the South East and the North East.

The uplift in business in January could, in part, be due to businesses waiting for the new year to benefit from the increase in annual investment allowances. That is the view of Maxxia Group CEO Roger Skinner, who says the last 12 months have seen a market characterised by increasing overall liquidity as a result of a significant influx of new players, including growth in the broker channel.

“This has been measured, to some extent, by what has been a relatively benign insolvency and default period beginning to harden,” he notes. “For most players this should cause few substantial issues, but those that have not employed prudent pricing and debt provisioning could start to encounter problems.”

Simon Lefevre, commercial director ABN Amro Lease UK, also refers to increasingly larger-scale insolvencies in key sectors such as equipment and vehicle rental, construction and infrastructure service providers as a significant development.

Skinner explains that the current government has demonstrated a clear desire for public sector organisations to expand their use of leasing and other forms of asset finance as a source of borrowing. This is particularly true in education, as schools struggle with the constant requirement to update and upgrade IT to be able to provide state-of-the-art learning facilities for their students.

“In fact, the technology leasing sector across the board is experiencing rapid expansion, as organisations of all types recognise the need to invest in this area to remain competitive,” he says. “There is also an expectation that infrastructure and environmental asset finance could see robust growth, despite the inherent risks.”

Clients have always demanded a high level of service and fast turnaround times, says Lefevre. “In our market [middle and larger ticket], this is complimented by experienced advice and support from a local relationship manager, who understand the needs of their business and can deliver a solution on time and in line with their expectations.” He notes that while ABN Amro’s service is currently based on offering a more bespoke deal-structuring facility, there are increasing conversations being had around lease as a service for some asset classes.

“The economy, and how we and our clients react to this, are the biggest challenges facing the UK asset finance market over the next 12 months,” adds Lefevre. “Should confidence levels fall further, we might expect a drop in demand, although the latest FLA stats show the sector is still growing.

“Maintaining our returns is another challenge. Basel IV is looming, and while the impact of this is not yet fully known, it does appear that lessors will have to hold greater amounts of capital.”

Until a few years ago, business customers were happy to send out a finance proposal via an email with an expectation of a turnaround time of between half and a full working day. However, the rapid development of on-demand services being offered by many other business sectors is permeating the leasing sector.

That is the view of David Horton, managing director of sales at Grenke Leasing UK, who says business customers now want a convenient way to apply, as well as an almost instantaneous response. “Our success has been as a result of pioneering this route to market, where our business customers can propose an opportunity and, subject to all financial information being available, have a decision within 20 minutes,” he says.

Jean-Michel Boyer, CEO at BNP Paribas Leasing Solutions UK, observes that economic growth remained at 0.2% during the three months to the end of January 2019, and that because of economic uncertainty, businesses are understandably hesitant to make investment decisions and are carefully managing their cash flow.

The general outlook is that investment intentions are low, and will remain that way for the coming months at least, he adds. “However, demand levels for asset finance in the UK are rising steadily. Business must go on, and for ambitious businesses, asset finance presents a way to spread costs over several years yet continue to grow and keep pace with global competition. These inconsistent indicators should send a signal to the industry to exercise caution whilst the current economic events play out.”

Boyer mentions healthcare as an example of a sector that has performed well over the last 12 months. “The healthcare industry covers multiple specialist markets from veterinary and optical to pharmaceutical,” he says. “Last year we expanded into this market, following the presence of the business in the European healthcare market for many years. The pace with which new technologies are emerging is at an all-time high, which is good news for the asset finance industry.”

Construction is another market where Boyer expects to see growth over the coming year. The government has set ambitious house building targets which, if achieved, will see 30,000 new homes built by 2025 and significant investment in new construction equipment will be needed to handle this load.

“Again, the industry must proceed with caution whilst current economic events play out, and businesses up and down the country will be doing the same,” he says.

Businesses should work with partners that can offer them full turnkey solutions that go far beyond finance and leasing solutions, meeting their needs from initial procurement throughout the lifecycle of an asset, adds Boyer. “Businesses seeking asset finance should expect excellent and consistent customer service every time they engage with an asset finance provider,” he says.

Interest Rates

Skinner adds rising interest rates to the issues facing the industry in 2019, noting that the odds are on a small increase later in the year.

“Compliance and regulation are never far from the list of asset funders’ priorities,” he continues. “The FCA’s ongoing investigation into practices in the automotive finance sector could throw up some additional challenges. In addition, all industries are struggling to recruit highly skilled workers, and asset finance is no exception.

“We need to think carefully about how we make the sector appealing to graduates, and to those later in their careers, and provide support for the learning and development that is required.”

It is important that the promising levels of growth across the market are maintained and managed effectively over the next 12 months, cautions Wilkins.

“Part of the challenge is to help SMEs retain their current levels of investment and continue to opt for asset finance as the funding option of choice. The market must also be wary of the continued oversupply of liquidity assets, which are driving down market yields.”

According to Boyer, the biggest challenge facing the industry is the current state of economic uncertainty. The coming months will be telling for the asset finance industry, with the potential for opportunities in the market – in times of uncertainty, businesses want to ensure they are spreading their cash flow and managing costs, and asset finance gives business owners this assurance.

“Aside from this, many businesses see the pace of technological innovation as a challenge,” he adds. “There is a need to keep up with competitors, but this could involve regularly upgrading technology and investing in new equipment. Businesses with concerns about keeping pace with technological change should consult their equipment provider about the best financial options available to them.”

Goldie suggests that asset finance firms provide quick decision making when considering a customer application, in contrast to other types of funding. Asked to assess the main challenges facing the UK asset finance market over the next 12 months, he refers to encouraging greater use of finance to foster growth.

“Many SMEs take advantage of asset finance as it gives them access to working capital and helps them manage cash flow,” he concludes. “However, according to research by the British Business Bank, a significant proportion of small businesses would rather forego growth than opt for finance of any kind. Changing that mindset is absolutely vital if firms are to reach their full potential in terms of growth and productivity.”

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