Consolidation and regulation remain issues of concern for those operating in the German lease market, despite the promise of growth in 2014. Paul Golden reports.
Data from the German Leasing Association (BDL – Bundesverband Deutscher Leasing-Unternehmen) shows that the leasing market was static last year with 48.5bn of new business.
The sector enabled investment of 46.5bn (down -0.2% from 2012) in mobile assets such as vehicles, machinery, IT equipment and other movable goods and 2bn (+5.2%) in real estate. However, weak demand for cars held back the acquisition of new equipment business and vehicle leasing failed to keep up with the increase in demand of around 4% for all the other classes of leased goods. Cars and commercial vehicles account for almost 70% of all assets leased in Germany.
According to BDL managing director Horst Fittler, leasing companies, especially in the small and medium-sized range, are handicapped by ever-increasing regulatory requirements. "Due to costs a not inconsiderable number have capitulated and ceased business and the consolidation process in the leasing industry has not been completed yet."
In view of the mood of uncertainty currently afflicting companies and their consequent reluctance to invest, he says the association was satisfied with stable levels of new business in 2013. However, it has been uneasy for some time about German companies’ reluctance to invest.
"The aggregate rate of investment in Germany has been falling for years," says Fittler. "Compared with other European countries, our record is poor. We want the new federal government to draw up a stable and dependable framework of operating rules and
procedures and to provide incentives for investment.
"The reintroduction of the declining-balance depreciation method and providing leasing companies with access to subsidies – specifically in the field of renewable energies – might be ways of encouraging companies to invest. But the German economy needs a forward looking, joined-up concept for reducing the investment backlog, dismantling unnecessary bureaucracy and supporting small and medium-sized companies.
"As part of our lobbying work we are calling for an investment strategy to bridge the investment gap in Germany. Naturally, the BDL works to ensure stable and reliable framework conditions for the leasing companies. A focal point is on regulatory requirements."
When asked whether the BDL expected the market to grow this year compared to 2013, Fittler referred to economists’ forecasts of 7% growth in equipment investment in 2014, adding that if these predictions are correct, the leasing sector will benefit in full from the upturn in demand.
In terms of market share breakdown between bank-owned, independent and manufacturer owned lessors, Fittler explains that captives have a current share of just under 60%, bank-owned about 30% and independent companies about 10%.
"The large share of the captives is due to the dominance of vehicle leasing," he says. "This sector is dominated by captives (80%), but the proportions differ in the various segments – production machinery and medical technology are dominated by bank-owned companies (80% and 60% market share respectively), while independent companies have about 30% of the IT equipment
Fittler describes the regulatory requirements and obligations imposed on the leasing industry as inappropriate to a sector made up largely of small and medium-sized companies.
He says: "These requirements have created additional costs and taken little account of the leasing business model or of the risk content of leasing transactions. It’s unacceptable that in their indiscriminate regulatory zeal our lawmakers are adopting – perhaps unwittingly – structural policies that could well cause the leasing market to atrophy. In our discussions with political representatives, we have for a long time maintained that the levels of risk involved in leasing transactions are inherently low."
In a presentation on the German leasing market in late November, BDL president Martin Mudersbach referred to research conducted by Deloitte on behalf of Leaseurope into 1.5 million leasing agreements transacted throughout Europe between 2005 and 2011 which showed the rate of default on leasing transactions was minimal and significantly lower than the default rates for comparable credit portfolios.
"Leasing companies have an excellent understanding of the assets they place on offer and of their markets," said Mudersbach. "They know exactly how to remarket used vehicles, machinery and IT equipment at the best going rate. The study clearly reinforces the view that the regulatory hurdles for leasing companies are too high and take no account of market realities."
Fittler went on to explain that while leasing of cars and commercial vehicles was down 2% last year, there was stabilisation in the rate of acquisition of new business since the middle of the year. "Be that as it may, the leasing sector has managed to increase its share of the overall car market.
According to the Federal Motor Transport Authority, there was a 6% drop in the number of new cars registered in the first nine months of 2013, but the volume of new car leasing business acquired in this period fell by just under 2%, both in terms of acquisition costs and of the number of vehicles registered."
The second most important category of leased assets is production machinery and in this segment there was a 4% increase in new business.
Fittler says: "This is a particularly pleasing result, because the German mechanical engineering sector was expecting a slight fall in demand for its products in 2013."
The leasing industry was able to improve its penetration rate in this sector. New business acquired through office equipment and IT systems has also increased at an above-average rate (7%). Numerous IT investment projects were put on hold in 2012 with the result that in the second half of 2013 there was a big surge in business."
Jochen Jehmlich, managing director of Sociétié Générale Equipment Finance Germany attributes last year’s growth in IT and office equipment leasing to purchases that had been postponed in 2012.
"The BDL is continuously appealing to the German government to better support the lease finance industry and views a stable economic environment and more governmental incentives for investments as necessary preconditions for continued growth of the leasing market. One incentive might be to enable leasing companies to access public sector development funds."
SGEF Germany has initiated internal leasing campaigns to push leasing as a financial solution and integral part of its product portfolio, including bundled services to offer a rental-like product, adds Jehmlich.
"This is accompanied by ongoing discussions with our core vendors to develop new products and services and thereby further expand our market coverage and penetration," he adds.
Wolfgang Pinner, country manager BNP Paribas Leasing Solutions Germany points out that industry concentration continues, regulation is biting hard and the significant players are looking for niches, either asset categories or bank leasing business.
Despite the negative developments, he says BNP Paribas Leasing Solutions recorded growth in 2013 and gained market share in the truck and IT markets. He is confident that if the consolidation of the eurozone crisis continues and the new German government is able to guarantee a stable framework for domestic investments, 2014 should be a better year for the industry and he observes that bad debts have now bottomed out from their historically low levels.
Industrial captives are gaining market share thanks to support on residual value management, better funding and/or being an unregulated manufacturer business, Pinner continues.
"The German government has not taken any direct action to support the lease finance industry," he says. "However, as leasing is crucial to the small business sector, initiatives such as digressive amortisation or a favourable purchase option that would not create negative balance sheet consequences under German fiscal decrees could boost leasing investments to support SME growth."
German businesses may be investing less, but they are making greater use of leasing as an investment tool explains Kai-Otto Landwehr, head of the commercial finance business of Siemens Financial Services in Germany.
The penetration rate of equipment leasing increased to 23% in 2013 and has been on an upward trend since 2010 (20.9%), while leasing share of externally financed investments rose from 50.8% in 2012 to 52% last year.
Landwehr expresses optimism about the prospects for the lease market in 2014. He says: "According to [German government-owned development bank] KfW, the German economy is expected to grow by 2% in 2014, with corporate investment expected to rise by 5% after three consecutive years of declining volume. If these predictions hold true, leasing will prove to be an invaluable financing tool in helping support this flurry of investment activities."
Landwehr expects the market share of independent lessors (which account for 10% of new business in equipment leasing despite representing more than half the membership of the BDL) to decline further in the medium term. "Since many independent lessors are small- and medium-sized companies, they are unable to afford the administrative costs associated with supervisory regulations," Landwehr says.
Machine tool finance
Research conducted by Siemens Financial Services highlights the growing importance of asset finance for the machine tools industry as generalist lenders withdraw from specialist areas of finance.
Thomas Stahl, country manager Germany at De Lage Landen agrees that consolidation is one of the key themes of the German leasing market and is also critical of the regulatory regime.
"Since 2009, when the leasing industry was put under supervision of the financial market regulators, conditions for leasing companies have deteriorated significantly. The sector is increasingly being subjected to regulatory requirements and obligations (and consequently costs) that are not appropriate given its structure of mainly medium-sized enterprises, its business model and the risks involved.
"A substantial number of small and medium-sized companies have already succumbed to the cost pressure and gone out of business. The regulatory requirements for leasing companies are too stringent and are disproportionate given actual market conditions."
He observes that clients are demanding immediate assurances of credit. "Waiting is no longer an option, at least not in the construction machinery sector. These days, procurement is on demand and the equipment is leased as soon as the order comes in.
Our vendors are prepared for such scenarios, both in terms of the technical aspects and logistics. Customers’ demands are becoming increasingly specific and they expect more flexibility."
Stahl says his company secured more new business last year than in 2012 and refers to forecasts of a significant surge (7-8%) in expenditure on equipment in 2014. He also suggests that market share is shifting towards companies that have no links with manufacturers.
"We are pushing our vendor business by offering manufacturers added value such as financing from leasing to recycling.
Manufacturers need us because without their own lease finance institution they will not be able to sell as many products and will lose market share. Customers simply do not have the time to look for a lessor as financier."
GE Capital Germany chief commercial officer Jörg Diewald describes the German leasing market as generally stressed and in a rebuilding phase. "The market develops differently in different segments – for example, there is solid development in the office equipment and IT segment, whereas we feel pressure in classical sub-segments such as automotive.
The manufacturing segment has grown, but we feel that SMEs remain cautious with their investment decisions and continue to postpone large capex programmes."
He refers to the pilot project developed by the BDL and the Association of German Guarantee Banks as a significant development.
The programme (which was launched in last month and will run for three years) is designed to support refinancing of leasing transactions with small and medium-sized enterprises. Guarantees can be granted for leasing investments of up to 500,000 per company.
The guarantee banks take between 30% and 60% of the risk and use counter-guarantees from the European Investment Fund (EIF) competitiveness innovation framework programme. In total, 120m is being made available for guarantees that can be used as surety for leasing investments by small and medium-sized enterprises of up to 400m.
Stahl credits the German government for improving the refinancing situation for leasing companies through the use of guarantees as collateral. "The EIF is finally treating leasing companies as general banks — the sector has been striving for this acknowledgement for years."
According to Diewald, the office equipment and IT segment performs better than others simply because of the overall technological progress. "Most companies are focusing on IT tools and equipment to increase efficiency and performance," he concludes.
"We are working to encourage growth in leasing activity in Germany by focusing on fast and efficient transactions and introducing IT and technology tools to make our customers’ lives easier, for instance an extranet for vendor partners."