Legislative change and taxation reform mean the Turkish leasing market is expecting big investment and strong growth, discovers Peter Johnstone.
As it recovers from the recent global recession, the Turkish leasing market is set for serious change.
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New regulation will make it easier for companies to enter the market, make transactions simpler and allow for more leasing options, all of which augurs well for the future of the industry.
Hakkan Gülelçe, secretary general of Finansal Kiralama Derne?i (FIDER), the 28 member Turkish leasing association, is optimistic about the future of Turkish leasing. He says that following a "period of contraction" in 2008- 2009, which corresponded with a general downturn in the Turkish economy, 2010 saw a return to growth, and forecasts (excluding real estate leasing) predict continued growth, from an estimated 3.67bn in 2012 to 9.2bn in 2017.
Phil Gerrard, responsible for European Leasing Advisory Business at advisory firm Grant Thornton UK, says that while Turkish leasing had seen the same mid-2000s slowdown as other sectors, it had not seen high levels of default, business had not "dropped off a cliff" and the market has continued to grow since.
He points to the fact that in 2009 new business (including real estate) was around 1.7bn, and although that was down from it’s 2006 level of 4.1bn, "it’s now more or less back where it was, it’s probably within 300 to 400 million". He believes that there’s "not been a massive fall off, and the recovery’s been a bit stronger," adding the general view for leasing is that "last year and this year the leasing market will be higher than it was in 2005; so you’ve had the dip but you’ve got a steady recovery".
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By GlobalDataSpeedy recovery
The sector certainly has recovered quickly. Official figures from FIDER show new business, excluding real estate, dropping off from a peak of 3.9bn in 2007 to just 1.3bn by 2009. But the following year it jumped up to just under 2bn and is now looking much healthier, reaching the same amount in the first nine months of 2012.
Gülelçe maintains that there are two main reasons for the drop in leasing business around 2008 – 2009, where the sector contracted much more sharply than the economy in general. The first is the general economic downturn, but the second is an increase in tax rates for leasing transactions.
The previous 1% tax rate, which was applicable only to leasing transactions, was increased to the standard 18% rate for most goods, with some available at a reduced 8% rate.
This move was partially reversed in December 2011, with the 1% rate having been reintroduced for some goods, such as construction machinery, power generators and conveyors. This gave a much needed boost to construction leasing, which increased its share of the leasing portfolio from 25% in 2011 to 33% in the first months of 2012.
This relaxation is significant in a country where construction machines, together with other machinery and equipment, account for 58%of the entire leasing sector. Indeed the next largest segment of the industry is textile machine leasing, which made up 9% of leasing for the first nine months of 2012.
Road vehicles account for only 3% of all leasing by FIDER members, stemming from the fact that Turkish lessors cannot lease to individual consumers. Gülelçe says that half of FIDER companies’ customers are SMEs, 45% are large businesses, and the remaining 5% goes to individual enterprises such as farmers. "Leasing transactions within the public sector" he says, are "almost zero."
Gerrard agrees with this, although there have been some other shifts in sector balance from last year: "Construction equipment leasing has increased slightly and manufacturing leasing has reduced. The services sector year-on-year is flat; $2bn of the total market is in the services sector, manufacturing last year was nearly $2.5bn but this year is only $1.7bn year to date."
Legal reform
Tax breaks aside, the other major development in Turkish leasing is the new leasing law, passed as a draft by Parliament in November, which will allow much greater diversity within the sector.
The most significant part of the law deals with operating leases, which have not been permitted in Turkey before now. Prior to their introduction, finance leasing was the only option companies could provide.
As Gerrard, who spoke at a recent conference on Turkish operating leasing, points out, to run a finance leasing business you need around 10m of capital and a license provided by the regulator. This means in effect that "financial houses, banks and the bigger leasing businesses that have got financial funders have mainly cornered the market in recent years."
The new law means that, as well as established entities opening operating leasing divisions, new entrants and smaller independents will be able to provide operating leases "and the present understanding is you will be able to do that as an unlicensed entity," says Gerrard.
Gülelçe thinks the new operating leases will allow more short-term leasing options, especially for smaller firms. He thinks that small companies could act as ‘sub-contractors’ for SMEs carrying out "project-based activities", operating machinery for particular projects.
Gerrard thinks it will be a boost for the vehicle-related sector, as the operating leasing model lends itself better to movable assets which are "relatively better value to fund, and clearly it’s relatively easy to set up a maintenance or incident management system with the right specialist knowledge."
Gerrard believes one of the challenges with the introduction of operating leases will lie in existing companies diversifying their product. As well as needing a separate skill-set, the new business line will have to act as "an additional rather than a substitutional product". They will have to look at how to grow the market rather than replacing one contract with another.
Gülelçe says another major benefit of the new leasing law is the simplification of the transaction and legal processes. Whereas before all leasing agreements had to be agreed and registered through a public notary, it is now sufficient to record such agreements in writing and register them with the soon-to-be-established Leasing, Factoring and Financing Companies Association.
Turkish delight
Both Gülelçe and Gerrard are confident about the future of Turkish leasing. Gerrard says that the "underlying expectation" at the recent conference was optimism "that they can increase the market size" with the introduction of operating leasing.
He adds that while the evidence currently points to a flattening out of the market, following growth between 2009 and 2011, the new regulations provide "an opportunity to drive it on again."
There are also several multinational companies with business in Turkey who have not previously moved into leasing, and see the new relaxation of regulations and introduction of operating leases as a possible entry point into the market. "They see the opportunity, now they don’t necessarily have to be a licensed leasing business, they’ve got access to funds [and] see synergies with the types of business they have," Gerrard adds.
FIDER predicts the Turkish leasing market will more than double over the next five years as the economy continues to recover, says Gülelçe. While penetration is still low at around 3.5 to 4 % he believes "there is room to improve and the new leasing law is a good opportunity to do so."
Gerrard says Grant Thornton is expecting to see modest market growth in 2013, but then possibly double digit growth in 2014 as the effects of operating leasing starts to impact the market. They are expecting work to begin in earnest in the New Year. "But" he says, "right now, it feels like there’s a real energy for people to go and grow this market.
Legal issues: the facts
- Leasing companies have been ena bled to carry out operating leases.
The legislation is called the Leasing, Factoring and Financing Companies Law:
- Sale and leaseback transactions will be allowed.
Companies will be able to liquidate their balance sheets by selling their assets to the leasing company to create long term working capital.
- Reproduced copies of computer software could be made subject of leasing.
The existing Law No. 3226 did not allow such programs to be made subject to leasing as they are of intangible value.
- Each individual good maintaining its original characteristics will be able to be made subject of leasing.
Attachments and integral parts will be able to be made subject to leasing.
- The transaction process and legal process will be simplified:
Minimum limits on leasing agreements of four years (for some goods, two years) will be scrapped and agreements only need to be made in writing and registered with the new Leasing, Factoring and Financing Companies Association, rather than through a notary.
