impact on most leased assets. Brian Rogerson
explores what effect it is having on residual values for an array
of assets.
As the residual values (RVs) of commercial vehicles plummet in
the wake of the economic downturn, all eyes are on the resale value
of other, non-wheeled assets as they return to market.
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Research by Leasing Life has discovered that
non-wheeled assets are not suffering anywhere near the same degree
of volatility as leased vehicles, although nevertheless
uncertainties abound.
IT equipment
Given the high degree of market uncertainty for residuals, Neil
McLaren, managing director of Quartz Finance, envisages a rise in
demand for outsourcing of complete office equipment packages – thus
avoiding lessees having to face the pitfalls of volatile RVs.
“It represents a clear refresh policy,” McLaren said, “and in
the long run is likely to be a cheaper way of replacing IT
equipment.
“The hardware element, for example, becomes part of a larger
service contract and far less prone to the vagaries of the
marketplace.”
McLaren added that although no radical downturn in IT residuals
has occurred at present, some companies which have leased IT assets
directly are likely to be planning to put off replacing the items
until the market settles down.
Chris Labrey, UK sales director at ECS Group (part of Société
Générale), said there has been a certain downturn in the RV of
desktop computers and servers – especially for some proprietary
systems.
He added that it is important for the lease period of IT assets
to be realistically in line with the useful life – typically three
years – for optimum residual investment.
Labrey believes that, come the economic upturn, the green
credentials of new IT equipment will become more apparent and
increasingly taken into account by customers.
He added that ECS Group is currently working with a major PC
manufacturer examining the electricity efficiency of three-year old
desktop equipment.
“They use some $40 (€27.8) a year more electricity than a new
piece of kit,” he said. “For a large corporate utilising say, 1,000
desktops, that will represent around $40,000 a year in fixed
costs.”
Printing equipment
James Cran, northern region asset manager at Key Equipment
Finance (KEF), said the RVs of printing equipment are remaining
buoyant largely due to high demand in the market.
“Hard assets that have international appeal, such as printing
equipment, are doing well,” Cran stressed.
“Worldwide market demand for such equipment is widespread,
especially in India, elsewhere in Asia and in South American
countries such as Brazil.”
Cran added that KEF’s policy is to work closely with its vendor
partners in order to rely on re-marketing support. An additional
stratagem is to leave assets in their current lease as long as
possible and await a market upturn.
“In actual fact,” Cran said, “changing an asset on the exact day
the lease terminates is in practice not always easy to achieve –
especially when delivery times for replacement assets are taken
into consideration.
“For larger assets there is frequently a lead-in time of from
three to six months which gives leeway for re-market timing.
Overall, we are very upbeat regarding RVs in the current
climate.”
Manufacturing and machine tools
Mark Lord, head of UK stock valuation and disposal at Sanderson
Weatherall, said that despite its recent successes and the current
fall in pound sterling, UK manufacturing has inevitably been hit by
falling international demand – especially in continental
Europe.
“This,” Lord said, “has hit the RV of many larger manufactured
assets including plant and machinery and machine tools. However,
where the items are in exceptionally good condition they will still
hold a premium – while those in not such good condition may have to
go overseas.”
John Tallon, of Tallon Associates, the valuers and auctioneers,
meanwhile said that RVs in the machine tool sector are holding up
since demand is steady as online sales find wider markets, and good
quality equipment is retaining its value.
“In the food sector, quality-branded stainless steel process
equipment is holding its own while older equipment is now starting
to see demand falling, resulting in realisations close to
salvageable value,” Tallon said.
William Moses, of GoIndustry Dovebid, another auctioneer, said
that the window-manufacturing sector is experiencing a
downturn.
“This has led to a steady fall in demand for all assets
associated with it – and even price reductions have not stimulated
demand,” Moses remarked.
Derek Ryan, sales and marketing director at Siemens Financial
Services, is aware of some lessors that have recently exited the
machine tool sector.
“Nevertheless,” he added, “healthcare assets are still doing
well since NHS Trusts still have much cash to invest this
year.”
KEF’s Cran said that mining and energy asset RVs are “holding up
quite well at present”.
Waste re-cycling equipment
Sanderson Weatherall has recently successfully disposed of some
bio-waste plant. Overall, however, Lord said that such equipment is
of very recent provenance and is still considered “new
technology”.
“When such equipment returns to the market,” he said, “it is
likely to be dismantled and disposed of in parts. It is a very
embryonic sector and much current installation consists of pilot
schemes.
“As a result, the assets are evolving rapidly and re-market
valuations are uncertain.”
Nevertheless, lease underwriting in this sector will inevitably
by assisted by the government’s WRAP’s eQuip scheme where residual
risk is removed by guaranteeing the equipment’s RV.
Since eQuip was launched in 2004 it has enabled funding of
equipment worth over £16 million (€20.05 million), in 108
individual deals ranging from £3,500 to £1.7 million for a
materials-recovery facility.
Construction equipment
The building industry is traditionally the most immediate victim
of an economic downturn and has again proved to be so this time
around.
“This has affected most construction equipment and yellow
goods,” Sanderson Weatherall’s Lord said. “There are still buyers
out there, but they are far choosier than previously and dealers
are not seeking to replace stock levels.”
Tallon said that currently one of the worst affected sectors is
construction-related equipment and contractors’ plant.
“The RVs of smaller assets in these sectors are down between 20
and 25 percent compared to 12 months ago,” he added.
“On a positive note, larger items of yellow plant are finding
markets abroad – helped by the current pound to euro rate.”
Another sector affected by the construction downturn is mobile
cranes. Following five years of strengthening residuals, Tallon
observed that the price for mobile cranes is softening as demand
weakens and cranes up to 100 tonne capacity are between 5 and 10
percent down compared to a year ago.
The future
There is little doubt that many lessors will face a turbulent
time over the next few months as their assets come to market.
It may well be a time when UK lessors learn to adopt US-style
“sweat the asset” strategies and tailor secondary and tertiary
leases over longer time frames.
ECS Group’s Labrey believes that a more controlled replacement
cycle of IT equipment
is likely in the future with smarter customers seeking more
efficient equipment and more realistic RVs.
“Customers will become more skilled at the management of their
kit which in turn will be returned in better order,” he said. “So
it is incumbent upon lessors to be setting ever more realistic RVs
from now on.”
John Tallon offers some light at the end of the tunnel.
He said: “I believe we have reached a point where RVs of most
construction-related and manufacturing assets are not likely to
drop much lower in the short term.”
Ryan of SFS realistically believes that lessors will inevitably
experience rising levels of bad debt and fraud as the economy
continues downwards.
“The economy will be tougher next year,” he said.
Operating leasing is counter-cyclical and still the best option
for those seeking to acquire assets according to Bruce Nelson, MD
of the UK arm of KEF.
“In an illiquid marketplace it is still the most attractive way
to retain the best balance-sheet ratios and help customers mitigate
their RV worries,” Nelson added.
