Kuwait’s construction industry value is forecast at approximately USD 3 bn in FY13, representing a real value annual growth of 3.6%. Kuwait also has commendable experience in the infrastructure sector, to be an ideal market for equipment rental companies
In Kuwait and other GCC countries leasing and real estate sector caused by failure to achieve expected results
First Equilease report confirmed that Kuwait’s construction industry value is forecast at approximately USD 3 bn in FY13, representing a real value annual growth of 3.6%. Kuwait also has commendable experience in the infrastructure sector, to be an ideal market for equipment rental companies
Written by; Ahmed Fathy
First Equilease report mentioned that Equipment leasing using the same data, a back of the envelope calculation reveals that Kuwait has a potential market of USD 3 Billion.In Kuwait and leasing is usually associated with real estate and personal automobiles. As a result
“Equipment Leasing” is yet to achieve its full potential. Equipment required by businesses is usually procured through outright purchase or conventional debt. Government spending on infrastructure and the recent surge of Islamic finance has provided a perfect platform for equipment leasing to flourish.
Kuwait’s construction industry value is forecast at approximately USD 3 bn in FY13, representing a real value annual growth of 3.6%. Kuwait has been slowly moving away from oil based economy to a more diversified economy; however its mindset has been conservative towards inward investments. It has got huge oil reserves and has been running a budget surplus for some years now. In the year 2013, approximately USD 12.6 Billion has been allocated to boost infrastructure investments and growth. Kuwaiti firms have commendable expertise in infrastructure and construction making them an ideal target market for stand-alone leasing companies.
Equipment leasing as a % of GDP stands at 1.67% of GDP among top 50 equipment leasing nations.
Construction Industry in the GCC region has been one of the major customers for equipment leasing. According to industry reports from MEED, there are close to USD2 Trillion worth of projects that are under underway in the GCC region making them one of the real estate and construction hot spots. This also makes them tied to the vagaries of global economy. To counter this, Governments in the GCC region are looking to invest in infrastructure projects. Fuelled by dollar revenues from oil export, the values of projects that are planned / underway exceed the GDP of each country in the GCC region.
ELFA Monthly Confidence Index
Owing to paucity of data in the equipment leasing sector in the GCC region, we use the Monthly Confidence Index for the Global Equipment Finance Industry (MCI-EFI) which is designed to collect leadership data. The index reports a qualitative assessment of both the prevailing business conditions and expectations for the future as reported by the key executives from the $827 billion equipment finance sector.
US and GCC region are highly correlated owing to their mutual trade relations and as a result any growth in US economy is positively expected to impact the GCC region. The ELFA Monthly confidence Index serves as a barometer in judging the confidence of businesses in taking up long term leases, higher index value representing higher confidence.
Business owners in the Middle East region prefer to own equipment either through outright purchase or through bank finance. While this might be a good strategy during a good economy, it might backfire when the economy does not do very well. Huge capital investments can be cutback and more efficiently used using “sale and leaseback” transaction.
Sale and leaseback transaction
A sale and leaseback constitutes an arrangement where the seller of an asset leases back the same asset from the purchaser.
The lease arrangement is made immediately after the sale of the asset with the amount of the payments and the time period specified.
Essentially, the seller of the asset becomes the lessee and the purchaser becomes the
lessor in this arrangement.
The lessee then pays a fixed amount as rent for the use of the asset, at the end of the lease period the ownership of the asset transfers back to the business.
A company can use sale and leaseback transaction judiciously to improve its various financial and operational metrics. Financial Ratios – Sale and leaseback might improve the company’s profitability and asset turnover ratios among others.
Improve Bottom-line – When structured as an operating lease, the depreciation is not charged to the P&L statement resulting in reduction of overall expenses. Business Flexibility Leaseback helps the company in reducing their fixed capital investment thereby help companies in taking up opportunities that might not have been possible otherwise.
Focus on Core – The lessee can focus on their core operations instead on other activities. In the construction industry, companies are required to spend time, money and effort in maintaining the equipment in operating condition.
U.S. Equipment Finance Market: Emerging with Renewed Vitality
US economy is seeing green shoots of recovery in 2014 and is estimated to grow at 3% this year (Highest rate since the recession set in in 2008-09).
Economic growth is expected to bring in more investments into equipment and software. A rise in interest rates is expected in 2014 and since lease rentals rates are tied to interest rates, companies might try and work out long term lease contracts.
Finance volumes are at all-time highs, the return on assets is at a five-year high and the charge-off rate is at a five-year low.
Banks have taken a more prominent role in the market, but there are still many viable market segments where captives and independents have excelled
Berkshire Bank said it has established a new business unit in Hartford focused on equipment
Leasing. Berkshire’s Equipment Leasing Group will target equipment-lease transactions ranging in value from $250,000 to $5 million.
The division will focus on variety of industries — construction, manufacturing, medical, dental, technology and transportation.
Leasing in the Shadows
The House of Lords EU Sub - Committee on Economic and Financial Affairs on 10 December held a one-off evidence session on the issue of shadow banking, the parallel world of unregulated banking activity, which although recognized as an important part of the global financial system, is dangerously large - in the region of €17.5 trillion across the EU.
The Lords Committee will be asking Patrick Pearson, Director for Financial Markets at the European Commission, how it is seeking to reform the shadow banking sector within the EU, and with what levels of success.
Among the questions Pearson will face will be, “Is there any danger that regulation of the sector could prevent it being an alternative financing channel for the real economy?” That’s an issue for the asset finance industry (aka alternative funding) because leasing is a candidate for inclusion in the definition of shadow banking.
What happened in Equipment Leasing in GCC?
Feb 2013 - Ithmaar Bank, a Bahrain-based Islamic retail bank, announced in February that it had merged with one of its Bahrain-based associates, First Leasing Bank.
The announcement follows the final approval of the Central Bank of Bahrain (CBB) and the Bahrain Ministry of Commerce and Industry (MOIC), as well as the completion of the three-month and the sixty-day notice period required by the CBB and the MOIC respectively
Total new leasing volumes for Q3 2013 reported by Leaseurope’s sample of firms was €16 billion, det erioration on the volumes reported in Q3 2012.
In fact there has been a general trend of decline in new business since the start of the Index time series.
Marie-Christine Ducholet, CEO of Society Generate Equipment Finance, commented, “The European leasing industry has been dealing with a difficult economic environment.
European business investment has continued to contract and is expected to fall by 2 percent in 2013.
As we draw closer to year end, it is however reassuring to note that this trend is at last expected to reverse in 2014 and we can finally hope to put this drawn-out crisis behind us. The decrease in the Leaseurope Index cost/income ratio in Q3 is encouraging and speaks to the strength and flexibility of leasing business models.
We can therefore expect to see improvements for the leasing industry going forward.”