Leasing business booming: growth rate at 6 percent

67 billion euro in new business | increased share of asset-investment market | growth driven by vehicle leasing

Frankfurt, 22nd November 2017 – Following the record results achieved in 2016, the leasing sector continues to boom, with the growth rate in 2017 reaching 6 percent. In terms both of new business acquired and of its share of the asset-investment market, the sector has once again managed to up its performance. This year, leasing companies have financed 67 billion euro’s worth of business in the Real Estate, Machinery, Vehicles, IT Equipment and ‘Other Assets’ segments, with hire-purchase transactions contributing 8.5 billion euro to this grand total. Whereas overall investment in equipment looks set to rise by just 2.3 percent, equipment leasing increased by 6.5 percent to 57.3 billion euro. This means that the overall share of the equipment-investment market accounted for by leasing has also increased, and now stands at 24.1 percent.

“We have every reason to be satisfied with this result. Leasing activity continues to outstrip the overall rate of economic growth, and has once again shown itself to be a powerful driver of investment in Germany,” says Kai Ostermann, President of the German Leasing Association (BDL). However, the upbeat mood generated by this growth has been dampened by low interest rates. “Persistently low rates of interest,” says Ostermann, “are having a markedly adverse effect on incomes and expenses”. And this is severely hampering the ability of the leasing sector to serve German businesses as an efficient investment partner.

Politicians need to keep framework investment conditions firmly in view

This partnership will be critically important in the coming year if, as expected, the upswing in the German economy continues to gain momentum, and brings about an increase in overall investment activity. The German Council of Economic Experts is predicting a 5.1 percent increase in equipment investment. “Given the healthy state of the economy, and the prevailing positive outlook, our politicians may be tempted to ignore the pressing need to create conditions that will encourage companies to invest,” warns Ostermann. “The outgoing CDU-SPD coalition government didn’t view this as a priority, and considerations of this kind clearly didn’t figure to any significant extent in the recently failed ‘Jamaica Coalition’ negotiations.”

“Regardless of who forms the next government, we will continue to urge politicians in general, and the governing parties in particular, to set in place improved framework conditions for investment. Red tape must be reduced, and a tax framework that is fit for purpose must be created. An overhaul of the fiscal depreciation tables, for example, is overdue. These haven’t been updated in 15 years, and have been out of step with actual technological life cycles for quite some time.” The ordinary useful life of assets acquired by companies is nowadays much shorter than allowed for in these tables, not least because of digitalization and the pace of change being dictated by ‘Industrie 4.0’. “For all of the above reasons, we feel the time has come for the reintroduction of the declining-balance method of depreciation. It reflects the change in the value of an investment over time more accurately than the straight-line depreciation method. That means costs are distributed more realistically over the useful life of the asset, and this frees up liquidity for new investments. In short, it relieves companies of financial pressure,” argues the BDL President.

Regulatory reform: reducing the administrative overhead

A further concern of the leasing industry has to do with regulatory requirements. The BDL believes that the regulators should take greater account of the low levels of risk associated with leasing transactions. “First, we feel leasing companies should be decoupled from the new requirements that the Financial Supervisory Authority has imposed on large banks,” explains Ostermann. “Secondly, we want to see an overall reduction in the amount of regulatory red tape the leasing sector has to comply with. For example, many of the requirements leasing companies are expected to meet in connection with the provision of documentation and information are extremely burdensome without being of any practical value.”

Developments in the various leasing segments

The main engine of growth in 2017 was Vehicle Leasing, with passenger cars and commercial vehicles accounting for 77 percent of all leasing business transacted. Leasing companies continued to punch above their weight in the very buoyant automotive sector, and they again increased their share of the market. Around 40 percent of all newly registered road vehicles are now leased. Vehicle leasing will have increased by 6 percent by the end of the year.

Leasing companies have also increased their share of the Machinery Sector in the current year. New business acquired in this the second largest leasing segment is up by 4.5 percent, and will thus in all probability outstrip the rate of growth in new orders received in Germany. According to the VDMA (the German Mechanical Engineering Association), orders placed in the first three quarters were up by just 2 percent. “This shows just how firmly leasing has established itself as an investment tool for mechanical- and plant-engineering companies,” says the BDI President.

The leasing of Office Equipment, Computers, Servers and IT Systems has stagnated in the current year. “After the sharp contraction of these market segments in earlier years, we see this as a sign that IT leasing may have a more positive future,” says Ostermann. However, these segments have changed considerably over time. “On the one hand there has been long-term erosion in the price of hardware, while on the other the process of migration to the Cloud remains ongoing.”

New business attracted through Real-Estate Leasing, which tends to be restricted to a small number of high-value transactions, failed to match the high levels recorded in 2016. Real estate accounted for just under two percent of all new leasing business transacted.

 

Overview of the Leasing Market in 2017 (Calculations Based On Projections)
New leasing business58.5 billion euro (+5.7 %)
Hire purchase8.5 billion euro (+10.4 %)
Equipment leasing57.3 billion euro (+6.5 %)
Real-estate leasing1.2 Mbillion euro (-20.4 %)
Overall leasing penetration rate16.1 %
Penetration rate in equipment segment24.1 %
Leasing-Segment TrendsYear-on-Year Comparison with 2016
Vehicles+6.3 %
Production machinery+4.5 %
Office equipment, IT systems0.3 %
Information and signalling systems, "Other products"+2.2 %
Aircraft, watercraft and rail vehicles+126.6 %