The revival that started in the middle of this decade continues to gather pace in Portugal, with the industry association and lease firms confident that growth will continue even though economic growth is likely to return to more sustainable levels. Paul Golden writes.
Data from the Portuguese Association of Leasing, Factoring and Renting (ALF) highlights the expansion of specialised financing products in 2018.
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The headline figures included a 37.3% increase in demand for real estate leasing – which was worth more than €1bn last year – and a more modest rise of 5.3% in movable assets leasing. The automobile leasing segment of the market was worth €1.5bn, and equipment leasing amounted to €767m.
The association’s former president, Paulo Pinheiro, observed that the growth of specialised financing in 2018 resulted essentially from the broad recognition of the advantages and benefits of leasing solutions compared to other less flexible options, and expressed confidence that this positive trend would continue through 2019 given the forecast for economic growth and rising demand from new customers, particularly in the SME sector.
Comments from the executive board of the IMF in July following the conclusion of a consultation with Portugal suggested that the country’s growth eased last year compared to 2017, in part due to weaker economic activity in Europe. Unemployment is at its lowest level for more than a decade, and growth in 2019 is expected to moderate to 1.7%.
Consumer price inflation remains subdued, but is expected to gradually increase in the coming years as wages pick up. It is also expected that the government will meet its 2019 budget deficit target, despite higher-than-expected transfers to Novo Banco, the bank created by the Bank of Portugal in 2014 to rescue the assets and liabilities of Banco Espírito Santo.
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By GlobalDataThe current real GDP level has now surpassed its pre-crisis level, although the IMF has called for further examination of the quality and composition of public spending with a view to shifting spending toward greater public investment.
The IMF observes that Portuguese banks have made significant progress in strengthening their balance sheets, with non-performing loans falling significantly in recent years. Nevertheless, troubled legacy assets remain high by European standards and profits are moderate with no significant acceleration in credit growth expected. This has led to calls for further efforts to improve asset quality, efficiency and governance.
Growth and Expectations
Asked to describe the health of the Portuguese leasing market as the final quarter of 2019 approaches, ALF president Alexandre Ferreira suggests that it is in good shape.
“This year, our projections for the first quarter have shown us that leasing maintains a growth trend aligned with expectations,” he says. “Real estate financial leasing was worth €200m, a 4.1% increase over the same period last year, while automotive and equipment leasing also confirmed an upward curve, increasing by 4% to almost €500m. This was due to the good performance of car leasing, with a total production of €324.6m and equipment leasing, which reached €174m.”
ALF members reported operational leasing growth of 2.2% in the first quarter of 2019, representing a volume of €146.4m, comprising €123.9m in passenger vehicles and €22.5m in commercial vehicles. In absolute terms, these figures correspond to a total of 6,987 passenger and commercial vehicles purchased in the first quarter, a decline of 1.7% over the same period last year.
“This decrease in the number of cars purchased is due to the instability that WLTP [Worldwide Harmonised Light Vehicle Test Procedure] has brought, which has reduced overall new car sales to 2016 levels,” notes Ferreira.
Focusing on the active fleet, ALF’s member companies verified positive levels of development with 113,469 managed vehicles, 6.6% more than in the same period last year and an increase of 17.1% in value, equivalent to €1.9bn. According to Ferreira, perception of the benefits associated with financial and operational leasing is becoming increasingly widespread, mainly due to its flexibility and advantages in terms of reducing costs or channelling and concentrating financial resources on companies’ core business.
“The leasing market generally reflects the performance of the wider economy and the needs of economic agents,” he says. “Therefore, linked with the improved economic and financial situation in the country, as previously shown, all segments are presenting continuous growth of new business volumes and expanding portfolios.”
Challenges
In addition to the economic environment, the Portuguese lease sector has had to deal with a variety of challenges over the last 18 months. These include:
- The increasing complexity of the regulatory environment, including the capital requirements for market risk regulation in the case of financial leasing as well as the introduction of new limitations in the use of vehicles in the case of operational leasing;
- Tax reform, such as the introduction of AIMI (an addition to the municipal property tax) in the real estate finance leasing market that was announced last year and covers homeowners with higher equity value, along with autonomous taxation and the WLTP in the operational renting sector;
- A gradual transition of the market to eco-friendly mobility, and
- The general digitalisation of the sector.
“The growth of the leasing market results largely from the work that the ALF has been doing together with its members in disclosing the different advantages and benefits of both operational leasing and financial leasing to the business community,” says Ferreira.
“The sectors have maintained the path of sustained growth, with companies increasingly recognising the benefits of leasing – namely the competitiveness, flexibility and adaptability it represents.”
For decades, specialised finance products were mainly used by large companies, he adds. Now, they are increasingly popular with SMEs.
Sustained Growth
The ALF president expects the market to expand this year, observing that the financial and operational leasing sectors should continue to grow in a sustained manner following the dynamism of the Portuguese economy, which forecasts a positive change in gross fixed capital formation of 6.8%.
“The biggest struggle tends to be with the stability – or lack thereof – in regards to legislation and tax levels, which have tended to penalise the automotive sector in particular,” he says.
On the subject of what his organisation is doing to encourage growth in leasing activity in Portugal, Ferreira says the Portuguese Association of Leasing, Factoring and Renting has the mission of defending and representing the common interests of its members, namely with any public or private entities, national or foreign, contributing to the technical, economic and social development of members’ accounts.
“In this context, we have promoted education sessions dedicated to the products we represent, we promote training sessions for our members and there is the component of being the meeting place for the sector to address common issues,” he continues, before expressing optimism about the prospects for the lease market over the next 12 months.
The development of the leasing market is highly linked to the economic evolution in Portugal and in Europe, but it is possible to anticipate a trend of growth, says Ferreira. “The sector will continue to show it is vital for the process of financing, modernising and strengthening the competitiveness of Portuguese companies. Characteristics such as flexibility and cost predictability make leasing one of the main instruments for companies that, operating in an increasingly global market, need faster and simpler access to resources in the short term.”
It is, of course, worth mentioning that there will be elections taking place in October, the outcome of which could alter the progress of the sector and the wider economy through the remainder of this year and into 2020. However, the ALF’s president notes that the financial and operational leasing sectors are currently in good health and providing important support to companies and the overall economy.
André Mesquita, managing director for sales at Grenke Portugal, notes that the Portuguese leasing market has entered its third year of solid recovery.
“The robust performance of the automotive sector, coupled with the machinery and industrial equipment sector now also demonstrating strength, has contributed to leasing market growth,” he explains.
“The machinery and industrial equipment segment is showing strong growth while other types of equipment – which includes energy generating assets such as photovoltaic panels – continue to experience higher demand from customers. In contrast, new leasing volumes for computers and business machines are flat.”
According to Mesquita, the most significant development in the Portuguese lease market over the last 18 months has been the growth of the use of digital signatures on contracts. “We offer our customers a quick and simple way to sign their contracts through digital signature,” he explains. “In Portugal, about 40% of our contracts are already signed digitally, which demonstrates a change in the mindset of corporate leaders.”
Grenke Portugal has been growing by double digits since 2016, and its managing director sales expects this three-year growth period to have expanded the business by more than 50% by the end of this year.
“We ended 2017 with 7055 contracts worth €51.7m,” he adds. “In 2018 we formalised 7,809 contracts worth €60.5m, and in the first half of this year we have alr00eady formalised 5,662 contracts worth €33m. We are expecting to reach €70m this year.”
To encourage growth in activity in Portugal, Grenke has established a protocol with the Institute for Support for Small and Medium Enterprises and Innovation, which was created in 1975 with the objective of helping micro, small and mid-size companies.
“The Portuguese economy has been growing in recent quarters, encouraging corporate investment,” says Mesquita. “If this scenario continues, we are confident and optimistic that it is possible to continue to grow.”
Javier Irigoyen, country manager of the Iberia cluster at BNP Paribas Leasing Solutions, also references modest growth in the number of lease contracts signed last year compared to 2017. “The real estate and vehicle segments are the biggest lease markets in Portugal,” he says. “Based on the information we have, the vehicles market has seen a better growth in comparison to the equipment market.”
Potential
When asked whether he is satisfied with market growth in Portugal, Irigoyen suggests that the market has a lot of potential.
“Since the creation of the Iberia cluster at BNP Paribas Leasing solutions, it has been a solid period in terms of sales growth. We truly believe that the synergy between Spain and Portugal will help us boost growth in Portugal,” he notes.
Irigoyen adds that the bank supports the development of its industrial partners by offering them financing solutions for their end customers, and the development of companies with full-service rental and fleet-management offers.
“We would like to underline our growth from 2015 to the end of 2018, during which time new business was up by more than 50%,” he adds. “We support the real economy and, at the same time, promote the circular economy. We help the manufacturers, but also the end users, to get access to finance solutions for them to grow their business in a sustainable manner.”
Irigoyen also expresses positive sentiment about the prospects for the local lease market over the next 12 months. “We are very optimistic,” he concludes. “As mentioned before, we expect a good growth of our business in Portugal.”
