Strong economic growth continues to benefit the Irish lease industry, although regulatory challenges and the ongoing uncertainty around Brexit weigh heavily on the minds of many market participants. Paul Golden reports.
The last Department of Finance SME credit demand survey, covering the period October 2017 to March 2018, found that more than one in four (26%) small Irish businesses had applied for bank finance, up from 20% during the previous six-month period.
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Almost one in five (19%) expected to apply for finance over the following six months, up from 13% during the corresponding period in 2017. Almost one-third (31%) of the businesses surveyed had used leasing or hire purchase products, compared to 21% during the period March-October 2017.
As previously reported, the absence of a central register for lease activity makes it difficult to determine the size of the Irish lease market or the performance of specific sectors.
Within the vehicle lease market, Michael Hegarty, president of the Vehicle Leasing Association of Ireland (VLAI), notes that as a result of the Finance Bill going through Ireland’s legislature, the Oireachtas, his members are waiting on the decision as to whether the vehicle registration tax relief on passenger vehicles will be reversed.
He warns that such a move could steer companies towards offering cash in lieu, further increasing the grey fleet. “While there has been a slight shift for companies to offer a company car under a lease option, the introduction of PCP has impacted how end users perceive a value for money solution,” he adds.
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By GlobalData“PCP has certain exposure to the end user that does not apply to the traditional business operating lease, and with increased imports from the UK on second-hand vehicles, there is an increased risk of users exiting the company car option.”
LEGISLATION
From a leasing perspective, the biggest legislative change over the last 12 months has been the introduction of 0% benefit-in-kind on fully electric vehicles, although Hegarty claims the most recent budget imposed some conditions which will limit the growth of the electric vehicle fleet.
“The asset finance market in Ireland is in a strong position; we have seen that not just in activity, but also in what our customers are telling us,” says Vinny Coghlan, head of sales – asset finance at Bank of Ireland Finance.
“Our recent market research study tells us that over half of SMEs are positive about the Irish economy over the next 12 months, and that 57% expect their turnover to grow during the same period. This positivity has, and will continue to stimulate activity in the asset finance market, and allows us to support customers as they grow and expand.”
He suggests the spread of asset finance business over a number of sectors is one of the factors that has positioned the market in such a healthy state.
Agriculture, transport, manufacturing, retail and tourism continue to perform well, and increased investment in construction and national development projects have triggered demand that will continue to rise into 2019.
SME Finance & Leasing Solutions chief executive officer Eugene O’Donovan says the €1,000-70,000 segment of the market is vibrant across all sectors, with the finance requirements for second-hand assets growing year-on-year, and more competitors in the market with increasing penetration of peer-topeer lending evident.
Competition in the yellow plant and transport sector is intense as larger-ticket items are targeted for new sales by finance houses, he continues. “Pricing is key here to attain the business, with the end user now able to negotiate competitive funding. Substantial funding continues to be provided by the Strategic Banking Corporation of Ireland to the finance houses, which have seen strong growth in their loan books during 2018.”
GROWTH AND COMPETITION
Irish businesses are educating themselves on smart ways of maximising their budgets and cash flow, and making their money stretch and work for them, suggests Justin Twiddy, managing director at Grenke Ireland.
“The increased competition in the market has been significant and welcome as it allows us to demonstrate our competitiveness,” he says.
“We are seeing increased peer-to-peer lending as well as business bridging loan options, in addition to a greater interest in invoice finance services. This last segment is an area where we have seen significant growth across not just Ireland but also the rest of Europe.”
Twiddy refers to growth across almost all markets, particularly IT. “We are getting more and more requests to fund some of the emerging technologies such as drones, virtual reality technologies and 3D printing.
“These devices are advancing in their uses across a number of different sectors and businesses – for example, drones are being used by utility companies to scope out danger areas, architects are using them for viewing large building areas, forestry companies use them as security surveillance systems, and large food and retail companies are using them as delivery devices.”
At the end of last year, DLL and the European Investment Bank (EIB) agreed a scheme worth €200m to support Ireland’s leasing market by allowing companies to access finance at discounted rates.
The scheme is aimed at SMEs and mid-caps active primarily in agriculture, food production, construction and transport. Fergal O’Mongain, country manager – Ireland at DLL, characterises the current health of the asset finance market in Ireland as strong on account of a good number of providers from both a bank and non-bank base, serving B2B and also B2C at prime-tosubprime rates.
The most significant development in this market over the last 18 months has been the continued growth of independent non-bank leasing companies for both equipment asset finance and commercial finance, he adds.
“Auto sales are dominated by the personal contract plan product provided by both captives and local banks as white-label finance partners.” O’Mongain describes construction as a stand-out performer, as years of underinvestment and a lack of development have caught up on the country, and says other sectors such as agriculture are also performing strongly.
He also notes: “Car finance has started to slow, as the pent-up demand from the recession years has been substantially satisfied and we return to more normal levels of replacement cycles.”
REGULATED FRAMEWORK
Invigors Ireland partner Kieran O’Brien says the country’s exceptional economic growth has resulted in the expansion of the asset financing sector even though the main banks’ asset financing operations are facing significant challenges from operating within a regulated banking framework and the constraints placed on them through public ownership.
This has created opportunities for new entrants into the market with the addition of new local players and growing operations from the asset financing divisions of international banks, he says.
“The Irish asset financing market – excluding the aircraft leasing sector – is still not as mature or well developed as the UK or the rest of Europe, so there are, therefore, more opportunities for new independent players to enter the market and offer innovative financing propositions in addition to the traditional leasing products.”
According to O’Brien, the Irish marketplace has several smaller players that do not have the requisite size or scale to continue as viable long-term operators; he suggests it is probable that there will be some consolidation of these smaller players as their international owners sell them to larger leasing operators.
Asset financing providers need to consider the changing global customer profile and requirements, he adds. “The reality is Kieran that businesses are earning less from their traditional sales channels, so asset financing companies need to place a greater emphasis on equipment relationship management, which will not only better support their customers but will also generate new income lines.”
The strong growth of PCP may be curtailed if the government decides to introduce a stronger regulatory regime, and Invigors suggests that the asset financing industry should lead the way in embracing digitisation and elements of artificial intelligence to support the increasing trends towards asset usage-based contracts and services.
O’Brien describes the establishment of companies’ own captive or vendor financing operations over the last few years as disappointing, although he suggests there are major opportunities for companies – especially in the manufacturing and ICT sectors – to look again at the advantages of setting up their own financing capabilities as a means of strengthening their established footprint with their customers.
BREXIT
Asked how Brexit is likely to impact the lease market, Hegarty says the lack of clarity and focus on a speedy agreement is having a considerable impact on business, with the influx of imports putting pressure on residual vehicle values and resulting in potentially higher whole life costs.
“The quicker a solution is agreed, the quicker it will bring certainty to the market and regulate vehicle imports,” he adds.
“Currently the ratio of new vehicles registrations to imports is one to one.”
Brexit has created a huge degree of uncertainty for the wider Irish economy, including the asset financing market.
Potential elements impacted include asset valuations, taxation and tariffs, interest rates and foreign exchange rates, all of which create uncertainty on companies’ investment plans, with a consequent impact on asset financing.
“In addition to the potential economic impacts, there will be significant additional operational burdens put on asset financing operations to handle increased compliance and regulatory requirements,” says O’Brien.
“There are opportunities for several of the larger UK asset financiers to take advantage of Brexit opportunities. This could be done by either setting up greenfield operations here or by converting current Irish branch operations into fully fledged captives.”
Lombard’s consumer motor book has grown substantially, despite the marginal drop in new car sales reported by the Society of the Irish Motor Industry, observes Colm Furlong, head of asset and invoice finance at Ulster Bank.
Investment in machinery is also strong, as SMEs strive for efficiencies and move towards greater automation. “Continuing uncertainty over Brexit is impacting confidence in some areas – for example the agri-food sector – and supporting sectors such as farming and transport, although they remain robust overall,” he adds.
“Elsewhere, sales of new vans and new trucks are up 5.9% and 4.8% respectively to the end of October 2018. Uncertainty affects confidence and planning for the future, which slows demand for capital investment, but once Brexit happens – in whatever form it takes – we believe that consumers and SMEs will adapt.”
While the precise impact of Brexit remains unknown, Twiddy is confident that there will not be any significant impact within the asset leasing segment to the more serviceled industries such as medical, dentistry or IT.
However, he accepts that it will have an impact on export-led companies, and notes that those sectors are currently in planning and reviewing their options. “While we have no greater insight into what Brexit will mean than we did the morning after the vote, we are hopeful that there will be some agreement rather than a ‘hard Brexit’,” says O’Mongain.
“There will likely be little immediate impact if we get the discussed transitional period, but beyond that we believe that a significant impact will certainly arise in the supply chains and expect this to be somewhat negative for the Irish transportation sector, while the introduction of tariffs would certainly not help the agricultural exporting industries.”
NON-BANK LENDERS
Irish SMEs are far more accepting of nonbank lenders than ever before with significant growth in the construction sector, especially for plant and machinery assets.
That is the view of Ronan Horgan, CEO of Capitalflow, who observes that many customers in a sector that was decimated during the recession are now back on their feet and need a lender that will think in the longer term as a partner.
However, he also acknowledges that the agricultural export market is being affected by Brexit, with a number of mushroom exporters seriously challenged by the drop in the value in sterling.
“We believe that the uncertainty over Brexit is dampening SME’s confidence to continue to invest. In some cases, business owners have decided to wait to see the outcome of negotiations, which could drag on another 12 months,” concludes Horgan.
“In a way, this cooling effect means that the economic recovery in Ireland will occur more slowly, but last longer.”
