Renewable energy has become a major focus for lease companies in Turkey as they seek to diversify their businesses in the wake of ongoing uncertainty around sectors such as real estate and vehicle leasing. Paul Golden reports
At the start of this year the International Monetary Fund (IMF) was making encouraging noises about Turkey’s economic prospects.
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In its January 2020 World Economic Outlook it referred to a return to historical norms of growth for a group of underperforming and stressed emerging market and developing economies that included Turkey and expectations of ongoing recovery as financing conditions turned less restrictive.
Following a visit to the country in December, the IMF observed that while private banks have cut back on lending, state-owned banks have engaged in a major credit expansion which picked up pace in the early part of last year.
The IMF stated that ‘economic growth has resumed, buoyed by expansionary fiscal policy, rapid credit provision by state-owned banks, and more favourable external financing conditions’.
But a World Bank report published in June reflects how expectations have changed since the start of the coronavirus pandemic. The report states that the collapse of the tourism trade will be felt particularly strongly in a country where tourism accounts for a sizeable share of GDP.
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By GlobalDataNoting that tourism tends to recover more slowly than other sectors, the World Bank forecasts that Turkey’s economy will shrink by 3.8% in 2020, reflecting a continued fall in investment, shrinking exports amid weak external demand, and the disruption to activity due to restrictive measures.
GDP outlook
However, it also acknowledges that the economic support package announced in March provides tax breaks and financial support for firms and predicts the economy will return to growth next year on the back of gradual improvement in domestic demand.
In another assessment, international forecasters expect Turkish GDP to contract by 4.3% this year, according to a survey by Consensus Economics, the Financial Times reported on 3 August.
Fadi Hakura, a specialist in Turkish affairs at international affairs think tank Chatham House, has noted that following the 2018 economic crisis Turkey’s economy achieved a ‘V-shaped’ recovery from a recession lasting three quarters to return to quarterly growth above 1% in the first three months of 2019.
However, he warns that this quick turnaround was built on vast amounts of cheap credit used to stimulate a consumption and construction boom. Turkish domestic credit grew by around 13% last year and the budget deficit jumped by 70% due to higher government spending.
Turkey’s central bank fuelled this credit expansion by cutting interest rates aggressively to below inflation and, since the start of this year, purchasing lira-denominated bonds equivalent to around a third of total acquisitions last year to push yields lower.
It has also linked bank lending to reserve requirements (the money banks have to keep at the central bank) to boost borrowing through state and private banks.
Hakura explained that commercial banks have reduced deposit rates on lira accounts to less than inflation to encourage consumption over saving. Together with low lending rates, the boost to the economy has flowed via mortgages, credit card loans, vehicle leasing transactions and general business borrowings.
In the real estate sector, along with the return to office protocols underway in many organisations, social distancing measures are likely to be part of wider implications for long term office demand.
According to real estate services company Cushman & Wakefield, while there was an acceleration in leasing activity during the first quarter of this year demand is likely to slow down in the coming months. However, the company also predicts that pent-up demand is likely to pick up quickly post-pandemic in line with major driving forces of workplace optimisation and flexible office space.
The industrial market has been less impacted despite supply chain disruptions. Major automotive companies have temporarily halted manufacturing in Turkey, but the logistics market is set to gain momentum with warehouse leasing activities along with the urgent demand of e-commerce and online retailers.
Cushman & Wakefield suggests that the physical retail market will face major challenges regarding uncertainty in lease agreements. These agreements remain in place and shopping centre owners are under pressure to allow ‘rent holidays’ with the exemption of store operating costs for the non-operational period.
In November, the European Bank for Reconstruction and Development (EBRD) extended a new loan to QNB Finansleasing, a leasing subsidiary of Turkish lender QNB Finansbank. The EBRD provided a syndicated loan of €50m that followed a previous loan of €25m extended in 2018. The latest loan is expected help strengthen the financial sector in the country and contribute to the wider proliferation of leasing.
Although often a viable alternative to bank financing, the EBRD noted that the share of the Turkish leasing market as a percentage of GDP is one of the lowest among comparable economies.
More recently, the European Fund for Southeast Europe (EFSE) provided a senior loan of €20m to Yapı Kredi Leasing in June. The investment aims to support the ability of micro and small enterprises and rural businesses in Turkey to continue operations in an economic environment made difficult by the Covid-19 crisis.
The loan will be used to boost new sub-leases for micro and small enterprises, an important economic segment that is being especially affected by the economic ramifications of the pandemic.
EFSE board chairman, Christoph Tiskens observed that micro and small enterprises provide a significant share of employment and income generation in Turkey and it is therefore of utmost importance that they retain access to the financing they need to sustain their operations.
In a similar vein, IFC (International Finance Corporation — a member of the World Bank Group) provided a $50m loan to Yapı Kredi Leasing to increase access to long term finance for small and medium enterprises. Yapi Kredi Leasing will use the loan to continue financing its clients, particularly businesses with operations in health care, medical equipment, food, packaging, e-commerce and logistics.
Half of the financing will be channelled to climate-related initiatives that will help these enterprises minimise their energy bills. Since 1996, IFC has provided multiple investment products to the company to support its expansion into the SME sector, with a particular focus on climate-friendly lending for energy efficiency measures and small scale renewable energy-related transactions.
Yapı Kredi Leasing’s general manager, Fatih Torun, said the company was focused on minimising the negative effects of the pandemic.
Renewable energy projects have become a major focus for Yapı Kredi Leasing as the firm recently secured a senior loan of €20m from the Green for Growth Fund (GGF).
The GGF is a public-private partnership that invests in measures designed to cut energy use and CO2 emissions and improve resource efficiency in 19 markets across southeast Europe, the Caucasus, Ukraine, Moldova, the Middle East and North Africa. The fund provides such financing directly to renewable energy projects, corporates and municipalities or indirectly via selected financial institutions.
The main purpose of this financial package is to expand the availability of renewables, in particular, rooftop photovoltaics or PV for self-consumption at industrial facilities. The two institutions have set a target of 38.6GWh of primary energy savings per year and the annual reduction of carbon dioxide emissions by 8,100 tons.
Another renewable energy financing deal has seen Garanti BBVA Leasing and solar power project developer Smart Energy sign a strategic alliance to offer financing to investors interested in this sector.
In the vehicle lease segment, a report from the Turkish auto leasing and rental companies association (Tokkder) on the performance of the operational leasing sector during the first quarter of this year found that the operational vehicle leasing sector had contracted by just over 13% compared to the same period last year and was down 5% from the final quarter of 2019 to stand at 264,000 vehicles.
Encouraging pattern
By the end of the second quarter, a more encouraging pattern was emerging though as lockdown restrictions were eased and people returning to work started using private vehicles rather than public transport.
Tokkder chairman İnan Ekici told local media that his member firms had reported a significant increase in business and said the association did not expect to see a significant decline in long term leasing since low-interest rates had ensured the affordability of lease vehicles even for companies whose business had lost revenue during the pandemic.
A paper looking at the short, medium and long term effects of Covid-19 on the European used car industry and particularly leasing companies published by Indicata in the second quarter of this year supported this view, noting that countries with low infection rates – such as Turkey – have been least affected.
In March, Athlon announced a partnership with Hedef Filo, a fleet leasing company with 20,000 vehicles across Turkey. The partnership includes leasing and services such as consulting, maintenance, roadside assistance, accident management and repair, custom documentation and insurance and international reporting.
Mobility is a significant market for lease companies in Turkey, with LeasePlan’s Mobility Monitor 2019 survey finding that the country had the second most positive attitude towards electric vehicles of the 16 countries covered, behind only Portugal.
This time last year the Turkish Association of Financial Institutions (FKB) reported total assets of TL 129bn (£13.3bn), a year-on-year rise of 7.5%. FKB president Aynur Eke observed that the sector had experienced a higher level of economic fluctuation compared to the previous year, although SCT (Special Consumption Tax) and VAT advantages that paved the way for automotive financing initiated a degree of recovery.
As of the end of the first quarter of this year, the FKB reported business volume of TL 4.2bn and total receivables of just under TL 50bn across the 22 companies operating in the lease sector.
According to Cüneyt Akpınar, chairman of the financial leasing sector representatives board of the FKB, the companies that operate within the framework of the Banking Regulation and Supervision Agency (BRSA) rules continue to manage risk efficiently.
“The main challenge facing the sector is not being able to realise its potential growth,” he says. “The performance of the sector is measured by penetration rates showing constant capital investments in Turkey financed by financial leasing companies as a percentage of total capital investments.”
A paper published by the Industrial Development Bank of Turkey last year references previous research showing that small Turkish firms finance on average 13 percentage points less investment with external finance than large firms, simply because they do not have full access to bank loans. Yet small firms were also found not to use disproportionately more leasing or trade finance compared to larger firms.
Financing from these sources is positively associated with financial development and does not compensate for lower access to bank financing of small firms in countries with underdeveloped institutions.
Leasing penetration
FKB data on leasing business volume as a percentage of total investments shows penetration sitting at around 2.5%, having hovered around 5% from 2011 to 2018
“In Turkey, the penetration rate attained its highest level of 9.8% in 2007,” observes Akpınar. “Within a few years the penetration rate had decreased to 2.5% as a result of the global financial crisis and competition in the banking sector.
“One of the reasons for the decrease in recent business volume is the coronavirus pandemic, although our members have supported clients who have experienced difficulties in making their payments by restructuring their payment schedules.”
In the medium term the industry has set a target of increasing the penetration rate to 5% through investment in digital technology and the diversification of distribution channels.
“It is deemed that with the entry into the market of leasing companies which are non-bank subsidiaries and established by sellers with global capital, the penetration rate will reach 10% in the long term,” adds Akpınar.
The FKB estimates that leasing business volumes in 2020 will reach approximately TL 21bn and may reach as much as TL 35bn by the end of next year.
Ranked 24th in the world
According to the White Clarke Global Leasing Report 2020, which ranks countries by leasing volume, Turkey was ranked 24th (compared to neighbours Bulgaria 36th and Greece 48th). Citing figures for 2018, White Clarke Group reported that total new leasing business in Turkey was $5.24bn (with growth down 4.16% on the previous year). White Clarke sourced its figures from Leaseurope.
Source: White Clarke Global Leasing Report 2020
Key data at a glance
IMF revised real GDP growth projections (due to Covid-19)
2020 -5.0%,
2021 5.0%
Source: IMF World Economic Outlook: The Great Lockdown, published April 2020
GDP per capita (pre Covid-19)
$28,270
Source: OECD, 2019 ($USD)
