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Equipment Leasing Market Report
Key Note Publications Ltd, Jan 1999
Between 1994 and 1998, the leasing equipment market increased in value by 43.4% from £15.53bn to an estimated £22.27bn. Owners of the assets (lessors) buy a variety of equipment which they rent to the users (lessees) over the period of the contract.
There are two basic types of lease - finance lease and operating lease. They are determined primarily by the type and cost of the equipment and the time it takes for full repayment. Other factors which affect the terms for lessees are the cost of acquiring the leased assets, their rate of depreciation and expectations regarding residual values, which are more important for some assets than others.
Most of the equipment leased in the UK is based on machinery and industrial equipment commercial road transport vehicles and cars computers, business machines and office furniture ships aircraft and railway rolling stock. Real estate is also a heavily leased asset, but is excluded from this report as it is not considered to be equipment.
The leasing of assets is popular with all types of industrial and commercial businesses, institutions and other organisations, as payments can be spread over the short, medium or long term. However, recent changes to tax regulations have reduced tax allowances on the depreciation of assets. This has severely reduced the attraction of finance leases for lessors who acquire long-life assets. Few leasing companies want to switch to operating leases for the long-term customer who requires large capital assets, because of the cost implications, but they will lose out on the recovery of capital allowances if they persist with finance leases. A variety of alternative options may be tried to resolve the dilemma, but whether they are successful will depend on the interpretations put on these efforts by the tax authorities.
Owing to its potentially low profitability and the greater financial risk for the lessor, the future of the finance lease is relatively poor. It is likely that the market for big ticket leasing will show much slower growth in future. If the traditional finance lease is allowed to diminish in importance, it will need to be replaced by another form of instalment credit. Undoubtedly, the leasing industry will devise a formula to overcome the changes in tax allowances and accounting standards that affect the industry, but the growth rates of past years are unlikely to be repeated in the near future.
Key Note forecasts that the value of leasing business will increase by 27.9% between 1999 and 2003, to reach £29.92bn. It is assumed that the UK will continue to lead Europe in consumer asset finance, which is unaffected by finance leasing and accounts for around 40% of the total market. In addition, the huge increase in railway rolling stock leasing will help compensate for parts of the business that are potentially vulnerable to the changes in accounting regulations and tax laws.
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