Equipment Leasing Insider

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1 Equipment Leasing Q Welcome to our newsletter Welcome to First Equilease's Q edition of the Equipment Leasing. In this issue of the newsletter, we focus on Kuwait s commercial real estate sector. The commercial real estate market in Kuwait is a bit subdued when compared to its peers such as Dubai and Qatar. While both Dubai and Qatar have major events lined up that justifies such huge spending, Kuwait s spending on real estate largely focuses on housing and investment properties. Prices of the commercial properties have more or less remained stable in 2014 across the key governorates. Key construction projects such as KIA s headquarters and Kuwait International Airport s expansion plan offer an exciting potential for the equipment leasing industry. The ELFA monthly confidence index seems to have bucked the downward trend with the index rising in September, thereby signifying higher confidence exhibited by the business owners. We are eager to hear your suggestions and feedbacks. If you would like to know more about any of the topics covered in the Newsletter, please feel free to get in touch with us. Best wishes, Mohammed Al-Qahtany Chairman & MD, First Equilease

2 Table of Contents Foreword 1 Kuwait Commercial Real Estate 3 Equipment Leasing and Finance Association Monthly Confidence Index 7 Latest from Global Equipment Leasing News 9 Open-End Lease vs. Closed-End Lease 12 2

3 Value (KD Mn) No of Transactions Equipment Leasing Q Market Analysis Kuwait Commercial Real Estate Kuwait s commercial property segment has seen some momentum going in its favor on the back of growing private sector spending. The sales in the commercial sector during August 2014 were at KD 14Mn up from KD 3.4 Mn it witnessed at the end of July The 1 st half of the year witnessed a healthy uptick in the transactional activity but it was weighed down by the poor business environment and high vacancy rates. Delays in development projects have played spoil sport and have slightly reduced enthusiasm among the investors. Figure 1: Commercial Real Estate Performance Q Q Q Q Q Q Q Q Q Q Q Value (KD Mn) Commercial (Quarterly) No Of Transactions Source: Ministry of Justice (MoJ) The sale value of commercial properties had increased to KD Mn in the 2 nd quarter compared to KD Mn witnessed during the 1 st quarter of 2014; thereby taking the 1 st half total to KD Mn. The value of transactions that took place during 2 nd half of 2014 is KD 51 Mn higher than the trade value recorded during the Q2 of The transactional value in Q is a two-year high surpassing values that were achieved during Q2 and Q3 of However, Q witnessed a dip in sales with total value recorded at KD Mn. 3

4 KD Price Movements in Governorates The average prices of commercial real estate in major governorates increased by 1% during the 2 nd quarter of the year The Capital Governorate, which houses most of the administrative buildings, commands the highest average price per meter in the region. Figure 2: Average Price per Meter for the Commercial real estate properties in various Governorates 7,000 6,000 5,000 5,898 5,948 4,000 3,000 3,479 3,525 2,448 2,483 2,845 2,868 2,939 2,969 2,000 1,000 - Capital Hawally Al Farwaniya Al Jahra Al Ahmadi Q Q Source: KFH While prices have remained stable in majority of the country, there were few areas where price increases were witnessed. Al Madina witnessed increase of 5%, and some places in the area of Al Qiblah witnessed rate increase of 2.5% 1. Commercial real estate investment in Kuwait does not follow a clear pattern and sales value fluctuate on a monthly basis and the average transaction value can be skewed heavily by one or two high value transactions. 1 KFH 4

5 Equipment Leasing Q Figure 3: Real Estate (Monthly Average Comparison) Sale Value Number of transactions Average Transaction Value (YTD) Source: NBK Monthly Economic brief, All Amounts in KD Mn with the exception of number of transactions, MoJ Monthly real estate sale value was the highest in the month of June 2014, totaling KD Mn followed by May (KD 40 Mn) and April (KD 39 Mn). Table 1: Top Commercial Real Estate Projects Project Name Project Value ($ Mn) Status KIA - Kuwait Investment Authority Headquarters Construction - Execution Kuwait DGCA - Kuwait International Airport Expansion - Infrastructure - Buildings Package Construction - Execution KOC - West Kuwait Mega Complex Construction - Execution NBK - National Bank of Kuwait Headquarters Construction - Execution Total Source: Zawya Projects 5

6 The office projects taking place in the region hold another potential opportunity for equipment leasing. While construction of the building requires equipment which could be leased, the relationship does not have to necessarily end at that juncture. Computers, furniture and other office equipment are certain items that can continue to provide some interesting business opportunities. The second biggest commercial projects in the table above, the Kuwait International Airport Expansion project, holds huge potential for equipment leasing. The construction activities that are taking place as part of the plan include the new expansion project of Terminal (2), the construction of a third 5.4 kilometers-long runway, the extension of the current east and west runways, the construction and equipping of another watchtower and the completion of the second phase of the air cargo city. Ground handling equipment, Sky bridges, Heavy duty trucks/ vehicles etc. are some of the equipment that would be required for the project. Airport expansion project offer a high turnover potential as most of the equipment have a short life span owing to regular usage and constant maintenance is required in order to keep them in running condition. 6

7 No of Units Total market Value ($ Mn) Equipment Leasing Q Crane equipment market in the GCC region The demand for cranes in the GCC region have ebbed and flowed according to the economic growth in the region. It constantly grew during the economic boom of and reached its peak during The number of cranes used in the construction market fell by more than half during 2009 on back of falling real estate prices in the region. Dubai was the most affected in the region owing to the real estate crisis. Figure 4: GCC Construction Crane Market 2,500 2,000 1,500 1, ,443 1, e 1,600 1,400 1,200 1, Crawler Cranes Rought Terrain Cranes2 Estimated total market value (Mn $) All Terrain Cranes Tower Cranes Source Manitowoc Finance The overall market value reached its peak of USD 1.4 Bn in 2008 before falling drastically to USD 54 mn in The market value for 2014 is estimated at USD 708 Mn, representing a 51% fall from its peak. However, the crane market has been witnessing a growing trend in the past 3 years on back of increasing real estate activities in the region. With the current pace of construction and announcement of new projects in the region, this industry offers a huge potential for equipment leasing business. Globally the financed equipment industry is expected to be 57% of the total equipment. Applying the same ratio this opens up a market of roughly USD 400 Mn for the equipment leasing industry in the GCC region. There has been a huge rise in revenues over the past 18 months in the construction sector driven by the lion s share of construction spending that has happened in the region which is expected to be positive for the equipment 7

8 USD Bn leasing market. The total value of construction projects going on in the Middle East in 2014 is estimated at USD 2.5 Trn according to MEED. The financed equipment market and the non-finance equipment market has been quite stable in the past few years with finance equipment market growing at a higher rate (CAGR 3.21%) than the non-financed equipment market (CAGR 1.33%). The higher growth rate for the financed equipment market is a positive sign for the leasing equipment industry. According to estimates from ELFF, financed equipment as a % of total equipment market stands at 57%. Figure 5: Total Finance vs Non-Finance Equipment Market 1,800 1,600 1,400 1,200 1, e 2014e 2015e Financed Equpment Non-Financed Equipment Source 2014 ELFF U.S. Equipment Finance Market Study, Keybridge Research LLC 8

9 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Equipment Leasing Q Trends Equipment Leasing and Finance Association Monthly Confidence Index The Equipment Leasing and Finance Association (ELFA) Monthly Confidence Index is one of the most widely known index which is used by industry leaders worldwide to gauge the business confidence. The Equipment Leasing and Finance Association is the trade association representing financial services companies and manufacturers in the $827 billion U.S. equipment finance sector. Figure 2: ELFA Monthly Confidence Index Source ELFA The ELFA monthly confidence index which fell throughout the 2 nd quarter of 2014 continued its trend in the first two months of the 3 rd quarter but has managed to inch up marginally in the third month and ended the 3 rd quarter at The Index ended at 58.9 during August 2014, the lowest since the beginning of the year. There was a marked change in the number of survey respondents who expected business prospects to improve over the next four months, with 36.4% of respondents concurring with the view in Sep 2014 (Up from 18.2% in August). An 9

10 overwhelming 60.6% of the respondents expect the business conditions to remain the same over the next four months while 3% of the survey respondents expect business conditions to be worse off over the next four months. The Equipment Leasing & Finance Foundation is predicting 5.5% growth in equipment and software investment in 2014, a substantial increase from its July forecast of 2.6%. 10

11 Equipment Leasing Q Latest from Global Equipment Leasing News Rasameel and Ejarah Global to develop $500m Ejarah Investment Program Rasameel Structured Finance Company, announces that its Dubai based wholly owned subsidiary, Rasameel Investment Bank Limited, has signed a formal agreement with Ejarah Global Limited to jointly develop an Ejarah Investment Program of up to $500m over the next three years. The Ejarah Investment Program will develop and launch a series of Sukuk issuances fully backed by commercial equipment and machinery on lease to high credit quality corporate and public sector entities in North America, the United Kingdom, Europe and Australasia. The Ejarah Investment Program will deliver attractive risk-adjusted Shariah compliant fixed income to wholesale investors in the Middle East and other Islamic markets. Following the successful GBP200m UK sovereign sukuk issued in July 2014, which attracted investor demands of GBP2bn, the Ejarah Investment Program will be launched later this year and will include Sukuk backed by UK-based equipment leases. Other Sukuk offerings will be denominated in US Dollars, Australian Dollars, Canadian Dollars and Euros to bring to the Shariah compliant investment market for the first time an internationally diversified strategy for liquidity management. Construction machinery: Digging deeper Growth in the GCC s construction market is fuelling more demand for heavy machinery. Despite the worldwide financial crash in recent years, which cut sales by over a third, the market for earthmoving equipment showed a 1.67% compound annual growth rate (CAGR) between 2008 and By 2015, the global construction equipment market is expected to rebound to an estimated market size of $145.5bn, said a recent report by Ventures Onsite published for PMV Live, which will take place in November as part of the Big 5 trade show. Holger Amann, director Liebherr Middle East, said: The recovery of the project sector and the growing scale of projects across the GCC is creating significant new demand for heavy duty equipment in the region. Construction for projects such as the Expo 2020 in the United Arab Emirates and the FIFA World Cup 2022 in Qatar are part of the story, but on-going investment in healthcare, education and housing projects has also supported healthy growth across the industry. IFC Lends $96 million to Yapi Kredi Leasing to Promote Energy Efficiency and Renewable Energy in Turkey IFC, a member of the World Bank Group, is lending $96 million to Yapi Kredi Leasing, Turkey's leading leasing company, to increase its leasing operations in energy efficiency and renewable energy projects. This long-term financing to Yapi Kredi Leasing will reduce greenhouse gases as it will be used to finance renewable energy 11

12 projects. IFC will directly lend $64 million of this loan from its own resources. The remaining $32 million has been raised through the IFC-Managed Co-Lending Portfolio Program, a syndications platform that allows institutional investors to passively participate in IFC's senior loan portfolio. Fitch: Modest Differentiation Among Equipment Leasing Sectors While the truck, container, railcar and aircraft leasing sectors share many common attributes, including reliance on wholesale funding, business cyclicality, and potential residual value risk, there are some points of differentiation which can result in a more or less favorable credit view of the respective sectors, according to a special report published today by Fitch Ratings. For example: The truck leasing sector is typically less exposed to business cyclicality as a result of more diversified/durable earnings streams, while also typically employing higher unsecured funding levels. On the other hand, the truck leasing sector is viewed as relatively more susceptible to technological change/disruption, namely as it relates to the fuel efficiency and emissions of the leased equipment. Truck leasing also tends to be concentrated within individual countries or regions as opposed to exhibiting global diversity. The container leasing sector typically benefits from increased global diversification, relatively longerlived portable assets that are less sensitive to technological change, and lower relative historical loss experience. Conversely, the container leasing sector typically exhibits a higher reliance on secured funding, less revenue diversity and higher customer concentrations. The railcar leasing sector typically exhibits higher relative customer industry diversity, and the railcars themselves are also generally viewed as less exposed to residual value risk than trucks and aircraft given the slower pace of technological change. Similar to the truck leasing sector, the railcar leasing sector tends to be concentrated within individual countries or regions as opposed to exhibiting global diversity. Aircraft lessors are viewed as having higher relative growth opportunities and greater flexibility in moving assets between lessees to match supply and demand or reposition fleets during stress. However, along with these positive attributes comes exposure to relatively weaker sovereign environments, less proven regulatory frameworks and weaker relative credit profiles for lessees. 12

13 Equipment Leasing Q Ratings assigned to large equipment leasing companies are typically centered in the 'BBB' rating category; however, individual issuers may be rated higher/lower depending on their individual risk characteristics, the magnitude to which they are exposed to sector-level strengths/constraints, or the presence of a more highly rated parent company. Nations Equipment Finance Completes $173M Term Debt Securitization Nations Equipment Finance, a commercial equipment finance company, announced today that it has completed a $173 million term securitization of equipment lease and loan backed notes. The debt includes a senior tranche rated A2/A- by Moody s and DBRS and two subordinate tranches rated Baa2 and Ba2 by Moody s. Guggenheim Securities served as lead initial purchaser and BB&T Capital Markets served as co-manager in the Rule 144A private placement. Once again, Matthew Perkins and his team at Guggenheim did a terrific job structuring and marketing what is now our second term securitization, said Nations Chief Financial Officer Rebecca Chandler. This transaction, like last year s, significantly improves the composition of our balance sheet. We couldn t be happier with the outcome and the assistance provided by Guggenheim. Tetra Financial Group Funds Aircraft Lease for Minnesota-Based Air Charter Firm Tetra Financial Group announced today that it has closed an aircraft lease for a large Minnesota-based aviation firm that provides aircraft chartering, maintenance, management and sales for the aircraft industry. With Tetra Financial Group's lease financing, the customer was able to completely renovate a 1972 Dassault Falcon 20F-5 in order to place the aircraft into the company's active charter fleet. The sale-leaseback structure of the transaction also allowed the customer to recoup the acquisition costs of the aircraft and still place it into service. 13

14 Educational Open-End Lease vs. Closed-End Lease Leasing equipment contracts have a number of conditions that are attached to them. A company should be well aware of such clauses and include that into their business projections for the future. Few commonly used terms in leasing includes an Open-end or a Closeend clause. Open- End Lease In this type of lease, the lessee guarantees the amount of the future residual value that needs to be received by the lessor at the end of the contract period. If the equipment is sold for less than the agreed value, the lessee has to bear the loss. Since the actual cost that the lessee has to bear is not known until the sale has been realized it is known as an open ended lease. Close-End Lease In this type of lease, there is no purchase option at the end of the contract. Owing to the absence of the purchase option, the onus is on the lessee to return it to the lessor. The lessor then absorbs the entire risk of the residual value. Advantage of Accounting Treatment Open-end leases gives the flexibility to classify it as a finance lease but when desired it can also be given the off balance sheet treatment of operating lease. 14

15 Equipment Leasing Q About First Equilease We were established in 2005 as a Kuwaiti closed shareholding company. We aspire to be the market's first choice in equipment leasing in the Middle East, recognized for the innovative trend-setting solutions, Client-centric approach, ethical standards, and dedicated towards the sustainability of our community and the environment. P.O.Box 23444, Safat 13095, Kuwait Tel. : (965) Fax : (965) [email protected] Url : FirstEquilease CopyRight FIRST EQUILEASE 2014 All rights Reserved 15