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UK Leasing and Asset Finance Market – Will 2017 trends continue into 2018?

Acquis asks industry veteran, John Bennett, for his view on the future for UK Asset Finance as we approach 2018.

For any forecast of the key trends likely to emerge next year in the UK leasing and asset finance market, the financial markets caveat that “past performance is not necessarily a guide to future performance” is more relevant for 2018 than it has been for several years.

Having enjoyed an extended period of steady growth in business volumes with relatively low portfolio default levels, as the leasing market recovered from a 30% volume collapse in 2008-9, it is likely that 2018 will prove to be more challenging than recent years for most lessors.

FLA figures for the first eight months of 2017 show market volume is up 6 % on last year, but the rate of growth this year has been declining steadily since March. On a positive note, leasing and asset finance has been taking a bigger market share of capital investment spending in the UK economy, which has seen growth at around 2.5 % pa according to the latest government data. It is likely that leasing’s increased penetration of capital investment has been achieved at the expense of bank lending’s market share.

For 2018, the main driver of leasing volume will continue to be the level of investment throughout the economy, and the outlook for this is uncertain. The Bank of England’s Q3 Agent’s summary of business conditions reports that investment intentions in the services sector had softened “reflecting the perceived outlook for consumer demand”. Customers in the services sector (mainly SMEs) account for two thirds of the UK’s £ 31 Billion asset finance market, and a slowdown in capital spending by these customers is bad news for asset finance. The upward cycle in interest rates that has just started will no doubt dampen consumer spending in 2018, but there is some comfort that the recent tourist boom, fuelled by the drop in the value of Sterling, will continue next year.

Another positive note for investment will come from capital expenditure by manufacturing businesses whose export sales will benefit from the lower value of the pound. Brexit uncertainties, however, will mean that many investment decisions will be deferred until the nature of the UK’s future trading arrangements with both EU and non-EU countries become clearer.

In terms of routes to market, the star performer in 2017 has been the broker channel, up 16 % on last year.   Brokers have never enjoyed access to as many funder sources as they have today, the funding famine that brokers endured in the aftermath of the 2008 financial crisis are all but a distant memory. I have no reason to believe that funders appetites for broker business will diminish in 2018, and my expectation is that the broker channel will continue to top the “routes to market” growth league table , although at a lower annual rate than this year.

Analysing 2017 new business volume in terms of asset categories reveals a wide disparity , with annual growth rates ranging from +14 % (business equipment and general plant equipment) to a 2 % decline for IT equipment. The business equipment sector has been growing at twice the rate of the total market, but at this time last year, it was growing at around half the market growth rate, a good example of the cyclicality that is a regular feature of this asset class. In 2018, I believe it’s unlikely that business equipment will maintain the strong growth seen this year, but I would not be surprised to see IT leasing recovering to a modest growth rate as businesses increase their spending on cyber-security and new systems to help achieve greater productivity and efficiency .

John Bennett has 35 years’ experience in leasing and asset finance, having been CEO of UK and European leasing subsidiaries at Chase Manhattan Bank, Sanwa Bank, Bank of America and Hitachi Capital.

John has been a Board member of both the FLA and Leaseurope, is an ex-chairman of Leaseurope and is currently an independent member of the FLA Business Finance Code Group.