UK and Europe: Rent or Own?

Local Feature Article
- 31 Mar 2005 ( #202 )
9 min read
It's the use of equipment in a business that produces benefits, not ownership. In Part 2 of our financing your forklift feature, we look at the UK and Europe. What financing options are there? Forkliftaction.com News reporter Christine Liew spoke to financial experts from two competing companies for insight into the two different markets.

The UK market

We spoke to Albury Asset Rentals managing director Kevin Lofting about methods of financing materials handling equipment in the UK. Albury, a subsidiary of BNP Paribas Lease Group, claims to be the UK's leading materials handling finance company and was awarded the UK Forklift Truck Association's supplier of the year award for 2005. It is the only finance company to ever win the award.

The UK Finance Leasing Association (FLA)'s 2004 Annual Survey of Business Finance showed that the FLA's total business volumes for 2003 covering all assets financed in the UK was GBP24,874 million (USD46.8 billion). The FLA's total new business volumes for 2003 in the plant and machinery sector (where forklifts fall under) was GBP3,304 million (USD6.2 billion).

According to Albury, there are three main finance products available in the UK - contract hire, finance lease and hire purchase.

Contract hire

Contract hire is a one-stop solution, widely viewed as the least complicated and most cost-effective method of running forklifts. The end-user enters into an agreement, usually over three to five years, with monthly or quarterly rentals that normally cover delivery, maintenance, servicing and repairs.

End-users hand back the forklifts at the end of the term and 100 per cent of rentals paid in the UK can be offset against taxable income. Residual values are also reflected in the rental calculations and that reduces the rental amount payable by the end-user.

Lofting said contract hire in the UK was also known as operating lease. However, the terms lease and rent were used very casually.

"The word lease is a bit of a misnomer in operating lease (and finance lease) because no one ever gets title to the equipment. This is one of the dangers of terminology," he said.

"Contract hire payments and finance lease payments in the UK are referred to as rentals while hire purchase payments are instalments. The only distinction in the UK is between hire purchase (ultimate ownership) and contract hire or finance lease (usage only).

"Seventy to 75 per cent of UK businesses will be on some form of contract hire or, if you like, operating lease."

Finance lease

In the UK, the lessee in a finance lease never owns the equipment at the end of the lease. The dealer will sell the truck to a leasing company (the lessor) and the lessee spreads the total cost, together with finance charges, over an agreed term (sometimes called the primary period).

Although all rentals paid are offset against taxable income, the equipment's initial value is shown on the customer's balance sheet and the total of rentals outstanding is shown as a liability. Maintenance, servicing and repairs are usually not included.

Lofting said the finance lease was the least popular product in the UK.

"I probably wrote 6,000 leases last year. Probably one or two were finance leases. There is no tax benefit for customers any more. The only companies which use finance leases are US companies with UK subsidiaries.

"There is very little demand for finance leases in the UK as, under current legislation, leased equipment is shown as an asset and a corresponding liability on the balance sheet, yet the customer does not get the benefit of ownership.

"It is, however, not unusual for a finance company to appoint the lessee as its agent to sell the equipment on behalf of the finance company and the finance company will pay the lessee up to 99 per cent of the proceeds, as a rebate of rentals," Lofting said.

Alternatively, at the end of the primary period, the lessee can continue the lease by paying an annual peppercorn rental equal to the monthly rental.

Hire purchase

This option offers the end-user eventual ownership of the equipment. The cost of the equipment and interest is spread over time through fixed monthly payments. The period is normally from two to seven years. Maintenance, repairs and servicing are not included.

Customers put the asset on their balance sheet and offset capital allowances against taxable income at a rate of 25 per cent on the reducing balance. All interest charges can be set against taxable income. Outstanding payments are shown on the customer's balance sheet as a liability.

"This is a deferred purchase of an asset and, when the customer pays the final payment, title transfers to the hirer," Lofting said.

The European market

In Part 1 of our feature, De Lage Landen's David Knight said the European market had a higher propensity to own equipment than the US. "It's to do with the way they've always done business ... there's a bit of an ownership mentality there."

Lofting agreed: "Certainly in relation to forklifts we have materials handling divisions throughout most of Europe, as Albury is a subsidiary of BNP Paribas Lease Group (a Pan-European finance house). I guesstimate that 25 per cent to 30 per cent of European (customers) acquire their equipment through contract hire."

As the European market is diverse and varied, we spoke to De Lage Landen's European business development director for the materials handling & construction market, David Witherspoon, for a balanced perspective.

In Europe, no 'one size fits all'

Witherspoon said although there was definitely a history of owning equipment in Europe there was a gradual shift to contract hire.

"Contract hire is popular in Europe but not all of Europe," he said.

"It is popular in Northern Europe but, in Southern Europe, it's catching up. Having said that, it's difficult to generalise but I can say the contract hire market in the UK is more mature than in Europe.

"The degree of maturity in the forklift financing market differs dramatically across the continent, and regional customs & practices also vary, resulting in a situation whereby there is not a 'one size fits all' solution across the continent.

"(We) serve a customer base that spans the southern tip of Italy and Spain in the south to Sweden and the Nordic countries in the north. The size and structure of the customer will dictate the most appropriate choice of funding solution," Witherspoon said.

De Lage Landen Europe does not provide finance products to the end-user. Instead it partners with a vendor to present a bundled solution to the end-user that incorporates maintenance, service and possibly insurance.

Different names, same products

It is no easy task to tackle the topic of finance products in a whole continent. Different names for similar products in different countries, with differing end-of-term options, make it complicated. To offer a general overview of what is available in Europe, Witherspoon categorised all such finance products into two areas:
1)'Rental' or operating lease products
2) 'Purchase' agreements (eg hire purchase, mietkauf, finance lease, etc)

"The most significant difference between the two is that operating lease rentals are (generally) tax deductible, and assets are not capitalised on the customer's balance sheet, whereas equipment financed via purchase rentals are treated as owned assets and are depreciated by the customer, and rentals are not fully allowable," Witherspoon said.

Finance products in Europe

It would seem useless to get pedantic about the terminology as rent and lease are confused and used interchangeably in Europe as well. However, Witherspoon says their casual use complicates things.

"The most complicating factor is that the generic term 'rental' is used (in Europe) to describe short-term rental, operating lease and, to a lesser degree, payments made under purchase agreements.

"Short-term rental (STR) is a means by which a customer acquires use of a forklift for a relatively short period (generally from a day to a year) from a rental house or a dealer's short-term rental fleet. The customer pays a premium for the fact that the contract is generally very flexible and matches short-term needs with specific rented equipment," he said.

Witherspoon said the European market had developed to replicate the STR option but, on a tailored basis, reflecting customers' requirements and the working conditions of the trucks. The result was the European use of the operating lease, incorporating a residual value and maintenance, generally quoted on a cost per week or month basis.

Operating lease

In Europe, operating leases are generally for terms of three years to seven years. The rentals reflect the residual value inherent in the deal and so are lower than STR rentals.

Like the operating lease used in the US, end-users can choose at the end of the term to extend the contract, replace some or all equipment with new models or redefine their fleet requirements. As end-users do not take title of the equipment, they have flexibility in replacing the equipment and guarding against obsolescence.

Witherspoon said lease-end options and guarding against obsolescence were key elements considered by European customers who more and more frequently were looking to match the lease with an underlying contract. That was particularly true for logistics companies.

Purchase agreements

"The European purchase agreement is asset specific and often structured to reflect rental profiles. It is like a loan and the deposit is one month's rental. Balloon rentals can be incorporated where the last rental reflects the assumed value of equipment. This is done at the customer's risk but makes monthly rentals generally lower than instalments made under a loan contract," Witherspoon said.

Key element is no burden of ownership

Witherspoon affirms the principle that it's the use of equipment in a business which provides benefits, not necessarily ownership.

"The key element is use of equipment without the burden of ownership (which makes leasing attractive), particularly for large fleet users. Flexibility, the ability to manage their fleet, balance sheet management requirements and the provision of maintenance and service to ensure maximum uptime are other benefits of leasing.

"While regional differences are evident, the move to rental is significant across Europe. The ability to facilitate multi-country deals is becoming more important as manufacturers strive to enhance profitability by relocating manufacturing sites as the economy demands.

"Forklift manufacturers are meeting this need in two ways: They fund the deal themselves (via operating lease structures with a finance company) and write the contract with the end-user directly or work with a finance company (like us) to structure a flexible end-user deal that satisfies the requirements of all parties.

"At the other end of the spectrum, there will always be a requirement for purchase agreements (hire purchase, finance lease), especially in a low-usage environment for the smaller customer," he said.

--
**De Lage Landen would like to inform readers of an error in part 1 of our finance feature. The phrase 'dollar portion lease' should read as 'dollar out option lease'.
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