Asset Financing Australia Report May 2014

Transcription

1 Asset Financing Australia Report May 2014 Page 1 of 9

2 Interest rates, currency and energy efficiency Low interest rates, a softening Australian dollar and high energy costs will be key influences on Australian businesses Asset Finance and Leasing decisions over the year ahead. Welcome to our first edition of the Commonwealth Bank Asset Financing Australia Report (AFA). The AFA provides a unique insight into the critical issues and key trends shaping the equipment finance market, based on a wide-ranging quantitative survey and qualitative feedback from selected industry experts. For this report, we commissioned East & Partners to conduct an in-depth survey of 861 business decision makers, gathering their views on the state of the market and the factors most likely to influence equipment financing and leasing decisions in the future. Our research suggests that the current low-rate market could present business owners with an exceptional opportunity to upgrade or expand key business assets. With asset lifetimes shortening, corporates and large institutions in particular see value in the current low-rate environment. At an industry level, transportation, and agriculture businesses are all thinking more positively about capitalising on low rates by upgrading existing equipment. If you are considering importing equipment directly from overseas, you re not alone. Our research shows there is an increasing trend among Australian businesses to reduce costs by looking beyond local distributors and dealing directly with overseas suppliers. Again, it s larger businesses that are more likely to take this avenue. While interest rates and the fluctuating currency are major factors for business, energy efficiency is also on the minds of decision makers. In this report, we look at what businesses say about hybrid and energy efficient equipment and how they will utilise asset financing solutions to help drive further efficiencies in their organisations. I hope you find the report s insights as interesting and thought-provoking as we have. Bronwyn Yam Managing Director Asset Finance Commonwealth Bank Page 2 of 9

3 ..many businesses are wanting to upgrade or add new equipment and are looking beyond their local suppliers. Page 3 of 9

4 Businesses weigh up direct equipment imports With the Australian dollar still trading well above its long-term average, more businesses are considering sourcing equipment directly from offshore suppliers. Key findings A robust Australian dollar has made direct imports increasingly attractive. Business decision-makers are increasingly sensitive to currency fluctuations. Larger companies are most likely to deal with overseas suppliers directly. The dollar has stayed high but for how long? Although the Australian dollar has fallen below the USD1.00 mark after three years at or above parity, it still remains significantly above its historical average, reaching a fivemonth high in mid April That has led many business decision-makers to consider the benefits of direct equipment imports, especially since many expect the dollar to soften in the future. The AFA survey found that businesses generally expect the Australian dollar to fall to US 90 cents or lower for most of It also shows that sourcing decisions are increasingly sensitive to currency movements. As a result, a growing number of businesses have sought to take advantage of a robust dollar by importing plant and equipment directly from offshore. Asked to rate the impact of movements in the Australian dollar on procurement decisions, survey participants indicated that currency fluctuations had become more important in the last quarter of 2013 as the Australian dollar fell. Larger businesses were also more sensitive to currency movements than their smaller peers, and were more likely to import equipment as a result. The impact is being most felt by medium sized businesses turning over between $150 million to $500 million, a year. Imports climb higher In December 2013, 19.2% of businesses indicated that they had imported plant and equipment from offshore, up from 16.0% in September Companies with an annual turnover of $500 million or more were most likely to import, sourcing 23.0% of plant and equipment purchases from offshore, compared to just 15.6% among companies turning over $25 million to $150 million. Bronwyn Yam, Managing Director of Asset Finance, says her team has seen growing interest from businesses looking to take the direct route. Throughout 2013, we saw an increasing number of clients enquiring about equipment import finance facilities. In a tight business environment, many businesses are looking to increase productivity and efficiency by upgrading or expanding essential equipment but they are also very focused on cost management, she says. For the right purchaser, going offshore can be an opportunity to tap into a larger market and access the latest technology at a very competitive price. Page 4 of 9

5 ..agricultural, and transport-related businesses are more encouraged by low rates.. Page 5 of 9

6 Low rates tempt business buyers Historically low interest rates have created an opportunity to lock in lower financing costs, tempting business purchasers to upgrade aging equipment. Key findings More than one in three larger businesses say the current low rate environment makes them more likely to upgrade equipment. Falling asset lifetimes have also helped to drive demand for finance. Transport, accommodation, cafe and restaurant businesses are most likely to increase finance commitments. Have we reached the bottom of the interest rate cycle? Just as the prospect of a falling dollar has encouraged businesses to take advantage of import opportunities while the dollar is relatively strong, the possibility that interest rates may rise appears to be driving many businesses to consider locking in low rates on asset finance while they are still available. While future interest rate movements are always difficult to predict with certainty, a number of analysts have suggested that the next interest rate move is likely to be up, including the Commonwealth Bank economics team. John Peters, Commonwealth Bank Senior Economist, writes that We believe that the current 2.5% cash rate will turn out to be the low point in the current cycle We expect the RBA to lift the cash rate to 2.75% on Melbourne Cup Day in November 2014 and further lift the cash rate to 3.25% by June A number of business owners appear to share that view, with many considering re-financing or upgrading equipment to benefit from more cost-effective finance. In our survey, 38.6% of businesses turning over $500 million or more a year said low interest rates had led them to think positively about replacing their current equipment. Small and medium enterprises (SMEs) turning over $25 million to $150 million were less affected, with 28.5% saying they were tempted to take advantage of low rates. Falling asset lifetimes are also helping to drive demand for equipment finance. Our survey found that average asset lifetimes have fallen from 5.1 years in September 2013 to 4.8 years in December Agriculture and transport lead the way Our survey also revealed significant differences between industry sectors, with transport and agriculture businesses among the most likely to say that low rates would encourage them to make equipment purchases. However, companies in the wholesaling, property and business service sectors were relatively uninfluenced by the current low rate environment. As a result, the transport sector is set to experience strong finance growth, with survey participants forecasting an average 17.4% increase in overall equipment finance balances by the end of December The accommodation, cafe and restaurant sector was close behind, forecasting 17.2% growth. In contrast, manufacturers forecast growth of just 7.7%, the smallest of any sector. The impact of low rates Bronwyn Yam points out that even a small difference in rates can have a large impact on the business bottom line. For each rate reduction of 1% on a $150,000 equipment loan saves more than $4,000 over five years. For clients funding a fleet of vehicles or upgrading a manufacturing plant that can mean a very significant reduction in costs. As a result, many borrowers are seeking to lock in current lower rates for a longer period. We regularly see clients leasing new vehicles and equipment over five years, locking in a fixed rate for that time. Financing through an Equipment Loan, Hire Purchase arrangement or Finance Lease means businesses can calculate payment commitments years into the future and accurately measure return on investment. Page 6 of 9

7 .. the larger the business, the higher the level of interest in using asset finance to acquire energy efficient assets. Page 7 of 9

8 Interest in energy efficient vehicles and equipment set to rise Energy efficient assets are not only environmentally sustainable, they can also help to deliver significant cost savings. Key findings One in five businesses say they would consider using asset finance solutions to acquire hybrid or electric powered vehicles. While fewer have considered borrowing to invest in energy efficient technologies, demand is likely to grow. Overall, larger businesses are most likely to use asset finance to fund energy efficient vehicles and equipment. Measuring interest in energy efficient assets While consumer interest in energy efficient vehicles and technologies is well documented, there has been less research into the level of interest among Australian businesses, particularly its effects on demand for asset finance. Our AFA survey sought to help close that gap. First, we measured interest in financing hybrid business vehicles. Business vehicles are often key business assets giving rise to significant ongoing maintenance and fuel expenses, making the prospect of potential cost savings an attractive proposition. In recent years, a variety of specialised hybrid vehicles have also become available, including earthmovers, trucks and buses. Overall, our survey found that one in five businesses would consider using asset finance solutions to acquire hybrid or electric powered vehicles. Interest was strongest among large companies with annual turnover of $500 million a year, with 28% saying they would consider financing energy efficient vehicles. SMEs were less interested, with only one in 10 saying it was something they would consider. Instead, SMEs were more likely to invest in green building technologies and energy efficient equipment with the potential to reduce power bills an important concern for many businesses at a time when energy costs have risen sharply. 12.1% of SMEs said they would use finance to fund pollution reduction equipment and waste management. Sustainable cost savings Generally, our research suggests that, the larger the business, the higher its level of interest in using asset finance to acquire energy efficient assets. In part, this may reflect the growing focus on sustainability among larger businesses, with many companies undertaking formal environmental, social and corporate governance (ESG) reporting programs. Yet our experience also suggests that investing in energy efficient assets can deliver significant cost savings and productivity improvements. As a result, we expect asset finance activity for these assets to increase. For example, the Commonwealth Bank asset finance team recently helped apple and chestnut grower Nightingale Bros complete a $1.2 million refrigeration upgrade. By replacing their aging refrigeration plant with a new ammonia-based system, Nightingale cut its energy costs by an estimated 40%, while reducing carbon emissions by about 488 tonnes a year. Nightingale financed the upgrade using an Energy Efficient Loan facility co-financed by the government s Clean Energy Finance Corporation, giving them access to tailored finance at a discounted rate. Page 8 of 9

9 For more information on how the Commonwealth Bank can meet your Asset Financing requirements, contact your Relationship Manager or call our Asset Finance Team on 1800 ASSETS ( ). About the Asset Financing Australia Report The Commonwealth Bank has commissioned East & Partners to conduct research and provide insights for this edition of the Asset Financing Australia Report. East & Partners established research methodology has resulted in findings which are statically robust and reflective of actual market experiences. Data is based on direct interviews conducted throughout 2013 with a structured national sample of 861 businesses with annual turnover in excess of AUD$25 million. The sample has been structured to directly mirror natural distribution of these businesses by turnover segment, geography and industry. In building the sample frame, the relevant enterprise population demographic distributions reported by the Australian Bureau of Statistics are used, with actual interviewee targets being randomly selected. The sole selection criteria used in addition to this natural framing was that the target business had to be actively engaging in asset or equipment financing. About East & Partners East & Partners Pty Ltd, a leading specialist market research firm in the business, corporate and investment banking markets of Asia Pacific, works across 11 countries in the region delivering both multi-client and proprietary market analysis services to financial services providers. Important information This report is published solely for information purposes. As this report has been prepared without considering your objectives, financial situation or needs, you should before acting on the information in this report, consider its appropriateness to your circumstances and if necessary seek the appropriate professional advice. The information in this report and any opinions, conclusions or recommendations are reasonably held or made, based on the information available at the time of its compilation, but no representation or warranty, either expressed or implied, is made or provided as to the accuracy, reliability or completeness of any statement made in this report. Commonwealth Bank of Australia ABN AFSL and Australian credit license Page 9 of 9