Q4 2015

Equipment Leasing

Insider

Welcome to our newsletter

Welcome to First Equilease's Q4 2015 edition of the “Equipment Leasing Insider”.

In this issue of the newsletter, we discuss Saudi Arabia’s residential real estate sector.

We discuss the steps taken by the government to alleviate the housing shortage that

is affecting the majority of the population in the country.

The ELFA monthly confidence index has fallen throughout the year for 2015 recording

an 8% decline. Most of the owners expect their business prospects to remain

unchanged in the next four months.

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,

Mohammad Al-Qahtany

Chairman & CEO, First Equilease

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Table of Contents

Foreword 1

Featured Interview 3

Residential Projects in KSA 6

Equipment Leasing and Finance Association Monthly Confidence Index

12

Latest from Global Equipment Leasing News 13

Operating Lease – Accounting Treatment 15

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Featured Interview

First Equilease held an interview with Mr. Babar Ali Malik, Head of Marketing at Al Hail Orix

Finance, PSC

1. Could you please elaborate on your business model? What kind

of assets do you lease?

Al Hail ORIX Finance provides finance leasing solutions in the UAE. The leases

are full pay out leases with all risks and rewards passed onto the end user.

Typical lease contracts range 12 to 60 months with financing for commercial

warehouses going up to 72 months. Minimum equity contribution from a lessee

is 10% for brand new assets and 20% for used assets. Average interest rate is

11%.

Assets which are financed by Al Hail ORIX include:

Plant & Machinery

Healthcare Equipment

Office Equipment

Commercial Vehicles

Saloon vehicles

Heavy Equipment

Retail Fit outs

Marine Yachts

Commercial Vessels (limited to tug / crew boats)

Discounting of Invoices / Cheques

2. What are your plans for the GCC region?

Currently the scope of Al Hail ORIX Finance is limited to UAE through its offices in Dubai, Abu Dhabi and

Sharjah. In the GCC, we haves Joint Venture companies in Saudi Arabia, Oman and Egypt through which

we plan to tap these markets.

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3. What is your take on equipment / machines market in GCC?

The UAE has strong demand for plant and machinery in line with the infrastructure development that is

happening in the country. Demand for construction related machines and equipment gives leasing

companies an opportunity to benefit from rental plans. Recently, number of new players has entered the

local market offering operating lease packages.

4. How has the current low oil price environment affected the equipment leasing business? What

are your strategies to wade through such a scenarios?

The fundamentals of the UAE are strong and the Government is committed to spending on infrastructure

development in line with its vision. While the low oil price does have an impact, projects which have

already been announced across UAE will continue and new projects announcement as part of EXPO 2020

are expected to gather pace in the next few years.

5. How do you rate the current awareness of leasing and allied products in the GCC region? How

will the leasing market develop in GCC?

In the UAE, leasing is a popular route taken to acquire assets. The SME sector also depends on the financial

institutions to support its asset acquisition strategy. Leasing has grown tremendously in the UAE over the

last decade with numerous banks and finance companies dominating the landscape. New players are

entering the market and offering finance and operating lease solutions. Banks have also entered the asset

financing market in the last few years especially targeting the SME sector to benefit from attractive

spreads. The Central Bank is looking at enhancing the Finance Company guidelines to bring them in line

with the dynamic landscape of the UAE Economy.

6. What are some of the major things that GCC customers look at before entering into a leasing

contract with your company?

Customers in the UAE look at the different asset backed financing facilities offered by Al Hail ORIX Finance.

Products like Fit out (mostly used in retail) Finance are not offered by other financial institutions which

gives Al Hail ORIX Finance an edge over its competitors. Similarly, Al Hail ORIX has a deep understanding

of the SME business in the UAE and proactively markets the SME market for leasing of plant and machinery

along with heavy equipment and commercial vehicles.

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7. We could see that you have a marine leasing division (Yachts and Boats) in your product

portfolio. How do you usually approach HNWI clients in the region with such products?

High net worth customers are approached through two channels

Luxury boat dealers

Boat shows

8. What are some of the popular leasing arrangements/mechanisms in Equipment leasing that

customers prefer in the GCC region?

Finance lease is traditionally popular amongst customers as they prefer to own the assets while Operating

lease is slowly becoming more and more popular as customers prefer to use the assets over shorter term

and do not prefer to capitalize the assets on their books.

9. How do you view the current regulation on and legal challenges related to equipment leasing

in the region?

The Central Bank regulates the banks and finance companies through specific guidelines issued for each

kind of institution. The Central Bank also audits these institutions to ensure their guidelines are being

implemented correctly. The local laws provide cover to the financial institutions in case of default,

repossession in the form of criminal complaints for bounced cheques and civil attachments in case of

immovable assets respectively.

10. Dubai Expo 2020 and FIFA Football 2022 are two major events that require meticulous planning

and lot of equipment. What are your views on the existing capacity and future demand for

equipment for such projects?

Construction and contracting are major activities in the UAE. EXPO 2020 is a one of the key drivers for the

UAE moving forward. However even before the EXPO was awarded, UAE’s infrastructure construction and

development was aggressively growing and numerous new projects were announced across the country.

This is in line with the vision of the leadership of the UAE. Demand for equipment is growing and new

dealership of international OEMs are opening their offices in the UAE keeping in mind the overall growth

in the GCC region going forward. Al Hail ORIX is also looking at starting an operating lease unit under a

different structure to cater to the growing demand of customers who want to keep their assets off balance

sheet. Demand for plant and machinery is expected to keep pace with the country’s growth.

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Market Analysis

Residential Projects in KSA

Saudi Arabia has one of the largest deposits of oil in the world and as a result, the country has one of the highest per

capita incomes in the world at $51,320. Unfortunately, the high per capita income has not eased the access for

housing in the country. According to analysts close to 60% of the citizens do not own a house. Rising rental levels

also add to the burden of the middle class in the country and many of the Saudi citizens do not meet the funding

requirement of home loans which further exacerbates the problem. To alleviate the housing shortage, the Saudi

government is currently constructing 68 housing projects that targets to build 1.25 housing units for its residents. In

addition to the above there are other housing projects that are currently being undertaken by the various real estate

developers.

Figure 1: KSA – Residential - Top 10 Projects (USD Bn)

Source: Zawya, Marmore Research, As of Jan 2016, (A)- King Abdulaziz University Faculty Members Housing

Note: The above pie chart does not include the Saudi Arabia Ministry of Housing - 500,000 Houses Program valued at $67 Bn since it will skew the

pie chart.

Bahrain IIB - Jeddah Housing Project

39%

Saudi Arabia MOHE (A)14%

Damac Properties - Damac Esclusiva Tower

8%

Saudi Arabia MOHE (A)

8%Alargan Homes Company - Al Suhoul

7%

Maskan Arabia - 292 Residential Villas

6%

Gulf Related -Antara

Residential Compound

5%

Saudi Arabian Ministry of Housing - Taima Housing

Project5%

Alargan Homes Company - Al Suhoul - Phase 2

4%

RCJY - Haii Jalmouda Public Housing - Phase 4

4%

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Housing Shortfall and Demand

According to Marmore’s KSA residential report, Saudi Arabia’s housing market continues to face the crisis of supply

shortage and ever-increasing demand in residential real estate market. High population growth and a rise in per

capita income fueled the growth of demand for residential units over the past decade. The total demand for housing

units in 2015 is estimated to be 495,000 according to the report. With population expected to reach 35 million in

2020 from 31 million in 2014, and average household size (no of members) estimated to reduce from 5.6 to 5.28 as

per current declining trends, the aggregate demand for housing units is expected to be 1.6 Mn units from 2015-20.

Figure 2: Incremental housing demand projections for KSA

Source: Marmore Analysis, Central Department of Statistics & Information

Note: For calculation purposes, annual housing demand for the current year includes the supply shortage that existed in the

previous year.

338349

326

302

276

249

220

188

0

50

100

150

200

250

300

350

400

2013 2014 2015 2016 2017 2018 2019 2020

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Affordable Housing Initiatives in KSA

Saudi Arabia has pushed through its affordable housing projects in both its major cities – Jeddah and Riyadh. In both

of these markets, the sales prices of apartments have come down over the last year while rentals have steadily

increased suggesting that prices of residential houses in both these areas are very expensive to be afforded by Middle

Income families. Developers in the region prefer to rent units to individuals or corporate clients rather than the

traditional sales approach owing to the slowdown. Rents increased by 20% and 8% YoY for Jeddah and Riyadh

respectively1 while the sales prices have declined by -5% and -1% respectively. Saudi Ministry of Housing (MOH) has

responded to the need by planning to construct 15,000 houses by 2017 and it also has plans for an additional 15,500

houses, however no time period was indicated for starting these projects.

Figure 3: KSA – Pushing for Middle Income Housing (Jeddah)

Source: JLL

Salman Bay Housing Project

Salman Bay Housing Project is one of the country’s mega-housing projects. The housing project is constructed over

approximately 3.2 million m2, the development is considered as part of future expansion of Jeddah. The project is

expected to deliver over 25,000 units of apartments; spread over 1,250 buildings and with a total capacity to

1 As of Q3 2015- JLL, For apartments

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accommodate 95,000+ residents. The apartment buildings that are currently being constructed are four floor

buildings with some of the apartment blocks having a provision for retail shops in the ground floor.

The first phase of the development, costing SAR 1.5 billion, includes 46 residential buildings, of which 97% have been

sold and are ready for handover at the end of 2015. The entire project is expected to be completed by 2023. The

project is located in the Northern part of Jeddah near the Salman Bay, located 12 km to the west of the Duhban Area

and approximately 25 km north of the King Abdul Aziz International Airport.

Figure 4: KSA – Pushing for Middle Income Housing (Riyadh)

Source: JLL

Eskan Airport Project

Eskan Airport Project is an important initiative that is undertaken by the Ministry of Housing. This housing project

spans a total area of 5 Mn m2 and aims to provide 3,000 housing units. Out of the total area 76% of the land plots are

dedicated for construction of individual villas. The total cost of the project is SAR 1 billion. Eskan handed over few

of 2,240 plots of land along with a housing loan of SAR 500,000 loan for developing the land for eligible families

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earlier in 2015. Eskan Airport project is located approximately 30 km north of Riyadh’s current CBD, and 22 km from

King Abdullah Financial District.

In addition to the above projects, the government of KSA has introduced White land tax to prevent hoarding of lands

by large developers. Much of the urban land is currently owned as a store of value or for trading for speculative

profits which is expected to come down. The weekly session of the Cabinet which met in November 2015 stipulated

that 2.5 % of the value of land has to be levied as tax annually. This law is expected to come into force during May

2016. Revenues from the tax and fines will be used for housing projects as well as for implementing infrastructure

facilities and services at these projects. Final tax amount would be calculated post the evaluation of the value of

the land.

Contracts awarded in KSA housing in 2015

Akfa landed $90m MEP deal on Saudi housing project

Turkey's Akfa Contracting has been awarded a $90m contract to undertake MEP (Mechanical, Electrical and Plumbing)

works on a mixed-use housing project in Jeddah, Saudi Arabia. Akfa will carry out all MEP tasks related to package

two of the Rayadah Housing Complex, which forms part of the Obhur Al Janoubia Project being developed by RIC (Al

Raidah Investment Company). The Obhur Al Janoubia Project is one of the biggest residential projects which is

undertaken by the Public Pension Agency (PPA) (total area of 2.5m2) in north of Jeddah.

Arabtec wins Dh1bn Saudi Aramco housing contract

The UAE’s largest listed contractor had won a $280 Mn contract from Saudi Aramco to build 380 villas in Al Dhahran,

eastern Saudi Arabia, where the national oil company’s staff compound is located. The contract was to build a total

of 166,200 sq metres of new homes on a 454,500 sq metres plot. The project would be undertaken by Arabtec Saudi

Arabia which is a joint venture with CPC Services, a member of the Saudi Binladin Group and Prime International

Group Services.

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Table1: Top ongoing Residential Real Estate Projects in KSA (By Project Value)

Project Name Primary Sub-Sector

Project Value ($ Mn)

Completion Date

Source: Zawya

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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 has fallen throughout the year for 2015 recording an 8% decline. In the last

quarter of 2015, the ELFA monthly confidence index remains unchanged in the last two months while dipping slightly

in October 2015. The ELFA confidence index measures the confidence of business managers over the next four months

through a survey that it conducts. Extract from its survey: 12.5% of executives believe business conditions will

improve over the next four months, a decrease from 14.8% in November. 75.0% of respondents believe business

conditions will remain the same over the next four months, an increase from 74.1% in November. 12.5% believe

business conditions will worsen an increase from 11.1% the previous month.

64.9

63.3

65.165.165.4

61.461.4

58.960.260.4

64.263.4

66.166.3

72.170.7

67.5

63.062.6

67.4

61.1

58.760.260.2

45.0

50.0

55.0

60.0

65.0

70.0

75.0

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Latest from Global Equipment Leasing News

Warba Bank announces acquisition of Equipment Leasing portfolio in United States

Warba Bank announced the acquisition of equipment leasing portfolio managed by ATEL Capital Group, an independent

equipment lessor based in the United States of America becoming the first Kuwait enterprise to invest with the

company. The acquisition of the portfolio is in line with Warba Bank’s strategy of capturing attractive sharia compliant

investment opportunities regionally and internationally, while diversifying its asset base and enhancing the global

scale. As part of the transaction, the Bank has initially invested US$8.2 million in a diversified portfolio of Operating

leases comprising of high-quality, low-tech, low-obsolescence, mission-critical equipment leased to investment grade

corporations in United States.

Middle East aircraft leasing takes off

About 40 % of the world’s planes are leased by airlines and it is a growing trend, especially in the Middle East where

that ratio stands at about 30 %, according to aviation experts. As tourism and business trips grow, airlines are adding

fleet – especially the younger carriers of the Middle East such as Etihad, Emirates and Qatar Airlines. Regional airlines’

plane orders will exceed US$700 billion in value over the next 20 years, spurred on by the growth of transport hubs,

regional economic and population growth, according to analysts. But there is often a time lag between an order and

delivery, meaning airlines can find themselves without planes to meet demand for new routes – and that means they

must rent planes. By leasing, an airline can also diversify its risks because, after a 10 year lease, an airplane may lose

value, especially if newer; better ones have come on the market.

Cooperation agreement between KarmSolar and Plus Leasing

KarmSolar Company for solar energy concluded a cooperation agreement with Plus Leasing to provide the necessary

funding to private sector companies to rely heavily on renewable energy in the operating irrigation systems to reclaim

the lands of the 1.5m acres project. Under the agreement, Plus Leasing will provide the necessary funding for

KarmSolar clients of companies and farms that wish to convert well pumps and irrigation methods from diesel to

solar energy. Plus Leasing has allocated EGP 30m to achieve this goal during 2016.

Arab contractors to launch 'equipment leasing' firm: report

Arab contractors have agreed to create a joint company for the lease of equipment to help contractors in their

projects. The Cairo-based Federation of Arab Contractors (FAC) approved the venture at talks in the Sudanese capital

Khartoum. The leasing company would work in coordination with local contractors and governments to support

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domestic development projects, expand the construction market in the Arab region, and create a database for

machinery and equipment available at Arab countries and member contracting firms.

Wasl says to start leasing units in Dubai affordable homes project

Wasl properties has announced that it will begin leasing 280 units in its new Wasl Oasis II development in Muhaisnah,

Dubai, as part of a push to offer affordable homes in the emirate. The real estate management company, a subsidiary

of Wasl Asset Management Group, said it plans to launch seven out of 23 buildings on December 20 as an initial first

phase release. Wasl Oasis II is made up of 23 buildings with a total of 1,244 residential units comprising a total of 48

studios, 636 one-bedroom apartments, 432 two-bedroom apartments and 128 three-bedroom apartments. The initial

launch of 280 units in the seven buildings will consist of studios and two-bedroom apartments, with Wasl Properties

planning to release 964 units in the remaining 16 buildings in the first quarter of 2016.

Finance lease increase by 183% in Egypt in 2015

The value of contracts based on financial leasing totaled EGP 17bn during the period spanning January and November,

a 183% increase compared to the EGP 6bn registered during the same period in 2014. The number of contracts surged

by 17% during the same period last year to a total of 2,459 contracts. Leasing activities have registered EGP 9.9bn

during the first half of 2015. Land and property lease accords dominated the total value of signed contracts at 41%,

accounting for an estimated EGP 7bn. The leasing of heavy machinery accounted for EGP 5.9bn, the second highest

value, while the leasing all other forms of equipment accounted for EGP 1.4bn.

Sumitomo Mitsui Unit to Buy GE’s Japan Leasing Business for $4.8 Billion

The leasing unit of Sumitomo Mitsui Financial Group Inc. said it reached an agreement to buy General Electric Co.’s

Japan leasing business for ¥575 billion ($4.8 billion). As part of its global plan to unwind its GE Capital financing

business, GE placed the Japanese business up for sale earlier in 2015, and several Japanese financial institutions

expressed interest. The business for sale has an asset value of nearly $5 billion. It comprises several divisions,

including auto leasing, equipment and asset leasing targeted at large- and midsize companies, as well as leasing of

office and information technology equipment.

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Educational

Leasing Case Study – Operating lease

Operating lease treatment under IAS 17

In order to gain classification of the type of lease that is being dealt

with, one must first look at the information provided within the

scenario and determine if the risks and rewards associated with

owning the asset are with the lessee or the lessor. If the lessee does

not take the risks and rewards, then it is classified as an operating

lease.

Case Study

On 1st October 2009, XY Ltd. entered into an agreement to lease a machine that had an estimated life of 10 years.

The lease period is for four years with annual rentals of $5,000 payable in advance from 1st October 2009. The

machine is expected to have a nil residual value at the end of its life. The machine had a fair value of $50,000 at

the inception of the lease.

How should the lease be accounted for in the financial statements of XY Ltd lessee. for the year end 31 March 2010?

Since the leasing happens in the middle of the year and lease rentals are paid in advance the following treatment

would be applicable.

On October 1st 2009

Advance lease rental of $5,000 would be paid to the lessor and the expense would be recorded on the profit and loss

statement.

On March 31st 2010

Since the rent is paid for another six months (1st April 2010 to 30th Sep 2010) the advance rent of $2,500 would be

classified as prepayments. At the end of 31st March 2010 there would be a lease expense of $2,500 that would be

recorded on the statement of income and a prepaid asset of $2,500 that would recorded on the balance sheet.

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About First Equilease

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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.

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