Fabio Pugini

R.E. Leasing: Activities of national and European R.E. Leasing: Activities of national and European associationsassociations

BBucarest – March 20th 2007ucarest – March 20th 2007

Speaker: Fabio Pugini, MCC Spa, ItalySpeaker: Fabio Pugini, MCC Spa, Italy

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ContentsContents

Real estate leasing: structure and featuresReal estate leasing: structure and features

Brief overview of european R.E. leasing marketBrief overview of european R.E. leasing market

Leaseurope initiative to foster R.E. leasing: the new Leaseurope initiative to foster R.E. leasing: the new steering groupsteering group

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ContentsContents

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11DefinitionDefinition

Advantages for Advantages for clients (Lessee)clients (Lessee)

Advantages for Advantages for financial institutions financial institutions (Lessor)(Lessor)

Leasing payments are

deductable offering a

fiscal shield (and

benefit!) that varies

depending on the

minimum allowed

duration (usually much

shorter than

amortization)

Higher LTV with

respect to loans: lower

initial investment

Availability of product

packages: financing +

insurance + legal

support + technical

support + …

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Credit risk mitigation

thanks to the asset

property

Lower regulations

capital absorption

Many economic

and operative

advantages (at

both client and

bank side) make

R.E. leasing a

financial

solution

preferable to

loan in a plenty

of cases

The financial leasing contract: structure and benefitsThe financial leasing contract: structure and benefits

By means of a financial

lease contract the lessee

obtains the right to

exclusively use or exploit

equipments or real estate

properties owned by the

lessor for a fixed period of

time during which payments

are due

At the end of the contract

the lessee has the

opportunity to purchase the

leased asset at a bargain

price, becoming the owner

of the asset

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Fiscal benefit comparison: loan vs leasing (the italian case)Fiscal benefit comparison: loan vs leasing (the italian case)

tt00 tt11 tt22 tt33 tt44 tt55 tt66 tt77 tt88

R.E. Purchase R.E. Purchase by Lessorby Lessor

R.E. Purchase R.E. Purchase by Lesseeby Lessee

Payments over the lease termPayments over the lease term

tt99 tt1010 tt1111 tt1212 tt1313 tt1414 tt1515

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LeasingDeduction of leasing payments (capital and interests):

Italian case (6,7% of financing each year)

tt00 tt11 tt22 tt33 tt44 tt55 tt66 tt77 tt88

R.E. Purchase R.E. Purchase by Clientby Client

tt99 tt1010 …… …… …… …… tt3333

Direct purchase (loan)

Linear amortization over the life cycle of the asset:

Italian case (3%)

End of End of amortizationamortization

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R.E. lease contract structure: the italian case R.E. lease contract structure: the italian case Average value of first up-front payment and option to purchase as a percentage of Average value of first up-front payment and option to purchase as a percentage of the asset valuethe asset value

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Outstanding New Business

2005 2004 2005 2004

Automotive 7,3 7,2 8,2 7,9

Real Estate 11,5 10,6 12,1 9,7

Equipment 1,4 1,2 1,5 1,1

Ships, Aircrafts, Rolling stock 4,3 4,5 2,6 2,0

Up-front

Option

Real Estate leasing is particularly convenient for the client due to low up-front payment and final option to purchase

Outstanding New Business

2005 2004 2005 2004

Automotive 11,1 11,2 10,9 11,4

Real Estate 11,9 11,7 12,0 12,2

Equipment 8,4 8,1 8,3 8,4

Ships, Aircrafts, Rolling stock 26,8 27,2 28,6 32,0

For both first payment and option slight decline in percentage value during the first half of 2006

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ContentsContents

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7,00%

3,17%

2,93%

2,05%

6,52%

0,56%

5,74%

6,77%1,28%

2,48%

3,65%

5,02%

0,73%

1,33%

0,27%

• Italy is ranked number one in Europe as far as R.E. Leasing is concerned

• Many countries show remarkable growth opportu-nities still to be pursued

€€/Billions/Billions

Source: National Leasing Associations, LeaseuropeSource: National Leasing Associations, Leaseurope

ItalyItalyGermanyGermanyFranceFranceSpainSpainAustriaAustriaUKUKGreeceGreecePortugalPortugalBelgiumBelgiumCzech Rep.Czech Rep.NetherlandsNetherlandsSloveniaSloveniaDenmarkDenmarkHungaryHungaryPolandPoland

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22

33

44

55

66

77

88

99

1010

1111

1212

1313

1414

1515

00 1010 2020 3030 4040 5050 6060 7070

Outstanding/GDPOutstanding/GDP

The comparative analysis of Outstanding / GDP is a good indicator of the RE Leasing penetration margin

European Real Estate leasing market ranking by outstanding European Real Estate leasing market ranking by outstanding 1/h 20061/h 2006

RomaniaRomania22220,07%

9Source: Leaseurope, National Leasing Associations, elaboration of 1/h 2006 data by Source: Leaseurope, National Leasing Associations, elaboration of 1/h 2006 data by R.E.S.G .R.E.S.G .

Total R.E. leasing new Total R.E. leasing new business (2005) in Europe:business (2005) in Europe:

46,8 Billions Euro46,8 Billions Euro

R.E. Leasing new business size and trendR.E. Leasing new business size and trend

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RE Equipment Automotive

• Almost half of new business in Italy is relevant to Real Estate leasing

• In other countries the RE percentage spans from almost zero to one third of the new business

Automotive leasing data Automotive leasing data are currently not are currently not

available for Romaniaavailable for Romania

ItalyItaly GermanyGermany FranceFrance SpainSpain AustriaAustria PortugalPortugal BelgiumBelgium HungaryHungary RomaniaRomania

Leasing new business breakdown by type of contract – 2005Leasing new business breakdown by type of contract – 2005Some examples (not exhaustive)Some examples (not exhaustive)

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(mio €)

0

10.000

20.000

30.000

40.000

50.000

60.000

Vehicle + Equipment Real Estate

Real Estate Leasing percentage weight and total new business became sensible only in the late ’90s

Nevertheless the YoY growth ratio increased steadly (except for 2003 and 2006) since early ’90s

19.2% 19.2%

-18.6% -18.6%

29.4% 29.4% 38.6%38.6%

22.6% 22.6% 39.0% 39.0%

70.0% 70.0%

31.1% 31.1%

-8.9% -8.9% 9.0% 9.0%

YoY YoY growth growth

Italian leasing new business growth in the last 15 yearsItalian leasing new business growth in the last 15 years

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Other leasing companies

16,9%

Top 1583,1%

(74,2% in the total leasing mkt)

Italian Real Estate leasing market is highly concentrated with Top 15 companies collecting more than 83% of total new business

Similar concentration, nevertheless, is also present for other leasing products

Italian Real Estate Leasing market concentrationItalian Real Estate Leasing market concentration

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<=0.5 mil. €10%

> 0.5 mil and 2.5 mil.€

22%

>2.5 mil.€39%

<0.5 mil.€3%

>0.5 mil.€ and <= 2.5 mil.€

11%

>2.5 mil.€15%

To buildTo build

AlreadyAlreadybuiltbuilt

“To build” leasing (29% of total RE leasing) still has good growth margin but new tax regulation (sept. 2006) will jeopardize the market (focused later on)

Breakdown by type of R.E. lease contract in ItalyBreakdown by type of R.E. lease contract in Italy

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Market concentrationMarket concentration R.E. Leasing business is mainly

concentrated in few economies (more than 70% of the business is in the hands of 5 countries)

Results of the round table Description

Growth opportunitiesGrowth opportunities Even in consolidated markets (not to

mention Eastern Europe…) evident business opportunities emerge as denoted by many indicators (growth trends, R.E. leasing penetration as percentage of total leasing business, as percentage of GDP, as percentage of total R.E. business, …)

Heterogeneity in market Heterogeneity in market regulations regulations

Growth is mainly driven by fiscal benefits which sensibly vary across Europe as many other legal aspects

Heterogeneity in Heterogeneity in operations operations

R.E. leasing, even in a Basel II perspective, is still operated very differently across Europe

• The richness in diversity can be turned into new business opportunities

• In order to leverage such diversity, building a common R.E. leasing knowledge, the european leasing association (Leaseurope) recently launched a steering group focused on “real business” issues

R.E. Leasing market: synthesisR.E. Leasing market: synthesis

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ContentsContents

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National and european Leasing Associations:National and european Leasing Associations:

Examples of Leasing Associations Examples of Leasing Associations

The opportunities of R.E. Leasing Markets widespread all over Europe fostered the creation of national and European leasing associations aiming at developing leasing business and facilitating clients knowledge of such financial instrument

Leaseurope: 33 National associationLeaseurope: 33 National association

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A new initiative from Leaseurope :A new initiative from Leaseurope :The R.E. Leasing Steering GroupThe R.E. Leasing Steering Group

A new Steering Group has been recently set up (November 2006) by Leaseurope on Real Estate Leasing involving many country associations and banking members

As Chairman of the S.G. Leaseurope appointed Mr. Paolo Alberto De Angelis C.E.O. of FinecoLeasing and CoManaging Director of MCC, both from Capitalia Group, Italy

The main goals of the S.G. are: To build-up a common know-how

on RE Leasing leveraging the best practice of member countries

To face challenges of the RE Leasing business and to define strategies to overcome them

To develop business opportunities in member countries based on success cases of other members

# of Members

ItalyItaly 2

AustriaAustria 1

BelgiumBelgium 1

GermanyGermany 2

DenmarkDenmark 1

SpainSpain 2

FranceFrance 3

United K.United K. 1

HungaryHungary 1

PortugalPortugal 1

UkraineUkraine 1

RomaniaRomania 2

The involvement of 12 countries and 18 active members (plus Leaseurope secretariat) is encouraging and goes beyond first expectations

Participating countries are not only those with consolidated R.E. leasing business but include emerging markets and nations that recently joined EU

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Kick-off meeting of the R.E. Leasing Steering GroupKick-off meeting of the R.E. Leasing Steering GroupRome 11/10/2006Rome 11/10/2006

The first action of the Steering Group was gathering for members’ appointment and setting up of the activities on the agenda

Mission statementMission statement Definition of the mission of the S.G.

Members’ commitment

Goals of the meeting Description

Introduction & Introduction & Overview Overview

Members’ introduction (bio-profile and company profile)

Overview of national R.E. Leasing markets (size, trends, opportunities, threats)

““Hot” topics and Hot” topics and open issuesopen issues

Selection and first brief discussion of topics of interest to be further focused and developed by the S.G. during next meetings

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22

33

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Examples of selected topics to developExamples of selected topics to develop

StatisticsStatistics Support the Statistic Committee with drivers definition and

standardization

TopicsTopics Aspects to be focusedAspects to be focused

TaxationTaxation Analyze minimum duration, fiscal framework and V.A.T.

management

R.E. FundsR.E. Funds Evaluate impacts of R.E. Funds on R.E. Leasing market

IAS ImpactIAS Impact Assess the impact of IAS on R.E. Leasing market

Cross Border Cross Border Select cross border business opportunities and relevant management

RegulationRegulation Define a synthesis framework for R.E. leasing regulation (out of fiscal treatment)

Asset valueAsset value Draft possible techniques for evaluation of the leased assets

Compare procedures for asset retrieval and defaulted clients management

Defaulted clientsDefaulted clients

Analyze public subsidies to R.E. Leasing (even at local level) Public subsidiesPublic subsidies

Further developed in the following

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R.E. leased assets evaluation: duties and opportunitiesR.E. leased assets evaluation: duties and opportunities

Basel II Requirements

DescriptionDescription ImplicationImplication

In order to benefit from favourable LGD In order to benefit from favourable LGD treatment for RE leasing, the following treatment for RE leasing, the following conditions (among others) must be conditions (among others) must be verified:verified:

Premises fair value must be Premises fair value must be monitored and updated periodicallymonitored and updated periodically

Exposure must be less than a Exposure must be less than a specified percentage of RE leased specified percentage of RE leased assets valueassets value

Market opportunities

A deeper Real Estate market knowledge A deeper Real Estate market knowledge is useful to correctly evaluate is useful to correctly evaluate investments and avoid fraudsinvestments and avoid frauds

RE leased assets must be RE leased assets must be monitored in order to monitored in order to ensure a lower capital ensure a lower capital absorptionabsorption

Monitoring is a business Monitoring is a business opportunity to pursueopportunity to pursue

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Basel II framework for R.E. leased asset value monitoringBasel II framework for R.E. leased asset value monitoring

The application of Basel II rules to Real Estate valuationThe application of Basel II rules to Real Estate valuation The frequency of the evaluation is merely based on

the typology of the premises as follows: Residential properties: 3 year Non - Residential properties: 1 years

There are two ways of estimating the premises: By entrusting the evaluation to an “indipendent

surveyor/specialist” (one-to-one approach) by using statistical methods (massive approach)

Even if the statistical method is adopted, specialist’s valuation is compulsory for financial exposures up to € 3 million / 5% of the bank regulatory capital

1 Year(One-to-One)

3 Year(One-to-One)

1 Year (One-to-One)

(Massive)

3 Year (One-to-One)

(Massive)

VALUEVALUE > 3

Mio

or >

5%

R.C

.>

3 M

io o

r > 5

% R

.C.

< 3

Mio

& <

5%

R.C

.<

3 M

io &

< 5

% R

.C.

Non ResidentialNon Residential ResidentialResidential

Statistical approach can be used between Statistical approach can be used between two successive evaluationstwo successive evaluations

Statistical approach can be used between Statistical approach can be used between two successive evaluationstwo successive evaluations

Type of REType of RE

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Examples from R.E.S.G. Members: ItalyExamples from R.E.S.G. Members: Italy

Basel II application: from 01/01/2008Basel II application: from 01/01/2008

MCC S.p.A. caseMCC S.p.A. case

MCC have chosen to adopt statistical approaches where applicable and to get market drivers informations externally by an authoritative provider: NOMISMAShort Term

Mid Term

MCC is planning to integrate NOMISMA’s service with more specific RE leasing market informations based on ASSILEA’s RE market monitoring projects

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MCC’s Short Term statistical approachMCC’s Short Term statistical approachCriteriaCriteria Initial premises Book Value (purchase value) is yearly updated multiplying it by a correction factor (“revaluation index”) provided by NOMISMA The proper revaluation index to be used for each asset is calculated based on asset’s characteristic (“drivers”):

Typology of the premises (6 different categories) Location (8 different categories) Date of the last specialist’s evaluation

Geographical resolution is quite accurate: based on the postal code (usually corresponding to municipal districts for small cities, or quarter, for bigger cities)

Well established: founded on 1981 Authoritative: lunched by a group of economists and statisticians, leaded by the Prime Minister Independent: it currently is a public limited company whose the main shareholders are the major financial and entrepreneurial italian groups Specialized: it’s specialized in Real Estate valuation projects on demand, but it also realizes its own “products” in co-operation with specific

Observatories (e.g.: RE market, Agricultural market, etc…)

External provider: NomismaExternal provider: Nomisma

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MCC’s Mid Term statistical approachMCC’s Mid Term statistical approachConsiderations Considerations Nomisma’s revaluation indexes are a little bit generic while RE premises value depend on a variety of different drivers Assilea is developing a RE market monitoring database in co-operation with the Territory Agency (public authority focused on

advertising services, supervision of the RE market Observatory and valuation services) based on a well detailed classification of premises

MCC is evaluating to integrate Nomisma and Assilea indexes for a more accurate estimate of RE asset values

Assilea RE market monitoring framework Assilea RE market monitoring framework

RE Leasing Companies Assilea Territory Agency

11 When purchasing a new RE asset, each leasing company fills up a form and sends it to Assilea

22 Assilea elaborates RE leasing statistics and shares them with the Territory Agency

33 Territory Agency joins Assilea database with a pervasive monitoring database on C-to-C RE purchase acts. (info recovered from notary)

44 Assilea issues an elaborated revaluation index to partner leasing companies

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Further activities of R.E. Leasing Steering Group on Further activities of R.E. Leasing Steering Group on this issuethis issue

By collecting more answers to the questionnaire broadcasted among members we will:

- Analyse the asset evaluating costs

- Improve statistical techniques

- Compare the adopted approaches

- Define good practices

- …

By collecting more answers to the questionnaire broadcasted among members we will:

- Analyse the asset evaluating costs

- Improve statistical techniques

- Compare the adopted approaches

- Define good practices

- …

The Steering Group will develop, for this issue as well as for other selected topics, “white papers” i.e. shared guidelines aimed at facing and solving main R.E. leasing concerns

Final goal is to foster R.E. leasing in each member country by enriching product knowledge, sharing expertise, defining good practices, selecting business development initiatives

Documents

Fabio Pugini