Q2 2014

Equipment Leasing

Insider

Welcome to our newsletter

Welcome to First Equilease's Q2 2014 edition of the “Equipment Leasing Insider”.

Globally, 2nd quarter of 2014 has seen sluggish development on the equipment

leasing front. The ELFA index which serves as a gauge of business confidence, has

come off its two year high.

In this issue of the newsletter, we focus on Kuwait’s retail construction sector. The

retail sector is expanding and demand for retail space is growing despite expensive

real estate. The urban and sub urban population of Kuwait enjoy higher per capita

income and they form the key target group for luxury retail players entering the

Kuwait market. Satiating the appetite of the target market calls for better retail

infrastructure. The expansion of the Avenues mall, The 360* Mall etc. can be seen as taking a step in the right

direction. I would like to thank Mr. Sameer G. Al-Omani who is the chairman and MD of Fixed Asset General Trading

& Contracting Co. for his interview and sharing insightful thoughts on prospect of construction industry in Kuwait

and need for equipment.

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,

Mohammed Al-Qahtany

Chairman & MD, First Equilease

2

Table of Contents

Foreword

Featured Interview

Kuwait Retail – Multi Faceted shopping experience is the order of the day

Equipment Leasing and Finance Foundation Monthly Confidence Index

Step Down Lease Rental

Latest from Global Equipment Leasing News

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Equipment Leasing

Insider

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Featured Interview

First Equilease held an exclusive interview with Mr. Sameer G. Al-Omani, Chairman and

MD of Fixed Asset General Trading & Contracting Co. Below is the transcript of the

interview.

1. Could you please provide a brief introduction about your organization, and its

purpose?

FAC has many activities in Kuwait and abroad also. We are in business of various

precast, construction, real estate and limited contracting. We sought to be specialized

in precast job that we do. We do specific precast molds. We focus primarily on road barriers as we see great

demand for this. We have skilled employees with deep experience in the precast business. If required, we also

help and guide our clients to engage recognized team for installation.

2. How do you perceive the construction industry in Kuwait for the next 5-10 years, given the number of

projects announced by the government in the Kuwait Development Plan? How does it impact the business

of precast barriers?

Construction is the main activity in Kuwait that drives the economy. Kuwait is not an industrial country and

would ideally like to be a financial center – but presently that is not the case. Additionally, we cannot stay

away from construction as a country requires infrastructure such as roads, bridges and houses, etc. This is a

de-facto situation.

It is obvious that there has been some delays in implementing the construction projects because of some

political gridlocks. However, the situation surely seems to be improving now and the politicians have

understood the need to press ahead with the development. As we all know there are many important projects

that need immediate attention such as: extension of the Kuwait airport, building new university campuses,

new hospitals, development of new roads etc. These projects have stalled because of the difference of opinion

between the parliament and the government. However, that is not the case anymore. Funding of these

projects has never been an issue for Kuwait. The country has recorded surpluses for the past so many years.

We have also discovered from 2008 crisis that investing money into building your country is much more

valuable than committing to portfolio investments which can go wrong. Therefore, I believe the three key

elements – the will, the need and the fuel (funding) – to push forward the development projects are aligned

now. Although, there might be some delays but I strongly believe the construction sector has a positive outlook

going forward.

4

If you look at our business of precast, we are fully-occupied for next two years. This should give you an

indication of the pace of activity in the construction sector. We also have plans to expand but this largely

depend on getting the land to establish the business.

3. What are your views on the recent regulations brought in by the Labor ministry regarding the recruitment

of foreign workers? What are the strategies that companies have implemented to reduce the business

impact of the regulation?

Surely these regulations impact our business. Earlier we used to hire locally but that option has become very

costly now as there are less skilled laborers available locally and they ask for higher salary. To solve this, now

we hire directly from the source country. With ministry understanding our needs, they have also started to

allow us to hire directly.

4. Could you please elaborate more about your key customer base?

We are generally involved in large construction projects through contractors. We are leading suppliers of

precast barriers. To a certain extent, we also serve a small base of mid-size contractors to meet their one-off

requirements.

5. How do you expect the demand for precast barriers to be in the medium and long term given the huge

infrastructure spending that the government has planned to undertake?

Demand for precast is rapidly increasing. The precast barriers address the problem of labor and equipment.

Instead of sending a team of people to work on a project, say construction of a bridge, we can install the molds

made in controlled conditions with accuracy. The molds can be used to make castings as per the specifications.

The final product has better quality and implemented in much lesser time.

Apparently, availability of laborer has always been an area of concern in Kuwait. Kuwait has a small population

base and the laborers that we have are all expatriates so it is better to utilize them to the fullest. The pre-cast

molds are also easy to assemble. However, one has to keep in mind that there needs to be enough volume. To

make precast successful we require standardization which enables us to use the same molds in different

projects. It is not feasible to make customized and different molds for different projects.

6. The companies, such as yours that are part of construction industry, require various types of heavy

equipment. What are the equipment that you require and where do you get it from?

We require wide range of equipment such as: boilers, overhead cranes, mobile cranes, trailers, bulldozers,

variety of transporting equipment, digging, lifting and other equipment. Mainly we get our equipment from

Q2 2014

Equipment Leasing

Insider

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Europe. And we prefer to purchase used equipment that are in excellent condition because purchasing new

equipment results in high depreciation. We also ensure the equipment that we buy has good resale value.

Buying new equipment would reduce our competency as the depreciation would be very high. New equipment

costs four times more than used equipment and this excess cost would make the business totally unviable.

7. What percentage of equipment do you lease/ own in your business? Do you see an increase in equipment

being leased?

We usually finance our equipment through commercial banks in Kuwait and leasing company. Presently, about

half of our equipment are self-financed and rest by the banks / leasing company.

Presently, the type of leasing arrangement that are available is more likely buying equipment for the lessee.

The leasing should actually be composed of a package that should also include maintenance, operating,

insurance, etc. If a specialized equipment leasing company leases without the package, most of the large

company would not come to them as they get lower rates with the commercial banks. Therefore, equipment

leasing companies should have an option of providing dry-lease or wet-lease.

8. What are the major hurdles that a company in your industry has to face while leasing equipment instead of

buying it upfront?

In business like ours, ultimately we prefer to own the equipment at the end of the leasing period as our

equipment are used for their useful life. We go for short-term leases only for those equipment that we need

for a shorter period of time, for e.g. to meet sudden increase in workload that have to delivered on short

notice.

6

Market Analysis

Kuwait Retail – Multi Faceted shopping experience is the order of the day

Kuwait’s retail property market is one of the least developed in the GCC region. Despite its higher per capita

income levels, Kuwait’s retail landscape is still dominated by cooperatives instead of hypermarkets and

supermarkets which is the norm in its neighboring gulf countries as well as globally. Non-availability of good quality

retail space is seen as an important hurdle by famous international brands and preventing them from coming in.

Some of the International retailers who have set up shop in Kuwait Include Harvey Nichols, Marks & Spencer, Tim

Horton, Beef O’ Brady’s and Spinneys.

Kuwait’s retail market potential has been well noted by international players and many of them have set their

sights on entering the hugely lucrative market. Kuwait ranks as one of the countries with largest per capita GDP at

USD 56,373 which is twice that of Saudi Arabia and 1.3 times that of UAE. Retail developments in Kuwait is playing

catch up with its neighboring markets which can be seen from the chart below.

Figure 1: Completed Gross Leasable Retail Area – Kuwait (In Million M2)

Source: MEED

630

1,070

0

200

400

600

800

1000

1200

GrossLeasable Retail Area

In M

illio

n M

2

2011 2020

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The Gross leasable retail area in UAE is 4.5 Billion1 Sq. mi which is 7 times bigger than the area in Kuwait. Kuwait

market however is not without its share of developments. New retail spaces have been made available in malls

including The Avenues and 3600 malls that have gained popularity among the local crowd. The Avenues mall has

especially been more successful in attracting the crowd. Close to 22 Million visitors come to the mall every year

spending over USD 1 Bn2. The 3600 Mall is the second largest mall in Kuwait with a total shopping area of more than

82,000 m3. More recently, The Gate Mall has opened in Kuwait which has close to 275 shops and covers a total area

of 65,000 m2 over 6 levels. Recently, renowned coffee house, Esquire, has opened its first store in the mall through

a local franchise.

Kuwait’s potential to be an attractive retail destination is visible from the 2014 Global Retail Development Index.

Kuwait has moved up 1 position to rank 8th during 2014. During the previous year, Kuwait rose three positions to

reach the 9th position.

Table 1: 2014 Global Retail Development Index

Country Market Attractiveness Country

Risk

Market

Saturation

Time

Pressure GRDI Score

UAE 98.5% 82.3% `17.5% 43.8% 60.5

Kuwait 78.8% 72.6% 32.9% 31.7% 54.0

KSA 72.3% 67.3% 29.5% 27.4% 49.1

Oman 75.1% 79.1% 27.0% 11.1% 48.1

Source: AT Kearney

Kuwait is featuring high on the luxury retailers owing to its refined consumer taste coupled with increasing

spending power. Retail sales have grown at close to 4.3% since 2011 and are expected to bring in higher end

developments.

1 MEED 2 MEED 3 MEED

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Infrastructure Projects

The Kuwait Metropolitan Railway Transport network has been the biggest ongoing infrastructure projects in Kuwait

and is expected to be completed by the year 2018. The underlying objective of this project has been provision of a

169Km long metro system with a total of 69 stations and four lines. The other objective has been to provide 411

Km of railway line for Kuwait. The Metro project is currently being implemented at an estimated cost of USD 7 Bn4.

Table2: Top 10 ongoing Infrastructure Projects

Project Name

Project

Value ($

Bn)

Status

Kuwait MOC - Kuwait Metropolitan Railway Transport - Railway System

- Design - Tendering & Bidding

Kuwait MOC - Kuwait Metropolitan Railway Transport System 7.00 Design - Tendering & Bidding

Kuwait MOC - Kuwait Metropolitan Railway Transport System - Metro System

- Design - Tendering & Bidding

Kuwait MOC - Kuwait Metropolitan Railway Transport System - Metro System - Line 1

- Design - Tendering & Bidding

Kuwait MOC - Kuwait Metropolitan Railway Transport System - Metro System - Line 2

- Design - Tendering & Bidding

Kuwait MOC - Kuwait Metropolitan Railway Transport System - Metro System - Line 3

- Design - Tendering & Bidding

Kuwait MOC - Kuwait Metropolitan Railway Transport System - Metro System - Line 4

- Design - Tendering & Bidding

Kuwait MPA - Bubiyan Island Port - Phase 2 0.50 Planning

Kuwait MPA - Bubiyan Island Port - Phase 3 1.50 Planning

Kuwait MPW - Nawaseeb Road Upgrade 0.58 Construction - Tendering & Bidding

Total 9.58

Source: Zawya Projects

Metro railway projects around the world have huge turnaround periods and require lot of maintenance and upkeep

to keep it in running condition. Cleaning equipment, cranes, electrical winches are all necessary and needs to be

on disposal. Such large infrastructure projects have tremendous scope for equipment leasing. Construction of

metro projects usually spans across years and requires constant maintenance of equipment used in construction.

4 Zawya Projects

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Potential equipment that can be leased in construction of metro projects can vary from very large equipment such

as earth moving machines, underground diggers/ dredgers and tunnel digging machines to small hand held

equipment such as welding machines, power drills etc.

Trends

Equipment Leasing and Finance Foundation Monthly Confidence Index

The 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 Equipment leasing and finance foundation monthly confidence index which rose throughout the 1st quarter of

2014 suffered a decline in June 2014. The Index ended at 61.4 during June 2014, posting a decline of 6% compared

59.059.6

61.762.1

59.2

48.5

51.550.2

53.053.3

49.9

48.5

54.2

58.758.0

54.0

56.757.3

59.4

61.061.3

54.0

56.955.8

64.9

63.3

65.165.165.4

61.4

45.0

50.0

55.0

60.0

65.0

70.0

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

Aug-12

Sep-12

Oct-12

Nov-12

Dec-12

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13

Jul-13

Aug-13

Sep-13

Oct-13

Nov-13

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

10

to May 2014. The respondents of the confidence survey also saw a marked drop in the number of people expecting

business conditions to look up over the next four months. Only 23.5% respondents were positive about businesses

improving over the next four months as compared to 31.4% of the respondents in May 2014. 70.6% of the

respondents expected the business scenario to remain the same over the next four months.

Educational

Step Down Lease Rental

The US Financial Accounting Standards Board (FASB) has been discussing

changes to lease accounting. It has now mooted a proposal to eliminate

the controversial off-balance sheet leases. The changes, if finalized would

result in all current and future leases being recorded in the balance sheet

as assets and liabilities.

Topic Existing U.S. GAAP Proposed Model Expected Impact

Overall

Recognition

Operating leases are

“off-balance

Sheet.”

Record an asset and

liability for all

leases based on the most

likely future

Rent payments and lease

term.

Increase in asset and liability on the

Balance Sheet

Payments for

Services Off Balance Sheet No Change

Need to distinguish payments for rent

from payments for services.

Lease term

Include option periods

with bargain

renewals or periods

prior to a bargain

purchase option.

Capitalize the most

likely lease term and the

option periods should

also be included

Need to reassess most likely lease

term each reporting period and adjust

financial statements if needed.

Purchase Options Capitalize bargain

purchase options.

Capitalize all purchase

options likely to

be exercised.

Need to reassess likelihood of exercise

each reporting period and adjust asset

and liability.

Source: Grant Thornton

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Latest from Global Equipment Leasing News

New $5bn Islamic Aircraft Leasing Fund Launched; Will Target GCC (GCC News)

Two Dubai-based financial firms, Quantum Investment Bank and Palma Capital, have been selected as the agents to

launch a new shariah compliant aircraft leasing fund, called ALIF Fund. The fund will be managed by the

International Airfinance Corporation (IAFC) with Airbus and Islamic Development Bank (IDB) as investors and

strategic partners, a statement said. With a targeted size of $5 billion from a combination of equity and debt, the

fund will focus exclusively on Airbus aircraft. It will operate according to shariah principles and will purchase brand

new and second hand Airbus aircraft to be leased to airline companies in the GCC and Organization of Islamic

Conference member countries, the statement said. “The objective of the fund is to achieve a risk adjusted medium

to long-term capital appreciation while generating a quarterly cash dividend to investors,” it added. The fund was

launched in London on June 23, 2014.

Digital Ocean Closes $10M Equipment Lease From CapX Partners (Tech Crunch)

Digital Ocean announced that it has secured $10 million in equipment financing from CapX Partners. CapX

previously invested in Digital Ocean’s $3.2 million seed round in 2013. The announcement comes on the heels of its

huge $37.2 million funding round earlier this year led by Andreessen Horowitz to fuel its growth. For Digital Ocean,

however, getting discounts and lines of credit with Dell and other vendors was very important during its early days

because it does actually have to incur quite a bit of cost to keep its co-located data centers running and scale

them up as demand grows.

Leaseurope: 2013 New Equipment Leasing Volume Reaches $326B

Leaseurope, the trade association representing the European leasing and automotive rental industries, has released

the results of its European Annual and Ranking Surveys for 2013. Leaseurope conducts a yearly survey of European

leasing activities by collecting information from its member associations on their national leasing market.

The final figures of the 2013 Annual Statistical Survey broadly confirm the preliminary European market results

published in March. Total new leasing volumes increased by 0.7% to reach Euro 251.9 billion ($344.7 billion). Total

new equipment leasing volumes, including vehicle leasing, grew by 1.9% to reach new business volumes of Euro

238.4 billion ($326.2 billion) or 94.6% of total new production in 2013. Vehicle leasing was the driving force behind

the market’s performance in Europe and grew by 5.1%. New equipment leasing volumes (ex. vehicle leasing) were

more subdued and fell by 3.6%. Nevertheless, these markets performed better in the second half of 2013 than in

the first six months of the year.

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Joint Accounting Rule on Leases May Not Happen in 2014

The chairman of the Financial Accounting Standards Board (FASB) hinted this week that a converged lease

accounting standard with the International Accounting Standards Board (IASB) will probably not be issued this year.

During a speech at the Institute of Management Accountants’ 95th Annual Conference and Exposition in Minneapolis

on Monday morning, Russell Golden said he did not expect the leases standard to be finished this year and added,

“It probably won’t be done until the latter half of 2015.” In 2005, the US Securities and Exchange Commission

(SEC) issued a report on off-balance-sheet activities and recommended that changes be made to the existing lease

accounting requirements to ensure greater transparency in financial reporting.

We were established in 2005 as a Kuwaiti closed shareholding company.

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.

About First Equilease

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