$NZD3.8b locked in asset ownership could be freed for investment
The number of New Zealand businesses suffering through the negative impacts of using outdated assets has risen from 75.3% in the inaugural round of research, to 79.0%. This finding comes as new research reveals that $3.8 billion of New Zealand corporate funds is tied up in the outright ownership of assets, as firms fail to unlock valuable capital that could be used for more productive means.
These are some of the key findings of the latest Alleasing Equipment Demand Index (the Index), which examines the current asset inventory and plans for future investment of New Zealand businesses. The quarterly index shows that despite firms of all sizes showing their intent to source new equipment to facilitate growth, they still appear to be bogged down by outdated assets sweated past their shelf life.
Micro businesses and SMEs appear to be the worst off, with the data showing 82.7% and 83.0% respectively are negatively impacted by old assets. Conversely, 67.4% of corporates said they are facing this issue. In terms of investment, 22.4% of micro businesses and 34.2% of SMEs respectively intend to acquire new assets during the March quarter, compared to 57.1% of corporates.
On a segment basis, the intention of both SMEs and corporates to acquire new manufacturing plant and equipment has jumped by 13.9% since the previous round of research. In addition, heavy industry is currently experiencing heightened levels of confidence with 21.4% of corporates planning to purchase yellow goods, which is a swing of 55.4% from the last round.
According to Alleasing Chief Executive Officer Daniel Blizzard, there is a marked difference between business sizes, with the smaller end of town clearly suffering the most.
“The negative effects of New Zealand businesses’ preference to own assets is evident in the large amount of corporate funds locked away in their asset ownership. These funds could instead be used more effectively to address productivity issues and free up capital for other areas of business investment for talent acquisition, innovation, or even operational improvements.
“Smaller firms felt these negative impacts more acutely than their larger cousins. SMEs are the backbone of the New Zealand economy and often struggle to access secured finance, so a lack of access to this significant amount of capital is undoubtedly hurting the nation’s productivity and impeding growth. Any freeing up of this liquidity has the potential to make a material difference.
The Index found the total proportion of owned assets in New Zealand is as high as 14.8%, with Auckland-based businesses owning a greater share of equipment than their Wellington-based counterparts. Australian firms are in a different position however, as the proportion of owned assets is much lower at 8.1%. The clear differentiation between both nations’ asset inventories also flows through to sentiment, with a lower six in 10 Australian firms indicating they are enduring the negative impacts of outdated assets.
However, the data indicates that a shift in the proportion of owned assets is likely as New Zealand businesses consider how they will fund future asset acquisitions. Currently 40.4% of corporates believe that equity provides them with the best return on equity outcome as an equipment funding option. Conversely, the smaller end of the market is distinctly different, with 28.6% of micro firms and 38.5% of SMEs indicating equipment finance provides the best return on equity outcome.
“That businesses are looking at alternative options to finance their equipment is a positive sign. If they do choose other ways to fund equipment, unlocking the $3.8 billion of corporate funds currently trapped in owned assets will be possible. If these funds start to shift, we could see a quantifiable difference in New Zealand businesses and the broader economy,” said Mr Blizzard.
When it comes to sourcing assets, the New Zealand dollar’s decline of around 80.0% in the past 12 months continues to play a role in the decision making process. Regardless of cuts to the official cash rate by the Reserve Bank of New Zealand, firms clearly have a preference to source new or replacement assets locally. Three quarters (75.0%) indicate they intend to do so, with eight in 10 (82.0%) stating this is due primarily to the cost and exchange rate.
NB. The research and publication of the Equipment Demand Index was conducted under Maia Financial’s previous name, Alleasing.
About the Alleasing Equipment Demand Index
The Alleasing Equipment Demand Index is a quarterly index, which examines the current asset inventory of New Zealand businesses, as well as expectations for future investment. Circa 450 firms that turn over $1-$100M are surveyed each quarter. These businesses have been broken into three segments: micro business ($1-5M annual turnover), SME ($5-20M annual turnover) and corporate ($20-100M annual turnover). The inaugural index was run during July and August 2015 – the research is executed by East & Partners on behalf of Alleasing.
Alleasing is a leading, independent provider of asset finance and leasing solutions. We have financed billions of dollars of assets for businesses in Australia and New Zealand during our 25 years of operation.