Leasing companies eye a piece of the real estate action
Leasing is big business in Poland, covering everything from computers to construction cranes and even real estate. But where the leasing sector overlaps with the real estate sector, legal and semantic questions abound.
The combined revenue of the 22 leasing companies that disclosed financial data to the Business Journal (see The List, p. 7) reached zl. 5.65 billion ($1.4 billion). But of these, very few have managed to break into leasing real estate, which in legal terms differs from renting, according to Agnieszka Deeg-Dabrowska, a partner with law firm Weil, Gotschal & Manges.
LHI Leasing Polska (LHI) is one firm competing successfully against real estate agencies, but how directly it competes is unclear. According to LHI, property leasing differs from renting mainly in the handling of taxes and depreciation. At present, no definition of leasing exists in Polish law. Thus, even "experts" disagree about what separates leasing property from renting.
LHI prides itself on cutting out the middleman the real estate agency, and its commission by marketing its own properties. This translates into low rates on retail and storage properties, said LHI president Tadeusz Kobylanski. By LHI's definition, its few competitors include BRE Leasing and ING Lease (Polska). ING has leased real estate here since 1997 and expects to sign deals for more than $100 million this year.
Setting aside the hairy problem of what leasing actually means, LHI said that in 1995 it was first to tap Poland's real estate leasing market and still leads in revenue from leasing. But LHI, the sole foreign subsidiary of German firm LHI Leasing, spent several years studying the Polish market and acquiring a property portfolio before putting the properties up for lease, Kobylanski said.
Its first real financial success came in 1997 when LHI, then called LHI Leasing Polen, earned $1.9 million leasing its property portfolio of zl. 2.4 billion ($750 million). The next year earnings reached $1.44 million and in 1999 the company posted almost $4.4 million in revenue. Kobylanski said LHI became the juggernaut in Polish real estate leasing because of its experience in Western Europe. When LHI's German clients set up operations in Poland, the company found itself with instant demand in the new market. "Our presence in Poland was forced by our customers, in fact," Kobylanski said.
But not every leasing firm receives instant access to the real estate market. Krzysztof Wojciechowski, vice president of Orix Polska, which leases heavy vehicles, computers, printing equipment and other products, agrees with Kobylanski: LHI simply inherited its German clients. He said his own company, which pioneered leasing in Japan 36 years ago and is the second-largest leasing company in the world, has long considered real estate leasing in Poland.
Slawomir Reszke, director of real estate leasing at BRE, said the real estate leasing market will grow 30-50% over the next three to five years. However, Wojciechowski said Orix would like to see the Polish market stabilize before it leaps into property, especially considering that they would be attempting to acquire properties using capital of only $10 million not nearly enough to become a real player in property leasing.
"This market is not mature yet," Wojciechowski said. "Generally, buildings (here) have a very long depreciation scale," which increases risk. "We are not ready to take that kind of risk", he added.
According to Polish tax law, buildings fewer than five years old only fully depreciate after 40 years, or at 2.5% per year. Older buildings depreciate in 10 years.
Kobylanski said LHI only considers deals worth more than zl. 10 million ($2.4 million) and that contracts the company entered into last year averaged more than zl. 100 million ($24 million). The life of these contracts extends at least 10 years, and usually 16-20 years. That compares to usually shorter leases but higher rates of return common in leases of moveable equipment.
LHI has set up nearly 80 companies called "special-purpose vehicles" (SPVs) throughout Poland that nominally own LHI real estate. In fact, according to Del Chandler, sales and marketing director at competitor ING, "LHI is one big SPV." Chandler said LHI's revenue figures reflect accelerated depreciation derived from holding properties through SPVs. One SPV, the home-improvement superstore chain OBI, is also a major shareholder of LHI, Chandler said, and OBI lease payments count as deposits to LHI.
In Poland, he explained, it's possible to "separate fiscal ownership from legal ownership" for tax purposes. Tax issues are "the biggest obstacle in real estate leasing," Chandler said. But despite the drawbacks, Chandler describes the current market for real estate leasing as "very pro-investment" and expects to see "more and more companies following LHI and ING."
That might happen soon if the government amends the laws affecting leasing contracts and defines "leasing." Deeg-Dabrowska of Weil, Gotschal & Manges, said she hopes that will come within the next few months. A draft of the amendment has been approved in Parliament, she said.
