If you can't buy it, lease it

RIGA - With a fairly low consumer purchasing power in the Baltic states, more and more people are discovering the advantages of leasing. The biggest player on the Baltic leasing market, Hansa Leasing & Factoring, with offices in each of the three Baltic states, is seeing steady growth at all of its offices. "People are not ready to pay the full amount for products, services or property they want in Latvia, and therefore leasing is a fast and effective way of obtaining what you want," Artis Birkmanis, director at Hansa Leasing & Factoring in Latvia, said.

Currently, 20 percent of Latvia's total credit market is based on leasing, with a total credit portfolio of 1.2 billion lats ($1.9 billion). Leasing may at first glance be confused with renting or buying on credit, but this is not how it works in reality. A client who wishes to lease a product, for instance, will have to go to a leasing company or a bank which offers the service. This company or bank will buy and own the product, with the client required to make "lease" payments to the lessor (leasing company), according to the terms in the contract.

The minimum purchase price of anything a client wants to lease through Hansa Leasing & Factoring must cost at least 150 lats. Birkmanis smiled and said there would be no point in leasing anything cheaper than that. If the client fails to make a lease payment, the lessor will promptly repossess the product and sell it, after the client has been warned, of course. Birkmanis said that so far they didn't have any problems collecting payments from their clients and added: "We have a very strict risk policy."

There are basically two different types of lease agreements a client can make. A finance lease means that after all payments have been made to the lessor, the client is the legal owner of what was leased. An operating lease is more like agreeing to rent something from the lessor, who then retains ownership of whatever is leased when the lease terms are completed.

Estonia is ahead of both Latvia and Lithuania in the leasing business. "There, operations in this market commenced back in 1993. Latvia followed shortly after and in Lithuania, leasing hit the scene in 1996," he said. "The competition is high in Latvia. We have a big market with several players. In Lithuania, the potential is very high because there are more potential clients there." Estonia and Lithuania have only leasing companies. Banks are not getting involved on the leasing market. The Lithuanian legislation even prohibits banks from dealing in leasing. In Latvia the scene is different, with banks allowed to compete with leasing companies for the business.

Parex Bank is the second biggest player in Latvia with a 26.1 percent market share. Jorens Raitums, head of corporate credit and leasing, said that they are planning to expand in this fast growing business field. "Our strategy is to be the largest and best bank in Latvia. There is a fierce competition between banks and leasing companies. It shows in advertising campaigns and new services offered," Raitums said. "But with our service level and knowledge, we are confident to succeed. We do not see a principal difference between loaning and other types of lending. We offer each customer services which suit their needs."

There are currently 23 banks in Latvia, but only a handful of them are claiming stakes in the leasing market. Raitums said this is a growing market with a huge potential because people are starting to put their faith into banks again and are realizing the advantages of modern banking services. In the mid-90s, the Banka Baltija crash not only stripped people of their life savings, it also contributed to a loss of faith in banks in general. "People are starting to overcome that psychological barrier which said: 'I owe something to the bank.' They are coming back to banks now," Raitums said. "Still, it is not only locals who are more confident in Latvian banks. Foreign investors are coming in and buying out our banks."

Although Parex Bank mainly focuses on real estate leasing, which Raitums said is the safest to lease out since the value of real estate is pretty stable, the trend in Latvia follows that in the rest of the world. Similarly as with other countries, car leasing is one of the most rapidly developing leasing products in the Baltic states. During the past year, Hansa Capital Holding's car leasing portfolio grew by 52.4 percent in Estonia, 37.6 percent in Latvia and 38.8 percent in Lithuania. The buzzwords were smaller down payments, lower interest rates and extended leasing periods of up to six years.

"Sellers are very positive because this form of business helps them sell their products. Fifty percent of all brand-new cars sold in Latvia are leased," Birkmanis said. Raitums also confirmed that this is most likely to be the case in Latvia. According to Hansa Leasing & Factoring's annual report for 2000, the holding group had a very good year. In Tallinn, where the real estate market is the most developed, Hansa Capital participated in several large home development projects, thus becoming the main financing partner to future homeowners. In Latvia, the largest single deals conducted were the warehouse complex of Avers Centrs and the Ori Bowling recreation complex in Riga. In Lithuania, several large contracts were signed, which the company believes will be completed this year. Last year, the largest deal was the sales-lease-back transaction with the Klaipedos Baldu Prekyba furniture store in Vilnius.