Colliers CEE 2011 by Annual Reports Europe

COLLIERS INTERNATIONAL 2011 NEW EUROPE REAL ESTATE REVIEW Albania Bulgaria Croatia Czech Republic Greece Hungary Poland Romania Russia Serbia Slovakia Ukraine

Accelerating success.

table of contents 2011 New Europe real estate review

CONTENTS Managing Partner, New Europe: Foreword

New Europe Regional Review

Albania

Bulgaria

Croatia

Czech Republic

Greece

Hungary

Poland

Romania

Russia, Moscow

111

Russia, St. Petersburg

127

Serbia

133

Slovakia

140

Ukraine

150

This report has been prepared by Colliers International for advertising and general information only. Colliers International makes no guarantees, representations or warranties of any kind, express or implied, regarding the information including, but not limited to, warranties of content, accuracy and reliability. Any interested party should undertake their own inquiries as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes all liability for loss and damages arising there from. This publication is the copyrighted property of Colliers International ÂŠ2011. All rights reserved.

Fluent in Real Estate

Representative Transactions in 2010/2011

Almaty Baku Barcelona Beijing Berlin Bratislava Brussels Bucharest Budapest Frankfurt Hong Kong Istanbul Kyiv London Madrid Moscow New York Paris Prague Shanghai St Petersburg Warsaw

Meyer Bergman

Invesco Real Estate

EUR 200,000,000

EUR 218,000,000

Joint venture with Neinver SA for the development of a city centre shopping mall in Katowice including the future redevelopment of the main railway and bus stations

Joint acquisition with CILOGER of a portfolio of 10 newly built shopping centres located throughout Germany

Poland

Germany

Danone Group

UniCredit Bank Austria AG

EUR 40,000,000

Value Confidential

Sale and lease-back of Danone Research’s R&D centre located in Saclay to Swiss Life Funds

Restructuring one of the largest single asset mortgage loans in Russia, secured by an office complex in downtown Moscow

France

Russia

RREEF

The Bank of East Asia, Limited

Approx. EUR 80,000,000

Approx. £50,000,000

Acquisition of Topaz and Nefryt, Class A office buildings located in the Mokotow district of Warsaw

Acquisition financing for the purchase of a retail/ office project located at Old Bond Street, London

Poland

United Kingdom

Heitman European Property Partners IV

Deutsche Pfandbriefbank AG

Value Confidential

EUR 181,000,000

Joint venture with TriGranit and acquisition of a 50% stake in the Arena Centar Shopping Centre located in Zagreb

Financing of 13 hypermarket-anchored shopping centres

Croatia

Poland, Czech Republic, Slovakia

ING Real Estate Development

HF Management Services, LLC

EUR 44,000,000

Value Confidential

Sale of a shopping centre located in Vörösmarty Square, Budapest

Office lease for Healthfirst’s new US headquarters to be located at 100 Church Street, New York City

Hungary

USA

www.salans.com

Foreword Dear Clients and Friends, As we start 2011, I am excited to take on the role of Managing Partner for the New Europe region, expanding my executive role from six countries in Central and Eastern Europe to sixteen offices in thirteen countries and a staff of 650. With full responsibility for Russia, Central and Eastern Europe and Southeast Europe, including Greece, my aim is to work closely with country management and provide regional leadership. Last year illustrated how we have been able to successfully lead and grow our business in Central and Eastern Europe during a challenging period. Colliers International was voted best CEE Real Estate Agent of 2009 in both Capital Markets and in the Industrial & Logistics sector at the CEE Quality awards – accolades we hope to retain for 2010. Hadley Dean mrics

managing partner colliers international new europe

We have appointed senior professionals into key regional roles across the region, notably John Verpeleti, Managing Director of CEE Investment

Pl. Pilsudskiego 3, IV Floor 0-078 Warsaw, Poland

Services and Tim Nicholls, Managing Director of CEE Valuation &

Phone

+48 22 331 7800

region this allows us to provide clients with seamless access to a full

Hadley.Dean@Colliers.com

Address

Advisory Services. Alongside existing senior members of staff in the range of real estate services across Central and Eastern Europe. Having our offices in Russia and South East Europe combined under one overall regional structure will only accelerate our ability to service you, our clients. Colliers has over 13 years experience in both of these regions and leveraging their expertise while adding the platform we have built in CEE, will result in a truly unique offering. We are doing business in what continues to be one of the most exciting global regions. While the past two years have undoubtedly been the most economically difficult in our countries modern history, I believe it is already resulting in opportunities that simply don’t exist elsewhere around the world. Our markets are coming out of the downtown with the same enterprising spirit we have always had but with a greater level of maturity and sophistication. This next chapter in our region will be pivotal as we continue to evolve and mature from a business perspective but maintain the unique attributes that make this region such a great place to live, invest and do business in. I, and Colliers as whole, look forward to partnering with you through this exciting time. Hadley Dean

p. 5 | Colliers International

2011 Colliers Real Estate Review » NEW EUROPE

2010 REPRESENTATIVE TRANSACTIONS

client: Fiege total size: 36,000 Sqm service: Industrial Tenant Representation

client ⁄ seller: Mayland Real Estate buyer: AEW Europe value: €92 Mln service: Investment Sale Advisory

client ⁄ buyer: NEPI seller: Portland Trust value: €101.2 Mln service: Investment Sale Advisory

client ⁄ landlord: Retail Chain scale: 300 shops leased service: Retail Landlord Representation

client ⁄ landlord: Gold Plaza Baia Mare size: 30,000 Sqm service: Retail Landlord Representation

client ⁄ tenant: Roche size: 8,700 Sqm advisor: Office Tenant Representation

Research: Damian.Harrington@Colliers.com

Colliers International | p. 6

New Europe regional real estate review

What a difference a year makes. All national economies in the region continue to stabilize and improve, with positive GDP growth of 3.6% on average forecast for the New Europe region as we head into 2011. This expansion comprises a combination of high industrial/ manufacturing production growth and falling unemployment, but rather muted growth in the demand for goods and services in most markets, bar Poland and Russia.

Damian Harrington

regional director, research and consulting colliers international new europe Address

Galerie Mysak Vodickova 710/31 Prague 1, 11000 Czech Republic

Phone

+420 226 537 624

Damian.Harrington@Colliers.com

On the downside, austerity packages, concerns over government bond defaults, the rising cost of international debt and increasing inflation, which reached ca 6.1% on average in 2010 – a similar figure is forecast for 2011 - could curtail the forecast for the year, although by varying degrees per country. In particular rising prices of energy, food and basic commodities could constrain any significant economic expansion. Office Market – vacancy appears to have peaked on average and is set for a period of slight stagnation or moderate decline over 2011. Average rents are likely to remain stable over the year, but we could start to see prime rental growth in some markets – Kiev has already jumped back from 50% falls at end 2010, Warsaw is likely to see prime rents climb in the first half of 2011. It will take until at least year-end 2011 for other markets to see a comeback in prime rents as a result of excess availability v. limited net take-up. Industrial Market – industrial production grew significantly in 2010 driving demand for modern warehouse/logistics space. This activity was predominantly focused on Poland, the Czech Republic and the Moscow region, driving a fall in vacancy in these markets. Outside of these regions, demand remained weak as a result of the lack of proximity to market – the export trade partners in Western Europe, notably Germany. By end 2010 interest was picking up in Slovakia from developers seeking land opportunities, but such interest is yet to migrate further south or east. It will eventually, but many markets are likely to be driven by retail demand in the short-term.

p. 7 | Colliers International

Retail Market – from an occupational and development perspective, retail continued to be the poor man in New Europe. Continued job uncertainty and austerity packages continue to drive low domestic consumption levels bar the usual anomalies of Russia, Poland and to a degree the Czech Republic. Retail sales took such a significant hit during the crisis period, it will take at least another year before retailers get close to par which will subdue any further expansion or growth in rents. That said, the long-term prospects for growth are much more positive – double the growth forecasts of western Europe to 2020. Given the large number of international retailers yet to penetrate New Europe, occupational growth prospects are positive but will place greater demands on shopping centre quality. Coupled with growth in internet-based retail shopping, there are interesting times ahead in the retail market. Investment transaction volumes over the year show a significant recovery compared to 2009, coming in at €6.36 Bln - an increase of 47%. That said volumes are still someway short of a longer-term turnover rate of €10 Bln, market cycles accepted. They only represent ca. 7.3% of total European transaction volumes. While the transaction cycle is on the way back up, the future for 2011 is a little opaque. Investor interest continues to move further south and east in search of acquisition opportunities which should increase turnover volumes for the region. With a €100 Mln prime office deal happening in Bucharest at the very end of 2010 – the first deal this market has witnessed since 2006 – money is finally moving beyond the core markets of Poland and Prague. This is the third annual review I have written for Colliers in New Europe and the best yet. It continues to be the most comprehensive report of its kind in terms of the geographic and sectoral coverage. I trust you find it an informative and interesting read. Kind regards, Damian Harrington

2011 Colliers Real Estate Review » NEW EUROPE

ECONOMIC OVERVIEW FIG. 1: 10.0

GROWTH: 2010 V 2011

Source: Focus Economics 5.0

-5.0

Bulgaria Czech Hungary Poland Romania Russia Slovakia Turkey Ukraine Republic

▄ 2010

FIG. 2: 10.0

▄ 2011

The better news is that all national economies are set to expand in 2011, in terms of ‘year-on- year’ GDP growth, as all countries finally emerge from the financial and economic crisis which started two years ago, in earnest. A good response time, all things considered, but a growth response not without downside risks.

GENERAL CONSUMPTION: 2010 V 2011

Source: Focus Economics/Colliers International 5.0

-5.0

Bulgaria Czech Hungary Poland Romania Russia Slovakia Turkey Ukraine Republic

▄ 2010

FIG. 3: 20.0

▄ 2011

INDUSTRIAL PRODUCTION: 2010 V 2011

Source: Focus Economics 15.0 10.0 5.0 0

Bulgaria Czech Hungary Poland Romania Russia Slovakia Turkey Ukraine Republic

▄ 2010

As we head into 2011, we can finally see that the economic recovery has filtered through into positive territory for almost all markets across the region. While Bulgarian growth remained largely neutral for 2010, Romania was the only market to suffer from another year of recession.

▄ 2011

Research: Damian.Harrington@Colliers.com

Poland of course continues to grow steadily having never succumbed to a recession, with the likes of Russia and Ukraine showing a strong rebound from the dark days of 2009. If realized this will also translate into stable/falling unemployment levels in 2011, according to consenus forecasts from Focus Economics. DEMAND FOR GOODS AND SERVICES POSITIVE ALBEIT VARIED…

Whilst GDP growth in CEE markets generally portrays a solid growth pattern, the actual demand for goods and services is less robust. Demand in Bulgaria, the Czech Republic, Slovakia, Hungary and Romania is forecast to be rather muted going into 2011, as is the case for the majority of south east Europe. This is likely to keep office and retail occupational demand subdued.

automotive industry. The Czech Republic, Poland and Hungary also witnessed a significant growth in output, moreso than the likes of Bulgaria and Romania further south and east. We put this down to their greater proximity and accessibility to market, the market being western Europe and notably Germany, where the vast majority of demand for exports produced in the CEE region emanates. That said, production growth is forecast to rise stronger in the more peripheral markets in 2011, largely matching the growth prospects of other countries across the region. GROWTH IS NOT WITHOUT RISKS

Despite the positive news, growth forecasts for the region are not without downside risks. Inflation is expected to rise or remain stable in most countries, which could dampen a recovery if interest rates follow. Perhaps more worryingly, the potential rising cost of debt & poor government bond ratings is also likely to dampen growth prospects, leading to more conservative growth estimates in 2011. The austerity packages many economies need to adhere to will also dampen consumption prospects, although providing more stable economic fundamentals in the long-term.

The demand for goods and services in Poland and Ukraine is far more robust, as it is for the regional behemoths of Russia and Turkey – all of these benefitting from large domestic markets.

Equally, positive growth does not necessarily translate directly into increased demand for more space. The abruptness and depth of the recent crisis created a significant pool of ‘unused capacity‘ in all the markets which were recessionary. This only started to get absorbed in 2010. Until economic output is back to par, which remains around 12 months away if not longer for some countries, this will continue to dampen the demand for office and retail space in 2011.

Even more promising is the extent to which industrial production has grown over the last 12 months, with very strong growth forecasts predicted for 2011 in all markets. Slovakia saw a very positive rebound in 2010, driven mostly by the

Industrial demand, however, is already back especially in those markets closest to Germany. This should spread immediately south to Slovakia in 2011, but it may not necessarily spread any further than Hungary.

Colliers International | p. 8

2011 Colliers Real Estate Review » NEW EUROPE

OFFICE MARKET FIG. 4: 30.00

AVERAGE VACANCY AND RENTS

20.0% 18.0%

25.00

16.0% 14.0%

20.00

12.0% 10.0%

15.00

8.0%

10.00

6.0% 4.0%

5.00

2.0%

Source: Colliers International 0.00

0.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

OVERVIEW

Over the course of 2010 we have wtnessed the office market move toward stablisation as a whole across the CEE region. Vacancy rates, on average, appear to have flattened out at 18%, having risen significantly over 2008 and 2009 from ‘unsustainable’ lows of ca. 5% in 2007.

▬ Prime Rent ▬ Average Rent ▬ Vacancy

FIG. 5: 60%

PEAK-TO-TROUGH CHANGE IN RENTS Source: Colliers International

Change, %

50% 40% 30% 20% 10%

FIG. 6: 8

ue Pr

isl

▄ Average Rent

�a

t es ar ch

▄ Prime Rent

AVAILABILITY V TAKE-UP

Source: Colliers International

7 Number of years

We expect vacancy to stabilize further in 2011, but to varying degrees by market. Kiev and Warsaw had already witnessed an overall decline in vacancy rates by end 2010, whilst the likes of Sofia may see vacancy rates climb further in 2011.

6 5

Prime rents had stabilized by year-end in all markets. Indeed, prime rents in Kiev had already started to increase by Q3 2010 (although it is worth bearing mind the market suffered from a 50% peak-to-trough fall in rents following the onset of the crisis) and prime rental growth is imminent in Warsaw as we head into 2011. These appear to be the only markets supporting prime rental growth in 2011, with all other markets remaining stable.

4 3 2 1

�a

av isl at Br

pe da Bu

Average rents mirrored prime rent trends, falling and then stablising in most markets over the year. The outlook for 2011 is somewhat different, however, with no growth anticipated amidst a general flight to quality stock by occupiers. Only stock located within the core, central areas and key business districts appear to have a strong chance of sustaining average rental levels in 2011. The significant volumes of availability in the major capital cities, bar Warsaw and Moscow, but especially in the likes of Sofia, Budapest and Bratislava, may lead to a continued fall in average rents in 2011 before stabilizing. SUPPLY V. DEMAND

In order to gain a more strategic overview of the overall recovery and growth position of each market, we can

p. 9 | Colliers International

start by looking at the balance between office supply and demand (availability v. take-up). Fig. 6 provides an outline of the potential ‘absorption rate’ of office stock per city, assuming an 8% vacancy rate to be ‘zero’. The vacancy rate of 8% is chosen as this is typically the lower point of the natural vacancy rate band, at which point rents are likely to grow. Once vacancy gets below 6%, rents typically grow at a much more aggressive rate. The number of years, or the ‘absorption rate spread’, is determined by the best and worst years of take-up relative to the current level of availability within each market (availability = the sum of existing vacant stock + stock actively under construction). For example, if take-up in Prague were to match the best years of take-up witnessed (in 2006) it would take less than 1 year to get back to 8% vacancy from ca. 14% today. Equally however, if take-up were to remain at the lows of 2009 it could take-up to four years for the market to recover to a position which would support rental growth across the market. Alternatively, Warsaw represents very limited absorption risk given that vacancy is already sub 8%. Combined with a very limited pipeline and economic growth driving take-up, availability remains tight and rents are expected to grow in 2011. The absorption point for all markets, of course, is most likely somewhere in the middle, although younger markets such as Kiev and Bucharest - yet to see their best years of take-up - should recover quicker than the more mature markets. Put simply, the wider the spread the better the position is for occupiers versus developers. Most markets continue to be oriented to occupiers in the short term.

Research: Damian.Harrington@Colliers.com

2011 Colliers Real Estate Review » NEW EUROPE

OFFICE MARKET STRATEGIC LONG-TERM SUPPLY (sqm/’000 capita)

FIG. 7: 3,000

West European Average 2,500 Source: Colliers International 2,000 1,500 1,000 500 0

Bratislava

Prague

Warsaw

So�a

Budapest Bucharest

Kiev

▄ Under 5 yrs old & Pipeline ▄ 5-10 yrs old ▄ Over 10 yrs old

GREEN CERTIFIED BUILDINGS IN CEE/SEE Market

Stock* BREEM* Details

LEED*

Details

Sofia

260

American Embassy

CSOB Headquarters (Skanska), City Green Court (Skanska)

Prague

414

Zlaty Andel, BB Centrum Beta (INGREIM)

Budapest

286

Quadrum Office Park (AIG Lincoln)

Warsaw

376

Bucharest

134

2 Lakeview (AIG Lincoln), Euro Tower (Cascade Group)

Bratislava

251

Kiev

160

Atrium City (Skanska), Atrium Center (Skanska)

* Buldings. Source: Colliers International/LEED/BREEAM

SHORT-MID TERM OUTLOOK Market

Forecast'Demand' Growth 2011

Availability/Absorption Rate (yrs)

Vacancy at 8%

Warsaw

3.5%

0.75

H2 2011

Kiev

1.5

H1 2012

Prague

1.5%

H2 2012

Bucharest

1.5%

2.5

H1 2013

Bratislava

1.75%

H2 2013

Budapest

1.5%

H2 2013

Sofia

1.5%

H2 2013

Source: Colliers International

SUMMARY OUTLOOK Developers Market: Now for Warsaw, slightly later for Kiev – rents likely to grow in 2011. Middle Ground: Prague and Bucharest – rents likely to grow in 2012, perhaps sooner for core/prime. Tenants Market: Bratislava, Budapest and Sofia – rents unlikely to grow overall until 2012/13, although core/prime rents may rebound sooner.

STRATEGIC POSITION

Fig. 7 gives an indication of the longer-term development potential of office markets. This is based on the current supply of office space relative to more mature western European capital cities of a similar size, in terms of Sqm per 1,000 population (where the western European average ranges between 2,500 – 3,000 Sqm). From this simple quantititave analysis, locations such as Kiev and Bucharest, the youngest markets, appear to have the greatest capacity to grow from a ‘strategic supply perspective’. At the other end of the scale are Prague and Bratislava, which look very close to capacity. In the ‘middle-section’ lie Warsaw, Sofia and Budapest which offer some further development growth of office stock over the medium-longer term. On the surface, one can develop an inkling as to which markets are good targets for developers. From a qualitative perspective, a different picture emerges. So, whilst the overall volume of stock is close to capacity in Prague, the quality of stock may not be as over 60% of stock is over 10 year old, and 35% over 10 years old. While this is not necessarily an accurate indication of quality, it does provide some indication that a high proportion of stock will soon become technically obsolete in Prague. This provides developers with a different ‘refurbishment and redevelopment’ opportunity, but an opportunity nonetheless. The question is, what to build? We believe there are two significant factors to consider to ensure the long-term sustainability and success of an office asset in line with changing market trends and demands. The first key factor is the extent to which a building is certified as being green/sustainable. To date only around ten office buildings are registered to a high enough standard by either BREEAM or LEED across CEE/SEE. A very small

Research: Damian.Harrington@Colliers.com

amount. The trend, however, shows that a further 100 or so are in the pipeline to be certified illustrating that developers and owners are now taking this more seriously as a must have, rather than a nice to have. Given that the actual construction of green office space is no longer prohibitive in cost, and the fact that the right construction can save operational costs, the use of energy and boost the CSR profile of occupiers, we see this as a real differentiator for developers in future. This is especially in a world of rising energy costs. By future we do not necessarily mean 5 – 10 years away, but now. Especially when one considers the competition for occupiers between developers which is likely to play out in a number of markets over the next few years. The other important factor to consider is the way we work and how this is changing our use and needs for office space. Continual improves in ‘mobile’ technology and the use of handheld/tablet devices alongside alternative working strategies – i.e. remote/flexible working, hot desking and more efficient use of space is already changing how office space needs to be configured to meet modern demands. This will ultimately change the use and format of office space, most likely leading to a reduction in the volume of office space which has traditionally been required and thus reducing the quantitative argument for developers. PROGNOSIS

The overall message is that the need for space improvements will provide developers and property companies with a new opportunity and/or challenge. Especially in markets which are otherwise saturated – notably Prague and Bratislava. Bucharest and Kiev should continue to provide traditional development opportunities but not to the extent one may think as capacity requirements fall.

Colliers International | p. 10

2011 Colliers Real Estate Review » NEW EUROPE

INDUSTRIAL MARKET TAKE-UP & IND. PRODUCTION GROWTH

FIG. 8: 400

Historically, take-up growth in the region has been driven primarily by three types of occupier:

350 300

Companies in the production/ manufacturing and assembly sector, which account for ca. 35% of occupied space directly.

250 200 150 100

2000 ‘01

‘02

‘03

‘04

‘05

‘06

‘07

‘08

‘09

‘10

‘11

‘12

‘13

‘14

Retailers and wholesalers comprise a much smaller proportion of the market directly at ca. 15%.

▬ Industrial Production Index ▬ Take-up Growth Index

Logistics operators/3PLS which comprise the largest market share, at ca. 50%, their business however, driven by the needs of the manufacturing and retail sectors.

TAKE-UP TRENDS BY MARKET (,000)

FIG. 9: 1,500 1,200 900 600 300

100%

ar lg Bu

▄ Capital City

FIG. 10:

e’ .P

co M

la Cz

▄ R/O Country

CEE EXPORT PARTNERS

80% 60% 40% 20%

e in Uk

ak ov Sl

ia an m

ar ng

tia oa

▄ Other ▄ CIS ▄ M.East ▄ Turkey ▄ Balkans ▄ Asia ▄ Japan ▄ China ▄ US ▄ Russia ▄ EU27

Overall, however, we would suggest the production/manufacturing and assembly sector is responsible for around 70% of overall take-up. Figure 8 highlights the strong correlation between growth in take-up/demand and industrial production pre and post crisis and even during the booms years of 2006 – 2007. During these boom years the market witnessed a ‘quantum leap’ in demand growth as take-up more than doubled across the CEE region overall. This major shift appears to have been driven largely by 3PLs expanding, growth in occupiers associated with the automobile industry & from existing tenants/ occupiers grading up from older B-class stock to higher-spec, A-class space. It does not represent a 100% growth in ‘net take-up’, allowing for renewals and renegotiations. As industrial production recovered in 2010, we have also seen take-up rebound, from the previous lows of 2009, albeit it to varying degrees by location. As Fig. 9 shows, activity is highly concentrated in three markets: Poland, inc. Warsaw, the Czech Republic, inc. Prague and in Moscow. So why such a difference with all the other markets south and east where take-up is significantly weaker? Even

p. 11 | Colliers International

allowing for the fact that some of these markets are less transparent and activity is generated by owner occupation as much, or indeed moreso, than by leasing. It still begs the question(s), why such a difference in demand levels, and is this likely to change in future? The reasons for the significant differences are largely obvious and do give some indication of how demand levels may change. Moscow is a very large domestic (practically regional) market in its own right with a population of ca. 13 Mln supporting large volumes of retailing and manufacturing production. In the Central European belt, Poland has witnessed sizeable take-up of ca. 1.4 Mln Sqm as a result of being a large, expanding domestic market of ca. 35 Mln of which Warsaw is key. Next in line is Prague and the Czech Republic, where take-up is around two thirds of that seen in Warsaw/Poland. In these markets, the role of industrial production comes much more into play. Take-up has been driven by western European manufacturers who have expanded and or relocated into the central European belt to exploit strong labour skills at lower production costs whilst maintaining strong proximity to market. As Fig. 10 shows, all of the Visegrad countries have similarly strong trade relationships with western European countries, especially Germany which accounts for around one third of exports. In fact virtually all CEE/SEE nations, bar Ukraine, have a similar export profile yet the further south and east one goes, the weaker the market in terms of take-up. The interesting difference is the extent to which take-up in Slovakia and Hungary has been far more muted than in the Czech Republic despite no proportional difference in market (pop’n) size. All markets are relatively close to market, although Hungary is arguably further afield. The answer seems to lie in operational costs and infrastructure.

Research: Damian.Harrington@Colliers.com

2011 Colliers Real Estate Review » NEW EUROPE

INDUSTRIAL MARKET

FIG. 12:

When one considers that transport costs typically account for 60% of all operational costs – labour costs typically comprise 30% - this proximity to market factor, driven by high quality infrastructure (roads) is keeping the bulk of companies production and distribution facilities within the central belt territory of Poland and the Czech Republic for now. This is likely to continue for the foreseeable future, although signs of demand spreading south and east have started to happen - Slovakia has stared to witness more signifciant developer interest toward the end of 2010, driven by demand.

ANNUALISED LABOUR COSTS (€)

Bulgaria Romania Latvia Lithuania Slovakia Poland Estonia Hungary Czech Rep Portugal Slovenia Spain Finland Austria Germany France Netherlands Belgium UK Denmark Sweden Luxembourg

Over the mid-long term what can we expect across the region, and which factors will be the primary drivers of this change?

T3: CURRENT

10,000

20,000

30,000

40,000

50,000

60,000

MARKET POSITION

Market

Vacancy

Rents

Yields

2011 Developers Markets Sofia (Bulgaria)

3.9%

€4.50

12%

Moscow (Russia)

6.0%

€6.55

12 – 13%

Slovakia

8.2%

€3.20 – 4.00

8 – 12%

Next in Line for Developers Prague (Czech Rep.)

14.4%

€3.10 – 3.90

8.5 – 9%

Belgrade (Serbia)

15.0%

€3.00 – 4.00

11%

Poland

15.6%

€2.40 – 4.50

9 – 11%

Czech Republic

16.5%

€3.60 – 4.00

9.5 – 11%

Bucharest (Romania)

15%

€3.80 – 4.00

10%

Tenants Markets for 2011 Kiev (Ukraine)

22.0%

€4.15 – 4.25

14 – 16%

Budapest (Hungary)

21.3%

€3.00 – 4.50

9 – 10%

Warsaw (Poland)

21.8%

€2.20 – 5.20

8 – 9%

St. Petersburg (Russia)

24.0%

€5.45 – 6.65

14%

SUMMARY OUTLOOK Developers Market: Sofia, Moscow & Slovakia, Brno in Czech Republic – where vacancy is below 8%, we may see some rental growth in 2011. Middle Ground: Poland and Czech Republic, especially regional locations. Rental growth possible at year-end. Tenants Market: The remaining markets, vacancy unliklely to fall to levels supporting rental growth in 2011.

Research: Damian.Harrington@Colliers.com

DISTRIBUTION HUBS OF THE FUTURE – KEY DRIVERS

From a demand-side, an increase in GDP per capita and disposable income will increase demand from retailers and associated logistics/3PLs across the entire region, in particular further south and east where economies are further behind the growth curve. From a supply-side perspective, the following drivers are key: —— The cost and efficiency of production, primarily driven by labour costs, will continue to support a shift of production from northern and western Europe to central and eastern Europe – CEE/SEE country labour costs are at typically least one third the labour cost of western Europe. The further south and east you go, the lower the cost, which would appear to support production moving further south and east. —— Increasing fuel costs and the requirement for a decrease in CO2 emissions will, however, curtail any immediate shift in production away from the ‘central belt’. In order for production to move further south and east, a significant shift in transportation infrastructure and

quality, which can reduce the cost of getting both products to market and obtaining raw materials, is essential. —— Shifts in distribution forms, notably from road to rail, and lower production costs allowing for quicker, more cost efficient delivery will be the catalyst for this alongside improved road infrastructure. A shift away from road and air freight (most fuel inefficient/carbon emitting) to sea & rail freight is already happening, for example H&M moving to Panatonni Park in Poznan, Poland. The company has made dramatic changes to the way products are shipped internationally and across Europe over the last few years. International air freight has been reduced to 74% from 100% in the space of a year. Across EMEA more goods are now shipped from Turkey via rail rather than by road, to distribution centres in Poland, Germany and Belgium – the shifts are very significant: Rail freight from Turkey to Poland was 10% in 2008 - by 2009 it grew to 87%; from Turkey to Germany it was 22% in 2008 - by 2009 it grew to 62%; and from Turkey to Belgium it was 0% in 2008; by 2009 it grew to 52%. In future, this modal shift to rail will support locations which can offer genuine ‘multi-modal’ capabilities, including those which can offer sea freight as an option. This should lead to a shift towards spoke & hub distribution points, rather than activity being concentrated around one or two major distribution hubs. PROGNOSIS

Over the short-term the central belt is likely to be the main beneficiary of production/assembly activity. Further south and east, retail will continue to drive demand as planned new roads and infrastructure remain 5-20years from completion. Advances in rail freight could alter the situation sooner.

Colliers International | p. 12

2011 Colliers Real Estate Review » NEW EUROPE

RETAIL MARKET FIG. 13:

RETAIL SALES GROWTH, MID’08–MID’10

Latvia Lithuania Estonia Greece Romania Bulgaria Slovakia Croatia Denmark Hungary Spain Czech Rep EU Average Italy Germany UK Sweden France Switzerland Poland Luxembourg |

-35

-30

FIG. 14:

-25

-20

-15

-10

-5

The positive news is that with such significant falls comes the greater opportunity of a rebound. As early as 2010 a number of markets in the CEE/ SEE area had already started to recover – with growth showing through in Croatia, Romania and the Baltics. The Czech Republic and Hungary have moved closer to neutral, whilst sales in Bulgaria and Slovakia continued to decline by ca. 2%. This does at least represent an improvement.

RETAIL DEMAND FORECAST, 2020

Germany Italy Greece Eurozone Netherlands Spain France UK Denmark Ireland Czech Rep Hungary Slovakia Poland Bulgaria Russia Romania Turkey

Source: Experian

10%

FIG. 15:

20%

30%

40%

50%

70%

Source: Colliers International

Bratislava Athens Belgrade Kyiv So�a Zagreb Warsaw Tirana Prague Budapest St Pete’s Moscow |

-20% -15% -10% -5%

10%

15%

20% 25% 30% 35%

▄ High Street Rental Change ▄ SC Rental Change

As we look forward to 2011 a scenario of economic growth combined with falling unemployment should start to drive the demand for goods. Although those countries faced with strong austerity packages – Romania, Greece, Ukraine and to a degree Hungary are unlikely to see particularly strong retail growth in 2011. With a view to the longer term i.e. up to 2020, retail demand growth forecasts for all CEE markets are very positive at 40% on average over a 10 year period –double the forecast growth of the Eurozone. Much better news for shopping centre owners and investors, especially those capable of capturing new retailers looking to expand and/or consolidate in the region. RENTAL CHANGE, HIGH-STREET and SHOPPING CENTRES

As a whole the Central and Eastern Europe region posted average rental growth of ca. 2% in 2010. This does,

p. 13 | Colliers International

however, mask some considerable differences in performance. Kiev, for example, experienced a strong recovery in prime rental levels with a recorded rise of 30%. In contrast, Bratislava and Budapest saw rental falls of 11% and 8% respectively whilst no change was recorded in Prague, Warsaw or Bucharest. Rental growth in South Eastern Europe was slightly negative at ca. -0.8%, driven by falls of 4% in Sofia whilst all other markets remained neutral. In Russia, rental rates in Moscow have increased by 25% over the year, whilst rents in St Petersburg have fallen by ca. 6% over the year. Whilst growth on the high street was marginally positive, rental growth in shopping centres was broadly negative at -2.7%. Only Russia posted positive growth across the whole territory – recording an increase of 12% in Moscow over the year, with minor growth of 0.5% posted in St Petersburg.

60%

RENTAL CHANGE BY MARKET, 2010

Bucharest

RETAIL SALES

Despite an improving economic climate there was no obvious growth in retail sales outside of Poland and Russia in 2010. From mid-2008 to 2010, almost all CEE/SEE markets performed worse than the EU average, a decline of -2.2% (-1.1% per annum avg). Other poor performers include Spain, and perhaps surprisingly Denmark. Poland on the other hand has been the number two performer across Europe since the onset of the crisis, second in line only to Luxembourg.

Of the remaining cities, 50% saw no change in rents – Warsaw, Prague, Budapest, Zagreb and Tirana. Whilst Sofia, Kiev, Belgrade, Athens, Bratislava and Bucharest all recorded rental falls ranging from 2.5 – 13.3%. So overall, there have been some quite disparate levels of performance as one would suspect but with some suprising results. Notably Bratislava suffering more than any market in both prime shopping centres and across the high street. Perhaps more suprising is the fact that there have been very limited declines in prime high street rents, and to a degree prime shopping centre rents, over 2010 despite such a strong fall in retail sales. This could partially be explained by the fact these changes only refer to the prime high street and shopping centre locations. Given the general flight to

Research: Damian.Harrington@Colliers.com

2011 Colliers Real Estate Review » NEW EUROPE

RETAIL MARKET FIG. 16: 1,200

RETAIL STOCK BY COUNTRY (SQM/1,000 CAPITA) Source: Colliers International

1,000 800 600

Nordic Average

400

West European Average

200

FIG. 17:

ev Ki

�a

he At

▄ Capital City

4.0

’s

a av

isl

▄ R/O Country

TRADITIONAL/SPECIALISED STOCK (SQM MLN) Source: Colliers International

3.5 3.0 2.5 2.0 1.5 1.0 0.5

8.0 7.0

ra lg

�a

es ar

isl

▄ Traditional

FIG. 18:

gr Za

sa ar W

’s

os M

0.0

▄ Specialised

EVOLUTION OF RETAIL STOCK (SQM MLN)

Source: Colliers International

6.0 5.0 4.0 3.0 2.0 1.0 0

2006

2007

2008

▄ Traditional

2009

2010

▄ Specialised

Pipeline

quality during the crisis, we suspect the impact has been more damaging to many secondary locations. For instance, the main high street has the ability to benefit from a diversified demand-base comprising tourism and passing business/discretionary trade, which should continue to underpin demand and performance irrespective of an economic crisis. A similar argument can be put forward for the large prime shopping centres, who continue to attract lots of city-wide trade, retail parks and outlets offering a well-planned budget offer at the opposite end of the scale and community retail centres which continue to offer a solid, local offer. Centres operating in the middle ground, however, with no significant USP are the most likely to suffer. Especially those in locations where the volume of retail space is quite saturated. Judging by Fig. 16 a number of cities already look fully saturated from a population catchment perspective, relative to western European and Nordic capacity levels. Bratislava appears to be somewhat alarmingly oversupplied, whilst Prague, Warsaw, Zagreb and St Petersburg also look to be fully developed markets. Even the less mature, southern markets such as as Sofia, Kiev and Tirana appear to be quite fully developed. All markets across New Europe, especially the most saturated group, do pose some interesting challenges for existing shopping centre owners especially where there is limited diversity of offer. Fig. 17 for example highlights the extent to which there is a limited mix of traditional and specialized shopping centres – specialized being the retail park and factory outlet end of the spectrum. This is especially the case in the Russian cities which appear to provide a real opportunity for this type of development – either as new, or as redevelopment/reconfigurations – given

Research: Damian.Harrington@Colliers.com

the complete lack of these types of facilities. In the more traditional shopping centre market sector, shopping centre owners will need to take steps to improve not only core retail environments but also accompanying catering and leisure facilities at their centres. This is a vital step if they are to continue to attract shoppers, who are increasingly technologically aware and more inclined to shop from the comfort of their home when not given a compelling reason to leave it. In fact, the expansion of internet shopping could severly dent the relative success of many a shopping centre which does not move with the times. PROGNOSIS

Colliers expects the retail property market across much of Central & Eastern Europe to buck the trend seen in Western Europe, with sharply increasing domestic consumption expected to be a key driver of retail sales growth across the region over the mid-long term. International brands began to show renewed interest in select areas of Eastern Europe in 2010, with TK Maxx experiencing its best ever opening in Europe with its first store in Warsaw. Strong retail sales figures in Poland over the next year and beyond will only serve to encourage this further. It may take some of the other eastern European markets another year to show more sustainable growth as unemployment starts to fall. We expect locations that did not see excess development during the boom years to see retail rents improve in the short to medium term, particularly where centres are upgraded to meet modern demand standards. We may also see increasing forms of diversity in town centres, notably more ‘department store’ type developments – again changing the overall shopping offer, such as the Mystore andVanGraff stores in Prague. This should encourage increasing investment in the market.

Colliers International | p. 14

2011 Colliers Real Estate Review » NEW EUROPE

INVESTMENT MARKET FIG. 19: 20 18

NEW EUROPE INVESTMENT VOLUMES (€ BN)

Source: Colliers International

16 14 12 10 8 6 4 2 0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

▄ Russia ▄ CEE ▄ SEE

FIG. 20: 18%

Of this, almost three quarters were recorded in Russia (44% at €2.872 Bln) and Poland (29% at €1.9 Bln). Outside of these territories, the other deals were recorded primarily in CEE (20% at €1.25 Bln), the majority of which were in the Czech Republic. Only €0.45 Bln of deals (7%) occurred in SEE nations – Croatia and Greece being the locations of choice.

PRIME YIELD MOVEMENTS OVER TIME Source: Colliers International

14%

10%

2003

2004

2005

2006

2007

2008

2009

2010

▬ UK Prime ▬ Warsaw ▬ Core CEE ▬ Fringe CEE ▬ Outer CEE

FIG. 21: 12% 10%

RETURNS, RISK PREMIUMS & PRIME OFFICE YIELDS

Source: Colliers International

8% 6%

Risk Premium

4% 2% 0%

Risk Free Rate |

London Warsaw Prague Budapest Bratis Bucharest So�a Prime lava

▄ Current German Government Bond Yield ▄ Cap EX ▄ Liquidity ▄ Equiv. Prime Oﬃce Yield

With regards to the investment market, a recovery in values and transaction volumes began to show though in 2010 driven primarily by activity in Poland and Russia. Transaction volumes over the year reached an estimated €6.47 Bln, including Russia, CEE & SEE. This represents a 50% increase compared to 2009 when investment volumes recorded were €4.32 Bln.

Kiev

▄ Defaults

That said, contrary to 2009, deals have now been transacted for good quality stock outside of Russia, Poland and the Czech Republic with deals occurring further south and east. In particular a €100 Mln, prime office deal transacted in Bucharest at the very end of 2010 – the first ‘prime/core’ deal since 2006. Combined with some deals in Hungary and Slovakia it is a sign that investor interest is eventually thawing and spreading out to ‘non-core’ markets. Based on investor interest at the start of 2011, this is a trend which is likely to continue throughout the year as the investor base grows, including non-core investors seeking higher yields to match their return requirements. As Fig 20. Highlights, yields have moved in such a manner to create almost four separate pricing levels: Prime Poland; Prime Core CEE – comprising Prague, Budapest and Bratislava; Fringe CEE – comprising Bucharest, then Sofia and Zagreb; then outer CEE – notably Kiev, which is much in line with Moscow.

p. 15 | Colliers International

As we all know, yields have comprseed over time moving much more in line with, but at a risk premium to, prime European yields – in this example London. Over the crisis period there was a noticeable lag-time response of around 6 – 9 months of the various CEE submarkets reacting to yield movements in the UK. As we have moved out of the crisis, the most interesting trend has been the extent to which Poland has split from the Core CEE pack, with prime office yields now at close to 6%, rather than the other core markets which are closer to 7%. All the other markets are priced accordingly, reflecting the various risk factors which drive higher pricing in these markets. So while the market and investment cycle is on the way back up, what can be expected as we head into 2011? A number of factors come into play in the capital markets/investment arena, from a supply, demand and pricing perspective: Pricing

Pricing (yields) are currently fairly priced, all things being equal relative to current return targets as per Fig. 21. That said, a picture of rising interest rates and bond rates will place upward pressure on the cost of money, which in turn places upward pressure on yields. If we consider that German government bond rates rose 30 basis points over a 3 month period to the end of 2010, this would already cut into returns and place rental growth pressure on office markets such as Warsaw and Bratislava. A similar picture would be apparent for prime shopping centres. As we have previously pointed out, rental growth in Warsaw – for both sectors – seems very probable. Much less so in locations suich as Prague and Bratislava, so there is very limited scope for yield compression in these markets. This could shift investor interest further afield as investors seek yields which match target returns.

Research: Damian.Harrington@Colliers.com

2011 Colliers Real Estate Review » NEW EUROPE

INVESTMENT MARKET FIG. 22: 10%

FINANCIAL GAP & PRIME OFFICE YIELDS Source: Colliers International

8% 6% 4% 2% 0%

Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012

▄ EURIBOR+margin ▄ 3m EURIBOR

FIG. 23: 40

▬ CEE Core Prime Oﬃce Yield

NUMBER OF ACTIVE BANKS

Debt

Source: Colliers International

Equally, bank margins (on the cost of debt) are also likely to rise as a result of the shrinking pool of debt, raising the overall cost of capital further. This negates any genuine capacity for further yield compression in the majority of markets. In fact, we may even see rising yields over the next 24 months. The critical component to better understand is debt.

30 25 20

The overall volume of debt available to the property market in Europe continues to reduce, creating a doublenegative impact on the property market:

15 10 5 0

Poland

Slovakia

Bulgaria

Romania

Hungary Czech Rep.

Ukraine

▄ Number of Banks Historically Active ▄ Banks Actually Providing Investment Funding

FIG. 24: 7,000

IMPACT OF LTVs ON DEBT REQUIREMENT Pre-crisis LTVs@ 80-85%

6,000 5,000

Post-crisis LTVs@ 60%

4,000 3,000 2,000 1,000 0

Source: Colliers International |

H2 2004

H2 2005

H2 2006

▄ Debt

FIG. 25: Pre-crisis LTVs@ 80-85%

7,000

H2 2007

H2 2008

H2 2009

H2 2010

H2 2011

H2 2012

▬ Equity ▬ Oﬃce CV

2012 VALUE & DEBT GAP CONUNDRUM 2007 Deal

6,000 5,000 4,000 3,000 2,000 1,000 0

H2 2004

H2 2005

H2 2006

▄ Debt

H2 2007

H2 2008

H2 2009

▬ Equity ▬ Oﬃce CV

Research: Damian.Harrington@Colliers.com

H2 2010

H2 2011

Firstly, banks continue to deal with write-downs and internal requirements to improve their liquidity levels. This has led to much lower levels of debt being made available to property as a whole. A trend which is likely to continue for the foreseeable future. This is reflected in the reduced number of banks active across the market, as per Fig. 23 – relative to the number of banks offering development and investment finance pre-crisis (in many cases it is less than half). At the central banking, senior-debt level, it appears that only Warsaw/Poland, Prague/Czech Republic and Moscow are deemed as viable core investment options worthy of debt. It is also reflected in much lower loan to value Post-crisis ratios of ca. 60% being in operation now, LTVs@ 60% relative to the 85%+ of the boom years. Overall, this equals less debt to go around and to compound this issue is the aspect of re-financing.

Concurrently, the debt shortfall created by lower loan-to-value ratios on offer now, relative to 2006 is not so significant and many banks will view the positive value upside as enough to warrant providing the additional debt required. This partially explains why so few ‘distressed’ assets have come to market to date. When we look at 2007 values relative to those likely in 2012, however, we have a very different scenario - one of significant value downside combined with a significant debt shortfall. This is highlighted by Fig. 25. If we take these forecasts at face value this would eliminate the equity of the owner and create the need for an additional 50% of debt. This could force a major shake-up in the market, driving a large number of debt or equity share deals in 2011 and 2012. Especially when one considers that more assets were acquired during 2006 and 2007 than at any other point during the last ten years. It is no coincidence that a number of banks across Europe are being reported as posting significant writedowns. On the positive side, there are an equal number of reports concerning new debt, mezzanine and equity funds being established to seek out the opportunities created by this short-fall. Combined with the volume of equity waiting in the wings and provided yields do not compress much further, we could see a a further increase in the volume of deals in 2011.

H2 2012

Re-financing & Values

If one considers that the typical finance term is for five years, 2011 will see a number of assets purchased and financed in 2006 coming back to market for renewal or roll-over. According to our analysis, based on values rising in 2011 relative to 2006 – as a result of yield compression and higher rents – assets will be in positive valuation territory, but only marginally.

Colliers International | p. 16

2011 Colliers Real Estate Review » COUNTRY

Albania

Dear Business Partners, Colleagues and Friends, 2010 was a challenging year for Albania’s real estate market. The country saw a positive increase in overall economic activity and took a step forward toward eventual EU membership through the visa liberalization program. The real estate market in Tirana signalled the first signs of Stela Dhami

Address

recovery from the economic crisis in 2009. Both office and retail

general manager colliers international albania

markets experienced a moderate drop in vacancy rates while

Sky Tower, Suite 141 Rr. Dëshmorët e 4 Shkurtit Tirana, Albania

For 2011, we anticipate stability accompanied by stable vacancy

Phone

+3554 2400 470

Stela.Dhami@Colliers.com

maintaining stable rents.

and rental rates in the office market. Growth is expected in the retail sector with the entrance of the newest and largest shopping mall in Tirana, Tirana East Gate. Completion is expected in the second half of 2011. We look forward to successful collaborations in 2011 by bringing our international and local experience to finding smart solutions and interesting opportunities for investors and all real estate users. Best Regards, Stela Dhami

p. 17 | Colliers International

Research: Firstname.Lastname@Colliers.com

2011 Colliers Real Estate Review » ALBANIA

ECONOMIC OVERVIEW KEY ECONOMIC FIGURES (2010 ANNUAL)

SUMMARY

Metric

% Change

GDP Growth

2.5% (constant prices)

Unemployment

13.5%

Inflation

3.4%

Retail Sales

-0.6% (QIII 2010)

Public Deficit

64.3% (November 2010)

According to INSTAT, overall economic activity experienced a positive 4.9% increase, year-on-year, compared with the third quarter of 2009.

Source: Bank of Albania, INSTAT, IMF, Ministry of Finance

GDP, CPI & UNEMPLOYMENT Source: INSTAT

14 12 10 8 6 4 2 0

2007

2008

2009

2010

▬ CPI ▬ Unemployment ▬ GDP Growth

700

FDI ANNUALY / QUARTERLY Source: Bank of Albania

600

The business sectors which experienced higher growth, compared to the same period of last year were industry, transport, other services and trade which posted growth of 18.2%, 12.9%, 12.0% and 8.1% respectively. The worst performing sectors were construction which posted a 22% decrease in activity, and post and telecommunications which shrank by 7.9%.

500 400

PROGNOSIS

According to IMF’s latest World Economic Outlook Database, Albanian GDP growth for 2011 is estimated to reach 3.2%, while the increase in GDP per capita is forecast to grow by 2.8%. In line with the overall improved economic situation, the unemployment rate is foreseen to be around 11.5% compared to 12.5% foreseen by the IMF for 2010. The banking system is estimated to be more active in terms of issuing more credits both to individuals and businesses. This is expected to boost overall economic activity in 2011.

In line with positive economic growth, the unemployment rate fell to 13.52% over the year, equating to 143,218 unemployed people by end Q3 2010. Unemployment had peaked at the beginning of 2010, when it reached 13.83%.

300 200 100 0

2007

2008

2009

Q4 2009

Q1 2010

Q2 2010

Q3 2010

FDI continued to increase reaching €213.3 Mln in the third quarter of 2010 compared with €173.7 Mln in the previous quarter of 2010, according to the latest statistical report of the Bank of Albania. Expressed in annual terms, by end of 2009, FDI reached €680 Mln compared with €620 Mln by end of 2008. Inflation rates remained within the target rate of 3 ± 1%, as the 2010 yearly average inflation rate reached 3.4% by year-end.

Research: Migena.Zace@Colliers.com

Colliers International | p. 18

2011 Colliers Real Estate Review » ALBANIA

OFFICE MARKET KEY OFFICE FIGURES

GENERAL OVERVIEW

Metric

Measure

Total Competitive Stock

63,400 Sqm

Vacancy

10.4%

Average Headline Rent

€15/Sqm/month

Prime Headline Rent

€24/Sqm/month

The office market in Tirana has a moderate volume of modern office stock composed of 13 grade A, B+ and B office buildings. A considerable amount of businesses continue to rent converted office spaces within residential buildings, which provides some evidence that the occupier market in Tirana is in need for office space with better amenities at affordable rental rates.

Source: Colliers International Research

70,000 60,000

CHANGE IN STOCK OVER TIME

40,000 30,000 20,000 10,000 |

2005

2006

2007

2008

2009

2010

▄ Supply

80,000 70,000

STOCK / NEW SUPPLY Source: Colliers International Research

60,000 50,000 40,000 30,000 20,000 10,000 0

2005

2006

2007

▄ Total Stock

The remaining office stock is spread across the broad center and central Tirana. DEMAND

Source: Colliers International Research

50,000

To date, Grade A office buildings in Tirana include Sky Tower, Twin Towers, the European Trade Center (ETC) and ABA Business Center. Nearly 80% of the business towers are located in the Central Business District.

2008

2009

▄ New Supply

2010

The office stock in Tirana is relatively young. Almost 53% of all office towers are 5 – 10 years old, whereas 44% fall between 1 – 4 years old. Only 3% of stock (one grade B+ low rise office building) is older than this, built some 15 years ago. The office market in Tirana continues to wait for the delivery of numerous projects, most of them mixed-use. There are speculative developments comprising ca. 50,000 Sqm of office space, which are either currently inactive buildings under construction or delayed planned projects. Delays in construction are further postponing the delivery of new office supply. SUPPLY

During the second half of 2010, no new supply was added to the total competitive stock, which has been registered at 63,400 Sqm since the first half of 2009 after the entrance of the ABA Business Center into Tirana’s real estate market.

Due to the economic downturn, which had a direct impact on the demand for office space, the Tirana market witnessed an increase in vacancy rates in H1 2010. Demand for office space picked up during the second half of 2010, however, leading to a decrease in the overall vacancy rate. As a direct result of upward demand movement in the office market during the second half of 2010, overall vacancy rates decreased by 2.2% reaching 10.4% Overall, tenants have become more price sensitive, requiring good locations at lower prices. Demand is continuously increasing towards office space in the suburban areas due to affordable rental rates and parking availability, which lacks in almost all grade B+ and B office buildings.

Currently, the Grade A inventory comprises the largest proportion of office space with 34,300 Sqm against 13,000 Sqm of grade B+ and 16,100 Sqm of grade B space.

p. 19 | Colliers International

Research: Migena.Zace@Colliers.com

2011 Colliers Real Estate Review » ALBANIA

OFFICE MARKET OFFICE STOCK LOCATION

VACANCY / AVAILABILITY

Highest vacancy rates continue to be recorded in grade A office buildings at 13.6% and lowest in grade B+ at 5.5%. One of the main factors causing the high rate of empty office space in grade A office towers is the significantly higher rental prices.

Central 7% Broad Center 13% CBD 80%

70,000

AVAILABILITY / VACANCY

14%

60,000 50,000

10%

40,000 30,000

20,000 10,000

H1 2009

30.00

H2 2009

▄ Availability

H1 2010

H2 2010

▬ Vacancy

RENTS

In contrast to the first half of 2010, where prices marked a slight decrease in rental rates, during the second half of 2010, rental rates in most office buildings in Tirana were kept constant and this is estimated to continue in the first half of 2011.

RENTS Source: Colliers International Reseach

25.00 20.00 15.00 10.00

H1 2009

H2 2009

The overall availability rate experienced a slight decrease from approximately 52% in the first half of 2010 reaching 50.6% by end of December 2010. These rates translate to over 59,500 Sqm and 58,000 Sqm of available office space in the second half of 2009 and 2010 respectively.

H1 2010

H2 2010

▬ Prime Headline ▬ Average Headline ▬ Low Headline

Research: Migena.Zace@Colliers.com

PROGNOSIS

As planned projects start construction works and inactive developments re-start, new completions will most likely push vacancy rates up, subsequently pushing rental rates downwards. However, given the continued delays in construction activity, rental rates and vacancy rates are most likely to remain unchanged throughout the first half of 2011 at least. As higher quality office buildings enter the market offering better amenities and infrastructure, many businesses may relocate from converted office space within residential buildings to proper grade B, B+ and A office buildings. Price sensitive tenants will only be attracted to relocate, however, when the office market experiences a considerable decrease of its high rental rates.

Rental rates continue to average at about €19.5/Sqm, €15/Sqm and €13/ Sqm in overall grade A, B+ and B office buildings respectively.

Colliers International | p. 20

2011 Colliers Real Estate Review » ALBANIA

RETAIL MARKET KEY RETAIL FIGURES

GENERAL OVERVIEW

Metric

Measure

Prime High Street Rents

€50/Sqm/month

Prime SC Rents

€33/Sqm/month

SC Stock

117,000 Sqm

SC Vacancy

In contrast to the office sector, which has been steadily growing over the last 10 years, the retail market is much younger. New supply activity only really started after 2005, and has been active ever since except for a lull in activity during 2006 and 2010.

Source: Colliers International Research

The biggest growth of the retail segment happened in the second half of 2009 with added new supply of 71,000 Sqm of retail space, a much higher figure than the 35,000 Sqm of new supply that was added to the retail market back in 2005. DEMAND

180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0

CHANGE IN SC STOCK OVER TIME

2005

2006

2007

▄ Traditional SC

180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0

Several mixed-use projects containing modern retail space have been delayed since end 2009, and continue to be inactive or postponing their planned developments.

2008

2009

2010

▄ Specialist SC

TRADITIONAL STOCK / NEW SUPPLY

Besides the delays, during the second half of 2010, the retail market in Tirana has welcomed new franchise brands in several existing shopping centers such as Collezione, VS Collection, Visconti and 7 Camicie. SUPPLY

2005

2006

2007

▄ Traditional SC

2008

2009

▄ New Supply

2010

Similar to the office market, no new supply was added during the second half of 2010 leaving the traditional shopping center stock of Tirana at 117,000 Sqm and with approximately 40,000 Sqm of specialized retail stock. Currently, Tirana’s retail market consists of eight traditional shopping centers, out of which well 67% are located in the suburban areas, 17% in the broad centre, 12% in the CBD and only 4% within central Tirana. Suburban locations are the most preferred for new retail developments due to the possibility of larger floor plates and ample parking. Current traditional shopping centers are City Park, QTU, Casa Italia, ETC, Twin Towers, Kristal, Condor and Olympia center.

In contrast to previous shopping trends, where the high street and central shopping centers dominated the market. Today many Albanian consumers shop at retail stores and malls such as City Park, QTU, Casa Italia, Megatek and Praktiker, all located in the outskirts of Tirana. During the second half of 2010, a decrease of roughly 20 – 30% has been surveyed in the purchase power of the potential buyers present in the high streets of Tirana. Part of this demand has shifted from high streets to shopping centers, contributing to a lower decrease of purchase power in this retail sub segment. On the tenant’s side, high streets are still one of the most preferred retail locations in terms of demand. This is also shown by a decrease of vacancy rates during the second half of 2010. Demand has followed a similar trend in the traditional shopping center segment.

Existing specialized shopping centers in Tirana include the Italian franchise Coin Department Store & Oviesse Industry and the two do-it-yourself retail stores of Megatek and Praktiker. Among the total specialized retail stock, 78% are located in the suburban areas and and 22% or 8,500 Sqm within Tirana’s CBD.

p. 21 | Colliers International

Research: Migena.Zace@Colliers.com

2011 Colliers Real Estate Review » ALBANIA

RETAIL MARKET 140,000

STOCK / VACANCY

16%

120,000

12%

100,000 80,000

60,000

40,000 20,000

H1 2009

H2 2009

H1 2010

▄ Total SC

€60

H2 2010

▬ Vacancy

VACANCY / AVAILABILITY

Overall, vacancy rates in traditional shopping centers are countinuously decreasing. During the second half of 2010 they reached 8% compared with 10% in the first half of 2010 – this translates into approximately 9,100 Sqm and 11,700 Sqm of empty retail space respectively. Even though landlords continue to reveal lower retail sales; high streets as wells as medium level streets have recorded a low figure of shops for rent during the second half of 2010, compared with 2009 and H1 2010.

RENTS

€50 €40 €30 €20 €10

Prime SC In Line

Prime SC Anchor

Prime High Street

RETAIL STOCK Delivery

Project

GLA (Sqm)

2005

ETC

9,000

2005

Twin Towers

5,000

2005

QTU

21,000

2007

Casa Italia

17,400

2008

Kristal

10,200

2008

Condor

10,000

2009

Olympia

6,800

2009

Coin & Oviesse

8,900

2009

City Park

40,000

2009

Praktiker

11,000

2009

Megatek

20,000

RENTS

Although high streets report no change in rental rates; it is believed that real rental rates for prime high street locations may have fallen by at least 16.7% or approximately by €10/Sqm.

PROGNOSIS

Following the increased popularity of one of the fastest growing suburban areas of Farka neighborhood as a high-end destination for residential apartments and villas, the newest and largest shopping mall is currently under construction in this area. Tirana East Gate will add a further 41,200 Sqm to the total traditional stock of shopping centers in Tirana and is expected to enter the market within the first half of 2011. Following the anticipation of the newest shopping mall in Tirana, vacancy rates are foreseen to follow an increasing trend. Colliers expects no major price change during H1 2011.

Prime shopping centers continue to register low changes in rental prices from €35/Sqm in the first half of 2010 to €33/Sqm during the second half of 2010, although it is believed that rental rates have dropped more than the figures reported.

Source: Colliers International Research

Research: Migena.Zace@Colliers.com

Colliers International | p. 22

2011 Colliers Real Estate Review » ALBANIA

ALBANIA TAX SUMMARY CORPORATE INCOME TAX AND CAPITAL GAINS

From 1 January 2008, corporations conducting business in Albania are subject to corporate income tax at a flat rate at 10%. The tax is applied to the accounting profit after adjustments for tax purposes. Capital gains from the sale of the real estate are included in the taxable income of the entity and taxed at the 10% rate. The sale of real estate by individuals is subject to personal income tax at 10% rate on the capital gain generated (0.5% over the sale price in case of sale of agricultural land). Since 1992, Albania has entered into Agreements with several countries for avoidance of double taxation. As at 1 January 2011, 29 double tax treaties with different countries are in force. General rule imposed by the tax treaties is that the right to tax the capital gains is conferred to the state of residence of the seller. However, a number of double tax treaties provide special regime for the capital gains if the shares being sold derive more than 50% of their value directly or indirectly from real estate. In addition, capital gains are taxed in Albania in case a foreign entity or a foreign individual transfers the direct ownership over a real estate situated in Albania. TAX DEPRECIATION

Entities may set depreciation rates for assets in accordance with their accounting policies, while under the provisions of the Law on Income Tax, maximum annual rates allowed for tax purposes are specified according to a separate tax depreciation schedule. Land is not depreciated for tax purposes. The solid buildings, including investment properties, facilities, transmitting devices, machinery and production equipment which are fixed at the building site are depreciated according to the declining balance method at the depreciation rate of 5%. Certain assets incorporated to a building can be treated as separate movable assets for tax purposes and therefore can be depreciated over a shorter period.

p. 23 | Colliers International

TAX LOSSES

Tax losses can be carried forward over three tax periods. It can be offset against the positive financial result after tax adjustment for the respective tax period according to the “first loss before the last one” principle. The tax loss cannot be carried forward if the ownership of stock capital or voting rights of a person changes more than 25% in number or value. THIN CAPITALIZATION

The thin capitalization rules apply in Albania if a company’s liabilities exceed four times the amount of its equity (excluding short-term loans). In such a case, the interest paid on the exceeded amount is not tax deductible. The thin capitalization restrictions do not apply to banks, insurance and leasing companies. In addition, the interest paid exceeding the average annual interest rate of loans published by the Bank of Albania is not tax deductible. WITHHOLDING TAX

The standard Albanian withholding tax rate is 10%. The withholding tax rate can be reduced by double tax treaties in which Albania is party to. DIVIDENDS

Withholding tax on dividends at 10% rate applies on all dividends paid by the Albanian companies unless a respective double tax treaty states otherwise. No withholding tax applies if dividends are paid to a tax resident company or partnership subject to corporate income tax in Albania. INTEREST AND ROYALTIES

Withholding tax at 10% rate applies on interest and royalties paid by the Albanian companies unless a respective double tax treaty states otherwise. REAL ESTATE TAX

Individuals and legal entities who own real estate property in Albania are subject to tax on real estate. Local taxes on real estate consist of the real estate tax on buildings and real estate tax on agricultural land. For the real estate tax on buildings, the tax base is the area of the buildings measured in a square meters for each floor of the building

owned (for real estate tax on agricultural land, the tax base is the area of agricultural land measured in hectares) and it varies depending on the district where the building is located. Buildings owned by the state and local governmental authorities as well as by religious institutions are exempt from this tax. REAL ESTATE TRANSFER TAX

The tax is applicable in case of transfer of ownership right on buildings and other real estate properties. The tax is payable by the entity who transfers the ownership of the real estate. The tax on ownership transfer of buildings is levied on each square meters and varies from ALL 100 to ALL 2,000 depending on the district where the real estate is located. The tax on ownership transfer of real estate other than buildings is 2% of the sale price. The tax is not applicable to individuals subject to personal income tax in Albania. Donors of real estate property to governmental authorities, religious institutions or not-for-profit organizations are exempt from this tax. The tax should be paid by the seller of immovable property before the transfer of the real estate is registered with the Real Estate Register. VALUE ADDED TAX

A supply of land and the lease of land is a VAT exempt supply in Albania. The supply of buildings (except the supply of construction works) is an exempt supply. The lease of building is an exempt supply except for these cases: —— renting for no longer than two months; —— staying in hotels or vacation resorts. In addition, based on the by-laws issued by the Minister of Finance, entities or individuals may opt (upon the fulfillment of certain conditions) to categorize their lease supply of buildings as a taxable supply.

Contact: arekmierzejewski@kpmg.com

Bulgaria

Dear Friends and Partners, Another year has passed, and we have a fresh, new year ahead of us – providing a much-needed cause for reflection. Conventionally, a past year is always labelled significant because it has taught us something. I would dare to challenge this convention, by labelling the year of 2010 primarily as a stepping stone for — or a prelude Atanas Garov

Address

to — 2011. To most markets, segments and businesses, 2010 was a bit of

managing director colliers international bulgaria

everything. It was definitely more profitable (and fun) than 2009, and

Business Park Sofia Building 7B, 2th floor 1766 Sofia, Bulgaria

greatest thing about 2010 was what it promised for 2011 and beyond; the

certainly not as prosperous as we expect 2011 to become. So maybe the possibility of a fresh start.

Phone

+359 2 976 9 976

We take great confidence in the future from the events and experiences of

Atanas.Garov@Colliers.com

2010. A new spirit of collaboration is emerging between different players in the market, aimed at making Bulgaria more competitive. Across sectors, enterprising business people are working together in a manner that hasn’t been seen before. In the real estate sector, we have already seen new players entering the market, and I believe that this year we will see investors and developers that are coming to our market for the first time. One thing doesn’t change though, Colliers is delighted to accelerate the success of our clients and partners. Best regards, Atanas Garov

Colliers International | p. 24

2011 Colliers Real Estate Review » BULGARIA

ECONOMIC OVERVIEW KEY ECONOMIC FIGURES Metric

% Change

GDP Growth

0.7%

Unemployment

0.1%

Inflation

4.5%

SUMMARY

Source: National Statistics Institute, Bulgarian National Bank

8.00%

GDP & INFLATION Source: Bulgarian National Bank

6.00% 4.00%

Over the course of 2010, GDP growth in Bulgaria was largely neutral but improving towards year-end. At the end of the first quarter of 2010 GDP posted negative growth of 4.0%, but grew by 0.5% and 0.7% respectively in Q2 and Q3, mostly driven by an increase in exports. Better news for the Bulgarian economy is the latest forecast showing that GDP is expected to increase to 2.8% in 2011.

2.00% 0.00% -2.00% -4.00% -6.00% -8.00%

Q1 2009

Q2 2009

Q3 2009

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

▬ GDP (real annual % change) ▬ Inﬂation

11% 10%

UNEMPLOYMENT Source: Bulgarian National Bank

9% 8% 7% 6%

Q1 2009

Q2 2009

Q3 2009

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Foreign Direct Investments in Bulgaria for the first nine months of 2010 amounted to €1.427 Mln (4.0% of GDP), ca. 30% down on the €2.112 Mln (6.3% of GDP) invested over the same period in 2009. As with GDP growth, however, FDI into Bulgaria is expected to pick up moderately in 2011, reaching in excess of €2,000 Mln. In line with the overall neutral economic trends, unemployment increased marginally to 9.2% in December 2010 — a slight increase of 0.1% compared to the same period in 2009. Unemployment is forecasted to fall by 0.5% in 2011.

▬ Unemployment (%)

15.0%

A more worrying sign for the Bulgarian economyc was the sharp rise in inflation, which surged to 4.5% yoy, although this remains under the eastern European average inflation rate of 6.3%. Only a slight increase in inflation is expected in 2011, below the average for eastern Europe.

INDUSTRIAL PRODUCTION

10.0% 5.0% 0.0% -5.0% -10.0%

Importantly, bank financing and credit terms are expected to improve – at least in terms of retail finance – which will be of most benefit to boosting consumer spending and the retail sector as well as helping to drive residential demand through tha availability of affordable mortage finance. Although domestic consumption saw negative growth in 2009 and 2010 (falling 3.6% and 2.8% respectively), the forecast for 2011 is one of modest growth of 1.3% on average over the year. This is supported by growth of the consumer confidence indicator which has started to increase since Q1 2010 and thus retail sales are expected to be influenced positively. On a structural level, the use of EU funds for regional development will gradually improve the transport and communications infrastructure of Bulgaria, helping to create the fundamentals for a viable logistics market.

Source: Focus Economics

-15.0% -20.0%

FORECAST

The economic outlook for Bulgaria is generally positive, particularly for the second half of 2011. On the basis of increasing levels of business acivity, real estate demand is likely to grow.

2006

2007

2008

2009

2010

2011F

▄ Industrial Production (annual variation, %)

p. 25 | Colliers International

2012F

On a more positive note, exports grew from January – September 2010 registering a 12.2% increase compared to the same period in 2009, but with differences in terms of the trading countries to which these exports were heading. The largest rise in exports were those aimed towards the European Union EU27, rising by 23.9%. The major markets for consumption of these goods were Germany, Italy, Romania and Greece, which absorb two-thirds of Bulgarian exports.

Research: Adriana.Toncheva@Colliers.com

2011 Colliers Real Estate Review » BULGARIA

OFFICE MARKET KEY OFFICE FIGURES

GENERAL OVERVIEW

Metric

Measure

Total Stock

1,318,000 Sqm

Take-Up

111,200 Sqm

Vacancy

25.4%

Prime Headline Rent

€9.8/Sqm/month

The contemporary office inventory in Sofia reached a new peak, with another 256,000 Sqm added to the stock during the year. The net absorption for the year was 111,200 Sqm.

Source: Colliers International

1,400

STOCK OFFICES CLASS A&B IN SOFIA (SQM,000) Source: Colliers International

1,200 1,000 800 600

The overall vacancy on the Sofia office market reached 25.4% of the total existing stock, equivalent to 335,000 Sqm office area. Total office occupancy reached close to 1 Mln Sqm by the end of the year.

400 200 0

H1 2007

H2 2007

H1 2008

H2 2008

H1 2009

H2 2009

H1 2010

H2 2010

INVENTORY STRUCTURE 8% CBD 20% Broad Center 72% Suburban

KEY OFFICE LEASE TRANSACTIONS Tenant

Size (Sqm)

Project

Submarket

Hewlett Packard

3,500

Kambanite BC

Suburban

Cisco

3,000

Crystal BC

CBD

Call Point New Europe

2,500

European Trade Center

Suburban

Strabag

2,300

Megapark

Suburban

Pfizer

1,800

European Trade Center

Suburban

Source: Colliers International

SUPPLY

On an annual base, the contemporary office inventory increased by 256,000 Sqm. This means that a fifth of the total office stock is actually completed in 2010. This massive increase is driven by the completion of a few, large projects that were initiated mid-2007, in a more optimistic market. Among the new additions to the market in this period are European Trade Center, Mega Park, Sofia Airport Center, Doverie Business Center and Galaxy Business Center which all together added 135,000 Sqm to the Suburban stock. Serdika Offices (28,000 Sqm) and GRAWE Office Building on Blvd. Totleben (5,800 Sqm) were the major new additions to the Broad Centre submarket. Perform Business Centre on Pozitano Square, Crystal Business Center and the new head office of DSK Bank increased the stock in CBD (Central Business District) with more than 33,000 Sqm, equivalent to 30% of the entire inventory in CBD, which hasn’t seen new deliveries for a number of years.

The total active pipeline fell to the lowest level in years at just below 500,000 Sqm. The size of the latent pipeline (comprising office project under construction, but currently frozen) is app. 250,000 Sqm. DEMAND

Net absorption in 2010 was 111,200 Sqm almost half of which were preleases in the office buildings that came to the market in the latter half of the year. The major transactions in the period included the expansion of Hewlett Packard in Kambanite Business Center; Cisco in Crystal Business Center; Call Point New Europe and Pfizer in European Trade Center. The majority of the demand was driven by relocation needs. Many occupiers took advantage of the attractive rental rate level for high quality office space in communicative locations. Incremental demand was driven primarily by the outsourcing sector and pharmaceutical companies which are already present on the market. Transactions were mainly closed for premises in the range 500 – 1500 Sqm. The preferred contract length was for 3 years or longer, but then with an option for renegotiation after a certain time. As in previous periods, genuine Class A premises attracted mostly large, international companies with more than 50 employees, while Class B offices are occupied by smaller, local companies.

The total inventory of modern office space in Sofia reached 1,318,000 Sqm with almost even split between Class A and B. The pipeline continues to empty as few new major projects were initiated in 2010. Exceptions were Fort Nox (Suburban area) and TAO (Broad Center).

Research: Adriana.Toncheva@Colliers.com

Colliers International | p. 26

2011 Colliers Real Estate Review » BULGARIA

OFFICE MARKET 140

NET ABSORPTION / VACANCY Source: Colliers International

120

30%

100

25%

20%

15%

10%

20 0

5% |

H1 2007

H2 2007

H1 2008

H2 2008

▄ Net Absorption

20.00

H1 2009

H2 2009

H1 2010

H2 2010

▬ Vacancy

Over the past four years, there has been a distinct change in the concentration of business premises. In 2006, Suburban office space accounted for 43% of total occupancy on the market. Four years later, the number has reached 63% of overall occupancy which is Suburban. VACANCY

AVERAGE ASKING RENTS CLASS A (€/SQM/MONTH)

Vacancy in Sofia grew by 145,000 Sqm in 2010 — significantly more than in any previous period. In percentage terms the vacancy rate at the end of the year amounted to 25.4%

15.00

10.00

5.00

Source: Colliers International |

H1 2007

H2 2007

H1 2008

H2 2008

H1 2009

H2 2009

H1 2010

H2 2010

▬ CBD ▬ Broad Center ▬ Suburban

1,000 900 800 700 600 500 400 300 200 100 0

PIPELINE SOFIA OFFICE MARKET

H1 2007

H2 2007

H1 2008

H2 2008

H1 2009

H2 2009

▬ Pipeline in ‘000 sqm

H1 2010

H2 2010

By sub-market, vacancy in the Broad Centre increased by 50,000 Sqm, reaching 66,000 Sqm. The Central Business District and Broad Center experienced negative absorption over 2010 as large-scale projects entered the market — these two factors significantly pushed up vacancy levels.

FORECAST

The Inventory of stock is expected to increase by ca. 150,000 Sqm in H1 2011. The general positive outlook for businesses in 2011, is likely to lead to expansions of office premises. As a significant number of lease contracts expire in 2011, we expect a large volume number of transactions over the year. Net absorption is expected to increase in 2011, as the economy starts recovering, but overall vacancy will continue to grow, pushing rental levels further down. Average rental rates in the CBD and Broad Center will have to adjust further to avoid a steep increase in vacancy levels.

In Suburban areas vacant space reached 242,000 Sqm. Although the Suburban part of the office market retained a high level of vacancy, almost half of the new supply in H2 was absorbed within the same 6-month period. RENTS

In H2 2010 the average asking rents continued to fall; Class A levels fell on average by €1/Sqm/month compared to the first half of the year, while Class B office space decreased more than €1.5/ Sqm/month. On an annual base average asking Class A rents fell in the CBD by 15%, the Broad Centre by 23% and by 26% in the Suburban area. The reduction was most meek for Class A space in the CBD and most significant for Class B space in the Suburban area, where average asking rents fell below €7/Sqm/month.

p. 27 | Colliers International

Research: Adriana.Toncheva@Colliers.com

2011 Colliers Real Estate Review » BULGARIA

INDUSTRIAL MARKET KEY INDUSTRIAL FIGURES OF SOFIA Metric

Measure

Total Stock

441,200 Sqm

Take-Up

19,000 Sqm

Vacancy

15%

Prime Headline Rent

€4.5/Sqm/month

OVERVIEW

The total stock of contemporary, speculative logistics and industrial space in Sofia grew by 29,300 Sqm on a year-on-year basis and now amounts to 441,200 Sqm.

Source: Colliers International

Net absorption increased slightly in 2010, but most transactions were driven by relocation and consolidation rather than expansion. Lidl opened its own distribution facility of 36,000 Sqm in Ravno Pole near Sofia, the major deal of the year. SUPPLY Capital

The total inventory of speculative logistics and industrial space in the capital, Sofia was 441,200 Sqm by the end of 2010. Included in the figure are all speculative projects as well as premises offered for rent by third-party logistics providers (3PL). Though some owner-occupied spaces, became vacant due to decreased activity and were offered for rent, this doesn’t seriously impact the overall genuine market. These premises are often in a poor condition, and thus don’t constitute a real alternative or competition to established, contemporary logistics facilities. The pipeline of industrial stock remained stable over the year driven only by a few, new projects. Under construction at year-end were bERS (7,400 Sqm), Administrative Logistics Complex in Obelia (13,000 Sqm) and Univeg (8,000 Sqm). There are several key zones in Sofia comprising clusters of speculative and 3PL projects. Naturally, the key logistics and industrial areas in Sofia are situated close to major roads, highways and transport hubs. The largest is the Airport area which represents 17% of the total stock, followed by Gorublyane (14%), the area along Botevgradsko Shousse (12%) and Kazichene (7%).

Research: Adriana.Toncheva@Colliers.com

Outside the Capital

The supply of good-quality space outside Sofia is limited. Plovdiv has numerous build-to-suit and owneroccupied projects, but despite the attractive, geographic position, developers are yet to endeavour with larger, speculative projects. The speculative market in Varna is the most developed after Sofia. There are a few projects with specifications of an international level such as Logitics Park Varna (9,600 Sqm) and Alpha Logistics (6,600 Sqm). The existingpipeline in Varna comprises building A06 of Logistics Park Varna which will add 10,000 Sqm of new stock to the market. Despite the strategic location on the Danube and close proximity to the Romanian capital, Bucharest, Rousse still hasn’t developed into a logistics hub. An area less than 1 km from the Danube Bridge, has, however, been designated as a modern industrial zone in Rousse. Logistics Park Rousse (13,850 Sqm) is planned within the zone, providing easy access and contemporary specifications. FMCG DISTRIBUTION

Major players on the logistics market for the second, consequtive year are the large, international food chains. FMCG retailers (Fast Moving Consumer Goods) increasingly prefer to build their own central distribution facilities rather than applying the model of decentralized distribution incorporating potential sales areas for storage. This model provides cost saving as goods are delivered directly to the central distribution facility and from here distributed to super/ hypermarkets and retail stores.

Colliers International | p. 28

2011 Colliers Real Estate Review » BULGARIA

INDUSTRIAL MARKET SELECTED INDUSTRIAL LEASE TRANSACTIONS Tenant

Size (Sqm)

Project

Area

Standart 17

3,000

BLCS

Hadji Dimitar

National Distributors

2,500

Universal

Gorublyne

TimeLine

2,500

Universal

Gorublyane

Second hand

2,200

ZMM

Ilianzi

Mercurius

2,000

Universal

Gorublyane

Bullog

2,000

SAC

Airport

Antalis Bulgaria

2,000

SAC

Airport

Source: Colliers International

6.00

PRIME RENTS BY CITY (€/SQM) Source: Colliers International

5.50

The area around Elin Pelin is the preferred location for establishing central distribution facilities because of its proximity to the two highways in Bulgaria. In Elin Pelin, the central logistics facilities of Penny Market, Billa and Lidl (which opened in the second half of 2010) are now established. Only Kaufland preferred to build its central distribution facility in Plovdiv. The facility is 67,000 Sqm, the largest in the country. Alternatively, Carrefour has chosen to outsource distribution for their hypermarkets to a 3PL.

5.00

DEMAND

4.50 4.00 3.50 3.00

H1 2008

H2 2008

H1 2009

H2 2009

H1 2010

▬ So�a ▬ Plovdiv ▬ Varna

H2 2010

The outsourcing of logistics services continues to define demand trends in the market as more and more companies are inclined to outsource part of their activities to be able to focus on their core business. As a result there has been a slight increase in 3PL activity. Companies, which choose to outsource activities, are often from the food, health & beauty, consumer electronics and automotive sector. Also active on the market are international companies from the beverage sector. The main reasons for their demand are contract expiration or consolidation of their office and warehouse space, cost optimization or renegotiation of the current contract conditions.

VACANCY

The upward trend in vacancy levels continued in 2010. Relocations from older projects to contemporary ones explain why there is almost no change in terms of vacancy levels in existing stock, but new projects that have entered the stock in Sofia in 2010 are completely unoccupied with the exception of Bulding 15 of Trade Center Europa which is partly preleased. Usually it takes time for new projects to adapt to the market and adjust their offer accordingly, after that they start to be absorbed by the market. Net absorption on the logistics market for speculative space was 34,000 Sqm in 2010. The majority of this net take-up happened in ZMM, Universal, Transcapital BLCS, Sofia Airport Center and Trade Center Europa. Overall, this has put vacancy at ca. 15% by year-end. RENTS

Overall, rental levels continued to decrease slightly throughout 2010. The prime asking rents in Sofia decreased by a moderate 6% on an annual basis while logistics premises in Plovdiv saw an average reduction of 13% in asking rents. Varna kept prime rental levels steady, benefitting from a slightly undersupplied market. FORECAST

The average size of a logistics inquiry in Sofia remains 1,000 Sqm for warehouse space, which is the typical size of a lease contract.

Univeg will be completed in Q1 2011 adding 8,000 Sqm to the current stock. Logistics Park Varna building A06 and Logistics Park Rousse will open in Q1 2011. No major boost in demand activity on the logistics market is expected in the coming six months. Rental rates are expected to stabilize.

p. 29 | Colliers International

Research: Adriana.Toncheva@Colliers.com

2011 Colliers Real Estate Review » BULGARIA

RETAIL MARKET KEY NATIONAL RETAIL FIGURES

GENERAL OVERVIEW

Metric

Measure

Prime High Street Rents

€65/Sqm/month

Prime SC Rents

€37/Sqm/month

SC Stock

560,000 Sqm

SC Vacancy

With the opening of nine shopping malls in 2010, the total inventory of contemporary shopping mall space in Bulgaria increased to 560,000 Sqm equal to 74 Sqm/1,000 inhabitants.

Source: Colliers International

Demand for High Street space in the four largest cities remained stable. 600

SHOPPING SPACE/1,000 INHABITANTS (SQM)

500 400

Rental levels in shopping malls and across the High Street continued to decrease slowly.

300

SUPPLY

200 100 |

ria

ov br

lik

▄ 2010

10%

�a

▄ 2011F

ANNUAL CHANGE IN PRIVATE CONSUMPTION Source: Focus Economics

8% 6% 4%

2010 marked the largest annual increase in terms of shopping mall supply with a further 327,000 Sqm new stock completed and thus total stock reached 560,000 Sqm. There are two projects in the pipeline for 2011: Markovo Tepe (16,000 Sqm) in Plovdiv and Danube Mall (23,300 Sqm) in Ruse, which will add another 39,300 Sqm to the total inventory.

2% 0% -2% -4% -6%

2006

2007

2008

2009

2010

2011F

Two very large shopping mall projects are in the pipeline for Sofia; Sofia Ring (70,000 Sqm) with the first IKEA in Bulgaria and Paradise Center (75,000 Sqm). With these two additional shopping malls, the Southern and Eastern parts of Sofia will be well serviced, while the Northern and Western areas of the Sofia will continue to be undersupplied. DEMAND

Despite the economic slump, distinct optimism amongst retailers is appearing. While 2009 and 2010 saw a negative development in consumption (3.6% and 2.8% falls respectively), the forecast for 2011 is for modest growth of 1.3%.

The market has proved ready to adopt new, innovative concepts developed by local retailers. In the future shoppers are likely to experience new, niche/hybrid concept stores (e.g. combining fashion & art, books & café or interior & fashion), many of which will include an entertainment component. Future demand is expected to come from three main segments; soft cash & carry, convenience stores and lower end fashion retailers. Particularly non-food hypermarkets are expected to expand in the years ahead. VACANCY

Shopping malls in Sofia enjoy low levels of vacancy, and aparently have absorbed the massive hike in stock in the spring 2010. As a result of intensive expansion and fall in consumer demand, some retailers are facing dwindling turnovers, and thus are pressed financially. With no new centers opening in 2011 in Sofia, existing malls have a chance to position themselves, and thus strengthen their competitive offer. The shopping malls that have opened in the second half of 2010 are characterized by significantly higher vacancy than most existing malls. A few projects in secondary cities are struggling to secure suitable tenants, and have opened with less than half of all retail units operating. This is particularly the case in cities that are already oversupplied with shopping mall space measured relative to the population.

Large international players kept to their expansion plans and continue to require space for opening of shops in 2011. The local and smaller operators however, are more cautious, focusing on optimizing costs.

Research: Adriana.Toncheva@Colliers.com

Colliers International | p. 30

2011 Colliers Real Estate Review » BULGARIA

RETAIL MARKET SELECTED 2010 MARKET ENTRANTS

HIGH STREET

Name Zara

Humanic

Marc O’Polo

Pull and Bear Peek & Clopenburg Koton

Columbia

Stradivarius

Gap

Collin’s

New Balance

Bershka

Sephora

Karen Miller

Jennyfer

LC Waikiki

Frey Wille

Massimo Dutti Mac

The High Street in Sofia is not unaffected by the opening of two large shopping malls. In the first half of the year overall vacancy was pushed to 10% and remainedat this level in the second half of 2010.

Source: Colliers International

There were insignificant changes on the High Street in Plovdiv, Varna and Burgas, despite some movement among existing occupiers. As a whole, however, the level of vacancy and replacements remained the same as in previous periods. BIG-BOXES / RETAIL WAREHOUSE

Discount retailers continued to be the most active within the big-box format. The second half of 2010 was marked by the market entry of the hard discounter, Lidl, with a simultaneous opening of 14 stores. Their acquisition of the Plus chain from German retail giant Tengelmann concluded and the 24 Bulgarian Plus stores are waiting rebranding. Lidl is part of the Schwartz group, which also operates Kaufland. 70 60

In Sqm/1,000 Inhabitants

40 30 20 10 |

Cash & Carry

Hypermarkets

▄ 2008

€70

Supermarkets

▄ 2009

Discount

RENTAL RATES, SHOPING MALLS/HIGH STREET

€50 €40 €30 €20 €10 |

So�a

Plovdiv

▄ Shopping Malls

Due to soft demand, average rental rates in shopping malls across the submarkets have fallen with 13% in 2010. FORECAST

Sofia Ring Mall (70,000 Sqm GLA) is expected to start construction in the first half of 2011.

In the second half of 2010 the big box market saw the introduction of the soft cash & carry hypermarket format. Serbian Delta Holding, which acquired Piccadilly in 2008, opened their first ‘TEMPO’ store in Retail Park Sredetz in Sofia.

The convenience format of the Food and DIY (Do It Yourself) sector is likely to grow. Fashion retailers in the lower price segment will enter the market or expand.

▄ 2010

€60

€0

RENTS

High Street space continues to be more accessible with decreasing rents. The average annual decrease on asking High Street rents is 28% in Sofia and 30% in Plovdiv, 38% in Varna and 35% in Burgas. Rental levels are clearly affected by the increasing supply of shopping mall space.

Discounters will continue to be active.

FMCG SPACE BY FORMATS IN BULGARIA

The graph shows the penetration of the various FMCG (Fast Moving Consumer Goods) formats in Bulgaria. The proliferation of the supermarket format in Bulgaria is primarily driven by local chains such as Piccadilly, Fantastico and 345, while the remaining formats are dominated by international chains.

Varna

Burgas

The big boxes started to clearly define the retail market in Sofia. The area at the junction of Botevgradsko Shosse and the Ring Road has already started to shape up as the big box hub of the city. Jumbo opened their 2nd hypermarket in Sofia as part of Black Gold Park, next to which the G Park Sofia project is planning another 50,000 Sqm of retail park space.

The High Street is expected to make a come-back in the coming period. New local retail concepts will be introduced.

▄ High Street

p. 31 | Colliers International

Research: Adriana.Toncheva@Colliers.com

2011 Colliers Real Estate Review » BULGARIA

RESIDENTIAL MARKET GENERAL OVERVIEW

No new large-scale projects have entered the mid-plus and high-end residential pipeline in 2010. The offered price range in the mid-plus and high-end segment of the market is quite wide, and is typically €1,000 – 1,600/Sqm (without VAT). There is a clear expectation that the residential market has reached the bottom in terms of sales prices. SUPPLY

The amount of residential units in the mid-plus and high-end of the market is estimated at 3,000 – 4,000 in the greater Sofia area. This includes projects with predominantly more than 50 units (apartments/row houses/houses) located in prime and emerging neighborhoods in Sofia — both finished and in final stages of construction. By Colliers definition, the mid-plus and high end market includes residential projects characterized by a clear concept at an attractive location, good quality of the construction, convenient access, green areas, effective layouts, ample parking, good surrounding infrastructure, property management services, and availability of amenities within the project or in close proximity. In terms of location, the majority of the mid-plus and high-end residential units (when referring to projects) are situated in the southern neighborhoods and in Iztok. The genuine new supply of mid-plus and high-end projects is small compared with the overall stock on the market, and must hence be considered a niche. Many of the projects are developed as so-called gated communities (compounds).

Research: Adriana.Toncheva@Colliers.com

No new large-scale projects have entered the mid-plus and high-end residential pipeline in 2010, and as the current stock is gradually absorbed, available supply is becoming scarcer. Having in mind that a medium-size residential project takes up to 3 years from initiation to completion, it is likely that this segment of the market becomes qualitatively undersupplied in the coming years. Thus, potential buyers might experience that the selection of appropriate properties gets smaller. There is little doubt also that developers will take advantage of the gap between supply and demand, and adjust prices to new market conditions. As most residential properties are bought for personal usage, only a few units are currently resold. DEMAND

Demand for residential real estate is growing in maturity with increasing segmentation of the market. Buyers of mid-plus and high-end properties have high expectations and requirements and prefer new projects offering an attractive standard of living. Research points to safety as the most important driver when selecting a home in a compound. Safety is followed by quality of the property and the maintenance of common areas as the demand factors. Large, green areas and the availability of parking solutions complete the list of priorities for buyers in this segment. This is hardly surprising as these elements are conspicuously missing in the vast majority of the Sofia residential inventory. Buyers are often attracted by neighbors with a similar lifestyle, and thus communities are being formed within these new developments.

Colliers International | p. 32

2011 Colliers Real Estate Review » BULGARIA

RESIDENTIAL MARKET In the mid-plus and high-end segment most transacted units are 3 – 5 bedroom apartments as well as single family houses. The typical profile of a buyer in the mid-plus and high-end segment is a person in a key professional position, often self-employed. These buyers are less dependent on the availability of mortgages, since most purchases have a high degree of self financing. The buyer is often selecting a home for the family, and has quite specific (and high) expectations. The growing number of Bulgarian managers in both local and international companies further drives demand in this segment, as their remuneration enables purchase of properties in this segment. The institutional buyer has all but disappeared from the market, though sporadic bulk buying is observed. A substantial majority of buyers are Bulgarian nationals (in a few cases diaspora), reflecting the diminishing role of expatriate management across most businesses.

Flexibility remains the key to closing a deal. Besides pure price discounts, developer’s concessions are made on finishing works, second parking space or notary/transfer fees. ‘Lease-to-buy’ remains a viable option in the market, but the success highly depends on the details of the various project schemes. FORECAST

Demand of mid-plus and high-end residential real estate will continue to grow as the Bulgarian economy gradually improves. Supply is dwindling and with increasing absorption, there is a genuine risk of the market becoming qualitatively undersupplied. Prices will stabilize or even increase slightly in 2011.

SALES PRICES

There is a clear expectation that the residential market has reached the bottom in terms of sales prices. Some developers are even considering adjusting prices in 2011, reflecting the steady demand and what is seen as a potential lack of supply as the pipeline empties. The offered price range in the mid-plus and high-end segment of the market is quite wide, and is typically €1,000 – 1,600/Sqm (without VAT). Numerous factors influence the price including location, quality, scope of finishes, type of property etc. The upper end of the scale is typically reached for apartments with exceptional view/ location as well as houses.

p. 33 | Colliers International

Research: Adriana.Toncheva@Colliers.com

2011 Colliers Real Estate Review » BULGARIA

INVESTMENT MARKET KEY INVESTMENT FIGURES Metric

Measure

Prime Office Yield

9.00%

Prime Retail Yield

9.25%

Prime Industrial Yield

11.00%

SUMMARY

Source: Colliers International

600

OVERALL INVESTMENT VOLUMES (€ MLN) Source: Colliers International

500

Economic stability and positive GDP growth as of year-end 2010 will exert a positive influence over investor confidence in Bulgaria which remained largely muted in 2010. This is not particularly suprising given the low volume of transactions which occurred outside of the core eastern European markets of Warsaw/Poland, Prague in the Czech Repuiblic and Moscow.

400 300 200 100 0

2006

300

2007

2008

2009

2010

INVESTMENT VOLUMES BY SEGMENTS (€ MLN)

250 200

There has been, however, increased activity in the market in terms of enquiry levels as of Q3 onwards, although mainly from investors that have been focusing on the country for the previous year. The result is that the conclusion of some deals which started negotiations during the end of 2010, have been pushed back to Q1 of 2011.

150 100 50 0

2006

▄ Retail

12.00%

2007

2008

2009

▄ Oﬃce

▄ Industrial

2010

PRIME YIELDS

10.00%

With stabilization and growth in the economy forecast in 2011, and with yields on prime product offered at fair, if not discounted, prices to neighbouring markets. We expect to see a return of institutional investors to the Bulgarian market in the second half of the year. Not least as a result of strong potential returns, relative to other markets. Banks, however, will remain conservative in their lending approach and are unlikely to exceed 60 – 65% loan-to-values for prime transactions, whilst loans on secondary product will become very difficult to come by. Whilst the pricing and retun opportunity exits, however, the lack of institutional-grade investment product will continue throughout 2011 and reduce any significant increase in transaction volumes.

In terms of product, as with more CEE markets, big-box retail and prime offices remain the focus of the majority of investors looking at the Bulgarian market. Interest in the office market of interest is confined to the capital city, Sofia, while the big-box segment has drawn attention to secondary locations across the country.

8.00% 6.00% 4.00% 2.00% 0.00%

2005

2006

▄ Retail

2007

▄ Oﬃce

2008

2009

▄ Logistics

2010

In terms of pricing, ther were signs of yield compression over the year in the prime office and big-box retail sectors, moving from double to single-digit yield levels by year-end. FORECAST

A minor continuation of yield compression is likely throughout 2011 with prime office yields expected to approach 9%. Big-box and retail-park yields should remain at between 9.00% and 9.25% over the year.

Research: Adriana.Toncheva@Colliers.com

Colliers International | p. 34

2011 Colliers Real Estate Review » BULGARIA

BULGARIA TAX SUMMARY GENERAL

Several changes to the Bulgarian tax legislation have come into effect from 1 January 2011. The most significant ones concern withholding tax (WHT) and local taxes and fees. CIT AND CAPITAL GAINS

The Bulgarian Corporate Income Tax Act (CITA) specifies that Bulgarian entities are subject to 10% corporate income tax (CIT) on their worldwide income. Foreign entities are subject to tax only on the profits derived from Bulgarian permanent establishments (incl. branches) and/or profits related to disposal of property of such a permanent establishment.

The Bulgarian CITA provides for maximum tax depreciation rates depending on the type of the depreciable asset. The maximum tax depreciation rate for buildings including those held as investment properties is 4%. Land is not depreciated for tax purposes. TAX LOSSES

A tax loss can be carried forward for five years. It can be offset against a positive tax result for a subsequent tax year. THIN CAPITALIZATION

The CIT is calculated on the basis of the annual financial result (as per the Income Statement of the entity) adjusted with certain permanent and temporary tax differences.

Thin capitalization rules apply in Bulgaria if the company’s liabilities exceed three times the amount of its equity. Interest expenses are deductible up to an amount equal to the entity’s interest income plus 75% of the profits before interest and tax. Interest expenses on bank loans are not subject to thin capitalization, except in some specific cases.

The income from real estate derived by Bulgarian entities is included in their annual financial result. The annual accounting financial result is subject to further adjustments for tax purposes.

Transfer pricing rules allow the revenue authorities to adjust tax bases where transactions are not carried out on an arm’s length basis.

The annual CIT liability is determined with the annual CIT return. Any outstanding liability (off-set with any advance installments made) should be remitted to the state budget within 31 March 2011. The same term applies for the submission of the annual CIT return. There is no tax grouping provisions in Bulgaria. TAX DEPRECIATION

Bulgarian tax liable persons should maintain Tax Depreciation Schedule (TDS) where they report all tax depreciable assets. The tax depreciation as per the TDS is to be reported as a downward adjustment to the financial result for tax purposes while the accounting depreciation expenses accrued during the year are disallowed for tax purposes and are reported as an upward adjustment to the financial result.

p. 35 | Colliers International

Please note that dividends and liquidation quotas distributed by local tax residents to shareholders local entities, as well as foreign entities that are tax resident in an EU/EEA member state are exempt of WHT taxation. The WHT rates could be reduced under an effective Double Tax Treaty signed between Bulgaria and the country of residence of the foreign income recipient following a specific pre-approval procedure. The WHT is generally calculated on a gross basis. CITA includes provisions under which foreign recipients of income subject to WHT, tax residents of an EU/EEA member state, are entitled to annual recalculation of the WHT which has been levied and paid on a gross basis following a specific procedure. The recalculation is aimed at equaling the tax treatment between local entities and foreign entities, tax residents of an EU/EEA members states.

TRANSFER PRICING

Under the transfer pricing provisions the tax base for CIT purposes may be adjusted as well as tax bases for calculating other taxes such as WHT. WITHHOLDING TAX

Specific types of income with Bulgarian source accrued by local tax resident entities in favor of non-resident taxpayers is subject to withholding tax (WHT) provided that the income is not derived through a permanent establishment of the non-resident entities in Bulgaria. Such income includes capital gains, rental payments, interests, dividends and liquidation quotas, royalties, technical services (including consultancy services), management fees, etc.

As of 1 January 2011 the WHT due on income realized by foreign entities from rent/ right of use of immovable properties, located in the country, should be deducted and paid by the local payer of the income, provided that the latter is a tax liable person under the CITA. So far the foreign income recipient had the obligation for deduction and remittance of the WHT. Interest and Royalty payments

Under the EU Interest and Royalties Directive, qualifying interest payments and royalty payments between associated enterprises, tax residents in EU member states may be exempt from any taxes imposed on those payments in that state, provided that the beneficial owner of the interest or royalties is a company of another EU member state or a permanent establishment of an EU member state situated in another EU member state.

The standard WHT rate is 10% WHT, with 5% WHT applied on dividends and liquidation quotas.

Contact: khadjidimov@kpmg.com

2011 Colliers Real Estate Review » BULGARIA

BULGARIA TAX SUMMARY However, a transitional period for the application of the Interest and Royalties Directive was agreed whereby Bulgaria has reserved its right to tax interest and royalty income arising in the country by applying the maximum withholding tax rates as follows: 10% for the period until 31 December 2010, and 5% for the period 1 January 2011 – 31 December 2014. As of 1 January 2011 the CITA is amended accordingly and the WHT rate on such type of income may be reduced from 10% to 5% provided that certain conditions specified in the law are simultaneously fulfilled. LOCAL TAXES AND FEES

The main local taxes and fees in relation to the ownership or acquisition of real estate in Bulgaria include real estate tax, garbage collection fee and transfer tax. Real estate tax

Owners of buildings and land plots situated in Bulgaria as well as acquirers of limited ownership right over real estate property are subject to annual charges for real estate tax. The tax rate of real estate tax varies in the range of 0.01% – 0.45%. It is determined at a municipal level and may vary from year to year. As of 1 January 2011 the taxable base for real estate tax of nonresidential property owned by companies is the higher amount of the tax valuation and the book value of the property. The taxable base for real estate tax of property owned by individuals or residential property owned by companies is the tax valuation of the property.

Contact: khadjidimov@kpmg.com

Garbage collection fee

Generally, garbage collection fee is levied on the book value/cost of the immovable property at a rate determined annually by the respective municipality where the property is located. The rates for the garbage fee may vary significantly between the municipalities. Transfer tax

Transfer tax is levied when transferring real estate property or limited property right over real estate. The tax rate is in the range of 0.1% – 3% levied on the tax base of the property in cases of acquisition against consideration. When immovable property is gratuitously transferred the tax rate is in the range 3.3% – 6.6%. The applicable transfer tax rate is determined by the respective municipality.

According to the provisions of the Bulgarian VAT Act the lease of buildings for residential purposes and the sale of unregulated land plots and old buildings (i.e. buildings for which more than 60 months from the issuance of the exploitation permit have expired) are considered a VAT exempt supply. However, the seller/lessor has the option to choose the sale of the land plot or the old building/the lease of building for residential purposes to be treated as a VAT taxable transaction and charge VAT at the rate of 20%. Sale of new buildings, plant, machinery, equipment and structures immovably fixed to the land is a VAT taxable supply, subject to 20% VAT. There is no VAT grouping in Bulgaria.

The tax base upon transfer of real estate property or limited property rights over it is the higher of the following values: (i) the purchase price/a price defined by state or municipal authorities and (ii) the tax valuation of the property. The transfer tax is generally paid by the transferee of the property, unless the parties have agreed differently. In case the transferee is not in the country, the tax is payable by the transferor. VALUE ADDED TAX

The changes of the Bulgarian VAT Act as of 1 January 2011 do not significantly affect the real estate.

Colliers International | p. 36

2011 Colliers Real Estate Review » COUNTRY

Croatia

MARKET

Dear Clients, Colleagues and Friends, Finally, a pick-up in economic activity in the second half of 2010 breathed some life back into the real estate market. After long two years, the 2010 market witnessed a few major investment deals, international retailers initiated very ambitious expansion plans and three new shopping centers were opened. In the office market, after a Vedrana Likan

development hiatus of almost one and a half years, the first new office

general manager colliers croatia d.o.o.

buildings started to be developed. Thanks to Croatia’s stable and

Address

42 Ilica, Zagreb, Croatia

business environment in Croatia in 2010 significantly changed for the

Phone

+385 1 4886 280

Vedrana.Likan@Colliers.com

restrictive monetary policy and improved macroeconomic conditions, the better. As Croatia prepares for EU accession, there remain long-term challenges concerning structural reform. The gradual removal of inefficient structures will allow the Croatian economy to improve in competitiveness in years to come, making this an interesting time for all real estate stakeholders on Croatian market. Naturally, those who are best prepared will benefit the most. We look forward to working with our clients over the year ahead to help maximise the opportunities the market provides. Best regards, Vedrana Likan

p. 37 | Colliers International

Research: Firstname.Lastname@Colliers.com

2011 Colliers Real Estate Review » CROATIA

ECONOMIC OVERVIEW KEY ECONOMIC FIGURES Metric

% Change

GDP Growth

-1.6%

Industrial Production

-0.6%

Unemployment

17.9%

Inflation

2.3%

Retail Sales

-2.8%

Public Deficit

34.8%

SUMMARY

The Croatian economy continues to show signs of recovery and is on the way of out of the economic crisis. After a period of negative growth in 2009, the economic activity in 2010 picked up. In spite of growth still in the negative realm standing at -1.6%, the rate of decline of economic acticity has slowed bringing GDP per capita to €10,615 in 2010 – on par with pre-crisis levels.

Source: Croatian National Bank and Focus Economics

20%

GDP, IND. PRODUCTION, UNEMPLOYMENT

15% 10% 5% 0% -5% Source: Croatian National Bank, Focus Economics

-10% -15%

Industrial production, one of the key drivers of economic growth in Croatia, experienced a significant change since the dark days of falling -9.3% in 2009, reaching largely neutral territory of -0.6% growth in 2010. A sign of stability.

2009

2010

2011

2012

2013

2014

▬ GDP ▬ Industrial Production ▬ Unemployment

Personal consumption levels improved, despite declining by -2.1% in 2010. This is a significant improvement on a -8.5% decline witnessed in 2009. Unemployment, however, amounted to a rather high 17.9% — this in part explains the limited growth in domestic consumption. Fortunately, this value is expected to drop to 16.6% in 2011. This has maintained low levels of inflation in Croatia of 2.3% in 2010, lower than in the EU member states where it is 3.2% on average and much lower than in Eastern Europe where it is 6.3% on average. Fiscal deficit in Croatia amounted to -4.7% (as a share of GDP) in 2010 although this is slowly improving. Croatia’s current account balance (CAB) is also in deficit, which means the country invests and spends more than it saves. In 2010, CAB stood at -3.7% (as a share of GDP), which was less than in 2009 and 2008.

Research: Renata.Susa@Colliers.com

PROGNOSIS

Continued growth of the Croatian economy of 1.8% of GDP, together with stronger growth of GDP per capita, are predicted for 2011 and are expected to continue on their positive growth path until at least 2014. Industrial production is 2011 is expected to reach 3% and grow to 4.1% in 2012. This will be driven by increasing levels of gross fixed investment which are predicted to grow by 3.5% in 2011 and 5.2% in 2012. Personal consumption is expected to grow by 1.9% in 2011, driven by the stabilization of wages, recovering employment market and projected reductions in unemployment levels. Overall this will bring more prosperity to Croatian consumers. Fiscal deficit is expected to drop to –4.1% in 2011 and to –2.9% in 2012, bringing it in line with EU Maastricht criteria. Inflation in Croatia is predicted to remain within the 3% EU target rate guidelines over the next two years. This is one of Croatia’s important strengths as it allows for increased consumption and stimulates investment without overheating the economy. In terms of Croatia meeting guidelines for EU accession in 2012, as of December 2010, six open chapters of the EU accession negotiation process remained. These are policies dealing with Competition; Agricultural and Rural Development; Fisheries; Regional Policy and Co-ordination of Structural Instruments; Judiciary and Fundamental Rights; and Financial and Budgetary Provisions. In these six chapters (of 35 in total) several benchmarks still need to be met. The benchmarks fulfilled by Croatia for the chapter on Regional Policy and Co-ordination of Structural Instruments are currently being assessed by the European Commission. The expected completion of the negotiation process is June 2011.

Colliers International | p. 38

2011 Colliers Real Estate Review » croatiA

OFFICE MARKET KEY OFFICE FIGURES

GENERAL OVERVIEW

Metric

Measure

Total Stock

682,000 Sqm

Take-Up

20,000 Sqm

Vacancy

7.5%

Prime Headline Rent

€15.5/Sqm/month

Office stock in Zagreb in 2010 stood at around 680,000 Sqm following an increase of around 1% from 2009 to 2010 period. Two new buildings were completed over the year adding 7,500 of Sqm of office space to the market.

Source: Colliers International d.o.o.

700

A slowdown in construction activity was noted as many announced projects have been deferred until the situation on the market becomes more stable.

CHANGE IN STOCK + PIPELINE (SQM ,000)

680 660 640 620 600 580 560

H2 2007

H1 2008

H2 2008

H1 2009

H2 2009

H1 2010

H2 2010

H1 2011

The vacancy rate also increased as a result of many companies being forced to cut costs and downsize or migrate to smaller/cheaper business premises. SUPPLY

KEY LEASE TRANSACTIONS Tenant

Size

Project

Developer

4,000

Hypo centre

Hypo Alpe Adria Bank

Philip Morris

2,500

Posl. Komp. Špansko

Tvornica vijaka Maček

EOS Matrix

500

Net City

BAKS group

Norwegian Embassy

377

Grand Centar

Chevrolet and General Motors

800

Posl. Komp. Špansko

Tvornica vijaka Maček

Coface Hrvatska

460

HG Spot

The market of quality office space in Zagreb is currently highly developed from a supply point of view. As mentioned above, two new office buildings were completed in 2010: Projekt Tuškanova comprising 3,600 Sqm and Poslovni kompleks Špansko building comprising 3,900 Sqm. Developers of these projects have not faced difficulties finding tenants for these buildings. Despite substantial growth in the size of the office market in the past few years, there is still potential for further growth, on a per capita basis. DEMAND

The first half of the year recorded slightly higher demand forpurchase and lease transactions of office space which was a consequence of lower prices which were a result of economic changes in 2009. Some tenants, however, continue to wait for a more favourable moment to relocate to better offices/locations in the belief the prices will reduce further. This is putting additional downward pressure on prices of both class ‘A’ and ‘B’ office buildings.

p. 39 | Colliers International

This also, however, creates a risk that many such tenants will be left disappointed as available options are being absorbed by those which are faster in their negotiations. In the second half of the year, there was an increase in demand driven by the large volume of leases coming close to expiration which is likely to continue in 2011, resulting in the best space getting absorbed. The most required offices in 2010 were those in the CBD zone and close to the city centre. In terms of size, the demand for large office space (2,000 Sqm – 5,000 Sqm in size) decreased – a trend that emerged in 2009 and continued in 2010 – even though several leases for offices of 1,500 Sqm, 2,500 Sqm and 4,000 Sqm were recorded. Office spaces around 1,000 Sqm in size were most sought after. In terms of layout, flexible floor plans proved to be more than desirable, especially for large companies with future expansion plans. On these rare occasions when it comes to selling or buying office properties it is usually small companies which choose to buy office space for their own needs rather than pay rent. The tendency among bigger foreign companies is to rent rather than buy. Larger local companies, however, usually occupy their own space or develop built-to-suit premises.

Research: Renata.Susa@Colliers.com

2011 Colliers Real Estate Review » croatiA

OFFICE MARKET 60.00

NEW STOCK IN 2011 (SQM ,000)

VACANCY / AVAILABILITY

In view of the fact that many companies were forced to seek a way out of their financial situation, lots of tenants moved out or tried to negotiate better lease terms. Some owners managed to make arrangements with existing clients, while in some cases even a contract termination occurred which resulted in increased availability in the existing stock of buildings. As a result vacancy increased by 40% over the year to reach 7%.

50.00 40.00 30.00 20.00 10.00 0.00

H1 2011

25.00

H2 2011

RENTS (€/SQM)

20.00 15.00 10.00 5.00 Source: Colliers International 0

H1 2007

H2 2007

H1 2008

H2 2008

H1 2009

H2 2009

H1 2010

H2 2010

▬ Prime Headline Rent ▬ Average Headline

BUILDING PERMITS ISSUED I.–X. 2010 41.2% Reconstructions

58.8% New constructions

At least the low levels of new demand were matched by an equally weak development cycle. For this reason, vacancy did not change over 2010. In 2011 a decrease in the vacancy rate is expected, especially in quality buildings in good locations.

PROGNOSIS

Given the moderate economic recovery is predicted for 2011 a stabilisation of rents and occupancy is expected. Since many notable tenants have lease contracts close to their expiration date additional relocations of major tenents are expected in the first half of 2011. Although there has been increased interest of investors looking for development opportunities for new office buildings in 2010, a substantial increase in new developments is not expected during 2011. There are only a small number of new projects coming to market in 2011 (around 60,000 Sqm) for the demand should absorb. Many of the commenced projects will not be finished until the end of 2011 or 2012.

RENTS

If we compare prime rents in 2010 with 2009 an overall decrease of 12% is shown. Monthly rents for class A/B+ buildings in city centre and CBD locations dropped to €13 – 15 per Sqm, while in less attractive locations outside the city zone rents decreased to €9 – 12 per Sqm. Smaller offices of units around 150 Sqm can achieve higher rents of around €17 per Sqm. In order to attract tenants and increase occupancy rates, owners of buildings have increased incentives for major tenants. Some owners are offering a full free fit out according to the tenant needs. Landlords also continue to provide discounts and incentives such as a shorter lease term, lower rents for the first years, rent free periods, fit-out contributions and more flexible contract terms reducing the net effective rent to a lower value compared to previous years.

Research: Renata.Susa@Colliers.com

Colliers International | p. 40

2011 Colliers Real Estate Review » croatiA

RETAIL MARKET KEY RETAIL FIGURES

GENERAL OVERVIEW

Metric

Measure

Prime High Street Rents

€45/Sqm/month

Prime SC Rents

€25/Sqm/month

SC Stock (Zagreb)

580,000 Sqm

SC Vacancy

25%

In spite of the economic crisis, Croatia saw the opening of six new retail centres in 2009 and 2010. Increasing volumes of space are expected to continue for several years based on the active pipeline of six shopping centres being built in various cities throughout Croatia.

Source: Colliers International

600

ADDITIONS TO SC STOCK OVER TIME, ZAGREB

500 400

Secondary cities such as Zadar and Split, where the retail offer mostly comprises big box outlets, have also started to see the opening of more traditional shopping centres.

300 200 100 0

1999

2000

2002

2003

2006

2007

2009

2010

▄ Total Existing Stock (sqm) ▄ Yearly Additions (sqm)

NEW MARKET ENTRANTS / DEVELOPMENTS Year

Size

Project

Developer

2010

63,000

Arena Shopping Centre

Trigranit

2010

50,000

City Centre One Split

Kaufmann Gruppe

2010

38,000

Supernova Zadar

M2 Gruppe

2010

18,000

Supernova Karlovac

M2 Gruppe

Developers and investors enthusiasm for completing and announcing developments is not fully supported by people’s limited purchasing powers. The stagnation of wages and uncertainty over employment has negatively influenced the propensity of the population to consume and will partially continue to do so in 2011. SUPPLY

2010 saw the opening of six new shopping centres throughut Croatia. This new supply placed an additional 203,000 Sqm of GLA to the market. Total supply of shopping centre space in Zagreb at the end of 2010 stood at around 600,000 Sqm GLA. Zagreb is still the largest retail centre of Croatia, with the highest number of shopping centres, big box content and other retail services; however a number of other Croatian cities are growing in their supply of retail space and thus becoming more sophisticated retail markets. That said, good quality land for the construction of such projets is not in abundant supply, especially locations which can offer good accessibility and traffic connectivity.

p. 41 | Colliers International

In the ever more competitive retail landscape, existing shopping centres, especially those constructed more than 5 years ago, have started to consider the neccesary reconstructions and modifications they need to make in order to follow the current market trends and not lose market share. DEMAND

Customer demand in Croatia is calling out for more choice in terms the retail products, services and formats on offer, especially in cities and locations which currently do not have much retail content present. This is helping to support demand from tenants for high quality space, including strong international brand names who are wishing to enter Croatia at the bottom of the market. In saturated retail markets such as in the capital city of Zagreb, the demand for retail space has slowed down. In spite of still present interest for new retail i.e. shopping centre developments, the investors are much more cautious in terms of the type of product they will be putting out on the market. RENTS

Retail rents in shopping centres, for both anchors and inline tenants, decreased in 2010. Prime rental values for anchor tenants dropped on average from €30 to €25 Sqm/pcm. Secondary rental values for in line tenants decreased from average €15 to €13 Sqm/pcm. Prime rental values for high street locations remained steady at around €45 Sqm/pcm.

Research: Renata.Susa@Colliers.com

2011 Colliers Real Estate Review » croatiA

RETAIL MARKET 60.00

PRIME RENTAL VALUES, SHOPPING CENTRES

40.00 30.00 20.00 10.00 0.00

VACANCY

The vacancy rate has continuallyincreased over the past few years. By end 2010, the vacancy rate in shopping centres amounted to 25%, compared to 17% in 2009.

50.00

2006

2007

2008

2009

2010

Values in €/sqm/month

RETAIL PROJECTS UNDER ACTIVE CONSTRUCTION* Project

Size

Developer

ZTC Shopping Centre Rijeka

25,000 Universale Internacional

Avenue Mall Osijek

26,700

Portanova Osijek

40,000 Amplitudo d.o.o.

Lumini Shopping Centre – Varaždin

33,000

Verdispar

Cvjetni Square Zagreb – mixed use project

3,000

Horvatinčić – private developer

City Centre One East Zagreb

75,000

Kaufmann Gruppe

GTC

* Expected Completion: 2011/2012. Source: Colliers International

The marked increase in empty spaces in all retail locations points to a relative discrepancy between rental levels desired by shopping centre managers and developers and those which tenants are able whilst still making a profit.

There are two shopping centres are in Osijek i.e. Avenue Mall (26,700 Sqm of GLA) and Portanova (40,000 Sqm of GLA) — both due for completion in August 2011; City Centre One East (75,000 Sqm of GLA) and a mixed use project in Cvjetni Square (3,000 Sqm of GLA) will appear on Zagreb’s retail scene in 2011; Finally, in the city of Varaždin, Lumini Shopping Centre (33,000 Sqm of GLA) is also expected by the end of 2011.

PROGNOSIS

The move towards a new concept in retail of ‘retailment’ — which is a blend of retail and entertainment space — giving added value to the consumer is the new aim of retailers who wish to be a part of today’s market.

In addition to these, there are four additional projects in Rijeka, Zagreb, Poreč and Šibenik that are either under active contruction or are in stable planning phases, which means they will most likely come to the market in another 1 – 2 years time.

We will continue, therefore, to see a repositioning and restructuring of older shopping centres in Croatia which have realized the need to move in line with the changing market conditions. This will be a key characteristic of activity in 2011. The growing interest for secondary markets will also continue in the future. This trend is expected to enrichen the overall retail status of Croatia, offering a wider choice of retailing to a larger number of people. This is illustrated by the number of new developments that are currently under active construction, including six new shopping centres most of which are expected to come to the market in 2011. One of these is the ZTC Shopping centre in Rijeka comprising a total size of 25,000 Sqm GLA;

Research: Renata.Susa@Colliers.com

Colliers International | p. 42

2011 Colliers Real Estate Review » croatiA

RESIDENTIAL MARKET 2,200

ASKING PRICE FOR APARTMENTS ZAGREB

OVERVIEW

Source: Colliers International 2,100 2,000 1,900

One of the basic trends which characterized the residential market in 2010 was a decrease in prices and sales volumes.

1,800 1,700

H1 2007

H2 2007

H1 2008

H2 2008

H1 2009

H2 2009

▬ Average Asking Price

H1 2010

H2 2010

This was a result of adverse economic trends in the country such as rising unemployment, decreasing wages, consumer pessimism and unfavourable financing conditions. The relation of household income to residential prices – the affordability ratio – remains unfavorable in Croatia. For this reason we expect a further decline in residential prices and the availability of more favourable loan conditions before the market can resume more normal trading activity. SUPPLY

According to the Croatian Bureau of Statistic construction works decreased by 14.9% yoy up to October 2010. Of the works conducted, 58.8% out of the total working hours were spent on new construction and 41.2% on reconstruction, repairs and maintenance. Over a similar period, the total number of completed apartments was 46% lower than in 2009, whilst the total floor area of space constructed was 49% lower than in the same period of 2009. A large stock of unsold apartments characterizes particular locations. The main problem which hampers the residential market is in high asking prices which owners are still hoping the buyers will be able to afford. This is an unlikely scenario for the foreseeable future. Only apartments in a good location at reasonable prices have found their buyers.

p. 43 | Colliers International

DEMAND

Following recent movements on the market, it is expected that the current fall in demand for residential properties is only temporary and that as of 2011 demand will grow. Despite the crisis, a part of Zagreb’s inhabitants aged between 25 and 55 years are planning to resolve their housing issues in the near future. It is expected that the demand for highquality residential premises will improve. As a consequence, the demand and prices for lower-quality dwellings will decrease, and the currently unrealistically small price gap between the low and high quality premises is expected to widen. The most desirable locations are those located in close proximity to public transportation, kindergardens, schools, public institutions and other amenities such as supermarkets, restaurants and recreational facilities. RENTAL MARKET

The supply of new residential buildings intended only for renting is scarce, where the majority of the rental market is part of grey economy. Most private owners do not report to the government that apartments are rented and in that way avoid paying taxes. There is, however, a new form of rental demand created by buyers that are waiting for more favorable conditions and are forced to rent until they can buy a property. Some investors have recognized this and there is an increasing number of investors offering unsold apartments for rent with the possibility of buying after a certain period. Rents have decreased as a result and are expected to remain at similar levels in 2011.

Research: Renata.Susa@Colliers.com

2011 Colliers Real Estate Review » croatiA

INVESTMENT MARKET KEY INVESTMENT FIGURES

SUMMARY

Metric

Measure

Investment Turnover

€310 Mln

Prime Office Yield

8.5%

Prime Retail Yield

7.5%

Prime Industrial Yield

10.5%

Source: Colliers International

300 250

INVESTMENT VOLUMES 2006-2010 (€ MLN) Source: Colliers International

200

There were six investment transactions in Croatia in 2010, four of which are notable in terms of their size. Two of these transactions concertned retail assets, two were office/industrial transactions and two were hotel market deals. In total, the investment value of these transactions came to around €310 Mln; around 53% of this volume was derived from the retail transactions, 44% from the office/industrial assets and the remainder from hotel deals.

150 100 50 0

2006

2007

2008

2009

2010

KEY INVESTMENT TRANSACTIONS Deal

Value

Vendor

Purchaser

Konzum – 6 Supermarkets

€47M

Carpathian PLC

WP Carey

Konzum HQ

€77M

Agrokor

WP Carey

Arena Centar Zagreb

€120M

Trigranit

Heitman

Zagrebtower

€60M

Europolis Real Estate Asset Management GmbH

CA Immobilien Anlagen AG public seller

12%

PRIME YIELDS

10% 8% 6% Source: Colliers International 4%

H1 2009

H2 2009

H1 2010

H2 2010

The most significant deals were the two retail transactions. The first was the purchase of a portfolio of 6 Konzum’s supermarkets by WP Carey from Carpathian PLC. The portfolio comprised 33,700 Sqm of retail space, with an investment value of €47 Mln. The second transaction was a share sale of 50% of TriGranit’s shopping centre Arena Centre Zagreb (30,000 Sqm) to Heitman Real Estate Investment Fund for €120 Mln. The most prominent transaction in the office/industrial segment was Agrokor’s sale of Konzum’s headquarters (warehousing/office) premises to WP Carey for €77 Mln. This was a sale-lease back transaction. The second transaction was the sale of Zagrebtower ‘A’ class office building comprising a total size of 25,725 Sqm for around €60 Mln. CA Immobilien Anlagen AG from Austria purchased the premises from Europolis Real Estate Asset Management GmbH in June 2010.

PROGNOSIS

Due to the impending accession to EU and the recovering economy, investment funds have again recognized Croatia as an attractive place for investment. Blue chip companies, such as Agrokor and TriGrant, have been participating actively in the Croatian market and their recent transactions stand as proof of renewed confidence in the potentials of the Croatian economy. Despite the decrease in foreign direct investment over the past two years, which was to be expected given the extent of the global economic crisis, the levels of investment in Croatia are improving and are predicted to grow by 3.5% in 2011 and 5.2% in 2012. In addition to economic growth, there are expectations for renewed growth in the number of investment transactions in 2011 compared to 2010. The city of Zagreb will remain the primary investment market, although certain other secondary cities, such as Split, will witness new development in the next 2 – 5 years helping to drive activity in the investment market over the mid-term.

▬ Prime Oﬃce Yield ▬ Prime Industrial Yield ▬ Prime Retail Yield

In terms of pricing, yields in the retail market increased by around 0.5% in 2010 and stood at 7% – 7.5% for high street locations and at 8% – 8.5% for shopping centres. In the office market yields followed the same trend and increased to 8.5% – 9% for prime locations, and 9.5% – 10% for secondary locations. We expect the yields to stabilize at these levels over 2011.

Research: Renata.Susa@Colliers.com

Colliers International | p. 44

2011 Colliers Real Estate Review » croatiA

CROATIA TAX SUMMARY GENERAL

The below comments are based on Croatian laws effective as at 1 January 2011. All Croatian citizens and legal entities have a personal identification number (PIN) and all business documentation and correspondence (including tax returns) must include the taxpayer’s PIN. EU citizens can freely buy real estate in Croatia. Other citizens need to apply for a permission from the Croatian Ministry of Justice before they are registered as owners in the land registry. As of 1 January 2011 Croatian foreign exchange laws were further relaxed (allowing cross border cash pooling). Croatia has opened all negotiating chapters for EU Accession. Further taxation and legal changes are expected leading up to EU accession. CORPORATE PROFIT TAX

Accounting profit, adjusted in accordance with the provisions of the Corporate Profit Tax (CPT) Law, is subject to CPT at the rate of 20%. Amongst others, the CPT base needs to be increased for: —— Interest on loans provided or guaranteed by foreign direct shareholders (holding 25% or more) where the loan exceeds 4 times the share capital invested by the shareholder (“thin capitalization” rule); —— Interest over 9% per annum on loans provided by a foreign related party (“excessive interest rate” rule), subject to the application of international agreements; and. —— Interest over 9% per annum on loans provided by a domestic related party, if one of the parties is in a tax favourable position or has tax losses carried forward from previous periods which can be utilised in the current tax period. Capital gains are generally included in income and taxed at the same rate, including income from the transfer of shares in Croatian and foreign companies.

p. 45 | Colliers International

However, domestic and foreign dividend income is not subject to CPT. Tax losses may be carried forward for a maximum of 5 years, if certain conditions are met, and no tax loss carry back provisions exist. There are no tax grouping provisions. Anti-avoidance provisions, including detailed transfer pricing provisions (which require a transfer pricing study including a benchmarking analysis, for all cross border transactions with related parties and for certain domestic transactions with related parties) exist. TAX DEPRECIATION RATES

Assets

Maximum accelerated annual deprec. rate (%)

Annual deprec.rate (%)

Buildings

Equipment, motor vehicles (other than personal cars), intangible assets

Personal cars

IT equipment and mobile phones

100

Other long-term assets

Depreciation expenses can only be calculated on a straight line basis and the tax depreciation rate is limited to the accounting depreciation rate. A depreciation expense relating to vessels, aircrafts, apartments and holiday homes is recognized as an expense for CPT purposes only if specific conditions are fulfilled. WITHHOLDING TAX

Withholding tax at the rate of 15% applies to certain payments made to non-resident legal entities (specified interest payments, payments for intellectual property rights, market research, tax advisory, business advisory and audit services). Withholding tax at the rate of 20% applies to payments for services made to companies outside the EU if the company has its registered seat or place of effective management and supervision in a country

with a CPT rate lower than 12.5% and if the country is included in the list published by the Ministry of Finance. The withholding tax rate may be decreased/eliminated pursuant to an effective double tax treaty. No withholding tax is levied on dividend payments, except for dividend payments made to individuals out of profits earned during the period from 1 January 2001 until 31 December 2004. REAL ESTATE TRANSFER TAX

Irrecoverable transfer tax at the rate of 5% applies to the transfer of land. For buildings constructed before the VAT law became effective (i.e. before 1 January 1998) transfers are subject to irrecoverable transfer tax at the rate of 5%. For newly constructed buildings (i.e. on or after 1 January 1998) transfers are subject to VAT at the rate of 23%. The subsequent transfer of newly constructed buildings is subject to transfer tax at the rate of 5% if the seller was not able to deduct VAT as a tax prepayment when the building was initially purchased by the seller. Croatian citizens acquiring their first property as their main residence are exempt from paying property transfer tax (but not VAT, if VAT applies), if certain conditions are met. Further transfer tax exemptions are available for the transfer of land or qualifying buildings located in special state care areas to both companies and physical persons, if certain conditions are met. VALUE ADDED TAX (“VAT”)

The standard VAT rate is 23% and applies to most products and services. A reduced VAT rate of 10% applies to: —— Tourist accommodation services and related agency fees; and. —— Newspapers and magazines issued on a daily and periodical basis, with the

Contact: psuchar@kpmg.com

2011 Colliers Real Estate Review » croatiA

CROATIA TAX SUMMARY exception of newspapers and magazines that consist mainly or entirely of advertisements or whose main purpose is advertising. A VAT rate of 0% (input VAT recovery possible) applies to bread, milk, educational literature (specified), certain (specified) medical supplies, scientific magazines and film projection services, as well as to exports.

SOCIAL SECURITY (“S/S“)

Employees’ pay pension s/s contributions of 20% from their salaries whilst employers’ pay health insurance, unemployment fund and injury at work contributions of 17.2% based on employees’ salaries.

Services are taxable in Croatia if they are deemed to be supplied in Croatia. The reverse-charge mechanism applies to certain services supplied from abroad. The rules regarding place of supply are similar to the EU 6th VAT Directive prior to the implementation of the “VAT package” applicable in the EU as of 1 January 2011. The registration threshold is taxable supplies of HRK 85,000 (approximately €11,600). Entities in Croatia using financial support from certain pre-accession EU funds are entitled to obtain goods/services without being subject to VAT, if certain conditions are met. The transfer of newly constructed buildings is subject to VAT at the rate of 23%. Individuals generally cannot recover VAT; however, VAT is generally recoverable for corporate entities registered for VAT in Croatia. Foreign legal entities may be able to recover VAT, provided relevant conditions are met. Foreign legal entities are required to register for VAT purposes, provided relevant conditions are met. PERSONAL INCOME TAX (“PIT“)

PIT rates were lowered with effect from 1 July 2010 and are as follows: —— under HRK 3,600, 12%; —— HRK 3,600 – HRK 10,800, 25%; —— over HRK 10,800, 40%.

Contact: psuchar@kpmg.com

Colliers International | p. 46

2011 Colliers Real Estate Review » COUNTRY

Czech Republic Dear Colleagues and Friends, If we would try to sum up the previous year, then – according to most recognized experts – it definitely lagged behind the expectations and hopes that many of us had vested in it. The optimistic prognoses of economists and experts on property markets about their strong revival haven’t proven true. All the more, the fundamental differences between each market segment broke through. All of them could be easily summed up in a few sentences very similar to a weather forecast. While the office market still struggles with overcast sky, the area of industrial and logistic properties seems to face somewhat cloudy weather. The investment market then goes through kind of a stormy climate where periods of calm and windlessness interchange with huge investment transactions that come up like bolts from the blue.

Karel Stransky

managing director colliers international czech republic Address

Galerie Myšák Vodičkova 710/31 Prague 1, 110 00, Czech Republic

Phone

+420 226 537 618

Karel.Stransky@Colliers.com

The new character of the market that we first noticed in 2009 reassured us once more last year that it’s not going on just a momentary change of wind but on a brand new trend. As well as in all other branches, the client – especially tenant – plays the leading role on the property market. This trend that originally started more than a year ago has been enriched by another interesting phenomenon during the past year – almost half of the volume of all the investment transactions has been secured by domestic private and institutional investors. After years of domination of German and other foreign real estate and pension funds, the tune is for the first time being called from someone else. Despite the fact I truly love my native Czech language; the international term “challenging environment” fits the best to describe the crucial changes facing the commercial property market. Due to the nature of these unforeseen changes, precise analysis, accurate estimations and perfect skills are required to react to these changes on-time and accurately; these are the grass roots from which new challenges emerge. These grass roots, as well as the ability to analyze facts and find mutually beneficial solutions, are more than ever becoming a true merit of our work. The work of real estate consultants. I’m not going to present any predictions and anticipations about future property market development in the upcoming year. It wouldn’t be serious. Instead, I and my team here in Colliers Prague office will try our best to deliver the most accurate market information and know-how you can get in the Czech Republic. You can find them outlined in this market report. With a view to provide you with the necessary advantage and information a stepahead. Remember – we were those who predicted future development of both office and industrial markets with admirable accuracy more than a year ago. Today, we are those who the others quote and bear up. Our deep know-how and courage to tell things frankly paid off to us last year. If you like, it can pay off to you as well! Thanks for your confidence and I look forward to working with you in 2011! Karel Stransky

p. 47 | Colliers International

Research: Firstname.Lastname@Colliers.com

2011 Colliers Real Estate Review » CZECH REPUBLIC

ECONOMIC OVERVIEW KEY ECONOMIC FIGURES

SUMMARY

Metric

% Change

GDP Growth

2.1%

Industrial Production

8.4%

Unemployment

9.0%

Inflation

2.0%

Retail Sales

0.3%

Public Deficit

4.8% of GDP

Source: Focus Economics, Ministry of Finance

GDP, UNEMPLOYMENT & INFLATION

10 8 6 4 2 0

As we mentioned last year, 2010 was the stabilization period for the Czech Republic. The main macro indicators (GDP growth, unemployment, and inflation rate) are showing positive outlooks and are now reaching more stable rate levels. Consequently, we are not expecting any substantial growth or drop in the coming years.

Following the GDP movements, unemployment in the country reached its peak in 2009 with 9.2%. In 2010, we started to see some improvements and the latest forecasts from Focus Economics show a positive outlook for the next 5 years with an unemployment rate set to reach about 6.0% in 2015.

The local economy, however, remains too dependent on external factors (exports, instability of the Czech Crown compared to the Euro or the Dollar) that could have a negative impact on the economy. Nevertheless, banks have started to be more active and are now lending more than in 2009. The volume of personal mortgages has increased by about 5% in 2010 compared to the previous year, and the decreasing average mortgage rate should help this trend to continue in 2011.

-2 -4 -6

Source: Focus Economics |

2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F

▬ GDP ▬ Unemployment, % ▬ Inﬂation, %

160

EXTERNAL DEBT AS % OF GDP Source: Focus Economics

120

PROGNOSIS

For the first year since 2000, GDP declined in the Czech Republic by an unprecedented 4.1% in 2009. In 2010, we have seen a more positive outcome with a recorded growth of 2.1%. Other than Bulgaria, Romania and Hungary, most of the Central and Eastern European countries have witnessed a positive growth of their GDP.

After the very strong years of 2007 and 2008, when the CPI inflation rate reached 5.5% and 3.6% respectively, 2009 saw a severe drop to only 1.0%. In 2010, inflation reached a more “stable” rate at 2.0% compared to the previous year. Based on the latest forecasts, we believe inflation in the country will remain stable at around 2.0% over the next 5 years.

80 40 0

Czech Republic

Hungary

Poland

▄ 2010

Romania

▄ 2011

Research: Lenka.OleksiakovaColliers.com

Slovakia

EU Members

Czech external debt increased to a record 45% of GDP in 2009, although has already started to decrease to 42% at the end of 2010. In comparison to the other Central and Eastern European countries or EU members, the Czech Republic is in a healthier situation: the average for EU members is about 77.4% of GDP and 52% of GDP for other Eastern countries.

Colliers International | p. 48

2011 Colliers Real Estate Review » CZECH REPUBLIC

OFFICE MARKET KEY OFFICE FIGURES

GENERAL OVERVIEW

Metric

Measure

Total Stock

2,697,850 Sqm

Take-Up

214,707 Sqm

Vacancy

13.15%

Prime Headline Rent

€20 – 21/Sqm/month

Source: Colliers International, PRF

2,750

CHANGE IN STOCK & PIPELINE (SQM, 000) Source: Colliers International, PRF

2,700 2,650 2,600 2,550 2,500

Q1 2009

Q2 2009

Q3 2009

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Overall take-up reached 214,707 Sqm, which represents a 13% decline compared to the previous year (245,000 Sqm). However, the take-up figures from 2009 were influenced by two significant transactions comprising 45,000 Sqm.

Historically the lowest amount of space was delivered to the market in 209 as construction practically stopped.

Take-up in 2010 was (again) driven mainly by renegotiations and relocations, accounting for 42% and 23% respectively.

On the flip-side, construction of almost 140,000 Sqm of office space commenced, mainly in the second half of 2010. 60% of this space started on a speculative basis. The majority of the space that is currently under construction will be delivered to the submarkets of Prague 4 and 8.

The net take-up continued to weaken during the year and reached less than 75,000 Sqm as a consequence of delayed reaction to the negative GDP growth in 2009. The second half of 2010 saw a slight improvement mainly with the Deutsche Boerse Group expansion in Prague 8.

SUPPLY

TAKE-UP STRUCTURE 6% Expansions 44% Renegociation

23% New leases

DEMAND

Although the GDP growth turned back to positive numbers in 2010, the net take-up continued to weaken. It declined by 35% compared to the previous year. As a result the vacancy rate increased to almost 14% in the course of 2011.

27% Relocation within stock

KEY LEASE TRANSACTIONS Tenant

Size (Sqm)

Project

Type

Oracle

9,831

The Park

Renegotiation

Deutsche Boerse Group

7,524

Futurama Business Park

Relocation + expansion

Computer Associates

7,201

The Park

Renegotiation + expansion

Financi urad Praha 4

5,000

Budejovicka 1

Relocation

Interoute

3,922

City West

Relocation

Only 41,790 Sqm of offices were been completed during 2010, representing a 70% decline compared to the previous year. 21% of the supplied space has been pre-leased.

The IT sector was the most active during the year generating 22% of the transacted volume, followed by Professional Services (18%) and the Manufacturing (16%) sectors.

The only significant completion was Filadelfia (28,160 Sqm) by Passerinvest – another building of the BB Centrum in Prague 4, being almost 100% vacant. The other completions include Vaclavske namesti 17 (1,265 Sqm), Parizska 26 (1,200 Sqm) and Havlickova Plaza (2,169 Sqm) in Prague 1 and CEZ building (4,000 Sqm) and Budejovicka 1 (5,000 Sqm) in Prague 4.

A-class buildings dominated the overall take-up with 81% of the total volume. Moreover, 60% of new leases were closed in A-class buildings and the majority of relocating tenants moved from B-class to A-class schemes. B-class buildings attracted mainly smaller tenants enquiring units of up to 350 Sqm.

The total modern office stock exceeded 2.69 Mln Sqm as of end of 2010. The amount of space offered for sub-lease decreased in the course of the year by 44% to 23,731 Sqm as some of the space was leased up or occupiers stopped offering their space on the market.

p. 49 | Colliers International

Research: Lenka.Oleksiakova@Colliers.com

2011 Colliers Real Estate Review » CZECH REPUBLIC

OFFICE MARKET 400,000

VACANCY

16%

350,000

14%

300,000

12%

250,000

10%

200,000

150,000

100,000

50,000

Q1 2009

Q2 2009

Q3 2009

Q4 2009

▄ Vacant space (sqm)

€24

Q1 2010

Q2 2010

Q3 2010

Q4 2010

▬ Vacancy (%)

RENTS

€23

Source: Colliers, PRF

€22 €21 €20 €19 €18 €17 €16 €15

Q1 2009

Q2 2009

Q3 2009

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

▬ Prime Headline Rent ▬ Prime Net Eﬀective ▬ Average Headline

BUILDINGS UNDER CONSTRUCTION IN PRAGUE Project

Size

Developer

Delivery

Harfa Office Park

19,600

Lighthouse Group

Q1 2011

VN 9 Offices

2,263

MTK

Q2 2011

Main Point

25,700

PSJ Invest

Q3 2011

Futurama A3, A4

16,032

Immorent

Q4 2011

Lyra Office Building

6,506

Immorent

Q4 2011

Budejovicka 3

10,346

Pankrac a.s.

Q4 2011

Qubix

11,722

S+B

Q4 2011

Rivergardens West

19,400

HB Reavis

Q1 2012

Rohan Business Centre

8,500

Karimpol

Q1 2012

Keystone

5,650

Karlin Group

Q1 2012

City Green Court

16,876

Skanska Property

Q2 2012

Palac Krizik II

6,000

Cecopra

Q2 2012

City West A2

15,236

Finep

Q2 2012

Research: Lenka.OleksiakovaColliers.com

VACANCY / AVAILABILITY

The vacancy rate rose to 13.2% as of the end of 2010, which equals more than 354,000 Sqm of vacant space. This is a y-o-y increase of 1.35 b.p. compared to the previous year. In the first half of 2010, the vacancy rate grew to 13.8% mostly due to the delivery of BB Centrum Filadelfia and the vacation of some buildings by anchor tenants (Siemens, Ceska Sporitelna). As a consequence of improving net take-up and low deliveries in the second half of the year, the vacancy rate started to decline. A significant vacancy rate increase occurred in Prague 6 (from 16.4% to 25.2%) as a result of the relocation of anchor tenants to other districts (Siemens, Citibank). On the contrary, a major decrease was recorded in Prague 8 (to 15.9%) thanks to recently closed transactions (e.g. Deutsche Boerse Group, Parexel International). A high vacancy rate remained in Prague 7 (28.0%) followed by Prague 9 (21.5%). RENTS

Prime office headline rents remained unchanged in the city centre, where they range between €20.00 to €21.00 Sqm/ pcm and in the inner city where they range from €15.00 to €17.50 Sqm/pcm. In outer outer city locations rents increased slightly from €13.00 to €14.50 Sqm/pcm. As landlords and developers continued to provide incentives (rent free periods and fit-out contributions) to both prospective and current tenants, the effective rents stayed on average 10% to 15% below the actual headline rent.

PROGNOSIS

95,329 Sqm will be delivered to the market in the course of 2011, 46% of which is already pre-leased. Based on the positive GDP growth which started in 2010, and the positive prognosis for 2011, net take-up is expected to rise again. New leases from UniCredit Bank, Komercni Banka or Seznam.cz have already been announced and are expected to be closed in the first half of 2011. As the Prague office market is now mature, renegotiations and relocations will continue to comprise a significant proportion of the overall take-up. Taking into consideration the delivery of the first phase of Harfa Office Park – Building Amadeus (19,600 Sqm) without any pre-leases, the overall vacancy rate may slightly increase in the short-term. We expect the vacancy rate to peak in the first half of 2011 and then start to decline as a consequence of improvements in net take-up (and absorption of the vacant space). The vacancy rate in Prague 4, Prague 6 and Prague 8 in particular should decline as the recently completed or vacated space is being/will be leased up. Vacancy in B-class buildings is expected to grow as tenants continue relocating to A-class schemes where they are able to achieve favourable terms for higher quality. Prime headline rents are expected to remain at current levels with effective rents still being up to 15% lower than headline, based on size and terms of the lease contract.

Colliers International | p. 50

2011 Colliers Real Estate Review » CZECH REPUBLIC

INDUSTRIAL MARKET KEY INDUSTRIAL FIGURES

OVERVIEW

Metric

Measure

Total Stock

3,691,000 Sqm

Take-Up

980,000 Sqm

Vacancy

10.4%

Prime Headline Rent

€3.60 – 4.00/Sqm/month

The preliminary market data suggest another record breaking year for the industrial property market in the Czech Republic. Until now, the market experienced the highest level of leasing activity in 2007 when the total take-up reached 904,000 Sqm. The overall 2010 figures imply that the take-up is likely to exceed 980,000 Sqm.

Source: Colliers International

3,800

CHANGE IN STOCK OVER TIME (SQM, 000) Source: Colliers International

3,600 3,400

Demand remains driven by logistic services providers, retailers and the automotive industry.

3,200 3,000 2,800

Q4 2008

Q1 2009

Q2 2009

Q3 2009

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

TAKE-UP STRUCTURE 4% Relocations from B to A Class

SUPPLY 56% New demand

12% Expansions

28% Renewals & Renegociations

Size (Sqm) Project

Type

HOPI s.r.o.

45,800

PointPark Prague D1

CEVA Logistics

26,595

CTPark Bor u Tachova

new lease

Brembo

25,553

renewal

CTPark Ostrava

new lease

€OGATE Warehousing & 23,482 Distribution Czech

ProLogis Park Štěnovice

new lease

TROST Auto Service Technik

Orange Park

new lease

23,365

Source: Colliers International

At least 152,000 Sqm was supplied to the industrial property market in the course of 2010, with a vast majority of the space being pre-let. The largest completions include the Logistic Terminal in Lovosice developed by HB Reavis (43,000 Sqm) and a 28,000 Sqm hall at CTPark Ostrava.

INDUSTRIAL LEASE TRANSACTIONS Tenant

The overall rate of vacancy keeps falling, however, the reduction of immediately available space is not being countervailed by new construction.

Speculative construction was undertaken but mostly only as a part of formerly pre-let space. Some of the local developers have built warehouse space on speculative basis in 2010 but this was mostly in regions with low level of existing industrial stock and low vacancy. At least 10,000 Sqm was developed speculatively in Eastern Bohemia.

DEMAND

In 2010 leasing activity grew gradually each quarter amounting up to over 980,000 Sqm at the end of the year. This represents an increase of more than 100% over take-up recorded in 2009. The total take-up figures of 2010 have been significantly influenced by the amount of large transactions. There were 15 transactions exceeding 15,000 Sqm closed in 2010, accounting for almost 330,000 Sqm of the total take up (compared to only 4 such deals signed in 2009). Furthermore, over 80% of this space was absorbed within the existing vacant premises. 67% of the total take-up was based on new demand only, taking into account all new leases, pre-lets or space expansions. Renewals formed around 28% of the total activity and the remaining 5% went to companies that decided to upgrade their space and move from older premises to modern A-class space. Most demand traditionally came from logistic services provides who accounted for over 40% of the total takeup. The logistics sector contributed almost 28% to total new demand for industrial space and also generated over 70% to all renewals.

At the end of 2010 the total modern industrial stock in the entire Czech Republic stood at 3.69 Mln Sqm. Most of the major developers are willing to offer a build-to-suit solution in new locations, provided that the tenant is a reputable company and ready to sign a lease for at least 5 years (while 7 – 10 year leases are preferred).

p. 51 | Colliers International

Research: Lenka.Oleksiakova@Colliers.com

2011 Colliers Real Estate Review » CZECH REPUBLIC

INDUSTRIAL MARKET 770,000

VACANCY

22%

700,000

20%

630,000

18%

560,000

16%

490,000

14%

420,000

12%

350,000

10%

280,000

210,000

140,000

70,000 0

2% |

Q4 2008

Q1 2009

Q2 2009

Q3 2009

Q4 2009

▄ Vacant space (sqm)

€5.00

Q1 2010

Q2 2010

Q3 2010

Q4 2010

▬ Vacancy (%)

RENTS

€4.50 €4.00 €3.50 €3.00 €2.50

Source: Colliers International

€2.00

Prague

1,200 1,000

Brno

Pilsen

Ostrava

TOTAL TAKE-UP (SQM, 000) Source: Colliers International

800 600 400 200 0

2005

2006

2007

2008

2009

2010

VACANCY / AVAILABILITY

Since the beginning of 2010, the overall vacancy has declined from 19.5% to the current level of just over 10%. The decline has been mainly caused by lack of new supply combined with high demand for immediately available premises. The current existing available stock still offer fairly wide choice of solutions for tenants searching for units of up to 5,000 Sqm. However, companies wanting to quickly lease a space of 5,000 – 9,999 Sqm have only around 15 alternatives across the entire country. The situation is much worse for requirements exceeding 10,000 Sqm as those can currently be accommodated only in 9 halls. Other than that, users may consider B-class properties or wait for a build-to-suit solution. The largest decrease in vacancy has been recorded in modern industrial projects in western Bohemia where the rate of vacancy declined from 32.1% to 8.8% in the course of 2010. Another significant change occurred in Ostrava with the vacancy going down from 26% to the rate of 13.4%.

The effective rents remain 10% - 15% lower than the headline rental rates. Rent levels for the mezzanine office space have been in general offered for €7.90 - €8.50 per Sqm and month. However, office space within build-tosuit solutions and premises build on demand the office rent can go up to €9.50 per Sqm and month. PROGNOSIS

New demand for industrial space has been growing continuously for the past six quarters, supported by relatively high volume of immediately available modern space offered at lower rental rates. For 2011, it is expected the demand would remain at similar levels. However, the lack of immediately available space may to some extent limit the real take-up figures. Companies requiring the space immediately may also look at B-class properties instead of waiting for a new construction. On the other hand larger requirements are likely to initiate new developments, although these are still not likely to be undertaken on speculative basis.

RENTS

In general, the rents have remained stable throughout the year. Slight increase has been recorded in areas where the vacancy has decreased dramatically – such as Pilsen and the D5 highway corridor. Headline rents for requirements below 5,000 Sqm range between €3.20 and €4.50, in Prague such space can be leased at around €3.50 - €4.30. Units of over 10,000 Sqm are generally offered at headline rents of around €3.10 - €4.20 depending on whether the solution is offered within existing premises or as a new construction.

Research: Lenka.OleksiakovaColliers.com

Delivery of at least 250,000 Sqm is expected in 2011 with approx. 95,000 Sqm being already under active construction. As CTP proceeds with the development of their newly acquired land in Cernovicka Terasa a short-term increase in vacancy rates is likely to occur in Brno at the end of 2011. The construction of new larger facilities at CTPark Brno II., which should accommodate the consolidation of CTP’s existing tenants, will result in the existing space being vacated and offered to new users.

Colliers International | p. 52

2011 Colliers Real Estate Review » CZECH REPUBLIC

INVESTMENT MARKET KEY INVESTMENT FIGURES

SUMMARY

Metric

Measure

Investment Turnover

€550 Mln

Prime Office Yield

6.75% - 7.00%

Prime Retail Yield

6.75%

Prime Industrial Yield

9.50%

The investor’s profile has changed over the past two years. As we started to witness in 2009, Czech investors started to invest more in actual real estate than foreign investment funds. Those local investors are focusing on office or retail properties with a strong income profile in established locations (i.e. City Empiria).

Source: Colliers International

300

INVESTMENT VOLUMES (€ MLN) Source: Colliers International

225 150 75 0

Q1 2009

12.0%

Q2 2009

Q3 2009

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2011

PRIME YIELDS

10.0% 8.0% 6.0% 4.0% 2.0%

H1 2006

H2 2006

H1 2007

H2 2007

H1 2008

H2 2008

H1 2009

H2 2009

H1 2010

H2 2010

▬ Oﬃce ▬ Retail ▬ Industrial

KEY INVESTMENT TRANSACTIONS Deal

Value

Vendor

Purchaser

Continental plant in Brandys nad Labem

€14 Mln

N/A

CPI

Siemens - City West, Prague office space

€70 Mln

Finep

CPI

IGY, retail in Ceske Budejovice

€40 Mln

GERE

CPI

City Empiria, Prague office space

€72.5 Mln

ECM REI

Unnamed Investor

MB Retail park, Mlada Boleslav

€25.3 Mln

MB Property

CPI

About €550 Mln were invested in 2010 compared to €400 Mln in 2009. The number of transactions also increased from 10 in 2009 to 16 in 2010. Another factor that is helping the market to improve is the fact that some banks have started to lend on new acquisitions again at more reasonable levels (about 60 to 70% Loan-To-Value). CPI investments was the most active player in the market. During 2010 they closed eight transactions totalling around €246 Mln. Their largest transaction was the acquisition of the Siemens headquarters in the City West office development by Finep. CPI acquired the property in December 2010 for a net initial yield of about 7.1% and a total lot size of around €70 Mln. In November 2010, the group also acquired the main shopping centre in Ceske Budejovice for a reported net initial yield of about 7.00% and a total lot size of around €41 Mln. The property also includes about 7,000 Sqm of office space, which at present suffers from a high level of vacancy. In Prague 2, CPI acquired the Longin Business Centre from Invesco for €29.5 Mln representing a net initial yield of 7.80%. Finally they acquired the Continental warehouse facility in Brandys nad Labem (close to Prague) for €14 Mln and a retail park in Mlada Boleslav for €25 Mln.

press release, the purchase price is said to reimburse only the debt and interest costs currently in place. PROGNOSIS

The main reason for the drop in activity over the past two years is the lack of available prime product in the Czech Republic. Prior to the credit crunch, a lot of investors were focusing on secondary products, which were trading at more attractive yields and had more upside potential. However, as we previously mentioned, investor’s interest has since shifted to prime or sub-prime products, not necessarily providing high returns but providing more secured long term income. Also, with prime yields increasing to 6.75%-7.00%, landlords are not willing to put their prime assets back on the market, as most of these properties were acquired for lower yields during the boom times (2006 – 2008). We do expect investment volumes to remain stable in 2011 compared to 2010 and the focus of investors to remain on secured income producing properties, with a preference for offices in Prague. Banks will continue to lend on new acquisitions, however, they are now much more selective in terms of properties and borrowers’ profile. Prime yields for well let, centrally located office stock are stable at around 6.75% to 7.00% while yields for secondary stock continue to increase due to a current lack of liquidity and limited interest in what is considered as riskier product. With the current lack of transactions in the retail and logistic market, we believe yields for those assets to remain stable compared to last year.

The largest transaction that was announced in 2010 was the sale of the Intercontinental hotel to Westmont Hospitality for a reported price of €110 Mln, which equates to about €300,000 per room and a net initial yield of about 4.80% on the EBITDA. According to the

p. 53 | Colliers International

Research: Lenka.Oleksiakova@Colliers.com

2011 Colliers Real Estate Review » CZECH REPUBLIC

CZECH REPUBLIC LEGAL OVERVIEW Basic Forms of Title

In the Czech Republic, the most common title to real estate is full ownership (“vlastnické právo”), which is similar to a “freehold” title and entitles the owner to a full range of perpetual rights to use and enjoy real property. It is also possible to use real estate based on (i) an easement (“věcné břemeno”) or (ii) a lease (“nájemní právo”), which can be either a long-term lease or a lease for an indefinite period of time. Acquisition of Real Estate by Foreigners

Foreigners who are EU nationals may acquire commercial real estate directly. The acquisition of residential and commercial property by non-EU foreigners is only possibly in the case of holders of a permanent residency permit or, indirectly, through the establishment of a Czech legal entity such as a limited liability company (“společnost s ručením omezeným”). A foreigner can own 100% of such legal entity. Registration System

In the Czech Republic, there is a so-called Cadastral Register (“Katastr nemovitostí”). This register shows the owner of the property in question and also indicates the extent to which the land is encumbered by mortgages and other servitudes. Any rights in rem become effective through registration in the Cadastral Register as of the day on which the application to register a right in rem is filed. As a general rule, “good faith” purchasers of land are entitled to rely upon information contained in the Cadastral Register, provided that the registration was made after January 1, 1993. The Cadastral Register system is accessible online. Transfer Taxes

Presently, there is a 3% transfer tax for which the seller is generally liable and for which the purchaser is the guarantor by law. Value Added Tax may also be payable in certain cases upon the transfer of real property.

Leases

Leases in the Czech Republic are freely negotiable but are subject to certain mandatory provisions of the Civil Code and the Act on the Lease and Sublease of Non-Residential Premises. These mandatory provisions may not be varied by contract. The most important restrictions concern the commencement of the lease. Recent amendments have increased contractual freedom in respect of leasing non-residential premises. Privatisation Claims

There is a comprehensive reprivatisation law in the Czech Republic and all deadlines for claiming possession have expired. However, certain proceedings may still be pending. These should be registered in the Cadastral Register. Notaries and Notarial Fees

Legal agreements for the sale of real estate and the transfer of perpetual usufruct rights to real estate do not need to be in notarial form in order to be enforceable in the Czech Republic. It is, however, common practice for a notary, attorney or local municipalities to verify the signatures on such agreement/letter. Language

In order to be enforceable in the Czech Republic, most legal agreements to be filed with the Cadastral Register, Commercial Register or other authority must be translated into Czech. However, it is common for English or other languages to be used as a second language for checking purposes. Information contained in this general outline does not constitute a legal opinion and is not meant to be comprehensive. As a result of pending and new legislation, laws and regulations change frequently in the Czech Republic and are often subject to varying interpretations. Professional advice should be sought regarding all aspects of real estate in the Czech Republic.

Colliers International | p. 54

2011 Colliers Real Estate Review » CZECH REPUBLIC

CZECH REPUBLIC TAX SUMMARY GENERAL

As of 1 January 2011, a number of significant changes to the tax administration system following the introduction of the new Tax Code were made. Further changes are anticipated in respect of VAT as of 1 April 2011. CORPORATE INCOME TAX AND CAPITAL GAINS

Corporate income tax is levied on profit from all activities (including rental incomes) and from the management of all types of property, although there are some exceptions to this rule defined in the tax law. The corporate income tax rate is 19% in 2011 (with the exception of pension and investment funds where it is 5%). Capital gains are generally included in income and taxed at the same rate, including income from the transfer of shares in Czech companies or co-operatives. However, if at least 10 per cent of the shares of a company is held by a parent company for 12 months, income from sale of the shares is tax exempt if the parent company is a Czech tax resident, an EU resident company or a resident of Norway or Iceland and the subsidiary is tax resident in an EU Member State or a non EU Member State with which the Czech Republic has concluded Double Tax Treaty (subject to certain conditions). As of 1 January 2011, the Czech Republic has 77 bilateral double tax treaties. As a rule, the right to tax capital gains is conferred on the state of residence of the seller. However, number of double tax treaties provides special regime for the capital gains if the shares being sold derive more than 50% of their value directly or indirectly from real estate (e.g. those with Australia, China, Cyprus, Egypt, Finland, France, Ireland, Canada, Sweden, USA). In such cases, the taxing right belongs to the state where the real estate is located. In other cases the taxing right belongs to the state of residence of the company whose shares are being sold (e.g. those with Germany and Israel). There are no corporate tax grouping provisions in the Czech Republic.

p. 55 | Colliers International

TAX DEPRECIATION

For tax purposes, either straight-line or reducing balance depreciation can be used. The tax depreciation period for buildings is generally 30 years except for administrative buildings, shopping centers and hotels where the depreciation period is 50 years. Special rates apply in the year of acquisition. Land is not depreciated for tax purposes. Certain assets attached to a building can be treated as separate movable assets for tax purposes and therefore can be depreciated over a shorter period. Special provisions apply for the assets of solar power plants. These fixed assets must be depreciated over 240 months and the depreciation must be claimed (unlike depreciation on most other assets). A special adjustments are made for similar assets acquired under finance leases.

than six times the equity in the case of banks and insurance companies); —— Financial expenses incurred on credits and loans with interest rates or other returns dependent on the debtor’s profit. Interest on loans and credits received from unrelated parties, or those secured by a related party, is fully deductible on general principles, except for interest on “back-toback” loans (i.e. where a related party provides a loan, credit or deposit to an unrelated party, which then provides the funds to the borrower) which is treated as interest on related party debt. Any interest or other expenses relating to a non EU or EEA resident lender disallowed under the capitalization rules may be treated as a dividend, i.e. is subject to dividend withholding tax, as reduced by the provisions of any applicable double taxation agreement.

TAX LOSSES

Tax losses can be carried forward for five years. Losses may not be carried forward on a substantial change in the ownership of a company unless it can be shown that at least 80 per cent of the company’s revenues are derived from the same activities as those carried on in the period when the loss arose. A change of at least 25 per cent in the ownership of the registered capital or the voting rights, or a change resulting in a person obtaining a controlling influence in the company, is always a substantial change. Tax losses are available after a merger or de-merger, although they only can be offset against profit on the same activity as was carried on in the year when the tax loss arose. THIN CAPITALIZATION

The thin capitalization provisions act to restrict the deductibility of interest where the borrower has insufficient equity. The following financial costs are nondeductible: —— Financial expenses on loans and credits received from related parties which are more than four times the equity (or more

WITHHOLDING TAX

The standard Czech withholding tax rate is 15%. However, the rate can be reduced by double tax treaties. DIVIDENDS

Withholding tax applies on all dividends paid by Czech companies. Under the EU Parent/Subsidiary Directive, a dividend paid by a Czech subsidiary to a parent company that is tax resident in an EU member state may be exempt from withholding tax. These provisions also apply to dividends paid between Czech companies and paid to Switzerland, Norway and Iceland. A parent and subsidiary qualify for this exemption if a minimum shareholding of 10% is maintained for an uninterrupted period of 12 months. INTEREST AND ROYALTIES

Withholding tax applies on interest, royalties and lease payments paid abroad; although the rate is reduced to 5% for finance lease payments. Under the EU Interest and Royalties Directive, qualifying interest and royalty payments between associated enterprises which are tax resident in the EU member

Contact: evadoyle@kpmg.cz

2011 Colliers Real Estate Review » CZECH REPUBLIC

CZECH REPUBLIC TAX SUMMARY states may be exempt from withholding tax. This also applies to recipients in Switzerland, Norway and Iceland. Residents of other EU and EEA countries have the option to file a tax return in respect of income subject to withholding tax (e.g. interest payments, royalties, income from freelance work), and to claim a deduction of the related expenses. This may result in a reduction in the tax burden as withholding tax is calculated on a gross basis. REAL ESTATE TAX

Real estate tax comprises land tax and building tax. The property must be located in the Czech Republic and recorded in the Land Register. The real estate tax is calculated on the area multiplied by the tax rate. The rate varies according to the type and location of the property. The basic rates may be increased depending on the number of floors and the location. Starting from 2009, the basic rates of real estate tax doubled for buildings and land, except for arable land, hop fields, vineyards, gardens, grassland and fishponds for intensive fish farming. Municipalities can also issue a decree increasing the basic tax rate or coefficient. REAL ESTATE TRANSFER TAX

3% real estate transfer tax is payable on the transfer of ownership to real estate for consideration. Generally the tax is paid by the transferor (seller), with the buyer guaranteeing the tax. The tax base is higher of the market value (according to the Valuation Act) or the sales price. The contribution of real estate to share capital is exempt from the tax unless the contributor sells all shares received within 5 years.

qualifies as social housing is subject to the reduced VAT rate. To qualify as social housing, an apartment should have a floor area of 120 Sqm or less and houses should not exceed 350 Sqm. The VAT rate on the sale of buildings is generally 20%. The transfer of buildings is exempt from VAT three years after the first approval for use of the premises or after the first use of the building. If the acquisition of a building is subject to VAT, this can be recovered if the building will be used to generate VATable sales. The recovery will be limited if it is used to wholly or partly make VAT exempt sales. A change in the level of exempt sales within 5 years of acquisition may lead to a claw back of previously recovered input VAT. It is expected that the claw back period will be extended to 10 years. The transfer of land is VAT exempt except for the transfer of building land which is subject to 20% VAT. The lease of buildings and land is generally VAT exempt but the lessor can opt to charge 20% VAT on a lease with a tenant which is registered for VAT. Groups of related companies can form a VAT group. ADMINISTRATION OF TAXES

Tax administration is governed mainly by the Tax Code with specific procedures provided by other acts. The Tax Code replaced the Administration of Taxes Act from 2011 and introduces wide range of changes, such as: —— different rules for deadlines for tax assessments; —— penalties for late filing of a tax return; —— filing additional tax returns with a lower tax liability or a higher tax loss is only allowed under limited circumstances; —— new rules for tax audits.

VALUE ADDED TAX

The reduced VAT rate is 10% and the standard rate is 20%. The sale of residential property which

Contact: evadoyle@kpmg.cz

Colliers International | p. 56

2011 Colliers Real Estate Review Âť COUNTRY

Greece

Dear Colleagues and Friends, The liquidity shortage and conservative views of investors become more apparent during 2010, showing through in a lack of large transactions. There is a great deal of uncertainty in terms of what to expect in the Greek market in 2011. Land owners are holding on to their assets until finance and market conditions improve, or until they are forced to sell by the banks. Ana Vukovic

The credit standards for lending to enterprises and households in

general manager colliers international greece

anticipation of an increase in non-performing loans have tightened. Business

Address

70 Syngrou Ave. & 2 Drakou Str. 117 42 Koukaki, Athens, Greece

be the case in order to attract and secure clients. This creates an

Phone

+30 210 683 2440

Ana.Vukovic@Colliers.com

and household confidence have declined. Discounts of fees may continue to opportunity for those willing to enter into property transactions before banks withdraw credit facilities. Despite these structural improvements and opportunities, we believe that it could get worse before it gets better as volatility dominates the market before it can stabilize. We believe that stabilisation may take place sometime during the second half of 2011. Those yet to invest and awaiting future opportunities, may very well benefit as values are expected to decrease once banks are forced to take measures against those not servicing loans. Colliers must maintain its reputation and its quality of services in order to attract the most reliable clients in order to increase its market share. Colliers team, which is focussed on gearing for growth in 2010, is well placed to take advantage of the opportunities that the Greek crisis will bring in 2011. We look forward to working with you in 2011. Best regards, Ana Vukovic

p. 57â&#x20AC;&#x192; |â&#x20AC;&#x192; Colliers International

Research: Firstname.Lastname@Colliers.com

2011 Colliers Real Estate Review » gREECE

ECONOMIC OVERVIEW KEY ECONOMIC FIGURES

SUMMARY

Metric

% Change

GDP Growth

-4.6% Q3 2009 y-o-y

Unemployment

12.4% Q3 2009 y-o-y

Inflation

5.2% as of December 2010

Public Deficit

15.4% (end of 2009)

By the end of 2009, the general public deficit had reached 15.4 percent of GDP and public debt had increased to 126.8 percent of GDP. Public debt as a share of GDP is forecast to peak at almost 150% of GDP in 2013 before declining thereafter.

Source: Hellenic Statistical Authority

15%

GDP, UNEMPLOYMENT & HCPI

10% 5% 0% -5% -10%

Source: Hellenic Statistical Authority, Eurostat |

2008

2009

2010

▬ GDP Growth ▬ Unemployment ▬ HCPI

120%

GOVERNMENT BOND & PUBLIC DEFICIT Source: Hellenic Statistical Authority, Eurostat

100% 80% 60% 40% 20% 0%

2009

2008

▄ Government Debt

Currently Greece is under a restructuring program with financial support from the EU and International Monetary Fund.

2007

▄ Public De�cit

2006

During the past few years, Greece has lost a lot of its competiveness. Public sector spending has increased beyond sustainable levels, while unemployment and CPI have also increased to unhealthy rates. To combat this, the Greek Government states within their update of the “Hellenic Stability and Growth Programme 2008 – 2011” dated January 2010 that it will take all the necessary steps for the reduction of general government deficit. Managing this will be difficult amidst a background of negative economic growth. According to the latest publication by the Hellenic Statistical Authority, GDP had decreased by 4.6% y-o-y by Q3 2010 (compared to Q3 2009). Despite significant declines in the external trade deficit – falling by 42.2% and thus contributing positively to GDP – declines in consumption, investment and government spending continue to place negative pressure on economic output.

The annual rate of inflation (based on the Harmonized Index of Consumer Prices) reached 5.2% by year end, which is high for EU standards, but lower than the 6.6% average for surrounding south east European nations. The rate of growth, however, is a concern increasing by 4.8% in November 2010 compared to November 2009 (it had already risen by 2.1% between November 2008 – 2009). PROGNOSIS

According to the Ministry of Finance, the recession in Greece will be more shallow than in 2010 at -3% compared to -4.2%, but larger than initially expected at the beginning of the year (-2.6%). GDP growth is, however, forecast by the Ministry for 2012 and is then expected to continue to grow steadily following the restructuring of the economy and increasing competitiveness. The extent to which this scenario is realized will greatly depend upon the ability of the Greek government to retain and build the confidence of international investors and the money markets, as it reigns in government debt and deficits. This could prove to be positive for the real estate industry, with the government recently announcing ‘renewed’ plans to sell government owned and occupied real estate and land holdings to raise capital. How true this is remains to be seen.

As a result, the unemployment rate rose again, reaching 12.4% by the end of Q3 2010 compared with 11.8% in the Q2 2010 and 9.3% in Q3 2009. This represents a 33% increase over a year.

Research: Ana.Vukovic@Colliers.com

Colliers International | p. 58

2011 Colliers Real Estate Review » gREECE

OFFICE MARKET KEY OFFICE FIGURES

GENERAL OVERVIEW

Metric

Measure

Total Stock

6,500,000 Sqm

Take-Up

5,700,000 Sqm

Vacancy

12%

Prime Headline Rent

€21/Sqm/month

Source: Colliers International Hellas Research

350.00

CHANGE IN STOCK OVER TIME & PIPELINE Source: Colliers International Hellas

300.00 250.00 200.00 150.00

Demand deteriorated in 2010 as the recession impacted on international companies entering the Athenian market.

Relocation to smaller sized offices in order to reduce operating expenses was also common and lease renegotiations have become more widespread, resulting in higher vacancy rates.

Demand was mainly driven by the relocations of multinational and local companies trying to consolidate their facilities and achieve smaller and better quality space at a lower cost. Renegotiations of existing lease agreements accounted for 40% of take–up in 2010

The amount of office space under construction has fallen significantly due to the lack of funding; pre–lets have also dropped significantly.

100.00 50.00 0.00

H2 2009

H1 2010

H2 2010

TAKE-UP STRUCTURE 10% Expansion 42% New leases

11% Relocation from B class

37% Renewal & renegociations

A large differentiation in rents has been noticed between Class A space and lower quality office space. Changes in the commercial law concerning the termination of lease agreements, reducing the compensation owed to the landlord by shortening the binding duration period from two years to one year resulted in strengthening the volumes of leasing market activity. SUPPLY

KEY LEASE TRANSACTIONS Tenant

Size

Area

Developer

Siemens

5,500

Marousi

Lamda Developments

New Democracy Party

5,500

Syngroy Av.

BVIC

Proton Bank

6,000

Syngrou Av. Shipping Company

DEMAND

A fall in supply of new office premises in Athens and a slowdown in leasing activity were key trends during 2010.

Traditionally demanded areas in Athens, like Kifissias Avenue, Attiki Odos and Athens/CBD have monopolised the interest of tenants, but the requests were for lower rentals and more efficient use of space, i.e. less Sqm. A number of landlords proceeded with offering other incentives such as stepped rents and leasehold improvements in order to attract tenants. A significant number of lease transactions during 2010 in Athens surpassed 1,500 Sqm of office space.

During 2010 leasing activity in Athens slowed down as development activity significantly decreased and supply edged upwards. The supply of Class A office space in Athens, however, remains limited. The total office inventory in Athens is estimated to be at around 6,500,000 Sqm, of which only 20% or 1,500,000 Sqm is of a high-quality. Approximately 1,500,000 Sqm of space is occupied by the public sector. Combined with the public sector downsizing, this will further increase vacancy. The volume of planned developments during 2010 was relatively low and pre-letting was the order of the day. Therefore, the majority of office buildings constructed were either pre-leased or built for a specific client, as many developers did not want to risk having their building sit vacant.

p. 59 | Colliers International

Research: Ana.Vukovic@Colliers.com

2011 Colliers Real Estate Review » gREECE

OFFICE MARKET 100%

DISTRIBUTION OF TRANSACTIONS, 2010

VACANCY / AVAILABILITY

90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Under 500 Sqm

500-1,000

1,000-2,000

2,000-5,000 Over 5,000 Sqm

▬ Renewal ▬ New

€25.0

Expansionary occupiers in all sectors were few and far between and the number of leasing deals has fallen significantly. The problem that office markets have to deal with is not only the self-evident crunch, but also the exceeding availability of free office space in all major locations. The northern and southern submarkets of Athens comprise almost 70% of total office stock. Vacancy rates in these submarkets for grade A buildings stand at 15%.

RENTS

€20.0 €15.0 €10.0 €5.0

H1 2009

H2 2009

H1 2010

H2 2010

Vacancy rates for grade A office buildings are estimated at 7% for CBD and at 9 – 11% for Kifisias Avenue.

▬ Prime Oﬃce Headline Rent ▬ Average Oﬃce Headline Rent

RENTS

As demand falls and the supply of disposable office space increases, prime rental values in Attica have consequently been dropping. The decrease of rental levels in the last 12 months has reached up to 10% for new build office complexes in the main office avenues. On Kifissias Avenue - often renowned as the benchmark location for office prices – the prime rental levels are near an average of €20/Sqm/pcm for new built properties, whereas for older properties the prices vary around €15 – 17/Sqm/pcm. On Syngrou Avenue rental values for office space range from €15/Sqm/pcm to €18/Sqm/pcm. Along the Attiki Odos motorway, the construction of which radically changed the real estate map of the area, depicts office space rents that range from €12/Sqm/pcm to €16/Sqm/ pcm.

Research: Ana.Vukovic@Colliers.com

Athens/CBD prime office buildings competing for premier office users can even reach as high as €30/Sqm/pcm although this is rare and most buildings of good quality offer space at €24 – 27/ Sqm/pcm. In the less attractive sub-markets, office rents currently stand at around €12 – 15/Sqm/pcm (Athinon Avenue, National road Athens-Lamia). PROGNOSIS

We expect lease renegotiations to dominate the market in 2011, while uncertainty will lead to a “hold” on any expansion projects. The driver of relocations will mainly focus on ‘downsizing’ of occupancy in newly leased premises in order to reduce the operation costs of occupiers. The upcoming year will also be dominated by strong sub-leasing activity. Kifisias Avenue is expected to be the focus of most sub-lease activity in the market. Vacancy rates should remain stable for prime office locations as demand is concentrated in these areas. This should also create stable prime rents. Vacancy and rents in secondary sub-markets, however, are expected to reflect a drop estimated to be around 10%. The limited construction of new office premises will continue in 2011, given the necessity of new developments to be pre-leased.

Colliers International | p. 60

2011 Colliers Real Estate Review » gREECE

RETAIL MARKET KEY RETAIL FIGURES

GENERAL OVERVIEW

Metric

Measure

Prime High Street Rents

€180/Sqm/month

Prime SC Rents

€50/Sqm/month

SC Stock

34,000 Sqm

SC Vacancy

30%

The decrease in commercial sales activity in various retail sectors, such as clothes and shoes, reached over 50% in 2010. Nevertheless, the request for stores of 1,000 Sqm and above in the central markets of large cities, e.g. Athens, Thessaloniki, Patras, Larissa, Heraklion remained stable.

Source: Colliers International Hellas Research

250

CHANGE IN SC STOCK OVER TIME (SQM, 000) Source: Colliers International Hellas

200 150 100 50 0

Q4 2008

€90.00 €80.00 €70.00 €60.00 €50.00 €40.00 €30.00 €20.00 €10.00 €0.00

Q1 2009

Q2 2009

Q3 2009

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Furthermore, new requests from large space users such us Hennes & Maurittz, Zara and Koton for space in smaller cities (40,000 – 80,000 inhabitants) such as Trikala, Volos, Alexandroupolis, Ioannina and others was also noticeable in 2010. High demand for shopping malls remained, giving limited opportunities to retailers to lease space as only two new developments opened in Greece in 2010 (Metro Mall and Capitol).

RENTS

Rental prices in central high street areas witnessed a decrease of 20 – 30%. |

Prime SC

Prime High Street

Prime Retail Outlets

NEW MARKET ENTRANTS OR DEVELOPMENTS Tenant

Size

Project

Developer

Shopping center

12,000

Capitol

Charagionis Talima

Shopping center

22,000

Metro Mall

Blanco

1,300

Ermou strore

Source: Colliers International Hellas Research

SUPPLY

Only two new shopping centre developments opened in Athens in 2010. These openings had limited negative impact on the market, as demand for these and existing shopping centres remained constant. The same cannot be said for the high-street. Despite the fact that Ermou Street is still one of the worlds most expensive high streets, retailers continue to express their desire to secure their presence in this prestigious retail market. This aside, Ermou had many empty stores by end 2010, which are not expected to be leased during 2011. Vacancy in high-streets stores was a growing trend in the centre of Athens in 2010.

According to market data, up to 25% of middle and small store owners have their properties available to lease and as it is estimated that this percentage is going to grow up to 35% within the next few months of 2011. DEMAND

Demand is now mainly for large stores in central market locations. Shopping Centers have become the preferred format of foreign retailers as well as local retailers. Fashion and home wear stores, restaurants, bars and supermarkets are all looking for opportunities to expand in these attractive developments. Subsequently, demand for space on prime high street locations is less than in 2009. RENTS

There was a decrease in High Street rents by 20 – 30% in 2010, down to €80/Sqm. Prime SC rents are now €50/ Sqm, and Prime Retail Outlet rents are €40/Sqm. PROGNOSIS

The market is expecting the opening of 2 – 3 retail developments in 2011. The large shopping mall — retail outlets to be delivered include: “River West Mall” by Viohalko in Athens, Mac Artur Glen outlet in Spata (Attica). These large scale commercial developments will increase the volume of available space by approximately 80,000 Sqm, although the timing of delivery is vague given the large delays in planning and construction. Whilst large retail chains will continue their expansion in both the Athens market and in other major Greek cities, this may not keep pace with new supply. Traditional high streets look set to suffer the most, where a large drop in rents is expected as vacancy rises over the course of 2011.

p. 61 | Colliers International

Research: Ana.Vukovic@Colliers.com

2011 Colliers Real Estate Review » gREECE

INVESTMENT MARKET KEY INVESTMENT FIGURES Metric

Measure

Investment Turnover

€121,000,000

Prime Office Yield

7.25%

Prime Retail Yield

7.00%

Prime Industrial Yield

8.75%

SUMMARY

The investment market in Athens slowed down in 2010 compared to 2009. The Greek investment market was characterised by an imbalance between demand-side requirements and supplyside expectations. A combination of these factors resulted in a limited amount of deals being made.

Source: Colliers International

600

INVESTMENT VOLUMES (€ MLN)

500

Source: Colliers International Hellas

400 300 200 100 0

2007

2008

2009

2010

PRIME YIELDS

8% 7% 6% Source: Colliers International 5%

H1 2009

H2 2009

H1 2010

H2 2010

▬ Prime Oﬃce Yield ▬ Prime Retail Yield ▬ Prime Industrial Yield

KEY INVESTMENT TRANSACTIONS Deal Value Q1 Q3

Vendor

Purchaser

€46M

Interamerican

Ship owner

€38M

Sona Sierra & Acropole Lamda Charagionnis & Lamda Developments (the Developments remaining shares)

On the supply-side, the majority of vendors in Athens, who had their properties on the market before the crisis, withdrew their offers, continuing to wait for the investment market to pick up again in order to be able to achieve ‘yesterday’s prices’. For some, this may not happen, but they have been able to afford to wait as their properties continue to generate income. On the demand side, the buyer interest that existed primarily came from private local investors looking for bargain deals and distressed properties, to provide high returns on equity. Of those investors investors with equity, most were not ready to assume an all equity investment risk.

PROGNOSIS

2011 is expected to be a challenging year with limited equity being available in the market to finance large projects, resulting in smaller transaction sizes. The general belief is that yields will move out significantly during 2011, driven by the cost of money. This will provide cash rich/equity investors with opportunities. The bulk of investors will continue to be dependent on debt, which may take some time to materialise. Yields are anticipated to rise more significantly for secondary properties in submarkets, also evident from the decreasing of the rental figures. The most sought after assets will continue to be core office properties in prime locations in Athens with long leases and strong tenant covenants.

These investors will continue to bide their time, anticipating forced sales. The decline in the volume of European bank debt and anticipated rise in debt costs may eventually begin to force some sales onto the market over the coming year. Due to a lack of comparable evidence and the limited amount of deals in 2010, there is an uncertainty regarding yields and pricing. Prime yields are estimated to be around 7.25% - 7.50% for office, 8.75 – 9% for industrial and 7.00% 7.25% for retail properties. Secondary property yields have increased more as these properties are seen as more risky and less desirable transactions - it is more difficult to source the necessary funding to acquire such assets.

Research: Ana.Vukovic@Colliers.com

Colliers International | p. 62

2011 Colliers Real Estate Review » gREECE

GREECE TAX SUMMARY VAT PROVISIONS FOR SERVICES CONNECTED TO IMMOVABLE PROPERTY According to Law 3763/2009 effective as of 1 January 2010, the place of supply of services to a taxable person shall be the place where the recipient has his business establishment, while the place of supply of services to a non-taxable person shall be the place where the supplier’s business is established. However, special provisions will apply regarding services connected with immovable property located in Greece (e.g. real estate brokers). In particular, VAT is due in Greece for the supply of services connected to immovable property located in Greece. CORPORATE INCOME TAX The taxable profits (or losses) of each year are the profits (losses) shown in the financial statements, derived from the official books kept in accordance with the Code of Books and Records after adjusting for non-deductible expenses and non- taxable income. Capital gains (or losses) are generally regarded as ordinary business income. The tax rate applicable to the profits of an AE or EPE or a foreign branch is 24% for fiscal years starting from 1 January 2010. Such tax rate is reduced annually by 1% until it reaches 20% for the profits of accounting year 2014. The distributed dividends/profits are subject to 40% tax. On the basis of a new draft bill which has yet to be finalized and ratified by the Greek Parliament the tax rate applicable to profits of an AE or EPE is reduced to 20% for financial years starting from 1 January 2011 onwards. Distributed profits are subject to a 25% tax withholding. Profits derived on the basis of financial statements as of 31 December 2010 are taxed at the rate of 24%, whereas distributed profits are subject to a 21% tax withholding. When a company earns income from real estate, the gross income therefrom is subject to a 3% supplementary tax, but such tax cannot exceed the corporate tax corresponding thereto. TAX DEPRECIATION Annual depreciation of fixed assets is compulsory for years ending on or after 30 December 1997 at rates or range of rates prescribed by law. Fixed assets of the same category can be depreciated on condition that the rate to be chosen will be used consistently. If a business in any accounting period does not take depreciation at the allowable rate, it waives its

p. 63 | Colliers International

right to deduct the corresponding amount in the future. Land is not depreciated for both tax and accounting purposes. Depreciation is taken on a straight-line basis on the acquisition cost of the asset plus any expenses incurred for improvement or extensions. RELIEF OF LOSSES Tax losses of companies and branches of foreign companies that maintain double entry accounting books and of entities maintaining income and expense books may be carried forward and be offset against taxable income of the five years following the financial year in which they were incurred. Losses cannot be carried back. Greek companies having a business interest (branch) abroad, may offset losses incurred by their foreign interest only from profits arising from a similar business interest abroad and not from profits arising from their business activity in Greece. THIN CAPITALIZATION Based on the provisions of Law 3775/2009, as amended recently with Law 3842/2010, accrued interest of loans or credits which are paid or credited to affiliated enterprises (i.e. enterprises related to each other in a relationship of direct or indirect substantial administrative or financial dependence or control) is deductible on condition that the relation of these loans or credits to the net assets of the enterprise does not exceed the ratio of 3:1 on an average per fiscal year. The thin capitalization rules also apply to bond loans, while intercompany loans include also loans provided by third companies, which are guaranteed by affiliated companies. Leasing companies, factoring companies, companies of Law 3156/2004 and Law 3601/2007 seated in Greece, credit companies and credit institutions which operate in Greece are exempted from the above provisions. WITHOLDING TAX Royalties Royalties paid to companies or individuals with no permanent establishment in Greece are subject to a withholding tax of 25%. However, if a treaty for the avoidance of double taxation is in force, its provisions will apply. Also reduction may be achieved of the aforesaid rate to 5% for the period up to 30 June 2013 (unless the relevant treaty for the avoidance of double taxation provides for a more favorable rate) or to 0% from 1 July 2013 onwards, in cases where royalties are paid by Greek entities to affiliated entities subject to the conditions of the

EU Interest – Royalty Directive. There is no withholding tax on payments made to Greek residents. Interest Except for interest from bank deposits, which is taxed by special provision, and interest from state bonds or bonds issued by Greek corporations, interest remitted to non-resident entities is subject to withholding tax at a rate of 40%, or at the rate applicable in a tax treaty for the avoidance of double taxation. Also reduction may be achieved of the aforesaid rate to 5% for the period up to 30 June 2013 (unless the relevant treaty for the avoidance of double taxation provides for a more favorable rate) or to 0% from 1 July 2013 onwards, in cases where interest is paid by Greek entities to affiliated entities subject to the conditions of the EU Interest – Royalty Directive. Interest earned on deposits with banks operating in Greece is subject to withholding tax at the rate of 10% (except for deposits made in foreign currency by a non resident which is tax-free). Interest earned on Greek State bonds, treasury bills and bonds issued by Greek corporations (including banks, insurance companies and foreign companies in which Greek banks have the majority in the share capital) is subject to withholding tax at the rate of 10%. Exemptions from tax may apply provided that certain conditions are satisfied and interest from Greek State and corporate bonds is exempt from tax if earned by a non resident. Service fees In general, fees paid to foreign undertakings or individuals who have no permanent establishment in Greece for services rendered in Greece are subject to a 25% withholding tax unless a tax treaty provides otherwise. Fees incurred specifically for studies, designs, research and scientific advice, as well as for supervision and consulting services in Greece on construction projects are also subject to a 25% withholding tax. There is no such tax in the case of a Greek resident. Where a treaty for the avoidance of double taxation is in force, its provisions apply. Dividends According to a new draft tax bill, which has yet to be finalized or ratified by the Greek Parliament, dividends deriving from financial years starting from 1 January 2011 onwards are subject to 23% withholding tax. Especially for dividends deriving from financial statements as of 31 December 2010

Contact: gstamatelou@kpmg.gr

2011 Colliers Real Estate Review » gREECE

GREECE TAX SUMMARY the corresponding withholding tax is set to 21%. Reduction or elimination of the said withholding tax may be achieved on the basis of either the applicable treaty for the avoidance of double taxation or the EU Parent – Subsidiary Directive. REAL ESTATE TAX Taxes on acquisition Law 3427/2005 introduced, as of 1 January 2006, VAT on the transfer of new buildings (construction licenses that were issued or revised after 1 January 2006) at the rate of 23% (as of 1 July 2010), on condition that they are to be used for the first time by the purchaser as his secondary residence or commercial property. Following this first transfer, every subsequent transfer will be subject to real estate transfer tax. Concerning the transfer of old buildings (whose construction license was issued up to 31 December 2005) as well as land and new buildings to be used as the purchaser’s primary residence, these are not subject to VAT but to real estate transfer tax. Real estate transfer tax is levied on the acquisition value of real estate. The tax is computed on the contract price or the objective value, whichever is higher. The objective value system covers real estate situated in almost every part of Greece and is a method adopted for mitigating disputes between the tax authorities and the taxpayer as to the taxable value of real estate. Where no objective values exist, the value is determined by the tax authorities. Real estate transfer tax rates are 8% for the first €20,000 and 10% for the remainder. A local authority surcharge, equal to 3% of the transfer tax, is also levied. Taxes on ownership Tax on ownership is imposed in the form of real estate tax. Real estate tax is imposed annually and applies to the total value of real estate situated in Greece and owned by individuals or legal entities on the 1st January of each fiscal year starting from 2010. For real estate owned by individuals, this tax is levied with progressive rates ranging from 0.1% to 1% whereas the tax free threshold amounts to taxable value of €400,000 per owner. Especially for financial years 2010, 2011 and 2012 the tax rate on any taxable value over €5 Bln amounts to 2%. For real estate owned by legal entities, the taxable value is based on “objective” criteria and taxed at 6‰ for businesses or at 3‰ for not-forprofit organizations which serve educational, religious or charitable purposes. A reduced rate of

Contact: gstamatelou@kpmg.gr

1‰ applies on some other categories of buildings including those used by entities on carrying out their own activities. Any tax due on the total value of buildings cannot be less than €1/Sqm. with the exception of semi-finished buildings. Especially for financial years 2010, 2011 and 2012 the taxable value of real estate self-used by hotel enterprises is taxed at 0.33‰ without the limitation of €1/Sqm. Finally, certain categories of real estate and certain taxpayers (the state, public legal entities, churches, monasteries, sports clubs) are exempt from real estate tax. Real estate tax is not deductible for income tax purposes. Real estate tax replaced real estate duty which was introduced in 2008.

Special tax on real estate A special annual tax is imposed at the rate of 15% calculated on the value of the real estate on offshore legal entities, companies or legal forms of any type (including trusts) that own the freehold or usufruct of real estate located in Greece effective from 1 January 2010. In order to be exempt from this tax, individuals who are the ultimate shareholders of Greek or EU companies must be identified and obtain a Greek Tax Registration Number. However, further exemptions from this tax may be also provided if certain conditions are met. The tax is calculated on the objective value of the real estate on 1 January each year and is paid at the time of filing the return, which should be filed by 20 May of the following year.

Taxes on occupation/Rental income Income from real estate is subject to income tax at the rates described in the previous chapters. There are special rules applicable to determine net taxable income where the income is earned by individuals and foreign entities which do not have a permanent establishment in Greece, and not all expenses (including depreciation) are necessarily taken into account. The occupation of self-owned real estate gives rise to imputed taxable income. The annual imputed income for using a self-owned (rented or granted for free) primary residence is calculated according to a specific scale based on its surface and on the zone prices applicable for the respective location. For secondary residences the annual imputed income is reduced by half. Businesses receive a deduction equal to their imputed income, thus there is no income tax effect. Apart from income tax payable on rental income, individuals are subject to a 1.5% supplementary tax on gross real estate income, which is increased to 3% if the real estate is used for residential purposes and exceeds 300 Sqm. This supplementary tax cannot exceed the tax payable on this income. Corporations are subject to the same supplementary tax, however only the 3% rate applies. Stamp duty is payable on rental income at a rate of 3.6% for commercial leases. Rental income is generally not subject to VAT, however the rental of shopping malls under certain conditions, furnished units with certain added services, and equipped industrial premises are subject to VAT (at the rate of 23% as per 1 July 2010).

Colliers International | p. 64

2011 Colliers Real Estate Review » COUNTRY

Hungary

MARKET

Dear Colleagues and Friends, 2010 was a year of change for Colliers International in Hungary. I replaced Michael Smithing as MD after Michael had served for more than 10 years in charge of the office. We also went through a re branding process and now have a strong shareholder in the region who is committed to further growth and Tim Hulzebos

investment in the company. At a regional level, we created new business

managing director colliers international hungary

lines and have appointed experienced professionals to lead these teams.

Address

Csörsz utca 41 H-1124 Budapest, Hungary

2011 will be a year of growth, a year in which we want to further

Phone

+36 1 336 4200

grow in office agency, where we were traditionally very strong in

Tim.Hulzebos@Colliers.com

Budapest, with an aim to reclaim our position as a market leader in the

integrate our professional services and build them out. We also want to

next two years. 2011 will be another challenging year as property markets show signs of recovery, especially the industrial market, but with an overall outlook still difficult to predict as so many factors remain uncertain. We are committed to further grow our service level for our clients and are ready to assist you in any property matter, big or small. We look forward to working with you in 2011! Best regards, Tim Hulzebos

p. 65 | Colliers International

Research: Firstname.Lastname@Colliers.com

2011 Colliers Real Estate Review » HUNGARY

ECONOMIC OVERVIEW SUMMARY

POLITICS

Following the crisis year of 2009, when the Hungarian economy contracted by more than 6%, 2010 was a year of stabilization not just for the country, but for the world and European economies as well. The economy grew gradually during the year and is on an upward trend, which is expected to continue in 2011. Industrial production is growing at a double-digit rate, while the currency also showed relative stability compared to previous years. The new government has expressed and demonstrated its commitment to continued fiscal consolidation and stabilization, taking measures to meet the original budget deficit target of under 3.8%. This policy is expected to continue in 2011, with a continued decline in the deficit.

12%

ECONOMIC FIGURES

8% 6% 4% 2% 0% -2% -4% -6% Source: Focus Economics

-8% |

2006

2007

2008

2009

2010

2011

▬ GDP Growth ▬ CPI ▬ Fiscal Balance ▬ Unemployment

2,000 1,500

FOREIGN TRADE BALANCE (EUR MN.)

ECONOMY

500 0 -500 -1,000 |

2005

2006

2007

2008

2009

2010

▬ Foreign Trade Balance

14%

BASE RATE

Driven by industrial production, economic growth sped up to more than 2% by Q3 2010, year-on-year, and GDP is expected to show an expansion of more than 1% overall for 2010, and close to 3% in 2011. The €/HUF exchange rate also showed relative stability, settling at a rate of around 275 for the year on average.

Source: MNB

12%

The foreign trade balance continues to show a surplus, and unemployment is slowly but steadily decreasing.

10% 8% 6% 4% 2% 0%

Hungary will hold the presidency of the European Union in the first half of 2011, which will bring increased attention to the Hungarian government and bring the country into the focus of the European and world public.

Source: Focus Economics

1,000

-1,500

While the previous government launched economic stabilization measures with the aid of a joint IMF-EU bailout package, the new government decided to take a different route and declared it does not plan to use any further loans from the IMF. Instead, the government enacted a package of measures to increase budget revenues in order to meet the originally planned budget deficit target of 3.8% of GDP. These measures included so-called crisis taxes levied on companies in the financial, energy, telecom and retail sector, and will be in place for three years.

10%

-10%

General as well as municipal elections were held in Hungary in 2010, which were both won overwhelmingly by the center-right Fidesz, in line with expectations. The new government has a decisive two-thirds majority in parliament, allowing it to pass laws, and even amend the constitution, without any obstacles from the opposition.

2005

2006

2007

Research: Akos.Balla@Colliers.com

2008

2009

2010

The new government’s crisis management measures, in addition to the crisis taxes, saw a rearrangement of the personal income tax burden, resulting in cuts for many households, which could help boost growth through increased domestic spending. The move to eliminate the second, private pillar of the pension system is expected to bring close to HUF 3,000 Bln into state coffers, ensuring that the budget deficit will not exceed the target in the next few years, and also helping reduce state debt. OUTLOOK

The country’s economic indicators are expected to improve further in 2011, with GDP growth and investments rising, the budget deficit, inflation and unemployment decreasing. The foreign trade balance is expected to continue to show a surplus. The government is expected to announce further structural reform measures in February to help improve the economy and investor confidence toward the country. On the property market, a recovery is expected on the industrial market, there is hope that retail sales will be stimulated by the government’s measures, helping the retail property market, while the office market is expected to see healthy take-up and a drop in vacancy rates. Developer activity will start to see the first signs of a recovery although financing will remain tight. Meanwhile, the property investment market, which had a quiet year in 2010, will hopefully show more activity as the economy recovers and investors see that the market has attractive products on offer. Overall, 2011 is expected to be another challenging year for both the Hungarian economy and the real estate market.

Colliers International | p. 66

2011 Colliers Real Estate Review » HUNGARY

OFFICE MARKET OVERVIEW

Following the dramatic mood of 2009, when the players of the Hungarian office market experienced the most difficult times, the overall mood improved last year, with take-up increasing and vacancy slowly starting to decrease by the end of 2010, as new completions decreased significantly.

Lease transactions last year totaled at 282,000 Sqm, of which 39.6% (around 111,000 Sqm) was signed in the fourth quarter, exceeding the average 55,000 Sqm volume of the previous three quarters.

KEY OFFICE FIGURES 2010 Metric

Measure

Total Stock

2,340,000 Sqm

Take-Up

281,747 Sqm

Vacancy

25.7%

Completions

145,339 Sqm

Source: RERA

CLASS A STOCK, ABSORPTION AND VACANCY 30% 25%

2,000

20%

1,500

15% 1,000

10%

500 0

5% |

Percentage of total transactions

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

▄ Stock

100%

Vacancy rate (%)

Stock and absoprtion (000 sqm)

2,500

▄ Absorption

Total modern office stock increased by more than 145,000 Sqm in 2010 as a result of new deliveries, of which 77% took place in the first half of the year. There was only 6,300 Sqm of new space delivered in the last quarter.

▬ Vacancy

DISTRIBUTION OF TRANSACTIONS 2010

Renegotiations played a large role on the market in 2010, accounting for around half of all take-up during the year. Experience shows that around 90% of large companies leasing space of more than 5,000 Sqm eventually decide to renegotiate in their current buildings. Last year transactions excluding renegotiations totaled 165,000 Sqm. This indicates that the market, for the first time since the beginning of the economic crisis, was able to absorb office space equal to – or even more than – the size of newly delivered office buildings. As a result, the vacancy rate stood at 25.7% at the end of the year, slightly less than the previous 26.1% at the end of 2009 and than the high of 26.8% registered at the end of Q3.

90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Source: Colliers, RERA |

<500

500-1,000

1,000-2,000

2,000-5,000

>5,000

Size of transactions (sqm)

Absorption on the market increased due to shared service centers (SSCs) and some office space expansions. Willingness to move remains the characteristics of smaller firms only, while the government was not active on the market in 2010.

▬ Renewal ▬ New

COLLIERS TOP TRANSACTIONS 2010 Tenant

Size (Sqm)

Project

UPC Magyarország

8,373

Kinizsi Office Building

KCI Hungary Kft.

5,816

Capital Square

DLA Piper

1,370

MOMentum Offices

XEROX Magyarország

1,212

Madarász Office Building II

Source: Colliers International

p. 67 | Colliers International

There was some success in terms of leasing in 2010, as two prime buildings, Capital Square and Eiffel Square leased more than 70% of their space. This underscores that projects in good locations can be leased; although rents continue to trade at 20 – 30% discount to rents pre crisis. The number one location remains the Váci corridor, but the Southern Buda region performed well too.

OUTLOOK

Colliers forecasts that take-up will remain strong in 2011, with a significant number of renegotiations, parallel with the decline in the amount of available quality space on the market. The number of completions is expected to decline significantly this year, to only around 50,000 Sqm (of which only 26,000 Sqm will be actually vacant, as pre-leases have been signed for the remainder). Further new developments are unlikely to begin until 2012, at the earliest. Meanwhile, we expect absorbtion to raise leading to a decline in vacancy rates. We believe that rents have reached the bottom level of €11 – 13 prime rent, and will not decline further this year. Office developers remain in a tough position due to the lack of financing, with only few deliveries and new projects planned for the next few years. Large, tested, equity-rich investors, such as Belgium’s Atenor or Sweden’s Skanska, are able to launch new developments even under these circumstances, and could thus be in a good position when the amount of quality supply dries up in 2012 – 2013. For larger companies where existing contracts expire in 2012 – 2013, the only solution to ensure moving to a new quality location (if they decide to move) is to sign a pre-lease agreement before the end of 2011. This would be a win-win situation, as the company would have a say in how the project is developed, while the developer would be able to launch the project with the signed pre-lease, and lease the remaining space in the building at a higher price in 2013, for example. This would also help promote new developments being launched. Overall, Colliers International expects 2011 to be a positive year showing further improvement compared to 2010.

Research: Akos.Balla@Colliers.com

2011 Colliers Real Estate Review » HUNGARY

INDUSTRIAL MARKET KEY INDUSTRIAL FIGURES

OVERVIEW

Metric

Measure

Total Stock

1,622,000 Sqm

Take-Up

122,000 Sqm

Vacancy

20.7%

Headline Rent, ‘big box’

€3.2 – 3.8/Sqm/month

Headline Rent, City Logictics

€5/Sqm/month

After a year of records in 2008 and the year of adaptation in 2009, 2010 was the year of stabilization on the Budapest industrial real estate market. The market moved towards a state of balance during the year, in terms of supply and demand, as well as rents.

Source: Colliers International

1,800

TOTAL STOCK (,000 SQM)

1,600 1,400 1,200 1,000 800 600 400 200 0

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Market developments were largely in line with Colliers’s expectations voiced at the beginning of last year, when we noted that speculative developments would decrease sharply, demand would be similar to 2009 and the role of pre-lease agreements would increase significantly. We missed the mark, however, with regard to completed new developments, which underperformed our earlier expectations.

▄ Speculative ▄ BTS

SUPPLY

300

Developer activity in 2010 was weak, with a total of 63,000 Sqm of space delivered to the market, only half of what we originally expected for the year. The cause of this was that fewer projects were launched, as developers took the position that they would not launch new projects until there is a significant fall in vacant space on the market.

STOCK EXPANSION (SQM)

250 200 150 100 50 0

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

▄ Speculative ▄ BTS

350

NEW CONTRACTS AND VACANCY RATE

300

25% 20%

250 200

15%

150

10%

100

50 0

2005

2006

2007

▄ New Contracts (,000 sqm)

2008

2009

▬ Vacancy Rate (%)

Research: Akos.Balla@Colliers.com

2010

The majority of the new supply was delivered in the first half of the year, comprising four speculative projects of a total 46,000 Sqm area, while the second half saw the delivery of only a single built-to-suit (BTS) project, with 17,000 Sqm of space. As a result, the overall stock of industrial space built for lease in Budapest and its vicinity rose to 1.622 Mln Sqm.

DEMAND

Take-up during the year was mostly in line with our expectations, coming in at 122,000 Sqm. The figure includes 33,600 Sqm of expansions, or 27.5% of the total, which is in line with the traditional 15 – 40% range. Of the newly leased space, 71% was in “big box” buildings, 20% in “small units” and around 9% in city logistics spaces. Small units performed especially well. A notable trend was that large-scale transactions were missing from the market, with the average size of leased space falling to around 1,300 – 2,000 Sqm, with no deals for space of more than 5,000, or especially 10,000 Sqm. Logistics firms, which earlier accounted for around half of take-up, were also missing, closing just one or two deals. At the same time, manufacturing firms have started to appear on the market, both in Budapest and elsewhere, seeking to lease space. Similar to 2009, there were also many renegotiations and extended leases in 2010. However, in many cases, these are negotiated directly between the tenant and owner, and are therefore not so transparent, providing insufficient data to be representative for the market. Colliers is aware of at least 60,000 – 70,000 Sqm that was renegotiated, but we would not be surprised if the actual figure was double or even many times this. Overall, we can say that interest and activity on the lease market is very high, with many firms looking for adequate space, but remaining cautious for the time being and often deciding to wait to see how the market develops.

Colliers International | p. 68

2011 Colliers Real Estate Review » HUNGARY

INDUSTRIAL MARKET BIG BOX LEASE TRANSACTIONS, 2010

VACANCY

Tenant

Building

Landlord

Sqm

ABB

East Gate Business Park

Wing

1,120

Anda Present

ProLogis Harbor Park

ProLogis

1,900

Decora

BILK

2,500

Düwi Kft.

Európa Center

Terra Invest

2,875

Filtrona

ProLogis Sziget

ProLogis

2,400

EXP

Flextronics

M5 - Gyál Business Park

Autóker

5,000

EXP

Flextronics

M5 - Gyál Business Park

Autóker

5,000

EXP

Flor

Európa Center

Terra Invest

2,412

Gemipap

Europolis Park Budapest M1

Europolis

2,080

Glynwed

Tulipán Park

Coteba (Segro)

2,000

Halton

South Base

Innovation Park

5,000

Játszóház

SCT Keszi

private

4,500

LGI Logistics

Europolis Park Budapest M1

Europolis

2,000

Liegl Dachser

WestLog DC

Industrial Securities Europe

2,000

EXP

Europolis Park Budapest Aerozone

Europolis

2,250

SUB

ProLogis Gyál

ProLogis

1,780

EXP

Oriflame

Üllő Airport Logistics Center

Goodman

17,000

BTS

Prista Oil

Rozália Park 1

Challenger

2,750

Prista Oil

Rozália Park 1

Challenger

2,750

Rapala

South Base

Innovation Park

1,200

Reining

South Base

Innovation Park

1,700

Retz

WestLog DC

Industrial Securities Europe

5,354

Tatárpék

WestLog DC

Industrial Securities Europe

1,700

Tesco

Agrogate

Talentis

6,000

EXP

Tesco

Agrogate

Talentis

2,000

EXP

UTT Europe

Tulipán Park

Coteba (Segro)

2,000

EXP

EXP=expansion, BTS=Build-to-suit, SUB=sublease

Building

Landlord

Sqm

A Takács

West Gate Business Park

Immoeast

1,200

Assist Trend

InNove Business Park

Altan Beton

1,196

BAT

North Pest NA

1,300

Cerva

Nagytétényi Ipari Park

Innovation Park

2,400

Ceva

Airport City

Ablon

1,300

DMG Hungary Kft. DAN

W-Go 2000

395

Equinoxe

Citypoint9

ConvergenCE

1,425

Ergo Trade

C-moll

720

Europan Hungary Citypoint9

ConvergenCE

510

Floretum

VPG - Delta Park M0

Valad

400

GTR Logistics

Besence street

Innovation Park

2,800

I-com Kft.

Európa Center

Terra Invest

625

Lisys

Európa Center

Terra Invest

902

Maranello Modena Európa Center

Terra Invest

739

Megadyne

West Gate Business Park

Immoeast

1,300

Nagytétényi Ipari Park

Innovation Park

1,494

Dél-Pesti Üzleti Park

Wing

1,000

Metalcar Dunakeszi

Metalcar

690

Metalcar Dunakeszi

Metalcar

1,000

Polonkai és Nagy VPG - Delta Park M0

Valad

670

PowerPak

Európa Center

Terra Invest

676

Radinum Kft.

DAN

W-Go 2000

160

Sprinter

Citypoint9

ConvergenCE

4,400

Szentgyörgy Security

Euro Business Park

Immoeast

2,000

Temesvári Trans Besence street

Innovation Park

860

Trend-Papír

DAN Üzleti Park

W-Go 2000

640

Trilak

Airport City

Ablon

3,000

X-System

InNove Business Park

Altan Beton

877

Z-tech Autó

Európa Center

Terra Invest

342

As a result of the positive net absorption, the vacancy rate decreased slightly in 2010, to around 20.7%, compared to 21.2% at the end of the previous year. There was 336,000 Sqm of vacant space at the end of 2010. Within this, vacancy at speculative buildings moved up slightly from 23% to 24%, while the figure dropped from 17% to 13% for BTS investments, compared to the end of 2009. The amount of empty space available is still fragmented in Budapest and its vicinity. While it is relatively easy to find 1,000 – 4,000 Sqm of leasable space, there are only eight locations where more than 10,000 Sqm of continuous space is available and only four where more than 20,000 Sqm can be leased at this moment.

LOGISTICS & “SMALL UNITS” Tenant

As there was also a certain amount of industrial space going vacant in the period, the take-up of the past year was enough to bring net absorption to around 25,600 Sqm in terms of speculative buildings, which compares to the 50,000 Sqm figure for 2009 overall. This figure can be considered a positive sign, as it indicates that stabilization has taken place and that the market is in a state of balance.

While the market of industrial property and land sales transactions was entirely dead in 2009, last year saw some movement in this field, with some interest toward smaller buildings and plots, mostly from small businesses. However, although demand picked up, there were few actual transactions. At the same time, interest for larger projects and plots remains limited. OUTLOOK

Colliers expects that 2011 will be a year of continued stabilization on the industrial market, with moderate growth possible in the near future. Project deliveries will be well below even last year’s low figure, with only two speculative projects known of at the current time comprising a total of 10,500 Sqm. Additional BTS or pre-lease projects could be developed, however, as some companies continue to consolidate their operations. We do not expect significant additional space to become vacant in 2011. As a result of the large amount of tenant interest currently seen on the market, we expect take-up to be similar to last year, resulting in higher net absorption and thus also a visible decline in the vacancy rate. Rents are also expected to remain stable or, as a result of the above, perhaps rise slightly.

RENTS, TRANSACTIONS

EXP

Rental levels stabilized during the past year, as headline rents for big box buildings remaining in the €3.2 – 3.8/ Sqm/pcm range, while the rate at city logistics buildings is around €5/Sqm/ pcm.

The transaction market is expected to show moderate activity, but interest toward larger buildings and plots is expected to remain weak.

Owners are mostly managing their vacant space, trying to offer them at favorable prices, in which case however they prefer not to sign agreements for the long term.

EXP=expansion

p. 69 | Colliers International

Research: Akos.Balla@Colliers.com

2011 Colliers Real Estate Review » HUNGARY

RETAIL MARKET SHOPPING CENTER FIGURES IN BUDAPEST Metric

Measure

Stock Q4 2010

1,145,095 Sqm

Completion 2010

39,600 Sqm

Future Supply 2011

84,000 Sqm

OVERVIEW

Following the crisis years of 2008 and 2009, the retail market in Hungary stabilized during 2010 as market players adjusted to the changed conditions.

Source: Colliers International

1,400

SHOPPING CENTER STOCK, GREATER BUDAPEST

1,200

The decline in retail turnover which has been experienced every year since 2006 has stopped and a recovery on the market is slowly but surely starting to take place.

1,000 800 600 400 200 0

2005

2006

2007

2008

2009

2010P

2011P

2012P

▄ Stock (sqm, 000)

10%

RETAIL SALES FOR HUNGARY

DEMAND

8% 6% 4% 2% 0% -2% -4% -6% -8%

Source: Focus Economics |

2005

2006

2007

2008

2009

Rents have stopped falling in many market segments, but tenants remain cautious, focusing on their best performing stores, reducing the size of units where necessary. There is more emphasis on market position, profitability and location.

2010

2011

2012

▬ GDP Growth ▬ Consumer Price Index ▬ Volume Index of Retail Trade

Domestic spending is showing signs of a turnaround, as official statistics indicate that retail turnover increased slightly year-on-year starting from July. 2010 should show an overall stagnation, which is a positive sign after five years of continuous declines. Absolute turnover levels however remain at the level of around 2003. Retailers are much more aware of market circumstances and consider very cautiously the number of shops a market can sustain, careful that any potential new stores do not take business away from existing ones. Brands present on the market were able to hold on to their positions during the year, as there were few new market players. Stronger brands such as H&M, C&A, Deichmann, Jean’s Club, Butlers, Gulliver Toys and some discount fashion operators such as Invasio and COSMOS have taken advantage of vacancies and obtained competitive terms to gain greater market penetration. These conditions have spurred more new brands to the market, including the return of Debenhams who will open a 2,400 Sqm department store in WestEnd City Center in Spring 2011 and another planned for later in the year.

Research: Akos.Balla@Colliers.com

Although fewer new brands entered the market in 2010, there were some new players: bijou retailers Beeline (SIX and Iam) and Claire’s opened their first stores with plans to rapidly build out a network, Müller opened its first store in Budapest with more planned for 2011, and Starbucks will follow their 3 newly opened cafés with about 5 more in 2011. Hard Rock Café will make its Hungarian debut in Váci1 Shopping Emporium, set to open in September. There were some market exits as retailers continued to experience difficulties: ElectroWorld and Pizza Hut have closed some units, banks have reduced their branch networks and drug store chain Schlecker announced it will leave Hungary. There were also many cases of space reductions and other efforts by retailers to optimize networks. SUPPLY

Only a handful of new retail centers opened in 2010. Aside from neighborhood strip malls outside the capital (Alpha Park in Keszthely, Family Center in Vác), the year’s only major new center was the Corvin Shopping Center in Budapest, with GLA of 34,500 Sqm. All opened with turnovers and footfalls exceeding expectations. Three smaller unique concept centers will definitely open in 2011 in downtown Budapest: ORCO’s landmark Váci1 Shopping Emporium (11,000 Sqm GLA), the futuristic retail and events center CET along the Danube (12,000 Sqm GLA) and Europeum (6,000 Sqm GLA) on Blaha Lujza tér, below a Marriott Courtyard Hotel. The two larger projects scheduled for Q4 openings, KÖKI Terminál (55,000 Sqm GLA) and Árkád Szeged (34,000 Sqm GLA), may be pushed into Spring 2012.

Colliers International | p. 70

2011 Colliers Real Estate Review » HUNGARY

RETAIL MARKET RENTS (€/SQM/MONTH) 100 Sqm 500 Sqm * Prime High Street Retail Rents, 2011 Budapest Vaci Utca

110

Budapest Andrassy Ut

Prime Shopping Center Rents, 2010 Budapest AA

Budapest B

Regional

Budapest

Regional

Strip Mall Rents, 2010

 

 





* Past 6 month trend ** Future 2 year trend

EXPECTED SHOPPING CENTER DELIVERIES FOR 2011 Project

Completion date

VÁCI1

Q3 2011

CET

Q3 2011

EUROPEUM

Q2 2011

Árkád Szeged

Q4 2011

KÖKI Terminál

Q4 2011

Source: Colliers International

Budapest’s dominant high streets Váci utca and Andrássy út remain popular targets for retailers, especially luxury brands, and have held on to their market positions even during the crisis. Turnover has been adequate, with new shops opening in 2010, including Max Mara and Frank Müller on Andrássy, Calzedonia and Bijoux Brigitte on Váci. Replay and Sinequanone signed for Spring 2011 openings on Andrássy, and Tezenis and a large Salamander flagship unit will open on Váci. Several weaker retailers have closed on Andrássy where there are numerous vacant units currently available for rent. RENTS

Following the decline in rents seen since the beginning of the crisis, levels have stabilized somewhat during 2010. While rents are still dropping in certain segments, especially outside Budapest, driven by the renegotiation of expiring contracts, 2010 saw slight increases in rental values on Váci utca and some centers with wealthier primary catchment areas, such as MOM Park and Mammut. Over the past year, most new centers in new and problematic locations were able to find new tenants when the owners adapted to the changed circumstances, reducing headline rents or implementing ‘stepped’ rental rates, coupled with higher percentage turnover provisions. In general, terms have become more ‘tenant friendly’ and lease terms shorter.

The reduction in personal income taxes in effect from January will increase the disposable income of households, especially those with above-average incomes. This should have a positive effect on retail turnover in 2011, most noticeably in the non-food sector where a 3 – 5% increase is projected. However, the more cautious shopping patterns brought on by the crisis will continue. In a regional comparison, Hungary is already seen as a favorable investment target by some retailers. Interest and activity from new market entrants is already picking up in response to projected increases in retail spending and rental conditions that are very favorable compared to neighboring countries. New pipeline shopping center supply will be delayed to 2013 – 2015. There will be greater activity in the next two years for older centers to refresh themselves in terms of design, concept and attracting new tenants, to hold onto their market position or even gain market share. Management will be under pressure to increase turnover through better marketing and more focus on customer services and retention of both tenants and regular shoppers while reducing costs.

OUTLOOK

The outlook on the retail market, while positive, is still characterized by a wait-and-see approach for 2011. Prevailing market and economic conditions have created an uncertain atmosphere regarding the future.

p. 71 | Colliers International

Research: Akos.Balla@Colliers.com

2011 Colliers Real Estate Review » HUNGARY

HOTEL MARKET 12.0 MN

NUMBER OF GUESTS IN HUNGARY

24 MN

Source: HSCO

10.5 MN

21 MN

9.0 MN

18 MN

7.5 MN

15 MN

6.0 MN

12 MN

4.5 MN

9 MN

3.0 MN

6 MN

1.5 MN 0

3 MN |

2003

2004

2005

2006

▄ Number of Guests

80%

2007

2008

2009

2010

▬ Number of Guest Nights

The rise in turnover was mainly due to returning foreign guests, while the number of domestic guests was essentially stagnant. Primarily Budapest profited from this, where the proportion of foreign guests is generally high; the number of guest nights increased by 5% here.

HOTEL ROOM OCCUPANCY IN BUDAPEST

70% 60% 50% 40% 30% Source: HSCO 20%

2004

2005

2006

2007

2008

2009

2010

▬ 3-Star ▬ 4-Star ▬ 5-Star

2010 HOTEL HANDOVERS IN BUDAPEST Hotel

Category

Number of rooms

Opera Garden Hotel & Ap.

Marriott Courtyard

229

Cosmo Fashion Hotel

Regnum Residence

Continental Hotel Zara

280

Royal Park Hotel

Eurostars Hotel

190

Achat Premium Hotel

135

TOURISM OVERVIEW

Based on preliminary data for the first 11 months of 2010, the number of guests and guest nights grew slightly, by around 1% in Hungary last year. Primarily hotels benefited from the rise in guest numbers, with growth at around 6% overall, and within this, higher category 4 and 5-star units fared best, registering growth of more than 10%.

Due to low domestic demand, the number of guest nights at Lake Balaton fell by 6 – 7%; wellness hotels (mainly due to an increase in capacity) were the only ones able to register a notable increase. Another positive development is the increase in the number of conferences held in Hungary, based on data from the first three quarters of the year. The number of international conferences was 40% higher than in the same period of the previous year, and although it remained below the base of 2008, there was an increase in the number of attendees. Hotel room rates fell in every category, by 5 – 8%. On the other hand, occupancy increased by an average 2 percentage points. The tendency remains that higher category hotels reach higher occupancy rates. This meant occupancy rates of 61%, 51% and 40% in 5-, 4- and 3-star hotels, respectively, in the first 11 months of last year.

Research: Akos.Balla@Colliers.com

Hungary’s EU presidency will in all certainty have a positive effect on the occupancy of Budapest hotels this year, although this will only last for six months. Coupled with the expected positive effects of the new personal income tax rules, we expect some upside in demand growth which will be positive for the industry. It should also be noted, however, that significant new supply entered the capital in recent years so the positive outcome for owners and operators will be slightly diluted. DEVELOPMENTS

There were 8 new 4-star hotels which opened in 2010, adding more than 1,000 new rooms to supply. On the one hand, it is positive that Budapest’s hotel supply is expanding with new quality units, but the increase in tourism has not kept pace with this supply, therefore strong price competition and relatively low occupancy is still expected in this segment. Rural hotel developments continue to be driven by EU funds. In 2010, several such hotels were opened, primarily near popular bathing resorts, and we expect this trend to continue in the next 1 – 2 years as well. Based on preliminary announcements, we expect 6 new hotels (around 400 rooms) to be opened in Budapest in 2011, including 3-, 4- and 5-star hotels, as well as an apartment hotel. Meanwhile, the number of new rooms is showing a decline from year to year, and we expect that by 2012 new supply will dry up, as financing has disappeared from the market in the last few years. Based on the experiences of financers, the financing of hotel properties and developments will remain one of the riskiest areas, which will keep the number of new developments low for years to come.

Colliers International | p. 72

2011 Colliers Real Estate Review » HUNGARY

INVESTMENT MARKET The causes for the lower than expected transaction volume of the past year are mixed.

OVERVIEW

Total investment transaction volume on the Hungarian real estate market is estimated to have been around €185M in 2010, which includes only transparent investment transactions. This is well below our expectations from the start of 2010. Most of the transactions were closed in the first half of the year, with the second half seeing little activity except for the notable sale of the Vörösmarty 1 prime retail property by ING to Redevco for €44M.

KEY INVESTMENT FIGURES Metric

Measure

Investment Turnover

€185M

Prime Office Yield

7.5 – 8%

Prime Retail Yield

7.5 – 8%

Prime Industrial Yield

On the other hand, there has been continued weak confidence toward the country since the massive GDP contraction in 2009, now combined with the government’s crisis measures and the state of the European sovereign debt.

Source: Colliers International

1,800

INVESTMENT VOLUMES

10%

1,600

7.7%

1,400

1,200

7% 6%

6.25%

1,000

5% 4%

600

400

200

1% |

2006

2007

2008

30.00

2009

▄ Investment Values (€ Mln)

At a domestic level, investors have raised concerns over perceived antimarket actions such as crisis taxes on selected industries like banks, energy, telecoms and retail.

800

On the one hand, investor interest, both foreign and domestic, has increased compared to the previous period, with potential buyers making investment tours and reconsidering market entry, but not yet closing any major transactions. The predictable shortage of prime office space foreseen around 2012 is also an attractive draw for investors who anticipate rental growth.

2010

2011

▄ Prime Oﬃce Yield (%)

PRIME OFFICE CAPITAL VALUES (€/SQM) Source: Colliers International

25.00 20.00 15.00

The main factors hampering the ability to conclude transactions are finance related, such as the very constrained level of debt available and the devaluation of foreign currency loans – in particular the presently weak € against the CHF; or the cost of breaking finance (swap) arrangements. We do not forecast any easing in the finance sector in the medium term, which will continue to restrain the investment market in Hungary.

window to exit developments with a positive gain, in part “encouraged” by shareholders or financiers to dispose of assets. In terms of yields, no significant change has been seen over the past year, and no quick improvement is expected in 2011. Investor interest for prime office and retail projects is currently at around 7.5 – 8%, and nothing below this level is likely to occur in the upcoming year. Prime industrial yields are above 9%. There is a list of potential buyers considering investments in Hungary, but this won’t create additional pressure on pricing as there is a considerable amount of property that can be purchased. The focus of interest remains high-class trophy assets in good location, such as A-class modern offices. There is also interest for prime retail centers, but limited interest for prime industrial properties. There is practically no interest for B-class real estate assets unless at absolute give-away prices. Sustainability and green certifications are also becoming essential to attract buyer interest. We anticipate Investors will remain extremely cautious in the upcoming period, indicating that the climb out of the bottom of the market will be a slow and gradual process. This also means that sellers will need to have their house in good order if they want to a have a strong chance of closing deals.

10.00

OUTLOOK

5.00

a av isl at

p. 73 | Colliers International

da Bu

rid

ris

In 2011 Colliers expects overall investment volume to be higher than in 2010, possibly reaching up to €500M, driven by a strong pipeline of potential deals. Supporting this is the fact that owners’ and buyers’ price expectations are now much more in tune with current values. The strong pipeline is driven by property funds being wound up, bringing assets to market. Another source of deals is property developers, who see a

Lastly, there is a clear preference to purchase assets rather than acquiring property via a company. Investors do not wish to inherit liability, particularly capital gains tax liability. It appears all the elaborate ownership structures previously structured to optimize value may become redundant in the rather cautious acquisition period the market is facing for the foreseeable future.

Research: Akos.Balla@Colliers.com

2011 Colliers Real Estate Review » HUNGARY

HUNGARY LEGAL OVERVIEW Basic Forms of Title In Hungary, the most common title to real estate is full ownership (“tulajdonjog”), which is similar to “freehold” title that entitles the owner to freely use and enjoy all the benefits of the real estate; however, the owner is obliged to bear all costs and expenses regarding the real estate and the costs and expenses that occur because of damages. The owner is entitled to dispose of the real estate freely (e.g. to allow other persons to use it, to offer the real estate as collateral or to establish other encumbrances on the real estate, and also to transfer the ownership of the real estate freely). It is also possible to use real estate based on a right of perpetual usufruct (“haszonélvezet”): In this form of usufruct one person formally owns the property, whereas the beneficiary is entitled to use and obtain the profits of the property and must bear the associated costs and burdens. The usufruct may be established for a determined time period and maximum until the death of the beneficiary. In case of perpetual usufruct, unless the beneficiary consents to the termination of its right, the perpetual usufruct remains in force irrespective of the transfer of ownership of the property. Land and buildings erected on land may be transferred only together, however the owner of the land may allow, via a contract, a third person to erect a building on the land and to obtain the ownership right of the building. The owner of the building has full ownership with respect to the building and must bear the costs related to the occupied land. The owner of the building is entitled to a right of first refusal if the land is sold, and the owner of the land has the same right if the building is sold. The owner of the building has a use right in respect of the land (“földhasználati jog”). A land use fee may be required by the owner. We note that the Hungarian Parliament has passed a new Civil Code, which will enter into effect in 2010/2011 and will introduce significant changes in various aspects of the civil law regulations. Acquisition of Real Estate by Foreigners Individuals and legal entities may acquire ownership right to a real estate. The contract of acquisition must be countersigned by a licensed attorney at law or it may be incorporated into a notarial deed. Foreign individuals or legal entities need permission to acquire the ownership right to a real estate in Hungary (with the exception of EU citizens acquiring real property for primary residence). The permission is issued by the regional administration office where the real estate is located. Hungarian legal entities may acquire the ownership of residential property and commercial

real estate freely. Foreigners are entitled to establish Hungarian legal entities or acquire the ownership of Hungarian legal entities and may be members and own 100% of the business quotas of such legal entity. Title to agricultural land (including all agricultural areas) may not be acquired by foreign or Hungarian legal entities nor by foreign individuals. Registration System The Land Register, which is handled by land registry offices, contains data on individual pieces of real estate, property owners, mortgages, other encumbrances, beneficiaries and notes on incidental outstanding applications. Any right in rem that is based on contract becomes effective through registration in the Land Register. Those foreign individuals or legal entities who do not have permanent residence in Hungary and do not have a person or legal entity – with permanent residence or seat in Hungary – engaged to act on their behalf in front of the Land Registry need to engage a delivery agent for the procedure of the Land Registry, so that documents and resolutions in connection with the procedure can be delivered to the delivery agent. As a general rule, “good faith” purchasers of land are entitled to rely upon information contained in the registers. The register is accessible on-line and the underlying documentation is accessible with the authorisation of the beneficiary of the given record. Transfer Taxes In case of acquisition of a real estate or an at least 75% share of a legal entity owning (directly or indirectly) a real estate (where the shares of related parties are to be aggregated), transfer tax (“duty”) is to be paid. The base of the duty is the value of the real estate. From January 1, 2010, the duty is 4% for the first 1 Bln HUF of the value of the real estate and 2% for the remaining part of the value, but the total amount of the duty may not exceed HUF 200 Mln per real estate. (The duty shall be calculated and paid after every single real estate, and the values of the real properties may not be pooled.) In certain cases, including but not limited to the following, this rate may be lower:

estate which is suitable for the construction of a residential building and the purchaser undertakes to and finally erect a building on the property in 4 years, no duty is payable; (iv) in case of a Hungarian legal entity which gained 50% of its net turnover in the preceding business year from professional real estate broker or a financial leasing activity, and it undertakes to sell the real estate within two years as from the purchase, the duty is 2%; (v) if the real estate is owned by a Hungarian legal entity no duty is payable if an organisationally separated unit of such company is purchased by another legal entity together with all the assets of the company including the property.

Leases Leases in Hungary are freely negotiable, but subject to certain mandatory provisions of the Civil Code and the Act on Leasing Apartments and Other Premises. Limitations mainly concern termination rights. Restitution Claims Privatisation of real property took place according to Acts passed in the early ‘90s. Except for churches in certain cases, the former owners of real property did not have their original property returned. Former owners received compensation coupons with which they could purchase real property (mainly agricultural land and residential property) which was sold by the state, local municipalities or state owned entities. Restitution claims can no longer be submitted to the state. Language In order to be enforceable in Hungary, most agreements need to be bilingual or officially translated into Hungarian for filing with the Land Register, Companies Register, etc. However, it is common for English or other languages to be used as a second and controlling language. Information contained in this general outline does not constitute a legal opinion and is not meant to be comprehensive. As a result of pending and new legislation, laws and regulations change frequently in Hungary and are often subject to varying interpretations. Professional advice should be sought regarding all aspects of real estate in Hungary.

(i) in case of residential property, the duty is 2% for the first HUF 4 Mln of the value of the real estate and 4% for the remaining part of the value; (ii) if the residential property is sold within 1 year and a new residential property is bought from the purchase price, the base of the duty is the difference between the amount for which the old property was sold and the amount for which the new property was purchased; (iii) in case of a real

Colliers International | p. 74

2011 Colliers Real Estate Review » HUNGARY

HUNGARY TAX SUMMARY RENTAL INCOME

From 2011, rental income is subject to 10% corporate income tax up to a tax base of HUF 500 Mln and 19% above this threshold. (In 2010 the corporate tax rate was 19% for the fist half of the year and for the second half of the year 10% corporate tax was applicable up to a tax base of HUF 250 Mln and 19% above this threshold. Solidarity tax (4%) has been abolished as of January 1, 2010). With respect to tax deductible items, only costs, expenditure, which are not relating to the core business activity of the Company are not deductible in Hungary for corporate income tax purposes. With respect to “normal” business costs, there is no specific limitation. Availability of robust and complete documentation is important to support the tax deductibility of business costs. Certain consulting and financing expenses (e.g. interest) which relate directly to the property prior to capitalizing the asset should be taken into account and capitalized as the part of the investment value. The amounts of possible future reconstruction/enlargement costs might also be capitalized as part of the real estate. In case of buildings, generally 2% p.a. depreciation is accepted by the corporate income tax regulations. In case of a real estate subject to rental, the accepted depreciation rate is 5% p.a. The value of the land can not be depreciated at all. Interest payments are tax deductible in Hungary, however thin capitalization rules should be taken into account. The Hungarian thin capitalization regulations provide for a debt to equity ratio of 3:1, which means that the proportional interest amount on the daily average loan liability, which exceeds the daily average amount of the equity of the company multiplied by three, should be treated as not tax deductible. Loans from financial institutions, even if related, are excluded from the calculation.

p. 75 | Colliers International

MINIMUM INCOME (OR MINIMUM TAX BASE)

With effect from July 1, 2007, resident taxpayers and foreign entrepreneurs (PE’s) might be subject to corporate income tax even if their taxable base for corporate income tax purposes is negative. The minimum tax base is 2% of the total of revenues, decreased by the costs of goods sold and the costs of intermediated services, and modified by some other items. If the higher of the tax base or the accounting pre-tax profit does not reach the minimum tax base, the minimum tax base should be considered as the tax base.

WITHHOLDING TAX

Withholding tax rules has been abolished as of January 1, 2011. (Between January 1, 2010 and December 31, 2010 withholding tax at a rate of 30% was payable on royalty, interest and certain service fees payments granted to foreign entities. Exemption from WHT was only possible for foreign companies that are tax residents in countries having double taxation treaty with Hungary. Having only their seats in such countries is not enough for exemption.) VALUE ADDED TAX (“VAT”)

However, taxpayers may choose not to pay the tax on the minimum tax base even if they were supposed to, based on the above calculation, but to file a specific declaration to the tax authorities stating that their tax base does not reach the required minimum income level. The tax authorities specifically focus on those companies that filed such declaration in the selection for tax audits. Minimum tax base rule does not apply in the year of foundation, and in case certain natural disasters caused the loss. LOSS CARRY FORWARDS

Under the effective legislation, 2004 and subsequent losses can be carried forward without time limitation. According to the new rule effective from January 1, 2010, no permission needs to be obtained from the tax authority in order carry forward losses. (Before that, if the taxpayer had a negative profit before tax position and had tax losses for two consecutive years (after the initial start-up period) or the total revenue of the company in the tax year did not exceed 50 percent of the total costs and expenses, the carrying forward of losses was subject to permission from the tax authority.) From January 1, 2010 financial institutions may also carry forward losses.

As of January 1, 2008, the VAT treatment of sales of buildings depends on the election of the taxpayer. However, if the sale is made within 2 years after the issuance of the final occupancy permit, the sale is subject to VAT. However, if the transaction is before the first occupation or after the first occupation, but between the date of the occupancy permit and the date of sale is less than two years, the sale is subject to VAT. In case of sales after 2 years of the issuance of the occupancy permit, the VAT treatment is dependant on the election of the taxpayer. After choosing either VAT-charging or VAT exempt status, the taxpayer has to remain with that choice for 5 years. If choosing VAT charging status, the taxpayer has to notify the tax authority until the end of the preceding tax year. From January 1, 2010 the taxpayer may choose to apply VAT charging status only for the sales of nonresidential real estate. Rental activity is exempt from Hungarian VAT, but with a taxpayer option to charge standard 25% VAT on rental fees. From March 2008, the VAT status of residential and non-residential real estate rental can be treated separately.

These rules can already be applied for the losses of 2009.

Contact: gabor.beer@kpmg.hu

2011 Colliers Real Estate Review » HUNGARY

HUNGARY TAX SUMMARY The VAT exempt method allows entities not to charge VAT on property rental, however, in that case input VAT could not be deducted or reclaimed. Companies have to submit a request to the Tax Authority within a statutory deadline if they will apply standard rated VAT. If such an election is made, the VAT treatment of the rental activity can not be changed for 5 years. Reverse charge system is applicable in case of construction and other real estate related services, reducing VAT financing costs. Since May 1, 2008 services that are provided in relation to real estate liable for official permit fall under this rule. LOCAL BUSINESS TAX If a real estate is recognized as stock in the books of the Company at the time of the asset deal, local business tax should be paid; the maximum tax rate is 2%. Rental income is also subject to local business tax. In case of calculating the amount of the local business tax base the amount of material costs, mediated services, cost of goods sold and direct R&D costs could be deducted. Please note that the amount of the local business tax is deductible from the corporate tax base only once as of January 1, 2010. As part of pre-tax profit, it is accounted as cost under Hungarian GAAP. (Until 2009 it could be deducted from the corporate tax base as well, if the Company will not have unpaid tax liability at the end of the tax year. This additional deduction was capped by the amount of the positive pre tax profit under Hungarian GAAP). ACQUISITION Until 2010, by purchasing the shares of a Hungarian entity, no VAT or RETT liability would arise in connection with the transaction. Only minor procedural costs would be payable to the Company Court to register the new shareholders. However, from January 1, 2010, stamp duty liability arises in case of the acquisition of shares of real estate owning companies. The liability arises at the time when the direct or indirect (through the owner’s related parties) ownership of the real estate owning company” reaches 75%. The base of the stamp duty is the gross market value of the real estate, proportional to the ownership. Please find the rate of the stamp duty in the RETT section below. CAPITAL GAINS ON SHARE DEALS If the shares of a Hungarian entity are sold by a non-Hungarian entity the gain is not taxable in Hungary. However, such capital gains are taxable in Hungary from January 1, 2010 if shares of a so

Contact: gabor.beer@kpmg.hu

called “real estate owning company” are transferred. A company will be considered a ‘real estate company’ if the following requirements are met: more than 75% of its total assets on a consolidated and/or standalone basis are real estate located in Hungary and at least one of their shareholders is resident in a state, with which Hungary has not concluded a double tax treaty or in a State where the double tax treaty allows such gains to be taxed in Hungary. According to the act, tax liability for the shareholders of a ‘real estate company’ will arise when the shareholder sells, gifts or contributes the shares of such a company. The tax base is to be the difference between the income from the sale of the shares and the acquisition costs including expenses related to the shares during the shareholding period. The tax rate will be 19% (i.e. reduced rate up to a certain tax base could not be applied). Deciding whether or not a taxpayer qualifies as a ‘real estate company’ could give rise to considerable administrative work. A further complicating factor is that the real estate of affiliated undertakings has to be considered too. ASSET DEALS

If a real estate is sold as an asset, the gain is subject to corporate income tax as part of the normal tax base at a rate of 10% up to a tax base of HUF 500 Mln and 19% above this threshold. PROPERTY TAX Hungarian companies may be subject to local land tax or local building tax. The maximum rate of local building tax may be 3.6% of the fair market value of the building owned or HUF 1100/Sqm (approximately €4/Sqm). The maximum rate of local land tax may be 3% of the market value of the parcel or HUF 200/Sqm (approximately €1/Sqm). The applied method of tax base depends on the local municipality. The tax liability arising is paid in two instalments (15 March, 15 September). This tax may be levied by the local municipalities at their own discretion. RETT

In case of acquisition of real estate in Hungary, the buyer is liable to pay stamp duty on the property, based on the market price of the property. It is important to note that the basis of the stamp duty liability is the gross market value of the property, inclusive of VAT.

The rate of the stamp duty has decreased: from January 1, 2010, the standard rate of stamp duty is 4% up to HUF 1 Bln of the value of the real estate, and 2% for the exceeding value, but with the maximum stamp duty liability of HUF 200 Mln per real estate (plot number). As of August 16, 2010 sale and purchase of shares of a company holding real estate in Hungary between related parties is exempted from RETT, however, in-kind contribution of such shares is not exempted in this respect. In special cases, lower stamp duty might be applicable: —— The stamp duty rate is 2% if the purpose of the acquisition of the property is resale/ finance leasing and in the year prior to the purchase, more than 50% of the buyer’s sales revenue arose from resale of properties/finance leasing, or the buyer is licensed by the Hungarian Financial Supervisory Authority to perform financial lease. Moreover the buyer has to state that the property will be either sold within two years, or leased, with the condition that the lessee would eventually buy the property. —— If the property is residential, the rate of the stamp duty is 2% up to 4 Mln HUF (approximately €16), and 4% for the excess part of the price. —— With regard to plots, if the buyer of the plot makes a declaration that it would build residential properties on the purchased plot within 4 years, stamp duty exemption might be obtained (as long as the 4 years deadline is met). Further notes: —— If the purchase price of the real estate is unreasonably low (less than 50% of the market price) the buyer pays gift duty on the difference of the purchase price and 50% of the market price, and stamp duty on the remaining amount. —— Loan debt assumptions are considered as exempt of gift duty as of July 9, 2009. (Before that time it was subject to gift duty of 40%).

Colliers International | p. 76

2011 Colliers Real Estate Review » COUNTRY

Poland

MARKET

Dear Clients and Friends,

It is my great pleasure to present to you, for the first time in my new role as Deputy Managing Partner, our latest publication summarising the main trends observed in the Polish commercial market during 2010 and an indication of what we can expect in 2011. 2010 was a good year for commercial real estate in Poland and in comparison with 2009 it offers hope for a further improvement. The Polish capital market experienced a significant growth. Total real estate investment volume in 2010 more than doubled in comparison to 2009 levels, with a number of high profile transactions. It is worth noting that for the first time post-Lehman, investors returned to regional cities with several prominent transactions, particularly in the office and retail sectors. Although new supply of office space in Warsaw was relatively limited, regional cities continued to grow steadily. More importantly, the office market recorded a noticeable increase in tenants’ activity. A similar situation was observed in the industrial market, where few industrial schemes were completed. Demand side, however, turned out to be very high. The retail market also experienced a slowdown in terms of new projects. As far as tenants are concerned, their interest in new space has visibly increased. However, market share is no longer their sole strategy. A great deal more emphasis is now put on profitability and the quality of the location. 2010 also turned to be a successful year for the company. Colliers was consistently instructed to advise in many prominent investment transactions which took place in the market, such as the sale of Grunwaldzki Center in Wrocław by Skanska, the sale of the Jantar Shopping Centre in Słupsk by Mayland, the sale of Panattoni Park Garwolin by Standard Life Investments, as well as the purchase of Trinity Park III by SEB Asset Management.

Monika Rajska-Wolińska

deputy managing partner colliers international poland Address

3 Pl. Piłsudskiego 00 – 078 Warsaw, Poland

Phone

+48 22 331 78 00

Monika.Rajska@Colliers.com

2010 was a turning point for our Land department, which acted as a real estate advisor in the first major transactions that took place in the Polish market after the crisis. More business opportunities are expected to come in 2011. Despite the unfavourable market conditions our Office, Industrial and Retail agencies secured space for many clients and won their appreciation. The Property Management division within Colliers continued to expand its portfolio by adding over 140,000 Sqm of office space and over 130,000 Sqm of industrial space. Since people are our main asset we decided to hire several talented specialists who will strengthen our market position both on a national and international scale. A new service line called Retail Solutions was also introduced, which will add a new value to existing services provided by Colliers International Poland. Also we accelerate our growth through a continuous commitment to Service Excellence. As an enterprising organization we endavour at delivering the best client experience. We look forward to further engagement with our clients and maintaining a customer-centric culture in our company. An additional change was our rebranding which gave us a new and more dynamic look and feel. We were delighted that our efforts were acknowledged by the industry when we were voted the Best Real Estate Agency of the Year at the CiJ Awards and the Best Industrial Team of 2010 in Poland at the Eurobuild Awards Gala. We are entering 2011 filled with plenty of positive energy and hope for an exciting time ahead of market revival. We wish all our Clients and Friends a prosperous year and that they enjoy many new business possibilities. Yours sincerely, Monika Rajska-Wolińska

p. 77 | Colliers International

Research: Firstname.Lastname@Colliers.com

2011 Colliers Real Estate Review » POLAND

ECONOMIC OVERVIEW KEY ECONOMIC FIGURES (YOY) Metric

2009

SUMMARY

2010

GDP Growth

1.8%

3.8%

Industrial Production

7.2%

11.5%

Unemployment

11.9%

12.3%

Inflation

3.5%

3.1%

Retail Sales

7.2%

12%

Last year Poland was a leader in Europe in terms of economic growth. In the third quarter GDP growth reached as much as 4.2%, ahead of analysts’ expectations. Economic growth in the last quarter is estimated to be at a similar level. According to preliminary results from the Main Statistical Office (GUS) growth for the whole of 2010 was 3.8%. The Ministry of Finance forecast growth of 4% in 2011.

Source: GUS

25%

GDP, INFLATION & UNEMPLOYMENT Source: GUS, IBnGR (forecast), Ministry of Finance (GDP forecast)

20% 15% 10% 5% 0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F

▬ GDP ▬ Inﬂation ▬ Unemployment Rate

18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0

FOREIGN DIRECT INVESTMENTS (EUR BLN.)

The main driver of growth has been domestic consumer demand, reflected in retail sales growth. This is despite the fact unemployment remained high during the whole year and in December stood at 12.3%. Economists estimate that unemployment will begin to drop during the first half of 2011, with IBnGR forecasting a decrease in unemployment rate to 10.8% by the end of 2011.

Source: NBP

2004

2005

2006

2007

2008

2009

2010

2011F

This is likely to create pressure for higher salaries amidst a general increase in inflation. In December inflation accelerated to 3.1% y-o-y, from 2.7% level in November. The increase was caused mainly by the growth of fuel prices. From an investment perspective, the NBP (National Polish Bank) expects the inflow of Foreign Direct Investments (FDI) into Poland to have reached €9.8 Bln in 2010. A further significant increase in FDI is expected in 2011, up to €12.7 Bln, bringing with it a higher number of technological investments.

Research: Dominika.Jedrak@Colliers.com

PROGNOSIS

The consensus view of GDP growth in Poland in 2011 is around 4%, supported by growth in industrial production of 8 – 10%. With this will come an increase of investments into fixed assets, a decrease in the unemployment rate and rising salaries in tune with rising inflation. The most important challenge for the Polish government will be to reduce the deficit and public debt. Although public debt levels did not exceed 55% of GDP in 2010, this may be difficult to maintain in 2011. The public deficit was around 8% of GDP. It is important for the longer-term sustainability of the national economy that both the public deficit and debt levels are reduced. Most economists indicate that a reform of the pension and social allowances system, savings in budget expenditures, a reduction of the government's fixed-cost base and an acceleration of privatization are necessary to balance state finances. The outcome of parliamentary elections scheduled for 2011 will be an important precursor as to how the new budget is set for 2012 as a means of tackling the ongoing public debt and deficit issues the country faces. This should not, however, significantly impact against strong economic growth fundamentals.

Colliers International | p. 78

2011 Colliers Real Estate Review » POLAND

OFFICE MARKET WARSAW GENERAL OVERVIEW

2010 saw a significant improvement in activity in the office leasing market. Total volume of leasing transactions in 2010 was double that of 2009 facilitating renewed action in the development community. Improved access to bank finance has helped drive developer activity, although some restrictions on the availability of development finance remain, creating an immediate scenario of very low levels of new construction.

300,000

Measure

Total Stock

3,435,830 Sqm

Take-Up

549,210 Sqm

Vacancy Rate

7.2%

Over 60% of new space was delivered in two zones: in the Upper South zone (64,640 Sqm) and Lower South zone (54,000 Sqm). The largest new projects completed last year were: Poleczki Business Park (Lower South zone; 45,000 Sqm), New City Mokotów (Upper South; 35,000 Sqm), Crown Square (West; 17,000 Sqm) and Zebra Tower (City Centre Fringe; 17,000 Sqm).

NEW SUPPLY (SQM)

250,000 200,000 150,000 100,000 50,000 0

2004

2005

2006

2007

2008

2009

2010

2011F

TAKE-UP STRUCTURE

5% Expansion

58% New

36% Renegotiation/Renewal

SELECTED LEASE TRANSACTIONS Tenant

Sqm

Property

Pekao SA

38,450

Lipowy Office Park Renegotiation

Aviva Group

13,000

Platinium Business Pre-lease Park IV

GTECH

4,700

Brama Zachodnia

Renegotiation

Pfizer Polska

4,350

Adgar Plaza B

New

Oracle Polska

4,000

Crown Square

New

Tchibo

1,800

Riverside Park

Renegotiation

p. 79 | Colliers International

We expect an even lower amount of new space to enter the market in 2011 (ca. 132,650 Sqm). One third of this space will be delivered in the city centre. DEMAND

1% Ow-occ

Type

Many of the largest transactions were renewals/renegotiations. Among these were: Bank Pekao SA in Lipowy Office Park (38,450 Sqm) and Orange in Renaissance Tower (17,400 Sqm). The largest new deals were signed by Aviva Group in Platinium Business Park IV (13,050 Sqm) and PZU in Empark Sirius (12,500 Sqm).

SUPPLY

An estimated 188,400 Sqm of new office space was delivered to the Warsaw office market last year, representing 27% y-o-y reduction in new supply.

KEY OFFICE FIGURES Metric

As a relatively small amount of space is under construction, we expect a shortfall in the availability of good quality modern space in the second half of 2011. This will have an impact on vacancy rates, which by the end of the year had fallen slightly to ca. 7%, and will continue to fall into 2011.

Demand levels returned to those recorded in times of prosperity as a total of 549,210 Sqm was leased over the year. This represents an increase of over 90% relative to take-up in 2009. This activity does, however, account for a sizeable amount of renegotiations and renewals (36%). A clear positive trend was an increase in the volume of pre-let agreements (12%) and expansions (5%) as a proportion of overall activity. Another noticeable trend is the increase in the number of large transactions in comparison with 2009. As many as 16 deals for space over 5,000 Sqm were signed. For comparison, in 2009 only 4 such transactions took place.

VACANCY / AVAILABILITY

The vacancy rate remained during most of the year at 8% before dropping slightly at the end of the year to 7.2%. This included the city centre, where availability of space decreased despite the fact some tenants had moved out to other districts. Further decrease of vacancy rate over the year across the city is expected. RENTS

Since the end of the first quarter rents have remained stable. Asking rents in the Central Business District are between €18 and 25 per Sqm. Although in some properties space is offered at rates below €18. Most non-central locations (Upper South and South West) offer modern office space for €12 – 16 per Sqm. The market situation advantageous for tenants found its reflection in the incentives offered by landlords (rent-free period, fit-out allowance). PROGNOSIS

In the coming months situation in the Warsaw office market should remain stable. We can expect that many tenants will utilize favourable conditions and will renegotiate their lease agreements or decide to move to cheaper location. High level of demand combined with a limited number of projects entering the construction phase and overall diminishing space availability change the market situation in favour of landlords in the second half of the year.

Research: Dominika.Jedrak@Colliers.com

2011 Colliers Real Estate Review » POLAND

OFFICE MARKET REGIONAL CITIES KEY OFFICE FIGURES City

Total Stock (Sqm)

Vacancy rate

Kraków

388,030

12.3%

Wrocław

305,430

4.3%

Poznań

191,480

13.9%

Tricity

217,060

16.8%

Katowice

180,730

22.0%

Łódź

177,750

25.6%

Lublin

48,480

6.1%

Szczecin

43,060

6.2%

GENERAL OVERVIEW

In 2010 a revival was also recorded in regional office markets, where demand increased significantly. In the eight largest regional markets as much as 216,200 Sqm of new space was completed. However, a smaller number of new projects entered the construction phase in 2010, so we anticipate lower levels of new supply in 2011.

Gdynia (9,045 Sqm) and renegotiation of Nokia Siemens Network deal in the Wrocław Business Park (7,380 Sqm). 2010 also saw further development of SSC/BPO sector in Poland. Such companies as IBM, Sony Pictures, McKinsey, Nordea Bank and Nycomed opened their centres. VACANCY / AVAILABILITY

SUPPLY SELECTED LEASE TRANSACTIONS Tenant

Sqm

Property/City

Type

IBM

17,000

Wojdyła Business Park/ Wrocław

Pre-let + expansion

Capgemini

10,000

Quattro Business Park/ Kraków

Pre-let

Motorola

11,840

Green Office/Kraków

Pre-let + expansion

Tieto Poland

4,600

Oxygen/Szczecin

Pre-let

NSN

7,380

Wrocławski Park Biznesu/ Renewal Wrocław

Capgemini

3,000

Millenium Tower/Wrocław New

Sony Pictures 1,260

Łużycka Office Park/Tricity New

IKEA

Malta Office Park/Poznań

2,850

New

The amount of new space delivered in 2010 was comparable to the new supply in 2008 and 2009. The majority of new supply was completed in Kraków (54,140 Sqm) and Katowice (47,610 Sqm). Due to this significant new supply Kraków remains the largest regional office market. The largest new projects completed last year were: Francuska Office Center (21,470 Sqm) and Katowice Business Point (17,500 Sqm) in Katowice, University Business Park B in Łódź (18,760 Sqm), Vinci Office Center (18,720 Sqm) in Kraków and Wojdyła Business Park in Wrocław (17,000 Sqm). Approximately 150,000 Sqm is planned to be completed in 2011. The largest amount of new space in 2011 will be delivered in Kraków and Tricity. New supply will include, among others, the 2nd phase of Quattro Business Park (Kraków) and Olivia Gate (Gdańsk). DEMAND

Last year was characterized by high activity from tenants. The most popular city was Kraków, where lease transaction volumes reached over 80,000 Sqm surpassing the activity levels recorded in other cities.

In comparison with 2009 the most significant increase in vacancy level was recorded in Katowice (from 10.3 to 22%) and in Tricity (from 10.5 to 16.6%). This was caused by the delivery of new space which then failed to let. In Kraków vacancy rate did not change significantly despite delivery of high volumes of new supply. A decrease in vacant space was recorded in Łódź (from 30 to 25.6%) and Wrocław (from 9.8 to 4.3%). RENTS

Rental rates remained at similar level throughout the year, although some landlords of buildings with high vacancy levels decided to lower their demands. Most asking rents are between €12 and €15 per Sqm. The lowest rates are in Łódź and Katowice and are between €11 and €13 per Sqm. PROGNOSIS

Similarly to the Warsaw market, we expect the situation in regional markets to be stable over the first months of the year. If demand continues to grow at similar rate, the amount of available space will drop bringing more balance to markets such as Łódź and Katowice. As Wrocław has an insufficient amount of space available for lease we can expect increase of rental rates in this city in 2011.

The largest transactions signed in the regional markets in 2010 were: IBM in Wojdyła Business Park (17,000 Sqm) in Wrocław, Motorola Solutions in Green Office (11,840 Sqm) and Capgemini in Quattro Business Park (10,000 Sqm) in Kraków, renegotiation by Thomson Reuters in Baltic Business Center in

Research: Dominika.Jedrak@Colliers.com

Colliers International | p. 80

2011 Colliers Real Estate Review » POLAND

INDUSTRIAL MARKET After a continued period with significant decreases in rents, the first signs of minor increases were recorded towards the end of 2010 in some of the regional Polish markets.

GENERAL OVERVIEW

2010 was characterized by exceptionally low activity of developers who almost completely withdrew from speculative projects and focused instead on BTS schemes. Nevertheless, several projects built on a speculative basis did enter the construction phase.

SUPPLY

Although the supply side turned out to be limited, the demand for industrial space was much higher than in 2009. Even so, the vacancy rates remain high in the Greater Warsaw area. In contrast, regional markets have recorded a gradual absorption of space by tenants. KEY INDUSTRIAL FIGURES Measure

Total Stock

6,400,000 Sqm

Take-Up

1,400,000 Sqm

Vacancy Rate

15.6%

It is worth noting that Panattoni is currently one of the most active developers in the Polish market, having started numerous projects despite the unfavourable market conditions. In 2010 they completed almost 220,000 Sqm of industrial space in different areas of Poland.

TOTAL STOCK BY REGIONS (SQM ,000)

At the end of the year ca. 196,000 Sqm of industrial space remained under construction, with a delivery date expected in 2011. r he

in ec

ań

aw cł

ów

ile pe

ań

sia

an ol

sa ar

ra nt Ce

2,750 2,500 2,250 2,000 1,750 1,500 1,250 1,000 750 500 250 0

Metric

The Polish industrial market grew by almost 252,000 Sqm in 2010, delivered within 14 projects. Over half of this new space was located in BTS warehouses. The remaining projects were speculative, requiring to be pre-let in order for construction works to start. The majority of space entered the market in the last quarter (ca. 140,000 Sqm) and most of this space was added to the Upper Silesian market.

TAKE-UP BY REGION ▄ Warsaw (30.7%) ▄ Upper Silesia (30.5%) ▄ Central Poland (13.1%) ▄ Poznań (12.9%) ▄ Wrocław (7.5%) ▄ Gdańsk (1%) ▄ Toruń (0.7%) ▄ Szczecin (0.3%) ▄ Kraków (1.3%) ▄ Other (2%)

p. 81 | Colliers International

WARSAW

Warsaw saw only 3 new deliveries which were the next phase of Ideal Idea in Zone I and 2 buildings within Panattoni Park Ożarów. It was thanks to these schemes that the total stock of the Greater Warsaw area grew by 42,830 Sqm, exceeding 2.45 Mln Sqm as of end 2010. Almost 60,000 Sqm of industrial space is under construction in the Greater Warsaw area. These are: the second phase of Good Point Puławska, 2 warehouses within Żerań Park II, Pannatoni’s BTS project in Święcice and a warehouse within Annopol Logistic Park IV by ECI SA.

REGIONAL MARKETS

Almost 210,000 Sqm of modern industrial space entered the regional markets. Significant deliveries included three BTS schemes built by Panattoni – for Tesco in Gliwice (56,700 Sqm), for H&M (30,000 Sqm) in Gądki, Poznań and for Cereal Partners (30,000 Sqm) in Toruń. With over 86,000 Sqm of industrial space delivered to the market, Upper Silesia was first in terms of new supply. Poznań came second among regional markets with almost 38,000 Sqm and Toruń third with 30,000 Sqm. New deliveries were also recorded in Central Poland (26,000 Sqm), Tricity (18,685 Sqm) and Wrocław (9,700 Sqm). Across the regional markets, the majority of space is currently under construction in Poznań (45,100 Sqm within 3 schemes – Panattoni’s BTS project for Neuca SA and 2 speculative projects) and in Rzeszów, where 32,500 Sqm will be delivered within a BTS project for Zelmer by Panattoni. Kraków is third in terms of the amount of space under construction (almost 25,850 Sqm within Goodman and MARR’s projects). In Wrocław, Upper Silesia and Toruń projects totalling ca. 10,000 Sqm are under way, whereas in Central Poland one project of ca. 3,300 Sqm hit off the ground. DEMAND

Total activity recorded in 2010 reached 1,440,000 Sqm, which represents a substantial growth in comparison with 2009, when the total volume of signed agreements amounted to 940,000 Sqm. New agreements and expansions were concluded for as much as 990,000 Sqm, renewals and renegotiations constituted the remaining 450,000 Sqm.

Research: Dominika.Jedrak@Colliers.com

2011 Colliers Real Estate Review » POLAND

INDUSTRIAL MARKET WARSAW

The highest level of tenants’ activity was recorded in Warsaw amounting to ca. 440,000 Sqm. New agreements and expansions encompassed over 315,000 Sqm, whereas renewals constituted almost 125,000 Sqm. REGIONAL MARKETS

Tenants’ activity in Upper Silesia was at a level comparable to Warsaw’s. The share of renewals was, however, higher than in the capital as they encompassed almost 190,000 Sqm. New agreements and expansions reached almost 250,000 Sqm. Upper Silesia saw the largest transaction in 2010, which was concluded between Tesco and Panattoni resulting in the development of a new BTS scheme totalling 56,700 Sqm in Gliwice.

Size (Sqm) Property

Fiege

36,520

Zelmer

32,500

Panattoni Park Rzeszów

BTS

Kaufland

24,500

Tulipan Park Gliwice

New lease

Moto-Profil

20,000

ProLogis Park Chorzów

New lease

Tesco

56,700

Panattoni Park Gliwice

BTS

PF Concept

23,000

Point Park Poznań

New lease

81.5%

11.9%

10.6%

13.1%

in cz

w cla

ile pe

4.1% |

w sa ar

10.8%

sia

14.3%

EFFECTIVE RENTAL RATES (€/SQM)

w W

Research: Dominika.Jedrak@Colliers.com

The only exceptions were Kraków where, similarly to Warsaw, vacancy rates remained at practically the same level, and in Gdańsk where the availability of space increased slightly. At the end of 2010, the locations with the largest volume of vacant space could be found in Warsaw Zone II and in the regional markets of Upper Silesia and Central Poland. RENTS

cla

ile rS pe

sia

sa ar W

w sa ar

w W

III

6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00

Renewal & expansion

VACANCY RATES

20.1%

2010 saw leasing activity also in Rzeszów (32,500 Sqm BTS scheme for Zelmer), Toruń (10,250 Sqm BTS for Nissin) and Szczecin (3,650 Sqm).

Throughout 2010 the average vacancy rate for the Greater Warsaw area remained stable at ca. 20%. When compared with vacancy rates recorded in the regional markets, there was a noticeable difference in that vacancy rates in almost all locations – namely in Central Poland, Upper Silesia, Wrocław, Poznań and Szczecin – where they dropped over the year.

Type

ProLogis Park Dąbrowa

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

The amount of space leased in Kraków and Gdańsk was lower – ca. 18,000 Sqm and 15,000 Sqm, respectively. However, we must consider that these are smaller markets.

VACANCY

SELECTED LEASE TRANSACTIONS Tenant

Central Poland and Poznań came next in terms of the leasing activity, with 188,500 Sqm and ca. 185,400 Sqm, respectively. Activity surpassing 100,000 Sqm was also reached in Wrocław (exactly 107,000 Sqm).

Since the beginning of 2009 rents had systematically fallen due to the high amount of unleased space which had entered the market alongside lower demand. Despite tenants’ higher activity in 2010 the downward tendency continued in the first six months of the year in all markets.

Warsaw Zone II and Zone III, as well as Poznań and Szczecin experienced further downward corrections in rents at the end of 2010. In contrast markets with low availability of space (such as Gdańsk) or with increasing tenants’ activity e.g. Warsaw Zone I and Upper Silesia recorded the first increases in rents for over twelve months. Nevertheless, effective rents are still much lower than at the end of 2009. PROGNOSIS

Due to tenants’ higher (activity combined with decreasing availability of space) rents are expected to start growing, especially in markets with decreasing amounts of vacant space. These markets include: Poznań, Wrocław and Upper Silesia. Since there is still a relatively high volume of vacant space in Zone II in Warsaw, Upper Silesia and Central Poland it is unlikely that developers will begin new projects in these locations throughout the year, unless pre-lease agreements are signed. Only those markets with a low level of available space can expect some increase in supply. These include: Gdańsk (Segro and Goodman have already announced new investments in this location) as well as Kraków, where some investments are already under way (Goodman and MARR). Developers will continue to focus on BTS schemes, as they demonstrate a much lower degree of risk than speculative developments, as well as on projects with secured pre-lease agreements.

Colliers International | p. 82

2011 Colliers Real Estate Review » POLAND

RETAIL MARKET KEY RETAIL FIGURES

GENERAL OVERVIEW

Metric

Measure

Total stock

8,040,000 Sqm

Stock under construction

890,000 Sqm

Market saturation in Poland

212 Sqm/1,000 inhabitants

Market saturation in the eight 662 Sqm/1,000 inhabitants largest agglomerations

900,000

NEW SUPPLY (SQM)

800,000 700,000 600,000

After a significant market decline in retailer activity in 2009, last year was characterized by stability. Although tenants continued to analyse their financial results carefully and many companies still looked to cut costs, growing optimism was visible amidst continued growth in retail sales across the country. Stronger retailers have taken the opportunity to expand their market share on advantageous conditions.

500,000 400,000 300,000 200,000 100,000 0

2004

2005

2006

2007

2008

2009

2010

2011

STOCK STRUCTURE 7% Retail Parks

1% Outlets

SUPPLY 83% Shopping Centers

9% Hypermarkets

SELECTED PROJECTS PLANNED FOR 2011 City

Project

Developer

Sqm

Rzeszów

Millenium Hall

Develop Investment

56,600

Opole

Turawa

Helical

41,000

Szczecin

Galeria Kaskada

ECE Projekt Management

43,000

Gdańsk

Morski Park Handlowy

Liebrecht&WooD

50,000

Saller Group West Investment

37,000

Ostrów Wielkopolski Ostrovia

In 2010 only 460,000 Sqm of new retail space was delivered to the market, although developers’ activity actually increased as new construction of over 670,000 Sqm began during the year in expectation of continued improvements in years ahead.

p. 83 | Colliers International

Total stock of modern retail space in Poland reached 8.04 Mln Sqm at the end of the year as ca. 460,000 Sqm of new retail space was delivered to the market in 2010. This is significantly less than in previous years (less than 60% of 2009 new supply) as a result of a significant drop in the number of schemes entering the construction phase during the crisis. The total retail stock in the eight largest markets is 5.19 Mln Sqm. Approximately 153,000 Sqm of new retail space was completed. The largest new project was Port Łódź (67,000 Sqm). The majority of new space was completed in small and medium-size cities. At the end of 2010 the total stock in these markets reached 2.9 Sqm. The largest projects delivered were Victoria shopping centre in Wałbrzych (43,000 Sqm) and Gemini Park in Tarnów (41,500 Sqm).

Among the largest cities, the saturation level is still the highest in Poznań (984 Sqm per 1,000 inhabitants) and Wrocław (863 Sqm per 1,000 inhabitants). As regards to medium size cities (above 100,000 inhabitants) the most saturated are Opole (1,059), Bielsko Biała (905) nad Płock (872). Market saturation in the latter increased significantly in 2010 due to the delivery of 46,700 Sqm of new retail space. PLANNED SUPPLY

Up to 650,000 Sqm of retail space is under construction and scheduled for delivery in 2011. This amount is similar to supply levels reached in 2008. The majority of this space will be completed in secondary cities. Taking into consideration the lenghty construction period for modern shopping centres we can expect only a few additional projects completed in 2011. Higher volumes of completions are expected in 2012 and 2013. The largest retail properties planned to be delivered in 2011 are Millenium Hall in Rzeszów (56,500 Sqm), Galeria Kaskada in Szczecin (43,000 Sqm) and Galeria Słoneczna in Radom (42,000 Sqm). The majority of this new supply will be traditional shopping centres. Retail parks (in total 101,000 Sqm) are expected to be completed in Opole, Kraków and Gdańsk. Also worth mentioning are outlets, which account for only 1% of total retail space in Poland. Delivery of such properties is planned in Kraków (Factory Outlet, 21,320 Sqm) and Szczecin (Outlet Park Szczecin, 23,000 Sqm).

Research: Dominika.Jedrak@Colliers.com

2011 Colliers Real Estate Review » POLAND

RETAIL MARKET Although tenants continued to analyse their financial results carefully and many companies still looked to cut costs, growing optimism was visible.

1,000 900 800 700 600 500 400 300 200 100 0

MAJOR CHANGES IN MARKET SATURATION Sqm per 1,000 inhabitants

Tarnow

Lodz

Plock

▄ Q4 2009

Przemysl

Walbrzych

▄ Q4 2010

SELECTED PROJECTS PLANNED FOR 2012/2013 City

Project

Gliwice

Europa Centralna Helical

Developer

Size (Sqm) 67,000

Kielce

Korona Kielce

Church Land Development

Elbląg

Siódemka

NEPH

Rzeszów

City Center

Star Europa Holding 42,000

Gliwice

Focus Mall

Parkridge

36,000 64,000 65,000

DEMAND

Although still very cautious in making decisions, tenants are more interested in new investments than they were during 2009. Generally, however, retailers are looking at consolidation focusing on their best performing stores and cities and reducing the size or closing unprofiteable units, or increasing the size in the best locations to increase economies of scale and improve the range and value of the offer. Retailers are also considering potential locations more carefully – market share is no longer the sole strategy. There is now much more emphasis on market dominance, profitability and the quality of the location. Such companies as Tchibo, Starbucks, TK Maxx, New Look, Pandora, Peacocks, Marks&Spencer opted for further expansion in 2010. Among new brands which decided to enter the Polish market were Muji, New Look, as well as luxury brands Carolina Herrera and Salvatore Ferragamo. In 2011 entry of such brands as Toys R Us, LC Waikiki, Chocolate Company and Jula is expected. Toys R Us will probably be the most significant market entry. Demand for street locations is also at a stable level, although limited bank branch expansions and the tendencies to close unprofitable locations has had an unfavourable influence on the vacancy level, mainly outside large agglomerations. This poses an opportunity for mobile phone operators, cafes, bakeries, fast food bars, restaurants and shops with accessories to take advantage of the current situation and secure units which were previously unavailable.

Research: Dominika.Jedrak@Colliers.com

RENTS

Rents in the very best centres and high street locations were maintained over 2010, with some increases seen in regional cities where demand exceeded supply. However, some of the lower quality centres have suffered from rental reductions as a result of falling retail turnover. PROGNOSIS

We can expect an increasing number of projects to receive financing and enter the construction phase, driving new supply levels in the coming years. Most tenants have put serious problems behind them and we therefore expect a more stable level of demand. Prime shopping centres will still enjoy the highest levels of interest. We expect to see rents remain stable in the coming months, although they are likely to increase slowly in prime shopping centres. In 2011 retailers will continue to seize the opportunity to take units from their weaker competitors and strong brands will continue to increase the size of their units and their offer to improve sales. We can also expect their higher interest in high street locations. Despite growth amongst retailers, there will be continued pressure to improve the management and marketing of centres to increase turnover levels, improve efficiencies, reduce costs and diversify the overall offer relatively to competing shopping centres.

Colliers International | p. 84

2011 Colliers Real Estate Review » POLAND

HOTEL MARKET GENERAL OVERVIEW

2010 was a year of worldwide hotel trading recovery, most regions participated in a pronounced improvement in occupancies and ADR growth. In Europe we noticed remarkable economic turnarounds, cities such as Munich, Frankfurt, London, Zurich, Berlin, Istanbul fared very well in the post recession year. Most of the aforementioned cities enjoyed a remarkable growth in RevPAR. To be added to this positive outcome for 2010, Warsaw can also be mentioned, with the increase of RevPAR of 7.5% and occupancy growth of 8%. The ADRs are still under pressure, especially in the oversupplied 5-star branded hotel category in the capital of Poland.

TOURIST ARRIVALS (MLN) Source: Instytut Turystyki

16 14 12

Some of the positive influencing factors in Poland were the GDP growth, the strong exports and manufacturing sectors, relatively well positioned Polish currency, and domestic demand level. Chopin 200 year anniversary and related festivals and activities also helped the Polish market with transient visits.

This city also performed well in comparison with 2009. The branded hotel products fared well, the occupancy in that segment was circa 64% at an ADR of €67. 5-star hotels showed growth in occupancy to 72% with a final ADR of €97.

EU debt crisis, the currency wars, volcano ash business interruption, Smolensk tragedy and floods in the south of the country were negative business influencers.

The city enjoyed a favorable summer season, which is predominantly leisure based travel. The hotels did a pretty good job in staying busy and competitive against most cities in Poland.

HOTEL SECTOR IN MAJOR CITIES Warsaw

The hotel sector in the capital enjoyed a very good year. Strong demand for room nights in the business and small conference segments were noticed throughout the last three quarters of the year.

10 8 6 4 2 0

2004

2005

2006

2007

2008

2009

2010

2011F

SELECTED HOTEL OPENINGS Hotel name

City

Standard No. of rooms

Hilton

Gdańsk

150

Holiday Inn

Bydgoszcz

134

Best Western Premier

Katowice

168

Ambasador

Łódź

143

Bella Note

Chorzów

HOTELS BY CATEGORY IN MAJOR CITIES 8% 1 star

8% 5 star

15% 4 star

20% 2 star

p. 85 | Colliers International

49% 3 star

The 5-star hotels performed with occupancy rate of 69.9% and ADRs of circa €98. The 4-star hotels also enjoyed a good trading year, occupancies were reported at the level of 68% and ADRs of €73. All the rest of the branded hotel products had circa 5% y-o-y growth in occupancies as well as ADRs. New hotel inventory was not added in Warsaw in 2010. In further years we can expect completion of the 4-star 347 room Doubletree by Hilton Conference Centre and Spa, the 250 room Renaissance by Marriott at the Chopin Airport, and the former Warszawa hotel building converted into a luxury class boutique hotel by the Likus family. In terms of economy sector in Warsaw, Orbis/Accor has announced a combination Etap/Ibis hotel (340 rooms) to be delivered in Q2 2012.

Kraków

The BPO business is creating new corporate room nights, and a new Conference Centre is being built next to the Park Inn hotel, which will bring new MICE sector room nights to the city. A new 157 room Hilton Garden Inn was delivered in January 2011, further diversifying the branded hotel offer in the city. Tricity

Tricity did relatively well, when you consider that the Radisson Blu (2009, 134 rooms) and the Hilton (2010, 150 rooms) were added to Gdańsk’s accommodation offer. There are no new branded hotel projects in the pipeline for 2011 in Tricity, however, a 3-star Globus hotel will be opened at the beginning of the year. Gdańsk faired 58% occupancy through all hotel categories, with an average daily rate of €55. The 5-star branded hotels finished the year at 64% occupancy and an ADR of €87. Sopot’s hotel also enjoyed a better year than 2009, we estimate that the 5-star hotel segment is performing at the level of 57% in occupancy at an average achieved rate of €112. The lower segment non-branded hotels finished the year at 61% occupancy and an ADR at circa €64. Gdynia’s occupancy rate was 49%, and an ADR of about €47.

Research: Dominika.Jedrak@Colliers.com

2011 Colliers Real Estate Review » POLAND

HOTEL MARKET OCCUPANCY & ADR IN MAJOR POLISH CITIES, 2010 City

Occupancy

ADR

Warsaw, 5* hotels

69.9%

€98

Kraków

64%

€67

Gdańsk

58%

€55

Wrocław

65%

€57

Poznań

49%

€61

Łódź

57%

€64

Poznań

The city of Poznań has been trying to turn around its poor hotel trading performance. 2010 showed some improvement for a few hotels there. There are also no new hotels in the pipeline. The Sheraton, the IBB Andersia, the IBIS and the Campanile are the city’s best performers. The city in all categories managed to do 49% in occupancy and achieved an ADR of €61.

FORMALLY RATED HOTELS AS OF END 2010 City

Total

Warsaw

Kraków

132

Poznań

Wrocław

Gdańsk

Łódź

Szczecin

One bright side to this city’s attempt to improve its competitiveness was its commitment in promoting and advertizing the city for leisure travelers. The challenge for Poznań is continuing to be the MICE market, and we believe Poznań should do all it can to reposition itself in this very lucrative segment.

Source: Colliers International on the base of Hotel Register in Poland

Szczecin

2010 was a better year for this city, and occupancies climbed to 58%, with an overall ADR of €49. The Radisson Blu, still the market leader, fared well in the city, with the introduction of renovated rooms and conference areas. Łódź

The hotel segment had a slightly better year, only due to regional and local conferences held in the city. The leader in the market continues on being the Andel’s Hotel in Manufaktura, which practically owns the small to medium size MICE segment in Łódź. The city did 57% in occupancy across all branded hotels, and an achieved rate of €64. 4-star Ambasador hotel was opened in 2010, however no new branded schemes entered the market. In the third quarter of 2011 Holiday Inn Hotel (that has been under construction since 2007) will be delivered into the market. A new 4-star, 191-room Doubletree by Hilton hotel is to open in 2013 in the city.

Research: Dominika.Jedrak@Colliers.com

Wrocław

The city finished the year with a very small improvement in RevPARs. The branded hotels leading in occupancy rates finished at 2009 levels – 65%, and an ADR of €57 was achieved across all categories. The 5-star branded hotels managed to deliver circa €86 in ADR and a 69% occupancy rate. 5-star Platinum Palace boutique hotel was opened in 2010, and the pipeline has a Hilton 5-star project which has been delayed for some time now due to the lack of financing. The same issue is affecting the Hilton Garden Inn development in the centre of the city. A Park Inn and dual branded Campanile and Premiere Classe have been announced and are currently being developed. Those hotels are planned to be delivered into the market in 2012. OTHER POLISH CITIES

Bydgoszcz is progressing very nicely. A new 137 room Holiday Inn was opened in October, and a Campanile is also being planned in the city. Katowice is developing rapidly into a well diversified city, catering to the trade, investment and shared service center sectors. We saw two hotels opening in 2010 – The Angelo (203 rooms), and the 168 room Best Western hotel. PROGNOSIS

Positive factors for the Polish hospitality sector will be the GDP growth, one of the strongest in the EU, as well as ongoing preparations for the UEFA Euro 2012 championships. The EU Council Presidency will be taken over by Poland in July. We estimate over 100,000 room nights will be used in conjunction with this event, and an extremely important promotion of the country during the last months of 2011 is expected to become reality.

Colliers International | p. 86

2011 Colliers Real Estate Review » POLAND

LAND MARKET RANGE OF RESIDENTIAL LAND PRICES €/SQM OF NET SELLABLE AREA (PUM) City/Region

Min

Max

Mid-point

Change*

Warsaw, centre

300

900

600

37%

Warsaw, suburbs

140

350

245

24%

Kraków

150

410

280

24%

Łódź

100

220

160

Poznań

120

350

235

Silesia

200

135

Wrocław

150

380

265

17%

Tricity

100

300

200

* Compared to 2009

RANGE OF OFFICE LAND PRICES €/SQM OF GLA City/Region

Min

Max

Mid-point

Change*

Warsaw

220

950

585

27%

Kraków

180

350

265

23%

Łódź

100

200

150

Poznań

180

300

240

Katowice

100

220

160

Tricity

130

350

240

Wrocław

160

450

305

19%

* Compared to 2009

GENERAL OVERVIEW

The second half of 2010 – especially the fourth quarter – indicated that the crisis in the land sector was over as the number of both investors and concluded deals is grew. Therefore, it is highly probable that the year 2011 will witness numerous new land and investment transactions. The beginning of 2010 was still strongly influenced by the global economic downturn which greatly affected the purchasing decisions of investment funds and developers. In this period no major transactions were recorded, however new plots were offered to the market. Also during this time, a growing number of Polish and foreign companies began their quest for new investment plots. In the second quarter there was a slight increase in the number of transactions recorded. New agreements were mostly signed in cases where the transaction price was considerably lower than the asking price. The summer holiday period – contrary to previous years – showed eagerness from investors to begin considerable purchases. A higher number of preliminary contracts were signed. In addition, potential buyers started to invest in the process of examining the urban, infrastructural, and legal status of plots. In the last months the number of companies with concrete investment plans, backed up with cash and preliminary promises of financing, increased. Also the number of closed transactions grew, including multi-phase investment projects.

p. 87 | Colliers International

TRENDS

It is clear that in the coming years the market will be oriented towards buyers and not towards vendors, as it was before the crisis. More and more frequently the major factors that constrained new deals were lack of building permits, financing, and in case of commercial properties – preliminary lease agreements. Many companies either changed or widened the range of their interests regarding the type of investments they focused on. The return of interest in residential plots is now noticeable. Commercial real estate, in particular retail, also become priority for many investors who until now were developing only residential properties. Banks have started to search for buyers interested in purchasing plots with bad credit loans; importantly, this process is carried on in collaboration with existing plot owners. Another noticeable trend is a joint-venture as more and more attractive form of investing, sometimes the only possible one for certain investment targets. Among factors restricting market activity are long administration procedures and the issue of perpetual usufruct (granting ground leases), the costs of which constraint some companies from investing in this type of plots. This is, in addition to high prices for the best locations, instances where the high amount of capital required deters many from investing.

Research: Dominika.Jedrak@Colliers.com

2011 Colliers Real Estate Review » POLAND

LAND MARKET MAJOR TRANSACTIONS IN 2010 City/Region Size (ha) Sqm*

Purpose

Price

Kraków

4.85

70,000

Residential/Office

€21.3M

Warsaw

4.4

60,000

Residential/Office

€17.9M

Gdańsk

2.7

45,000

Residential

€7.9M

Warsaw

1.8

45,000

Office

€6.2M

Gdynia

1.44+2.25 30,000

Office/Industrial

€4.4M

Toruń

Industrial

€2.6M

10,000

* Investment potential

PRICES & TRANSACTIONS

The average price of office investment sites increased in comparison with the end of 2009 in Warsaw (27%), Kraków (23%) and Wrocław (19%). Prices in Łódź, Katowice, Poznań and Tricity remained at the same level. With respect to residential investment plots the highest increase in average prices was recorded in Warsaw city centre (37%). An increase in prices was also recorded in other Warsaw districts (24%), as well as in Kraków (24%), Poznań (11%) and Wrocław (17%). The most significant transactions in the Polish land investment market included sale of 4.85 ha plot in the city centre of Kraków at a price of ca. €21 Mln. The site is designated for residential and office development. Another major deal was the sale of a residential/office investment site in south-eastern Warsaw. The price for the 4.4 ha plot was PLN 70 Mln (ca. €17.9 Mln).

New residential projects will begin in all major and medium-sized cities. Developers are already in possession of well-prepared plots, therefore in many places we can expect construction to begin soon. There are more and more investors interested in retail parks, cities with above 30,000 inhabitants will continue to be besieged by searches for plots in attractive locations, offering a good price and limited competition in the area. In the coming years prices will remain at the current level with some minor changes. If a growth in prices is recorded, it will be sensible, especially taking into account dynamics in the pre-crisis years.

PROGNOSIS

The second half of the year, especially the last quarter proved that the crisis is over and the number of transactions and investors is increasing. Some banks now offer conditions that many investors are willing to accept. With regard to the residential market, the improvement in borrowing power is noticeable, which will cause an increase in purchasing activity. Everything indicates that 2011 will be a very active year in terms of new land and investment transactions, construction of new residential, office, retail and warehouse projects. Locations for potential hotel developments will also find buyers.

Research: Dominika.Jedrak@Colliers.com

Colliers International | p. 88

2011 Colliers Real Estate Review » POLAND

INVESTMENT MARKET KEY INVESTMENT FIGURES

5,000

SUMMARY

Metric

Measure

Investment Turnover

€1.8 Bln

Prime Office Yield

6.75-7.25%

Prime Retail Yield

6.75-8%

Prime Industrial Yield

8-8.5%

As a result of strong macroeconomic fundamentals and low vacancy rates, Poland’s commercial property market navigated well through the recent credit crisis.

INVESTMENT VOLUMES (€ MLN)

4,000 3,000 2,000 1,000 0

2001

13%

2002

2003

2004

2005

2006

2007

2008

2009

2010

Poland is widely perceived by the international investment community as the ‘hot-spot’ in the CEE region and indeed a major European economy. The country has continued to emerge as a ‘core market’, with such features as liquidity for core assets (equity and debt), low risk premiums, institutional quality inventory within a sound legal environment. The Polish commercial real estate market has remained attractive relative to other EU countries and property values have not been impaired to the degree observed in other CEE countries during the crisis. Moreover, upward pressure on pricing with regard to core assets was recorded in 2010.

PRIME YIELDS

12% 11% 10% 9% 8% 7% 6% 5% 4%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

▬ Industrial ▬ Retail ▬ Oﬃce

SELECTED INVESTMENT TRANSACTIONS Project Arkadia & Galeria Wileńska Horizon Plaza

Value

Seller

Buyer

n/a

Simon Ivanhoe

Unibail Rodamco

€102M

IVG

Union Investment

Trinity Park III

€93M

Ghelamco

SEB AM

Jantar SC

€92M

Mayland

EPISO

Logistics Portfolio

€91M

Panattoi

EPISO

Topaz & Nefryt

€79M

GTC

RREEF

Grunwaldzki Center

€77M

Skanska

RREEF

Total real estate investment volume in Poland in 2010 more than doubled in comparison to 2009 levels with a number of high profile transactions. Single transaction volume increased in comparison to 2009 and the market has witnessed several all equity transactions which demonstrated the confidence of the investors in the market. Office and retail asset classes dominated the market, whereas the logistics sector also recorded major transactions, including a core portfolio sale.

We note that the Polish investors are becoming increasingly interested in the commercial real estate market, which has been marked by acquisitions concluded by PZU, Poland’s largest insurance company (which purchased e.g. Athina Park office complex). PROGNOSIS

Core German investors are expected to continue to dominate the investment landscape for the medium term, given the ability to transact by means of ‘all’ equity or low leverage levels. As a result of the available pool of debt and equity being focused on standing core assets, a growing difference in yield or pricing has become more prevalent between ‘core’ and ‘non-core’ assets. Several assets in Poland are currently in due diligence and we expect investment activity to remain strong in 2011, although likely less volume than in 2010. We are of the opinion Poland will out-pace the rest of CEE for the near term, primarily due to the inherent, healthy macro-economic dynamics, a national economy, which continues to expand and also due to favourable leasing dynamics in Poland’s major cities. Stabilization of core yields in the mid-term is becoming increasingly dependent on the macroeconomic fundamentals of the region in the wake of the sovereign debt issues.

For the first time post-Lehman, investors turned to regional cities with severalprominent transactions, particularly in office and retail sectors (Grunwaldzki Center in Wrocław, Avatar in Kraków, Jantar Shopping Center in Słupsk, Galeria Malta in Poznań).

p. 89 | Colliers International

Research: Dominika.Jedrak@Colliers.com

2011 Colliers Real Estate Review » POLAND

POLAND LEGAL OVERVIEW Basic Forms of Title In Poland there are four basic forms of title to real estate: (i) full ownership (“własność”) which is similar to “freehold” title and entitles the owner to a full range of perpetual rights to use and enjoy real property; (ii) the right of perpetual usufruct (“użytkowanie wieczyste”) which is a form of ownership where the State Treasury or units of local government own the underlying title and grant the user full rights to use and enjoy the property for up to 99 years subject to an annual statutory fee; subject to certain conditions, the right of perpetual usufruct may be changed into full ownership; (iii) a long term lease (“dzierżawa”), which was originally designated for agricultural land but is often used to lease commercial property for up to a maximum period of thirty (30) years; and (iv) a lease for a fixed period of time (“najem”) which has a maximum term of ten (10) years or thirty (30) years, if the agreement is entered into between commercial entities.

Acquisition of Real Estate by Foreigners Generally, the direct or indirect acquisition of commercial property by entities which are “controlled” by foreigners require a permit from the Minister of Internal Affairs and Administration. However, due to amendments arising from Poland’s EU accession, entities from the EEA no longer require such a permit. However, certain restrictions and transitional rules relating to the purchase of specific types of real estate (i.e. agricultural land, land located in border zones and second homes) remain in place. Registration System In Poland, District Courts maintain land and mortgage registers (“księgi wieczyste”) which can date back more than 100 years, depending upon the jurisdiction. These registers show the owner of the property in question and also indicate the extent to which the land is encumbered by mortgages and other limited property rights or limitations. As a general rule, “good faith” purchasers of land are entitled to rely upon information contained in the registers.

Transfer Taxes Generally, the supply of immovable property is subject to VAT. The supply of undeveloped land other than building land or land designated for development is exempt from VAT. As regards developed land, the VAT exemption also covers: The supply of buildings, constructions or any part thereof (together with the land), except where: (i) the supply is made within the first occupancy (as defined by VAT Law) or before the first occupancy took place; (ii) the period between the first occupancy and the supply of a building, construction or any part thereof was shorter than 2 years; The supply of buildings, constructions or any part thereof (together with the land) which is not subject to the exemption referred to in A, provided that: (i) the person supplying these items had no right to reduce the amount of output tax by the amount of input tax connected with these items; (ii) the person supplying these items, did not incur expenses for their improvement in respect of which he/she had the right to reduce the amount of output tax by the amount of input tax, and if such expenses were incurred, they were lower than 30 per cent of the initial value of these items. However, taxpayers who fall within the VAT exemption referred to in point A above, may opt for taxation of the supply made (if the formal requirements provided by VAT Law are met). The exemption referred to in point B above is obligatory for taxpayers. Where a sale of immovable property is either VAT exempt or not subject to VAT, the sale is subject to a transfer tax at the rate of 2% (the buyer is liable for the payment of the transfer tax). Transfer tax is charged on the market value of the immovable property subject to its being transferred. Leases Leases in Poland are freely negotiable, but subject to certain mandatory provisions of the Civil Code which cannot be varied by contract. The most important restrictions concern the length of lease terms (although in commercial leases the maximum period for which a lease agreement can be signed was recently extended from 10 to 30 years) and termination rights.

Restitution Claims There is no comprehensive restitution law in Poland. Instead, there is a complex web of laws which, under limited circumstances, permit certain former owners of real estate to assert claims against governmental authorities. Restitution claims may be registered in the land and mortgage books; however, the absence of such registration does not necessarily indicate that no such claims exist. Notaries and Notarial Fees Legal agreements for the sale of real estate and the transfer of perpetual usufruct rights to real estate need to be in notarial form in order to be enforceable in Poland. Notarial fees are calculated on the value of the transaction up to a set maximum. The new law on Court Registration Fees (effective as of March 2006), introduces fixed fees for entering the following rights into the Land and Mortgage Registers: the right of ownership, the right of perpetual usufruct and limited property rights (e.g. mortgages and easements). Construction Law As a general rule, all major construction requires a building permit in a form of an administrative decision. Following the amendments made in 2006, administrative requirements for the construction of media access have been relaxed. Planning and Development Law The local development plan is the main document deciding which investments are to be allowed on a given site. However, many Polish communes still have no local plans in force and therefore, prior to obtaining a building permit, an administrative decision on the site development conditions is required.

Language Most legal agreements do not need to be executed in Polish in order to be enforceable in Poland. Nevertheless, the notarial form of real estate transfer can only be executed in Polish. Information contained in this general outline does not constitute a legal opinion and is not meant to be comprehensive. As a result of pending and new legislation, laws and regulations change frequently in Poland and are often subject to varying interpretations. Professional advice should be sought regarding all aspects of real estate in Poland.

Colliers International | p. 90

2011 Colliers Real Estate Review » POLAND

POLAND TAX SUMMARY GENERAL Since 1 January 2011, the new VAT rates have been introduced – standard rate of 23%, as well as reduced rates of 8% and 5%. Generally, based on the currently binding VAT provisions, the sale of the buildings and constructions occupied for longer than 2 years is VAT exempt (as a result, 2% transfer tax is payable by the buyer). However, in most cases, the taxpayers may give up the exemption on such sale and make it a VAT-able transaction if the special conditions are fulfilled. Also, exempt from VAT are supplies of buildings and constructions if the supplier had no right to deduct input VAT upon acquisition of this building or construction (and additional conditions are met). The reduced 8% VAT for sales of residential property before first occupation applies only if the property meets the criteria of social housing program. If the area of a house or apartment exceeds certain surface, both reduced and standard VAT rates applies. Based on the amendments to the CIT Act being in force starting from 1 January 2011, the possibility to implement step-up on the value of properties not recognized as fixed assets (i.e. properties being reported as work in progress, e.g. apartments for sale) was eliminated. However, there are still some tax optimization possibilities to be implemented in 2011. CIT AND CAPITAL GAINS Generally, CIT in Poland is levied on all taxable income, with some exceptions, e.g. income derived from forestry and agricultural activities. 19% CIT is payable on income which is computed as taxable revenues reduced by eligible costs incurred to generate these revenues or retain or secure a source of a taxable revenue. The costs incurred in respect of given up investments may be treated as tax deductible costs. There is no separate capital gains tax, but gains on the disposal of fixed assets and intangibles are added to the taxpayer’s mainstream income (gains from the sale of real estate property are taxed at regular 19% CIT rate). For the seller, profit on the sale of assets is added to the mainstream income subject to corporate income tax at normal rates. On disposal, the taxpayer can deduct the net tax value of the assets and associated disposal expenditures. Taxable income can be reduced by tax losses available for utilisation.

p. 91 | Colliers International

In case of a sale of shares in a Polish company held by a non-Polish shareholder typically the double tax treaties Poland has concluded with other countries provide for a taxation right of respective capital gains in the jurisdiction of the shareholder. However, in some double tax treaties sale of shares of the Polish company which to a great extent comprises of real estate is taxed in Poland at 19% CIT (for example double tax treaties with UK, Spain, France, Ireland, Germany, Austria, Belgium, Denmark, Malta, Sweden). A fiscal group may be created for corporate tax purposes. There are a number of conditions that need to be met (in practice, the most difficult is the requirement for the profit of the group for tax purposes to be equal to at least three percent of gross taxable revenue). In principle, partnerships are used to achieve consolidation of CIT results. TAX DEPRECIATION Depreciation of fixed assets is usually calculated on a straight line basis using the rates laid down in the Polish CIT Act. Depreciation write offs are then claimed on the initial value of the individual fixed or intangible assets, in equal amounts each month, starting from the month following the month in which particular asset was brought into use, until the end of the month in which the total depreciation write offs equal to the asset’s initial value or in which it is liquidated, disposed of or found missing. The key annual depreciation rates are: 2.5% for buildings, 4.5% for constructions and 10% for technical devices. Land is not depreciated for tax purposes. TAX LOSSES Tax losses may be carried forward for 5 years and up to 50% of particular tax loss can be utilized in any one year (after 5 years they expire). The ability to utilize tax losses is unaffected by a change of ownership of a company. THIN CAPITALIZATION

The Polish thin capitalisation rules limit the tax deductibility of interest paid or capitalised on loans granted by qualified lenders, i.e. —— from the shareholder holding solely at least 25% of voting rights or shareholders holding jointly at least 25% of voting rights of the borrowing company; —— from a sister company which has the same shareholder as the borrower, if the shareholder owns at least 25% of voting rights of both the lending and the borrowing company (i.e. sister company).

Generally, the thin capitalization restrictions apply to interest paid from the above loans by the Polish company if as per the date of its payment the total debt to the above qualifying lenders and shareholders of parent entity with at least 25% of voting rights in the parent entity exceeds three times the equity of the Polish company. In principle, the interest paid from the part of the loan exceeding this debt to equity ratio will not be tax deductible. There are some uncertainties how thin capitalization rules should be applied in practice. WITHHOLDING TAX Dividends Dividends are subject to 19% withholding tax. This is generally reduced under double tax treaties to which Poland is a party. To apply the reduced rate, the payer should be in possession of a tax residence certificate of its shareholder. Dividends paid to qualifying Polish resident company, EU/ EEA resident companies (or its foreign permanent establishments) or qualifying Swiss companies are exempt from Polish withholding tax if the shareholder owns at least 10% (in respect of the Swiss shareholders at least 25%) of payer’s shares and the shares are uninterruptedly held for at least 2 years. The withholding tax exemption is also applicable if the dividend payments are made before the end of this period, but if the shares are disposed of earlier, any withholding tax due is payable together with penalty interest. Interest, Royalties and Intangible services Under Polish domestic legislation, withholding tax of 20% applies on payments of interest, royalties and fees for intangible services made abroad. This is generally reduced or eliminated under the double tax treaties to which Poland is a party. However, in order to apply the treaty rates, the payer should have a certificate of tax residence of the recipient. Poland was granted a derogation period until 1 July 2013 to fully implement the EU Interest and Royalties Directive. Based on the above derogation provisions, until 30 June 2013 interest and royalties paid to qualifying EU resident companies or EU permanent establishments are subject to 5% withholding tax. From 1 July 2013 qualifying interest and royalties will be tax exempt. To apply the EU Interest and Royalties Directive provisions in the above manner the 2 years holding period is required. These provisions can be also applied before the 2 year holding period has been fulfilled, but if the shares are disposed of earlier, any withholding tax due is payable together with penalty interest.

Contact: honoratagreen@kpmg.pl

2011 Colliers Real Estate Review » POLAND

POLAND TAX SUMMARY Similar provisions apply to qualifying Swiss resident companies.

REAL ESTATE TAX

Real estate tax is a local tax which applies to land (and perpetual usufructuary of land), buildings and constructions (installations). The taxable base for all buildings is the floor area of the building. For land (and perpetual usufruct of land), it is the area. For constructions (installations), the depreciation value is taken into account. The current (for 2011) maximum rates for real estate tax cannot exceed: —— PLN 0.80 per Sqm for land used in business activity. —— PLN 0.41 per Sqm for other land. —— PLN 0.67 per Sqm for dwellings. —— PLN 21.05 per Sqm for buildings used in business activity. —— PLN 7.06 per Sqm for other buildings. —— 2% of the value of constructions/ installations (in principle on tax written down value at 1 January each year). Year-by year is intended by a government to implement a new real estate tax where the basis for the taxation will be the value of the real estate (cadastral tax). However, the implementation of this tax is being postponed each year and there is no information when (if at all) it would be implemented. TAX ON CIVIL LAW TRANSACTIONS (PCC, TRANSFER TAX) 0.5% PCC is imposed on capital injections to a newly registered company, as well as on any increases of the share capital or additional payments made to the reserve capital of the company (or on the value of contributed assets in respect of partnerships). The shareholder loans are PCC exempt while non-shareholder loans are generally subject to 2% PCC (the borrower is obliged to pay the transfer tax; if certain conditions are met there is no obligation to pay PCC on loans). Moreover, the sale and exchange of goods and property rights are subject to PCC if outside the scope of VAT. If the sale is VAT exempt, it is usually exempt from PCC, except for land and buildings (purchase of real estate is subject to 2% transfer tax on its market value even if VAT exempt). Acquisition of shares in Polish companies in principle is subject to 1% transfer tax in Poland

Contact: honoratagreen@kpmg.pl

payable by the buyer, but some tax optimisation techniques can be used.

VAT General provisions regarding real estate Generally, since 1 January 2009, the sale of the buildings, constructions and their parts is VAT exempt (except if the sale performed confines the first occupation or is made before it or if the sale is performed within 2 years from the first occupation). However, in most cases the taxpayers are able to give up the exemption if the special conditions are fulfilled. Also, exempt from VAT are supplies of buildings, constructions or their parts if the supplier had no right to deduct input VAT upon acquisition of this building or construction and additional conditions are met. In case of a VAT exempt sale of the buildings, constructions and their parts, the transaction is subject to 2% transfer tax. In case of a sale of land with a building which qualifies for a VAT exemption, then both assets are VAT exempt and are subject to 2% transfer tax. The standard VAT rate in Poland on the sale of land and buildings is 23%. The reduced 8% VAT for sales of residential property before first occupation applies only if the property meets the criteria of social housing program (houses not larger than 300 Sqm and apartments not larger than 150Sqm). If the area of a house or apartment exceeds such values, both VAT rates applies (8% to the area up to the 300 Sqm/150 Sqm, 23% to the area exceeding those statutory limits). Where a property is acquired as a going concern (as a whole business or organised part of business) such transaction is outside of VAT. In these circumstances, transfer tax applies at 2% on the value of property and is payable by the buyer (if an enterprise would be consisted of various components, transfer tax of 2% applies to sale of real estate, movables, perpetual usufruct rights; 1% applies to sale of other property rights). Lease of office and rental space is subject to 23% VAT regardless of the status of the tenant. Lease of residential property for housing purposes is VAT exempt.

Place of supply of services Generally, the place of supply of services to a tax payer registered for VAT purposes in Poland or in other EU country is the place where the purchaser has its seat, permanent place of residence or permanent place of carrying

business. However, in case the supply of services is done to entities other than tax payers (registered for VAT purposes in Poland on in other EU country), the place of supply of services is where the service provider has its seat, permanent place of residence or permanent place of carrying business. However, in case of services related to the real estate, the place of supply of services is where the real estate is situated. The advisory services provided to the non-tax payer (i.e. entity not registered for VAT purposes in Poland on in other EU country) having its seat or permanent place of residence outside of EU are subject to taxation where the purchaser have its seat or permanent place of residence. VAT refund under domestic law Since December 2008 the standard refund period has been shortened from 180 to 60 days. In order to apply for direct refund of input VAT excess within standard 60 days, the taxpayer has to perform taxable sale. The standard periods of refund (60 days) can be shortened to 25 days if all purchase invoices from which VAT is declared in particular VAT return are paid by the time the VAT return in submitted to the tax office. If there is no VATable activity, then the VAT refund can be obtained as well, however, within 180 days. It can be shortened to 60 days if the taxpayer files the security deposit. Foreign VAT refund under VIII Directive Since 1 January 2010 VIII Directive reclaims must be filed with the local VAT authority (where a company is registered) and not where VAT has been paid. VAT reclaim has to be filed electronically. EC services list Since 1 January 2010, the monthly EC services lists must be filled by the tax payers, if they supply services to tax payers from other EU countries where the reverse-charge mechanism was applied. Advisory services where the VAT is charged in the recipient’s country have to be included. Services relating to the local real estate where the VAT is charged locally are not to be reported. The EC services lists must be filed by 15. of the following month or by 25. of the following month if filed electronically.

Colliers International | p. 92

2011 Colliers Real Estate Review » COUNTRY

Romania

MARKET

Dear Friends, With its passion for education and in depth knowledge, Colliers International has created another full and comprehensive analysis of the 2010 real estate market, including a 2011 forecast for each market segment. Its main purpose is to help real estate players understand the factors of success or failure in this industry and as a result, to help them make better decisions. If we look at the timid movement in the market, we could say we are now back in a time similar to early years of 2000. The current market outlook places us at the beginning of a exciting new cycle. As it’s time to start building the market again, we should be wise and learn from the past whilst looking to a brighter future. But do we actually learn from the mistakes of the past? Ilinca Paun

managing director colliers international romania

Whilst still in a crisis period, a paradox is arising, with many niche development markets undertaking a race to secure locations in very little time. Thus, some markets are heating up, whereas others continue their struggle to recover. Although

Floreasca Business Park 169A Calea Floreasca Building A, 7th floor 014459 Bucharest 1, Romania

the rush itself brings some good news, it reminds me of past mistakes, when

Phone

+4021 319 77 77

If we were to go back to 2008, the desire for transparent and high quality real

Ilinca.Paun@Colliers.com

estate consultancy was expressed and a manifesto against aggressiveness was

Address

decisions were based on the desire to maximize short term profit margins, instead of thorough analyses of the projects’ sustainability.

supported by many developers and investors. However, as the market is picking up, some players consider loyalty, transparency and integrity not as important as their immediate goal to secure clients. These are examples of lessons to be learned from the past, in pursuit of a new healthy market cycle. Hopefully you will find other valuable information in the following pages of our market report and you will join us in our efforts to recreate a sustainable real estate business in Romania. Should you be interested in understanding the value of our services and our people, I will be glad to be your guide through our business philosophy, expertise and values. Yours sincerely, Ilinca Paun

p. 93 | Colliers International

Research: Firstname.Lastname@Colliers.com

2011 Colliers Real Estate Review » ROMANIA

ECONOMIC OVERVIEW SUMMARY

After a 7% decrease in GDP in 2009, 2010 brings the Romanian economy one step further to its recovery, with a 1.2% decrease by the end of year. The economy is now stabilizing and growth is set to resume, starting with 2011.

KEY ECONOMIC FIGURES Metric

% Change

GDP Growth

-1.2%

Industrial Production

4.2%

Unemployment

Inflation (eop)

8.1%

Public Deficit

-6.8%

The unemployment rate slightly increased from the previous year, reaching the estimated value of 8% by the end of 2010.

Source: National Commission of Prognosis, National Institute of Statistics

10%

Inflation has increased sharply as a result of the recent climb in the VAT rate and higher food prices, due to higher world prices as well as the summer flooding which disrupted food production in Romania. Headline CPI jumped from 4.4% in May to 8.1% estimated by the end of the year.

GDP, INFLATION & UNEMPLOYMENT

8% 6% 4% 2% 0% -2% -4% -6% -8%

Source: National Commission of Prognosis, National Institute of Statistics |

2007

2008

Prior to the VAT increase, prices were on a firm disinflation trend towards the center of the National Bank’ target band of 3.5% ±1 percentage point.

2009

2010

▬ Real GDP ▬ CPI (yoy, eop) ▬ Unemployment rate (eop)

12.00

BNR MONETARY POLICY RATE, %

11.00 10.00 9.00 8.00 7.00 6.00 5.00 4.00

Source: National Bank of Romania |

Dec 2006

Jun 2007

Dec 2007

Jun 2008

Dec 2008

Jun 2009

Dec 2009

Jun 2010

Dec 2010

In regards to its external affairs, Romania continues to recover. The current account deficit improved from 13.5% in 2007 to 5% of GDP (on a 12-month basis) by September 2010, driven by continuously shrinking trade deficit. Exports are gaining momentum with recovery in major trading partners (driven by manufacturing sector) while modest domestic demand is limiting import growth. On the transfers’ side, Workers’ remittances have shrunk compared to 2009 due to the recession and high unemployment in host economies. Foreign direct investment continues to be weak.

PROGNOSIS

According to the IMF, Government revenues are improving and expenditures are falling, putting the government on track to reach its 2010 fiscal deficit. On the bright side, the fiscal measures might improve Romania’s perception in international financial markets, notwithstanding the considerable uncertainties in the Euro zone periphery. While the economic recovery has been delayed by the weak domestic demand (in part due to the needed fiscal consolidation), exports are booming and GDP growth is set to resume in the coming quarters. For 2011, the real GDP is expected to grow by 1.5%. Internal demand will only slowly regain momentum after real disposable income was reduced by lower public wages and the VAT hike. Beginning in 2012, demand from households and enterprises should become the main growth engine, as incomes recover. Risks to this outlook remain large but broadly balanced. On the downside, political tensions could reduce confidence and weaken performance. A weaker-than-expected recovery in Western Europe could affect Romanian exports. The ongoing turbulence in the Euro area periphery could still spill over into Emerging Europe, raising risk premia and affecting capital flows to Romania. On the upside, the booming export sector could result in stronger spill-over effects to the local economy. The sharp fiscal adjustment undertaken in 2010 could clear the way for a faster recovery of consumer confidence and domestic demand in 2011.

The banking sector remains liquid and well capitalized but non-performing loans continue to rise and will likely continue to increase in the first half of 2011. This is due to the slow economic recovery and the effects of recent public wage cuts on disposable incomes.

Research: Iuliana.Tataru@Colliers.com

Colliers International | p. 94

2011 Colliers Real Estate Review » ROMANIA

OFFICE MARKET KEY OFFICE FIGURES

GENERAL OVERVIEW

Metric

Measure

Total Stock

1,360,000 Sqm

Net Take-Up

110,000 Sqm

Vacancy

18%

Prime Headline Rent

€18/Sqm/month

1,600

In 2010, the Bucharest office market witnessed a more active year than in 2009, although it does not yet imply a full recovery. Demand slightly increased as tenants became accustomed with the new economic environment. Moreover, landlords were more flexible, paying more attention to companies’ needs.

STOCK EVOLUTION (SQM ,000) The stock refers to class A oﬃce buildings, over 3,000 sqm.

1,400 1,200 1,000

SUPPLY

800 600 400 200 0

2006

2007

120,000

2008

▄ Stock

2009

2010

▬ New deliveries

At the end of 2010, Class A office stock reached 1,360,000 Sqm, after the delivery of roughly 170,000 Sqm during the year. Out of the total modern office stock, over 20% is located in central areas, while the remaining is approximately equally split between semi-center and periphery.

NET TAKE-UP EVOLUTION BY AREA

100,000 80,000

Secondly, a large numberof the contracts signed in 2005–2006, for a 5-year term, expired in 2010 and tenants had to make a decision. The health care sector together with IT and outsourcing companies were the most active tenants on the market. Since new deliveries started to diminish, some cautious tenants that also have important space requirements will most likely try to secure space either by preleasing or by finding built-to suit opportunities. In terms of take-up by area, the most sought after location in 2010, was the semi-central area with approximately 50% of the total demand on the market. The remaining space was almost equally distributed between CBD and peripheral areas.

60,000 40,000 20,000 0

2006

2007

▄ CBD

2008

▄ Semi-center

2009

2010

▄ Peripheral

KEY LEASE TRANSACTIONS Tenant

Size (Sqm)

Project

Developer

Sanador

11,735

Castrum

Rompetrol

9,300

City Gate

GTC

Oracle

7,000

Nusco Tower

Nusco

Mic.ro

6,000

Cubic Center

Expert Roinvest

In comparison to the delivery of new office stock in the previous year, 2010 saw a 55% decrease in the delivery of new space. This shows that developers have been highly responsive to current economic and office market conditions, postponing their development plans.

Trying to optimize the costs implied by their leased premises, a large number of tenants looked for buildings located in semi-central areas. Such choice could offer a reasonable rent in addition to good accessibility and market exposure.

The largest share of total deliveries on the market in 2010 took place in the first half of the year (74% of the deliveries) resulting from projects that were started before the onset of the financial crisis.

The overall vacancy rate stabilised during 2010 at ca. 18%.

VACANCY / AVAILABILITY

DEMAND

2010 saw a lively activity on the Bucharest office market. Out of 170,000 Sqm, 65% represented net take up, while the remaining included renegotiations, renewals and subleases. After a modest demand registered in 2009, this year brought a small increase in terms of take up. Firstly, landlords were more flexible in negotiating the contract terms, in an attempt to maintain or secure tenants.

p. 95 | Colliers International

In terms of buildings’ age and the office market stage, projects delivered on the market between 2005 and 2007 have the smallest available area, less than 10% of the gross lettable area. 2005 marked a new phase in the office market development, as the newly delivered projects brought new standards of office quality, and tenants’ interest for the Bucharest office market increased. Therefore, pre-leasing played an important role in the total demand.

Research: Iuliana.Tataru@Colliers.com

2011 Colliers Real Estate Review » ROMANIA

OFFICE MARKET 300

TAKE UP & VACANCY (,000)

20%

250

15%

200 150

10%

100

50 0

2006

2007

▄ Lease

2008

▄ Pre-lease

2009

2010

▬ Vacancy rate

ASKING RENTS (€/SQM/MONTH) CBD

Semi-center

Periphery

2009

18 – 20

15 – 18

10 – 15

2010

16 – 20

13 – 16

10 – 13

ASKING PARKING RENTS (€/CPS/MONTH) CBD

Semi-center

Periphery

Underground

120

100

Above ground

100

Starting with 2008, the office space supply surpassed the demand and therefore buildings delivered after 2008 have on average higher vacancy rates.

The largest share of the deliveries planned for 2011 will take place in the first half of the year.

Vacancy is not spread evenly across the city. The semi-central buildings registered the lowest vacancy level (14%), closely followed by the CBD (16%).

Since only three projects have been announced to be launched on the market in 2011, the delivery of new spaces will decrease significantly towards the end of 2011 and the beginning of 2012.

This has been driven by tenants who redirected their interests towards the semi-central areas where they have been able to source more cost-effective solutions than those available in the CBD.

Demand in 2011 should reach and surpass 2010 levels as the economy starts to expand in 2011. Concurrently, the vacancy rate is likely to decrease as overall availability falls in response to declining new supply levels in 2011.

RENTS

In 2010, the average asking rents on the market registered a further decrease of around 20%. However, there are still developers that did not decrease the prices – notably buildings located in the central business district. Regarding the average headline rents, there was an extra 10% decrease, compared to the asking ones. In addition to the negotiation discount, tenants could benefit also from rent free months or fit out allowance, taking the effective rent paid by the tenant 10% lower.

As a consequence,rents overall should remain almost constant over the 2011 period. However, landlords will remain flexible in negotiation with potential tenants; offering incentives for fit out and free rent periods as the market remains more advantageous for tenants, thus continuing to lower net effective rents.

After a small decrease in parking rents of ca. 10% in 2009, as they returned to 2007 levels, parking rents remained stable in 2010. PROGNOSIS

For 2011, around 150,000 Sqm are announced to be delivered on the market. Taking into account that all the projects included are very close to completion, we expect that the new supply for 2011 to be close to this number.

Research: Iuliana.Tataru@Colliers.com

Colliers International | p. 96

2011 Colliers Real Estate Review » ROMANIA

INDUSTRIAL MARKET KEY INDUSTRIAL FIGURES

OVERVIEW

Metric

Measure

Total Stock

907,000 Sqm

Take-Up

86,000 Sqm

Vacancy

15%

Prime Headline Rent

€4.4/Sqm/month

200,000

The industrial and logistic market came to a standstill in 2009 and changed little over 2010. Both the stock and demand did not register any significant activity. SUPPLY

CHANGE IN STOCK OVER TIME & PIPELINE

1,000,000

180,000

900,000

160,000

800,000

140,000

700,000

120,000

600,000

100,000

500,000

80,000

400,000

60,000

300,000

40,000

200,000

20,000

100,000

H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010

▄ New Supply

▬ Stock

TAKE-UP STRUCTURE 8%

35%

Logistic & Transport FMCG Automotive Media Industry Retail Other

9% 9% 15%

15%

In 2010, 12,000 Sqm were brought to the market, within the first phase of Millenium Logistic Park, in the southern outskirts. Therefore, the Bucharest total modern industrial stock, at the end of 2010, reached 907,000 Sqm. In the countryside, Ploiesti and Timisoara increased their supply of industrial and logistic space by over 50,000 Sqm. DEMAND

KEY LEASE TRANSACTIONS Tenant

Size (Sqm)

Project

Geodis

20,800

Prologis Bucharest A1

Augsburg

10,000

A1 Business Park

Adevarul

6,400

Mobexpert Tunari

Golden Foods

6,000

Millenium Logistic Park

1,000

Within Inner and Greater Bucharest, the industrial space offer did not register any major change in 2010. Following 2006 – 2008 when new deliveries overcame 650,000 Sqm, the last two years added another 50,000 Sqm of industrial space to the total stock.

On the demand side, things did not look any brighter. Starting with 2008, the requests for industrial space began to decline; in 2010 the gross absorption reached a level of 86,000 Sqm, slightly higher than the value recorded in 2004. Out of the total absorption, 60% was represented by net take-up. The most active players on the market were the logistic operators, FMCG and the automotive sector, although not nearly as active as in previous years.

AVAILABILITY & ABSORPTION (,000)

800 600 400 200 0

H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010

▄ Stock

▬ Vacancy ▬ Net absorption

ASKING RENTS Area (Sqm)

Rent (€/Sqm)

Evolution

< 3,000

4 – 4.5

Slight decrease Stable

3,000 – 10,000

3.75 – 4.2

Stable

> 10,000

3.5 – 4

Stable

p. 97 | Colliers International

Forecast

Furthermore, retailers were quiet (8% market share in 2010) on the market, unlike recent years when an important part of the demand was driven by this sector. This evolution is reasonable taking into consideration the decline of the domestic demand in 2010. The fact that logistic and FMCG operators, the drivers of the demand for the last years, were not very active in 2010 might be one reason for this slow

down. Moreover, a large extent of the automotive companies were looking for space in the countryside, close to Renault and Ford factories. AVAILABILITY

Since 2008, the vacancy rate began to rise, advancing in three years from 0% to 15% at the end of 2010. Regarding each area, the western outskirts have 12% available space, whereas the rest of the industrial hubs reached vacancy rates of over 30%. Taking into account that the western part of Bucharest comprises over 85% of the modern industrial premises, the influence of this area on the overall vacancy rate is considerable - keeping the city average at 15%. RENTS

Rents remained constant in 2010. As an exception, tenants with space requirements of less than 3,000 Sqm benefited from slightly better rates compared to 2009, since the majority of industrial space is available within small partitions up to 3,000 Sqm in size. PROGNOSIS

On the short term, we do not see any noteworthy variation on the market, since the industrial market is closely connected to the domestic demand. Therefore, we think that as the constraints imposed by the fiscal consolidation will fade and consumption increases, industrial and logistic demand will eventually improve. Given the fact that we will not see important deliveries in 2011, together with a small level of demand, we expect that rents will remain stable. Regarding the market outside Bucharest, tenants will maintain their interest for the western part of the country and also for Craiova and Pitesti, areas where industrial hubs are being created by several large foreign investments.

Research: Iuliana.Tataru@Colliers.com

2011 Colliers Real Estate Review » ROMANIA

RETAIL MARKET RETAIL STOCK AND SUPPLY, 2010 (SQM) Criteria

Romania

Bucharest

Countryside

Supply 2010

145,000

80,000

65,000

— malls

140,00

80,000

60,000

5,000

Stock 2010

1,342,000

552,000

790,000

— malls

1,037,000

452,000

585,000

305,000

100,000

205,000

— retail

parks

The analysis takes into account only shopping centers and retail park galleries with more than 5,000 Sqm GLA, DYI’s excluded.

SHOPPING CENTERS VACANCY, 2010 Area

Vacancy in 2010

Bucharest

10%

Rest of the country

13%

These are average levels, there are big differences between shopping centers in the same cities and between cities as well.

PRIME LOCATIONS RENT LEVELS, 2010 City

€/Sqm/month*

Bucharest

60 – 75

Cities over 250,000 inhabitants

30 – 35**

Cities under 250,000 inhabitants

15 – 20

* These represent the highest rents levels that can be achieved in well performing shopping centers (occupancy over 70%), units of 100 Sqm, prime locations. ** This level represents a market average, there are big differences between cities based on the existing competition.

PROJECTS UNDER CONSTRUCTION City

Project

Developer

Shopping Centers Arad

Galleria

GTC

Bucharest

Baneasa Shopping City extension

Baneasa Development

Oradea

Oradea Shopping City

Shopping Center Holding

Constanta

Polus Center/Maritimo

Immofinanz

Iasi

Iasi Palas

Iulius Grup

Baia Mare

Maramures (refurbishment)

SC Magazin Universal Maramures SRL

Craiova

European Retail Park

Belrom

Bucharest

Colosseum

Modus, UK

Retail Parks

The analysis takes into account only shopping centers and retail park galleries with more than 5,000 Sqm GLA.

Research: Iuliana.Tataru@Colliers.com

SHOPPING CENTERS Supply

2010 brought limited supply in terms of shopping centers GLA – only 3 new projects and one major refurbishment were opened in the entire country. This is the lowest increase in stock yoy since 2002. The percentage of opened shops at delivery (measured in GLA) in the new shopping centers oscillated between 50% and 90%. The gap is mainly due to factors such as existing competition in the cities/region as well as the moment of the delivery during the year (autumn deliveries, when the economy and the consumption stabilized, were favored by the retailers). 2010 brought a few “firsts”: we saw the first 2 shopping centers going into insolvency (Tiago Mall Oradea and City Mall Bucharest) and the first sale of a mall in such circumstances, Tiago Oradea, developed by Mivan. Demand

In 2010, the Germanic retailers were still the main drivers of the demand due to their financial power, most of the operators being much more active compared to 2009. The retailers that up to 2010 did not manage to secure locations in Bucharest and the top 5 cities, have now made their primary focus opening such locations. Due to the limited options for expansion in retail parks and due to the good financial conditions obtained from shopping center developers, some classical retail park operators have chosen compromise solutions, adapting their format to shopping centers (Decathlon, Kiabi). Low sales and cash flow problems forced more retailers to go into insolvency: InterHome, Diverta, Lee Cooper are just a few examples.

Rents

In shopping centers with high vacancies and low footfall levels the rents remained stable, as the majority of new leases are signed on turnover rent only. For the well performing projects we witnessed a small decrease in rents level, especially for those that had not previously offered rent reductions or were threatened by upcoming competition in their catchment area. Prognosis

Although the end of 2010 brought an avalanche of press releases announcing the re-launch of various shopping centers through-out the country, because of the lack of financing very few will realistically start/restart constructions during 2011. However, we believe that this year there are chances to see some of the projects that were under construction when the crisis arrived, restart construction. The focus of the developers, driven by the interest of the retailers, will be concentrated on the top cities with limited or no competition (Galati, Brasov, Timisoara, Craiova). 2011 will bring to the market the long waited opening of the first H&M shops. We do not expect to see other notable entries, as many retailers will be focused on consolidating their existing operations in the countries they are already present in. The rents will be affected on one side by the general economic situation hence the consumption/sales levels and on the other side by the supply/demand levels. As a general trend, we expect to see stabilization, a trend that is, however, highly dependable on any new Governmental measures that may influence the general economic climate.

Colliers International | p. 98

2011 Colliers Real Estate Review » ROMANIA

RETAIL MARKET Emporio Armani and Gucci entered on Calea Victoriei in 2010. There is still a gap between owners’ expectations and what tenants’ can afford to pay. High street demand will continue to be driven by the food sector, and banks looking to relocate.

RETAIL PARKS Supply

Two retail parks were delivered in 2010, and two other multibox retail parks are under construction. Moreover, only a few more plots are in the pipeline in major cities. Due to the limited supply in retail parks, retailers are now focusing on securing standalone units. As land prices remained high, developers’ activity decreased leading to direct acquisitions made by retailers for their own use. Many of the active developers are focusing on retail parks sites as they move away from the rather saturated traditional shopping center model. Demand

The top 5 cities together with Bucharest are still the main focus. MAIN BIG BOX DELIVERIES, 2010 Operator

Units

Location

Baumax

Bucharest, Pitesti, Constanta, Timisoara

Dedeman

Brasov, Craiova, Arad, Timisoara, Resita

OBI

Bucharest, Ploiesti, Sibiu

Praktiker

Botosani

Carrefour

Drobeta

Kaufland

Orastie, Deva, Ramnicu Sarat, Carei, Sighet, Botosani, Medias, Campu Lung Muscel, Mioveni, Giurgiu

Real

Bucharest

Hornbach

Bucharest

HIGH STREET RENT LEVELS, 2010 Area

€/Sqm/month

Central

50 – 75

Semi Central

20 – 35

Peripheral

8 – 25

Prognosis

The DIY and food operators will continue to be the main drivers of demand for renting or acquisition of boxes in the large cities. The next 3 – 4 years will be decisive for the market share of each brand. Due to the structure of demand some locations initially designated for shopping centers, could be used for retail parks. HIGHSTREET Supply

Some land owners with plots positioned within neighborhoods’ limits started being open to building new spaces in order to rent them. Only a few buildings (office and residential) with retail spaces on the ground floor have been delivered in 2010 and brought very limited new supply.

Fashion discounters are following the food anchors in order to complete the retail park offer. A new trend on the market is the presence of fast food drive units, auto repair shopor gas stations.

Due to the process of network optimization undergone by large retail chains, we did, however, see some retail spaces made available for sublease.

One of the new entries in 2011 on the DIY sector will be Leroy Merlin which will open its first unit in Colosseum project, Bucharest. Auchan Group made the biggest retail park acquisition of 2010 in Craiova and considers opening stores for all of its brands in this project by the end of 2011. Rumors on the market mention the intention of Tesco to enter Romania by a possible acquisition.

Demand is focused mainly on small units of around 100 Sqm, with the exception of supermarkets, which are requiring larger areas.

Demand

Requests came from food processing operators, banks (due to relocations), or other retailers profiting from lower rental levels. The food sector was by far the most active, followed by casinos and gambling agencies.

Rents

Rents for big boxes remained stable. The presence of a hypermarket within the scheme slightly increased the rents of other tenants. Step-up rents are used by tenants to cover the risk of lower sales in the first 2 or 3 years after opening.

Rents

After the fall in rents value in 2008–2009, rents decreased by another 10–15% during 2010, except for those areas with no vacancy rate where rents remained stable. Forecast

The rents will be stable for areas with no or limited vacancy. A small decrease is expected in the more peripheral high street locations.

p. 99 | Colliers International

Research: Iuliana.Tataru@Colliers.com

2011 Colliers Real Estate Review » ROMANIA

HOTEL MARKET 15%

HOTEL ARRIVALS, ROMANIA

GENERAL OVERVIEW

10% 5% 0% -5% -10% -15%

2007

2008

2009

▄ Domestic

2010F

▄ International

MAIN FEEDER MARKETS - ROMANIA Country

Nights

Country

Hungary

1,798

Poland

Nights 228

Bulgaria

765

Austria

183

Germany

395

164

Italy

326

France

136

Bucharest 131

Number of rooms

11,405

Occupancy

55.6%

Average rate

€68.96

BREAKDOWN BY CATEGORY, BUCHAREST 10% 2 star

3% 1 star

18% 5 star

46% 4 star

23% 3 star

66% 62%

AVERAGE OCCUPANCY, BUCHAREST 64.6%

58% 56.1%

54%

55.6%

50% 46%

2008

¤100 ¤80

2009

2010

AVERAGE ADR, BUCHAREST

73.3%

68.9%

¤40 ¤20 0

2008

2009

Research: Iuliana.Tataru@Colliers.com

2010

Due to a slight increase in arrivals at the beginning of the year, the occupancy rate for 2010 reached 55.6%, a level similar to the one registered in 2009 (56.1%). Over the year, occupancy levels followed the those of 2009, with a marginally slower activity recorded in September and October. Although this looks encouraging, things were not even for all hotel categories. While hotels in the 4- and 5-star category registered small increases in occupancy, hotels in 3- and 2-star categories registered decreases. In order to fill beds, hotels chose the easy way of discounted rates and continued the price war started last year. Therefore the average rate (ADR) continued to go down and reached a yearly average of €68.9, which means, a 6% drop compared to 2009. Even so, we registered some months with higher ADR than 2009 (May, September) but also some moths well below 2009 (February, June). If we look to situation by category, the 5-star hotels register the highest decrease in ADR while the 4-star hotels stayed at the same level.

Most of the hotel openings announced for 2010 were delayed or canceled, therefore only 7 hotel openings were registered this year. Out of that, 3 were new built hotels: Ramada Oradea, Epoque Hotel (Bucharest) and City Hotel (Satu Mare) and other 4 were refurbishments: Continental Grand (Bucharest) Timisoara Hotel (Timisoara), Orizont Hotel (Predeal) and Best Western Balvanios.

As very few projects were launched in the last years, with few openings announced for 2011 and no foreseeable closures, supply is expected to remain at the same level.

Due to difficulties in raising capital and owner’s reluctance to sell at very low prices, the transaction of hotel assets registered a historical minimum of €16 Mln, a 60% drop compared to 2009. Most notable transactions were the sale of Hotel Faleza Galati for €2.6 Mln and of Hotel Piemonte Predeal for €2.5 Mln.

GDP change and airport passenger movements have been historically good indicators of hotel demand evolution. Considering that both are expected to have positive growth in 2011 (+1.5% in GDP and +10% in passenger movements) we estimate that hotel demand will also increase in 2011.

BUCHAREST MARKET

84.8%

¤60

Direct industry contribution was 5.1% to GDP, and 6.1% to employment, one of the lowest figures in Europe, and well below neighboring countries. The presence of international hotel chains is still very limited, only 7.6% of the room inventory being affiliated to a hotel group, and generally all are concentrated in Bucharest. Main hotel chains present in Romania are Windham Hotel Group (1,808 rooms), Accor (1,221 rooms) and Best Western (1,072).

KEY FIGURES & DISTRIBUTION Number of hotels

After a consistent decrease of arrivals in 2009, hotel activity continued to go down in 2010 for both domestic and international travelers, by 6.5% on average. The most important room nights generators were European countries especially those close proximity including like Hungary, Bulgaria and Austria.

The Bucharest hotel market is mainly based on business and events related activities. As the economic situation continued to depreciate in 2010, hotel activity followed the same trend, and posted an overall decrease of 4%.

PROGNOSIS

In this context hotel activity will start to recover, especially with regard to occupancy. While rates will follow the same trend and start to rise this will be at a much slower pace.

Colliers International | p. 100

2011 Colliers Real Estate Review » ROMANIA

RESIDENTIAL MARKET SUPPLY BY TYPE OF PROJECT

GENERAL OVERVIEW

It has been more than two years since financial crisis hit, marking a significant change on the residential market. Prior to 2008, almost every land owner used to build residential as everything available on the market was sold out pre-completion. During the last two years, however, only financially independent developers remained active and completed their projects. At the same time, end users have become much more sensitive to prices.

10% Upper middle

37% Middle

20,000

53% Low

DELIVERIES AND STOCK EVOLUTION

15,000

SUPPLY

10,000

At the end of 2010, the new residential market offered 4,500 units in 35 projects completed or close to delivery (available from developers).

5,000 0

2007

2008

5,000

2009

▄ Deliveries

2010

2011F

▄ Stock

DEMAND EVOLUTION (half yearly data) Source: Colliers International

4,000 3,000 2,000 1,000 0

H2 2006

H1 2007

H2 2007

H1 2008

H2 2008

H1 2009

H2 2009

H1 2010

No new project broke ground in 2010 and one more project stopped the construction works. Moreover, in 2010, the owner of Stejarii choose to adress the leasing segment, in order to reduce the impact resulted from the poor sales activity registered during the last two years.

H2 2010

The supply is still dominated by low class developments, which represent 53% of the units available for sale. Around 3,900 apartments were delivered in 2010, almost equally distributed between the first and the second half of the year. Consequently, the stock reached approx. 15,000 units at the end of the year. Compared to the record number of deliveries in 2009 (6,100 units), the market registered a 36% contraction. 1 Each project on the market was included in one of the following categories (low, middle or upper middle), depending on the target clients it addresses, taking into account the location and the type of product offered.

p. 101 | Colliers International

The number of delivered and unsold apartments continued to increase in 2010, reaching circa 3,800 units at the end of the year. The stock increase was disproportionally split over the year. During the first half of 2010, unsold new stock increased with 1,200 units. The second half of the year saw only approx. 500 units added to the stock of available and unsold units. DEMAND

Prior to the crisis, i.e. pre 2008, annual take-up of units on the market had risen to 7,000 units per annum. In 2009, this rate fell to 1,300 sold units and in 2010 it went further down to approx. 1,100 units. This has been in direct response to low economic confidence and government austerity measures that undertaken in May 2010 (such as: VAT increases and salary cuts for emplyees in the public sector). Although the general mood of buyers improved by the end of 2010, only 500 units were sold to end users in the second half of the year. Thus at the end of 2010 sales decreased by 17% compared to the first half of 2010. In 2010 buyers’ attention was on delivered units at low prices no matter the quality of the product. The last two years provided greater opportunities for those projects targeting the low income population. Even though the market was severely affected by the financial crisis, developers owning low price projects were better able to reach a saleable price to match demand and thus reap the “poor benefits” of this period. Our analysis reveals that in 2010 around 67% of the total number of sales on the market was in projects targeting the low income population. The Prima Casa program was a catalyst for this category of projects.

Research: Iuliana.Tataru@Colliers.com

2011 Colliers Real Estate Review » ROMANIA

RESIDENTIAL MARKET SALES BY TYPE OF PROJECT

PRICES

In 2010 the prices slid further, down 18% compared to the previous year, from €1,300/Sqm at the end of 2009 to €1,070/Sqm (VAT not included) at the end of 2010. The decrease was equally split over the year as each semester registered a decrease of around 10% compared to the previous period.

8% Upper middle

25% Middle

2,000

67% Low

PRICE EVOLUTION BY TYPE OF PROJECT

1,500 1,000 500 0

low

middle

market average

▬ Average price 2009

upper middle

▬ Average price 2010

PRICE EVOLUTION COMPARED TO PEAK VALUE H1 2008 0%

H2 2008 |

H1 2009 |

H2 2009 |

-10% -20% -30% -40%

H1 2010 |

H2 2010 |

The reduction in the average price on the market came mainly from middle class projects. Prices in low class projects were the first to adjust to new conditions on the market. Consequently prices in these projects did not decrease significantly in 2010 (a decrease of around 7%), from €1,020 to €950/built Sqm, VAT not included. It took 6 months for prices to decrease and align to the new market conditions. Developers accepted the reduction in prices only towards the end of the first half of 2009 and consequently the prices went down by around 11% during that period. The following three semesters (H2 2009 – H2 2010), have seen a continual price decrease by approx. 8% on average. The largest decrease in prices was registered in case of the medium and upper medium projects. Following strong resistance to a decrease in prices during the second half of 2008 and 2009, projects in these categories eventually adjusted in 2010. Thus, compared to price levels existing at the end of 2009, medium class projects registered an average decrease of 16% (from €1,430 to €1,200/built Sqm, VAT not included). Projects in the upper middle class segment witnessed price falls of 20% during 2010 (from €1,860 to €1,490/ Sqm, VAT not included).

Research: Iuliana.Tataru@Colliers.com

PROGNOSIS

As seen in 2010 residential market performance is directly correlated with buyers’ confidence in the market, and depends greatly on the measures taken by the government. In terms of both sales rates and prices we expect to see at least the same level of performance registered in 2010 as the market stabilises. The only change of the year will be seen on the deliveries side. Most of the projects available on the market are already delivered or very close to delivery. After several years of important increases in supply, the Bucharest market is unlikely to see new significant deliveries. Hence, although developers have announced approx. 1,900 more units to be delivered in 2011 most probable a large proportion of these units will be postponed until at least 2012. Based on the premise that demand will remain stable, or perhaps grow slightly, 2011 could see developers enter the market looking for good opportunities to buy land with potential for future development.

Colliers International | p. 102

2011 Colliers Real Estate Review » ROMANIA

LAND MARKET BUCHAREST PRICE AREAS

GENERAL OVERVIEW Prime Secondary Peripheral

Investors see potential in Bucharest for future projects of various use (retail, office, residential adapted to the current demand, hotel or medical). Plots bought nationwide were in cities targeted almost exclusively by the big box retailers or retail parks developers.

3 5 4

8,000

The land market finally moved out of the doldrums which started during the second half of 2008 as a number of land deals transacted. Investments were split equally between Bucharest and the nationwide market.

Despite the increase in activity we cannot, however, speak yet of a full market recovery given the limited number of transactions (most of which were at low values) and the continuing downward price trend of land.

PRIME AREAS

7,000 6,000 5,000

SUPPLY

4,000 3,000 2,000 1,000 0

2006

2007

2008

2009

2010

▬ Min ▬ Max

2,500

SECONDARY AREAS

2,000 1,500 1,000 500 0

2006

2007

2008

2009

2010

▬ Min ▬ Max

1,200

PERIPHERAL AREAS

1,000 800 600 400

The supply of land has consistently increased during the past 2 years, determined by several factors: —— very little demand for land from the investment/development community —— landowners whose various businesses were affected by the economic downturn decided to putting up land for sale in order to get liquidity —— many developers with projects curtailed by the real estate crisis making their properties available for sale —— banks executing non-performing loans from their balance sheets.

An important component of new supply outside Bucharest has been the sale of premises of factories operating in those industries most affected by the crisis (namely textile and furniture production). Many of these properties have been subject to transactions where their location (central or semi-central) and site characteristics (area of 2.5 up to 5 ha, regular shape, generous frontage) were very appealing to retailers. DEMAND

Land buyers in 2010 were almost exclusively end users of the future projects (e.g.: retailers, private persons looking to build individual villas, companies wanting to develop and own their office premises etc.), or developers with secured anchor tenants. Speculative acquisitions were extremely rare, although plenty of opportunistic investors scanned the market in search for distressed land. Big box retailers were, by far, the most active buyers. Bucharest is not yet saturated with this type of space and represents the top priority for most retailers. Other targeted locations were cities exceeding 50,000 inhabitants where competition is still low. Cora, Kaufland, Lidl, Penny Market and Dedeman closed most of the deals this year. Demand coming from traditional office developers started to reactivate in 2010 in Bucharest locations with excellent infrastructure and connection to public transportation. The current land prices allow for a sensible development profit, based on delivering a successful project in 2 – 3 years. During this period, office demand is expected to be back on track and office supply is estimated to shrink due to minimal deliveries in the pipeline.

200 0

2006

2007

2008

2009

2010

▬ Min ▬ Max

p. 103 | Colliers International

Research: Iuliana.Tataru@Colliers.com

2011 Colliers Real Estate Review » ROMANIA

LAND MARKET TOP 3 LAND TRANSACTIONS City

Area

Value

Site

Buyer

Craiova

12 ha

¤30M

Electroputere Factory

Auchan Group & 2 managers of BelRom Group

Bucharest 5.1 ha ¤34.6M*

Timpuri Noi Factory

Interprime Properties, Ikea Investment Fund

Brasov

Hidromecanica Cora Factory

4 ha

¤13M

* VAT included

City

Prime

Primary

Brasov, Cluj-Napoca, Constanta, Craiova, Timisoara

300 – 600 200 – 400

Bacau, Galati, Secondary Iasi, Ploiesti, Sibiu

Tertiary

Alba Iulia, Botosani, Focsani, Piatra Neamt, Targu Jiu

Secondary Peripheral

The price of land continued to decrease during 2010, however, at a lower pace compared to the 2009.

On the short and medium term, the land market will remain a buyers’ market, where only those owners with a competitive price offer can conclude a deal. Thus, it’s highly important that owners remain flexible not only in terms of price but also in terms of the various forms of transaction structure by which a deal can be undertaken. This will translate into a still pretty timid demand for land amidst a well supplied market. In turn this will lead to a continuation of the negotiation of land prices.

50 – 200

250 – 500 150 – 300

50 – 150

150 – 350

35 – 100

100 – 200

Several other large transactions, both in Bucharest and in the countryside, are still under negotiation. Completion has typically been postponed because of either slight divergence over the price or difficulties in the planning process. PRICES

LAND PRICES IN CAPITAL CITIES (€/SQM) City type

This year recorded the first transactions over €10 Mln since the beginning of the crisis.

We consider land plots situated within the city limits, with areas in between 5,000 and 50,000 Sqm, benefiting from good visibility and exposure.

In Bucharest, transactions were concluded at prices which were on average 15 – 30% lower than 2009 prices. Peripheral Bucharest locations remained unattractive. The lack of transactions here makes it difficult to estimate the market price in these areas, but we estimate that a min. 50% discount to the current asking prices could attract eventually buyers. In the countryside, the decrease was more abrupt, bar those cities where 2 – 3 landowners control the good plots on the market with limited pressure to sell. Therefore, such locations were more resistant to a significant decrease in price.

As a result we do not expect price stabilization in the very near future. We do not, however, expect any large price decreases. Only small adjustments in price limited to the usual negotiation margin of 15 – 25% of the offer price. However, there are market segments where current land prices make sense for profitable real estate projects. In these cases, the active buyers have 2 options: either to go for the land acquisition, satisfied with a reasonable profit margin, or to wait for a potential further land price decrease, assuming that, if other similar projects are being delivered in the meantime, they would enter on a more competitive market environment.

PROGNOSIS

As concerns about the evolution of the macroeconomic indicators will start to ease, we expect investors to regain confidence in the absorption potential of the local real estate market.

Research: Iuliana.Tataru@Colliers.com

Colliers International | p. 104

2011 Colliers Real Estate Review » ROMANIA

INVESTMENT MARKET KEY INVESTMENT FIGURES Metric

Measure

Investment Turnover

¤460 Mln

Prime Office Yield

8 – 8.5%

Prime Retail Yield

9 – 9.25%

Prime Industrial Yield

9.25 – 10%

1,600

The investment market saw a sharp improvement in transaction volume last year, moving from €100 Mln in 2009 to around €500 Mln in 2010. Although many of the deals were atypical, representing cross-border acquisitions, intra-group settlements or nominal sum trade, there were, however, a number of classic investment transactions as well (around €150 Mln). The year-end brought the most notable acquisition of the past two years, that of Floreasca 169A office building, in a deal worth €100 Mln.

INVESTMENT VOLUMES, EUR MLN

1,400 1,200 1,000 800 600 400 200

2004

2005

2006

2007

2008

2009

2010

CLASSIC ACQUISITIONS Deal

Vendor

Purchaser

Iris Park Pitesti

Avrig 35

NEPI

Polus Constanta (85%)

Trigranit

Immofinanz

Floreasca 169A

Portland Trust

NEPI

OTHER TRANSACTIONS Deal

Type

Portfolio

Cross-border Europolis transaction

CA Immo

Tiago Oradea

Distressed sale

Unicredit

Baneasa Investments

Constanta Office Building

Sell back option

NEPI

Avrig 35

Atrium Centers

Intra-group transfer

Carpathian PLC

Atrium Shopping Centers and Arcadom

City Gate (15%)

Intra-group share deal

Bluehouse

GTC

Vitantis Shopping Intra-group Center transfer

Equest Balkan Properties

George Teleman

Intra-group transfer

Equest Balkan Properties

George Teleman

Moldova Mall Iasi

Vendor

p. 105 | Colliers International

Purchaser

Transactions

The first half of the year was the most active in terms of transactions, with 7 deals being completed, totalling cca €300 Mln. The traded assets were mainly office buildings in Bucharest and shopping centers in the countryside. The most noteworthy deal in H1 completed locally was the Avrig 35’s sale of Iris Park Pitesti, a retail park anchored by Auchan and Bricostore to the South African investment fund NEPI for €21 Mln.

The second semester had a slower start due to the effects of the government’s austerity measures on the investors’ sentiment towards Romania. However, it ended with the keynote transaction of Floreasca 169A that marked a turning point in the crisis stricken investment market, showing a return to core asset deals. The sale of Floreasca 169A office building, which Colliers International intermediated, represents the 3rd office investment deal concluded by Portland Trust on the Bucharest market, after Opera Center (2003) and Bucharest Business Park (2005). The 36,000 Sqm building, fully occupied with strong international tenants was purchased by NEPI for €100 Mln. The end of the year saw yet another intra-group deal, the transfer of the retail schemes Vitantis Shopping Center in Bucharest and Moldova Mall in Iasi from Equest Balkan Properties to the Managing Partner of the fund, Mr. George Teleman. Players and Prices

The first semester also brought about the first large distressed sale on the market. Unicredit Bank disposed of the nearly finalized shopping center Tiago Oradea, through an auction won by Baneasa Investments for €30.5 Mln. The project was not functional at the purchase date. The largest transaction in terms of volume was the sale of Europolis’ portfolio (the real estate investment arm of Volkbank) to CA Immo. The deal was closed at the mother companies’ level in Austria. The deal included all the funds’ assets in Romania which comprise both industrial and office property evaluated at cca €200 Mln. The transaction transformed CA Immo into the second largest player on Bucharest office market after Immofinanz.

The most active player on the real estate investment market was NEPI, a South African Property Fund listed both on London Stock Exchange (on the AIM market) as well as on Johannesburg Stock Exchange, who recently announced plans to list on Bucharest Stock Exchange as well. The fund accounted for three of the main deals concluded on the national market in the past two years, namely European Retail Park Braila purchased from Belrom in 2009, Iris Shopping Center Pitesti and Floreasca 169A.

Research: Iuliana.Tataru@Colliers.com

2011 Colliers Real Estate Review » ROMANIA

INVESTMENT MARKET 14.0%

EVOLUTION OF INVESTMENT YIELDS

12.0% 10.0% 8.0% 6.0% 4.0%

H1 2006

H2 2006

H1 2007

H2 2007

H1 2008

H2 2008

H1 2009

H2 2009

H1 2010

▬ Oﬃce ▬ Industrial ▬ Retail

PRICE GAP NARROWINIG, FINANCING GAP CONTINUES Vendors Financiers Investors

INVESTMENT DEALS BY TYPE 27% Retail

73% Oﬃce

H2 2010

All in all, there are still only very few buyers on the market. Many of the private equity and institutional funds that were on the market before the crisis were still not keen on returning to Romania due both to the still high perceived risk of the local market as well as the attractive opportunities in other neighbouring or distant emerging economies. With distressed asset opportunities still way below predictions, the focus of the existing investors turned to the less risky segments, namely prime office properties and big boxes. Moreover, private equity funds are also starting to look towards development opportunities as it became increasingly difficult to meet return targets from standing assets. 2010 brought a narrowing of the gap between buyers and sellers in terms of pricing. The yield expectation of investment funds have moved down since 2009 by almost 100 basis points for prime property on all segments. However, there is still some ground that needs to be covered before we can see more transactions on the market. The gap in price expectations is also fuelled by the low availability and high price of financing. Without adequate financing conditions, private equity funds cannot meet the performance requirements on their equity and are forced to offer higher yields. With very few cash only buyers on the market, the yield gap in not expected to close unless financing policies become more relaxed or vendors are pressured to accept higher yields.

Research: Iuliana.Tataru@Colliers.com

Prognosis

Although not many transactions were actually completed in 2010, we saw more interest from investors and more deals initiated, which gives a positive start for 2011. Therefore, we expect to see a bigger number of classic investment transactions in 2011. Although Romania’s economy is still in its negatives, we expect the investment market to benefit from the spill-over effects of the slow but steady economic revival in the rest of Europe (not withstanding the sovereign debt crisis affecting Southern Europe). The positive economic news from the west influence Romania in two ways: —— On the one hand the good opportunities in Western and Central Europe are starting to die out leading to a compression of yields, which is expected to drive investors further East in search for better opportunities and returns. —— On the other hand, due to its close ties to the rest of Europe, Romania is seen by investors to be on the brink of restarting growth and are now following more actively the country’s progress in view of re-entering the market. The number of distressed asset deals might increase slightly in 2011, but by now all the players are resigned to the fact that we will not see the massive foreclosed sales that were predicted two year ago. All in all, the market has optimistic signs for 2011 and even though we are far from seeing sharp increases in both economic and investment activities, we do expect this year to be a turning point that will set the market on an upward trend.

Colliers International | p. 106

2011 Colliers Real Estate Review » ROMANIA

ROMANIA LEGAL OVERVIEW Basic Forms of Title With some exceptions, land may be owned, used and transferred freely in Romania without any limitation as to the surface area of the land. Each transfer of land, irrespective of the legal nature of the agreement (e.g. sale and purchase agreement, donation, etc.) is subject to the notarised form of the agreement (i.e. authentication by a notary public), under the sanction of absolute nullity of the alienation/ transfer deed. The ascertainment of nullity may be requested in court by any interested person. Prior to notarisation the fiscal record of land as well as the land registry must be inquired. Should any inconsistency occur concerning the land’s status, the notary public shall refrain from notarising the transfer. Other forms of property right, less than full ownership, are usufruct, use, surface right, servitude and habitation - all in rem rights. The agreement’s notarisation is required in case of such special rights. Long-term leases are common for commercial purposes, although a lease of land is insufficient for granting construction permits. In such cases, a surface right should be granted. According to the recent amendments of the construction regulations, the ownership, use, usufruct, surface right and servitude are in rem rights based on which a building permit can be obtained. As opposed to them, the rights arising out of a lease agreement, an assignment agreement, a free lease agreement and a concession agreement might offer only a limited right to build, under certain strict conditions. Restituted land may be subject to restrictions on transferability for a period of time (e.g., although the land acquired by way of reconstitution of title can be freely transferred, the land acquired by way of “constitution of title” is subject to a 10-year interdiction to sell), and certain limits exist on the amount of agricultural and forest land that may be owned by a person as a result of the restitution process. “Constitution of title” means granting land to certain categories of individuals that were never owners of such land or did not inherit such land from former owners. For instance, “constitution of title” may refer to granting land to: (i) members of the former agricultural cooperatives who did not contribute land in such cooperatives; or (ii) persons who performed agricultural works for a cooperative, although they were not members in such cooperative.

p. 107 | Colliers International

Acquisition of Real Estate by Foreigners Following the Romanian legislation on the subject matter (Law 312/2005) as from January 1, 2007, i.e. the date of Romania’s EU accession, EU nationals and legal entities, as well as the stateless persons domiciled in EU and having established their residence in Romania can purchase/acquire land under the same conditions as Romanian citizens. In terms of the agricultural or forest land, farmers acting independently, being EU nationals or stateless persons domiciled in Romania or stateless persons domiciled in EU having Romanian residence, can acquire agricultural and forest land as of January 1, 2007, under the interdiction of changing the agricultural or forest purpose of such land during the phase-in period. Non-resident EU citizens and EU legal entities may acquire land after a five-year phase-in period and agricultural and forest land after a seven-year phase-in period calculated from EU accession. Non-EU foreign persons and legal entities may acquire land in Romania in accordance with international treaties based on reciprocity. All foreign persons, regardless of nationality or residence, may directly own buildings in full property, although they do not have the ownership right over the land. In practice, in such case the surface right is granted, in a way in which the foreigner person will benefit from the ownership title over the building and the right of use of the land. In any case, EU citizens and other foreign persons may acquire land by way of legal inheritance. However, in case such foreigners are not allowed to own land in Romania, they are obliged to sell the land and get the counter value of it. Nonetheless, notary publics in Romania are still reluctant to notarise the acquisition of land with foreign persons, regardless of the legal provisions on the matter at hand. For such reason it is an accepted and common practice on the Romanian real estate market for foreign persons to own land indirectly through legal entities incorporated in Romania, even if such entities are wholly owned by a foreign entity or person.

Registration System In order to be opposable to third parties, all acquisitions of real property and other in rem rights must be registered in the real estate registry (Land Registry) kept by the local office of the Agency for Cadastre and Real Property Publicity of the Ministry of Administration and the Interior. Registering a change in ownership normally takes at least one week. However, it is expected that the introduction of computerised databases and Internet access will make the operation of the Land Registry far more efficient and reliable in the future. Certain amendments to the Land Registry regulations were enacted in 2009, referring, inter alia, to: (i) repealing the provisions according to which, in the regions whereby an old registration system was applicable, the registrations may be performed pursuant to the old rules until the opening of the new Land Registries based on the new Land Registry law No. 7/1996; (ii) certified copies of the documents required from a Land Registry will not display personal data, save for some specific cases; (iii) new items that may be mentioned (in Romanian - "notate") in the Land Registry (e.g., prohibition to lease, sub-divide or merge plots, prohibition to build, demolish, restructure and organise; the opening of the insolvency proceedings); (iv) the ownership rights and other in rem rights shall be registered based on deeds ascertaining their creation or transfer, if those deeds have been concluded with the observance of the validity conditions regarding the form required by law; (v) the new amendments allow the registration of a merger of neighbouring plots, even if such plots pertain to different owners; (vi) the procedure regarding the registration in the Land Registry of the existence of a lawsuit in connection with a real property has been simplified, such registration is allowed based on a simple copy of the relevant Court action, bearing the stamp of the relevant Court, rather than only based on an official Court certificate. Transfer Taxes The disposition of real property may trigger the payment of (i) 16% profit tax in case the Seller is a company (other than those designated as micro-enterprises), charged on the capital gain computed based on the fiscal value of the real property, (ii) transfer tax calculated at the transaction value in case the seller is a physical person (in this case the tax ranges between 1% and 3%, and may exceed such threshold, depending on the transaction value and period of ownership). Starting from January 1, 2007, notarising sale-purchase contracts involving real estate is free of stamp tax.

2011 Colliers Real Estate Review » ROMANIA

ROMANIA LEGAL OVERVIEW Leases While certain standard requirements exist for contracts for residential leases, landlords and tenants are largely free to negotiate most aspects of both residential and non-residential leases. Rent may be freely agreed by the parties. There are no rent control laws, although a few categories of persons still benefit from state-subsidised housing. Romanian law does not set a minimum or maximum term for leases but nevertheless provides some rules. For instance, hereditary leases are forbidden, and leases cannot be perpetual. Foreigners may lease property directly, but a lease that could be characterized as an effective sale (e.g., a 90-year lease) would certainly be invalid. To be opposable to third parties, lease agreements exceeding three years and concession agreements should be registered with the Land Registry. If lease agreements do not exceed three years, their date should be certified for opposability purposes by a notary public, a lawyer or by following any other procedure provided by the law. Restitution Claims Former owners whose property was nationalised under the communist regime were entitled to seek restitution under several laws, as long as they provided adequate supporting documentation and no compensation was made at the time of confiscation. The most important as well as disputed provisions are rendered by Law 10/2001, regarding real estate abusively taken over by the state between March 6, 1945 and December 22, 1989, which became the overreaching framework governing the restitution process and leaving very few cases to be settled in accordance with specific other legislation, especially with Romanian Civil Code. These provisions completing the internal legal framework are meant to be applied to the extent that the international agreements and arrangements of human rights preservation do not provide otherwise. Notwithstanding this general rule, Romanian case-law was frequently inconsistent with the case-law of the European Court of Human Rights. Most types of claims should have been filed by the cut-off date of February 14, 2002 and supporting documentation by the date of the claims’ resolution. Many of these restitution claims are still pending before competent authorities or the courts and are likely to take years to resolve conclusively.

Regardless of the special laws, such as Law 10/2001, some claimants were relying on the Civil Code, and sometimes Romanian courts appeared sympathetic to such claims. Such situation was meant to generate uncertainty and significant adverse consequences for citizens’ rights as well as for investors’ economic interests. However, current property evolution in Romania is constantly improving, subject to a decisive process of clarification. Following an appeal of the General Prosecutor’s office aiming to clarify the issue on whether such Civil Code claims are acceptable for the Courts, the Supreme Court of Justice rendered a ruling which appears to leave open the path of Civil Code restitution claims, based on the prevalence of the European Convention on Human Rights, without prejudice to another ownership right or to the civil circuit security. Although in theory the solution of the Supreme Court of Justice in this case should be compulsory to other courts, nonetheless the outcome of such debates and the approach of such other courts as to the above aspects cannot be predicted. Topics as to restitution process under Law 10/2001 have been debated in front of the European Court of Human Rights, in a pilotjudgment procedure. On 12 October 2010, the European Court of Human Rights rendered the decision on the pilot-judgment procedure. In brief, the Court stated that there had been a violation of the European Convention on Human Rights and held that Romania must take measures to secure an effective compensation mechanism. The Court noted that, by May 2010, out of a total of 68,355 files registered with the Romanian Restitution Authority (ANRP) only approximately 21,000 had resulted in a decision awarding a “compensation certificate”, and that fewer than 4,000 payments had been effectively made. The Court also noted the very substantial cost to the State budget represented by the compensation scheme, and that the listing of the Property Fund (due in 2005), had still not been accomplished by the date of the pilot judgment. This implementation of an effective compensation mechanism for the successful restitution claimants could eventually become an actual topic, even though certain progress has been made in the listing of the Property Fund.

Notaries and Notarial Fees Mortgages, transfers of real property and granting other in rem rights must be notarised by a notary public. The fee charged for the service rendered by the notary public is negotiable depending on the transaction value, and in case of real property transfers, generally ranges from approximately 0.5% to 2.5%.

Language As a general rule, documents may be executed in any language. However, documents involving real estate, including sale-purchase contracts, long-term leases and mortgages, are normally executed and notarised in Romanian. Filings with Romanian authorities, including enclosures, must be either executed in original in Romanian or translated into Romanian by a translator duly authorised by the Ministry of Justice. Information contained in this general outline does not constitute a legal opinion and is not meant to be comprehensive. As a result of pending and new legislation, laws and regulations change frequently in Romania and are often subject to varying interpretations. Professional advice should be sought regarding all aspects of real estate in Romania.

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2011 Colliers Real Estate Review » ROMANIA

ROMANIA TAX SUMMARY GENERAL

Several changes to Romanian tax legislation were enacted in 2011 of which the most important concern corporate tax. CORPORATE TAX, INCOME TAX AND CAPITAL GAINS TAX

Taxable profits are determined by reference to accounting profits, recognized in accordance with Romanian accounting standards, subject to certain specific adjustments as provided by corporate tax law. The standard corporate tax rate is 16%. Capital gains realized by corporate entities from sale of assets are deemed to be corporate profits and are taxed at 16%. Income realized by individuals from transfers of real estate are subject to lower tax rates. Capital gains derived by individuals from sale of securities, other than shares in limited liability companies and securities in closed companies, are subject to 16% personal income tax rate, irrespective of the period for which the securities are held (previously, a preferential 1% tax rate was available where securities were held for at least 365 days).

There are no corporate tax consolidation rules in Romania. TAX DEPRECIATION

The following depreciation methods are available for tax purposes: —— Straight-line method. —— Reducing balance method (may be applied only to certain assets) —— Accelerated depreciation method (may be used for technological equipment such as machinery and installations, computers and related equipment). The accelerated method allows for a deduction of 50% of the cost of the asset during the first year of operation. Land and goodwill cannot be depreciated for tax purposes. Buildings can be depreciated only using the straight line method. The tax depreciation period for buildings is between 40 and 60 years. Certain assets attached to a building can be treated as separate movable assets for tax purposes and therefore can be depreciated over a shorter period. TAX LOSSES

Income from immovable property located in Romania is subject to 16% capital gains tax. Income from immovable property located in Romania includes mainly income from the rental or the grant of use of immovable property located in Romania, gains from the sale-assignment of rights of ownership or other rights related to immovable property located in Romania and gains from the sale-assignment of participation titles in a legal entity, if at least 50% of its fixed assets derive directly or indirectly from real estate located in Romania. Non-Romanian vendors may be entitled to claim Romanian tax exemption under double taxation treaties where applicable. Certain double tax treaties (e.g. that with Germany, France, Austria) provide special regimes for capital gains similar to the Romanian rules if the shares being sold derive more than 50% of their value from real estate located in Romania.

Tax losses can be carried forward and deducted from taxable profits recorded during the following seven years on a First In First Out (FIFO) basis (tax losses incurred before 2009 are to be carried forward for a five years period). Tax losses recorded by companies that cease to exist as a consequence of a merger or de-merger cannot be taken over by the surviving company after the merger or de-merger. There is no withdrawal of the tax losses carry-forward right on change of ownership or activity. Tax losses can only be carried forward, not carried back.

Interest expenses are wholly deductible if the debt-to-equity ratio of the borrowing company is less than three-to-one. If the debt-to-equity ratio is three-to-one or more (or negative), interest expenses are nondeductible (but not permanently nondeductible – see below). However, interest and foreign exchange losses relating to loans received from Romanian or foreign banks, non-banking financial institutions (including leasing companies), mortgage credit companies, and other regulated lending institutions are exempt from the scope of thin-capitalization rules. Any interest which is not deductible due to the lender having negative equity or debt to equity ratio higher than 3 to 1, can be carried forward to be deducted against income earned in future periods, if and when the company’s debt-to-equity ratio falls below the relevant thresholds. If foreign exchange losses suffered by a company in relation to any monetary item exceed the foreign exchange gains, then the deductibility of net foreign exchange losses is subject to the same restrictions as interest. Starting 2010, under the Romanian law, unrealized foreign exchange differences on monetary items are recognized on a monthly basis and are taxable or deductible upon corporate tax calculation (subject to potential thin-capitalization deductibility restrictions).

THIN CAPITALIZATION

There are two basic Romanian thincapitalization rules to be considered, as follows: Deductibility of interest is restricted to 6% for non-RON denominated loans and to the level of the interest rate of the NBR

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corresponding to the last month of the quarter for loans denominated in RON. This limitation is applicable for each loan. The restriction of deductibility is determined before the calculation of the debt-to-equity ratio. Interest which is non-deductible after the application of this rule is permanently non-deductible.

WITHHOLDING TAX

The standard Romanian withholding tax rate is 16%. However, the rate can be reduced by double tax treaties. As at 1 January 2011, Romania had double-taxation treaties with more than 87 countries.

Contact: mgibbins@kpmg.com

2011 Colliers Real Estate Review » ROMANIA

ROMANIA TAX SUMMARY DIVIDENDS

A 16% dividend tax rate applies on dividends paid to non-residents (whether individuals or companies). Starting 2011, dividends paid to corporate shareholders resident in the European Union or EFTA countries are tax exempt. Under the EU’s Parent Subsidiary Directive, dividend payments made by a resident legal entity to an EU legal entity which holds at least 10% of the Romanian entity’s shareholding for a period of at least two years are exempt. Similar exemption applies for dividend payments made by a resident legal entity to an EFTA legal entity which holds at least 10% of the Romanian entity’s shareholding for a period of at least two years.

REAL ESTATE TAX

Real estate tax comprises land tax and building tax. The tax on land is determined by taking into account the surface of the land in square meters, the status of the locality where the land is located, and the area and/ or category of use of the land, in accordance with relevant decisions issued by the local council where the land is located. For companies the tax on buildings is usually determined based on the gross book value of the building at a rate between 0.25% and 1.5% while for individuals the tax on buildings is pre-determined depending on the type of building. For building tax purposes, if a company has not performed a revaluation of its building for 3 consecutive years then starting with the 4th year it is generally liable to an increased building tax rate of up to 10% of the gross book value of the building.

INTEREST AND ROYALTIES

A 0% withholding tax rate applies for income derived from interest and royalties, if the effective beneficiary of this income is a legal entity which is located in an EU Member State or EFTA State or a permanent establishment of a company from an EU Member State, located in another EU Member State or EFTA State. This rate applies, provided that the effective beneficiary of the interest or royalties owns at least 25% of the securities of the Romanian legal entity for an uninterrupted period of at least 2 years, which terminates at the date of the interest or royalties payment. REQUIREMENTS TO APPLY THE EU’s DIRECTIVES

Starting with 1 January 2010 in order to apply the provisions of the EU’s Directives, a non-resident should provide Romanian companies with an affidavit stipulating that the first fulfills the mandatory condition of being beneficiary.

Contact: mgibbins@kpmg.com

REAL ESTATE TRANSFER TAX

Transfers of real estate may result in land/ building registry taxes and notary fees of up to 1% of the value of the transaction.

sold no later than 31 December of the year following the year of its first occupation or use. “New buildings” also include (i) altered buildings whose structure, nature or function has been modified or (ii) buildings for which the value of improvements exceeds 50% of their market value, assuming there has been no change in their structure, nature or function. Building land is defined as any unimproved or improved land on which buildings may be erected according to Romanian legislation. Rental of real estate is also VAT exempt without the right of deduction. For both rental and sale of real estate properties, companies may opt to charge VAT and when they do so, a formal notification must be submitted to the tax authorities stating that the company has opted to charge VAT for the rental or sale of the buildings or part of buildings which it owns and operates. VAT grouping is allowed only for certain categories of VAT payers.

VALUE ADDED TAX

Starting 1 July 2010, the standard VAT rate in Romania is 24%. A reduced rate of 9% is applicable for certain supplies of goods and services. A special VAT rate of 5% is applicable for sales of dwellings to certain categories of the population as part of the Government’s social programme. Supplies of buildings, parts of buildings and land are VAT exempt without the right of deduction (meaning that any input VAT incurred on the relevant expenditures is not allowed to be offset against output VAT, but should be borne by the company as an extra cost). However, there is an exception for supplies of so-called “new” buildings which are subject to VAT provided that the taxpayer has deducted all or part of the VAT incurred in relation to the costs of the building (or has the right to deduct VAT for such costs). In order to qualify for supplies of “new” buildings subject to VAT, certain conditions must be met on a cumulative basis. Romanian tax law specifies that the “sale of a new building” is deemed to occur if the building is

Colliers International | p. 110

2011 Colliers Real Estate Review » COUNTRY

Russia, Moscow MARKET

Dear clients, partners, and friends, 2010 was a year of growth for all commercial real estate sectors in Russia, which represented a qualitative change in market dynamics compared to the previous year. Last year saw increasing transaction levels in the office, retail, and warehouse segments. The growing demand for real estate properties triggered developers' activity, who resumed construction of previously suspended projects, as well as buying land plots for new development. The only segment that saw a rather small amount of transactions was the investment sales market where only a few transactions were registered. However, we observed a large number of deals closed in Central and Eastern Europe, which Maxim Gasiev

managing director colliers international russia Address

77 Sadovnicheskaya Embankment Building 1 115035 Moscow, Russia

Phone

+7 495 258 5151

Maxim.Gasiev@Colliers.com

is likely to lead to a decrease in capitalization rates in these regions and growth of investor interest in Russia. Investors desiring to maintain high profitability rates will start paying attention to Russian projects. We are already witnessing increased interest of foreign investors in Russia. The most important event for our company was, undoubtedly, the global rebranding of Colliers International. The strategic alliance gave us access to even more international resources. We are becoming increasingly aware that the company operates as a single organism as we witness the successful integration of offices in different countries. Today, Colliers International is a company with a single strategic vision focused primarily on providing exceptional service to our clients. For our business in Russia, 2011 will be a year of growth and new opportunities. We are planning to develop new business lines. Last year, we launched the high street retail business and it has already delivered the first results: the division has become profitable, and our clients are now using the services we hadn’t provided before. Compared to 2009, we increased our market share across all segments. However, the implementation of each separate project and commitment to service excellence remain the company’s priorities. We are always open for cooperation. Sincerely yours, Maxim Gasiev

p. 111 | Colliers International

Research: Firstname.Lastname@Colliers.com

2011 Colliers Real Estate Review » RUSSIA, MOSCOW

ECONOMIC OVERVIEW KEY ECONOMIC FIGURES

SUMMARY

Metric

Change

GDP growth rate

3.7%*

Industrial production growth rate

8.2%

Unemployment rate

7.2%

Inflation rate

8.8%

Retail trade turnover

12.1%**

Budget deficit

–25.5%***

The positive growth trends of the economy observed at the end of 2009 continued into 2010 as Russia posted a healthy GDP growth rate of 3.7%.

* January–November 2010 ** January–November 2010/January–November 2009 *** Change vs. 2009 Source: The Federal State Statistics Service, Colliers International

20%

GDP, PRODUCTION, UNEMPLOYMENT Source: The Federal State Statistics Service

15% 10%

This put Russian growth ahead of developed Western economies, such as the USA, continental Europe and the UK but behind many other developing countries, such as the other BRIC countries. Growth could have been stronger but for the drought and forest fires which encompassed practically the entire European part of Russia. As a result, GDP growth fell to 2.7% vs. 5.2% in Q2.

5% 0% -5% -10% -15% -20%

Q1 2009

Q2 2009

Q3 2009

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

▬ GDP ▬ Industrial Production ▬ Unemployment

The prices of oil and key industrial metals Which exert a considerable influence on the growth rate of the Russian economy displayed a positive trend. The price of oil increased from US$81.23 per barrel to US$93.975 per barrel during 2010. The prices of copper, aluminum, and nickel increased by 18.9%, 6% and 31.5%, respectively, during the same period. Industrial production grew at a record pace (the highest since 2004), although it was coming off a low-base due to large falls during the crisis period. Other positive factors were the declining unemployment rate and seeing inflation rate back to 2007 levels, accompanied by an increase in real disposable income.

The growth rate of exports slowed toward the end of the year, down from 18.1% in September to 14.9% in October 2010. This can be traced to the introduction of the government ban on grain exports until July 2011. Even though revenue from oil exports grew, the increase was not significant enough to compensate for this decline. In September 2010, the law regarding the budget for 2011 – 2013 was enacted. This introduced a ban on increasing the headcount of government employees in 2011, as well as its gradual reduction by 20% by 2013, with the aim of cutting government payroll costs. Unlike in previous years, it is planned to fund the budget deficit by means of domestic borrowing and state property privatization - previously, the deficit was mostly funded by means of foreign debt which are planned to be halved. PROGNOSIS

Most analysts expect a GDP growth rate of 4.3% in 2011. This is 0.3% higher than that expected in 2010. Due to the accelerated inflation rate at the end of 2010, the inflation forecast for 2011 has been increased by 0.2%, to 8%. We expect a decline in the industrial production growth rate to 4.6% in 2011. We expect a decline in the industrial production growth rate to 4.6% in 2011.

For most of the year, the inflation rate stayed at historic lows, reaching its lowest level of 5.5% in July. Due to higher food prices caused by the drought, however, inflation finished the year at 8.8%.

Research: Tatiana.Kalyuzhnova@Colliers.com

Colliers International | p. 112

2011 Colliers Real Estate Review » RUSSIA, MOSCOW

OFFICE MARKET KEY OFFICE FIGURES

OVERVIEW

Metric

Measure

Total Stock

12,640,000 sqm

Take-Up

1,320,000 sqm

Vacancy

12%

Prime Headline Rent

EUR 48/sqm/month

Source: Colliers International

5,000 4,000

TOTAL STOCK AND NEW CONSTRUCTION (SQM,000) Classes A and B

3,000 2,000 1,000 0

2007

2008

2009

▄ Total Stock (beginning of reporting period)

2010

2011F

▄ New Construction

2010 saw growing interest in the office property market by both tenants and developers. Thanks to the revival of demand, the gross take-up in Q1–Q3 2010 exceeded the corresponding figure for the entire 2009. The number of the companies interested in leasing and buying office premises with an area of over 10,000 Sqm increased; in particular, there was emerging demand for properties to be commissioned in 2 – 3 years. The take-up increase led to a drop in vacancy rates and growth of rental rates. This, in turn, resulted in an improvement of the situation in the construction market re-activating the development of the previously suspended projects. According to our estimates, the trend for the office property market revival is stable and is going to gather pace in 2011 unless any macro-economic disruption occurs. This will lead to a further decrease in vacancy rates, growth of rental rates and gradual strengthening of landlords’ position in negotiations. SUPPLY AND NEW CONSTRUCTION

2010 saw the commissioning of 970,000 Sqm of new space in the office property market, with Class A properties accounting for 34% and Class B properties for 66%. As a result, by the end of 2010, the total stock of Class A and B office space amounted to 12.64 Mln Sqm. It should be noted that in 2010 the amount of commissioned space was considerably lower than in previous years, when approximately 1.5 – 1.8 Mln Sqm of office space had been commissioned annually. The reason is that in 2009, against the backdrop of a slump in demand for office properties, many projects were suspended at early construction stages.

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DEMAND

In 2010, a revival of demand was registered in the office property market, primarily on the part of companies operating in the primary, public, and consumer goods sectors. Demand from financial companies also increased, which testifies to the renewal of their business activity and the need to expand the occupied office space. An outstanding trend of 2010 was the demand for office premises with an area of 10,000 – 30,000 Sqm, both in completed buildings and buildings under construction to be commissioned in 2 – 3 years. A larger portion of such requests – about 95% – came from Russian companies. In 2010, the gross take-up in the office lease market amounted to approximately 1,000,000 Sqm, which is 38% more than in 2009. Deals with Class A and Class B properties accounted for 28% and 72% of the total leased area, respectively. It should be noted that in 2010 demand remained focused on operating business centers. In 2010, gross take-up by end users in the office sales market amounted to 320,000 Sqm. The total area of office premises purchased in 2010 was 16% more than in 2009. VACANCY RATES

Recovering demand and growing take-up, typical of the office property market in 2010, provided for a decrease in vacancy rates. As of the end of 2010, vacancy rates in Class A buildings amounted to 17.1%, in Class B buildings to 11.0%. It is worth mentioning that Q4 saw a slight growth of vacancy rates for Class A premises (from 14.3% to 17.1%) following the commissioning of approximately 160,000 Sqm of office space and, correspondingly, an increase in supply. This is comparable to the total area of Class A properties commissioned in the first three quarters of 2010.

Research: Tatiana.Kalyuzhnova@Colliers.com

2011 Colliers Real Estate Review » RUSSIA, MOSCOW

OFFICE MARKET 25%

AVERAGE VACANCY RATES

RENTAL RATES AND SALE PRICES

20% 15% 10% 5% 0%

Q4 Q2 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 2000 2001 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

▬ Class A ▬ Class B

VOLUME BY GEOGRAPHIC SEGMENT, 2011 1.8% 3% 9.5%

16%

46.4% Within Boulevard Ring BR - Garden Ring GR - Third Road Ring TRR - Fourth Road Ring FRR - MKAD Outside MKAD 23.3%

Research: Tatiana.Kalyuzhnova@Colliers.com

In 2010, we observed the gradual stabilization of rental rates in the first half of the year followed by their slight increase in the second half of the year. As of the end of 2010, weighted average rental rates in the CBD amounted to $ 760 Sqm/pa* for Class A, $660 Sqm/pa for Class B+, and $390 Sqm/pa for Class B– properties. Outside of the CBD, weighted average rental rates for office premises remained practically the same since the beginning of the year and amounted to approximately $450 Sqm/ pa year for Classes A and B+ and $220 Sqm/pa for Class B–. PROGNOSIS

In 2010, the following positive trends developed in the office market: demand revival, absorption volume enhancement, and vacancy rate reduction. This resulted in an increase in rental rates, as well as in developers becoming more active and resuming previously suspended projects. This includes the following business centers: Olympia Park, Metropoliya, Nagatino i Land, Skyline, Classic, and Olympiysky Prospekt. This is testimony to the fact that both developers and financial institutions are feeling positive about the office market development prospects and forecast that by the time new properties are commissioned, there will be corresponding demand in the market.

We believe that the market revival trend is stable and is going to gather pace in 2011 unless any macro-economic disruption occurs. It will result in further reduction of vacancy rates, growth of rental rates, increase of competition for office space between tenants, as well as a gradual enhancement of the bargaining power of landlords and property owners. We expect that in 2011 the trend of longer lease agreements will grow, due to the expansion of leased space and landlords beginning to see the possibility of long-term business development planning. Financial institutions which came into ownership of collateral properties may make an impact on office market trends in 2011. Their combined strategy could partially determine future supply, vacancy, rental rates and sale prices in the office market. This will depend on how they manage these assets - for example, whether they dispose wholesale or establish asset management/development units within their corporate structures and dispose of these properties independently. In 2011, there are plans to commission the development of about 900,000 Sqm of office space. The majority of properties due to be commissioned are located outside the Garden Ring. This indicates there will be a shortage of new office space in the city center, which should result in a more rapid increase in rental rates within the Garden Ring compared to the market average.

Colliers International | p. 114

2011 Colliers Real Estate Review » RUSSIA, MOSCOW

INDUSTRIAL MARKET KEY INDUSTRIAL FIGURES

OVERVIEW

Metric

Measure

Total Stock

5,100,000 Sqm

Take-Up

950,000 Sqm

Vacancy

Prime Headline Rent

€9/Sqm/month

The warehouse property market experienced perhaps the most profound impact of the crisis than other segments of the commercial real estate market: demand dropped dramatically, vacancy rates increased sharply from 1% at the end of 2008 to 19% in the middle of 2009. As a result, most new projects were put on hold. This resulted in new construction volume decreasing by a factor of 1.6 in 2010 compared to the previous year.

Source: Colliers International

5,000 4,000

TOTAL SUPPLY AND NEW CONSTRUCTION Class A Warehouse Facilities

3,000 2,000

Subsequently, however, there was a major revival of demand in the warehouse segment in 2010. As a result, the take-up of warehouse space was double the volume of new construction helping to define the main trends of 2010: a reduction of vacancy rates and growth in rental rates.

1,000 0

2007

2008

2009

35.0%

2010

▄ Total Stock (beginning of reporting period)

2011F

▄ New Construction

DEMAND BY REQUESTED AREA IN MOSCOW

As a result of demand recovery, in Q1–Q3 2010, the total volume of transactions in the warehouse property market of the Moscow Region was almost the same as during the entire 2009 (about 600,000 Sqm). In 2010, the total take-up in the warehouse property market of the Moscow Region amounted to about 950,000 Sqm, which is 55% greater than in 2009. In the demand structure, a trend towards a higher share of requests for premises in excess of 3,000 Sqm was observed. For example, if in H1 2010 they accounted for less than 50% of the requested areas, in H2 2010, they accounted for over 70% (see Chart 2). Overall, there was a noticeable increase in the number of transactions for areas in excess of 20,000 Sqm in 2010 as compared to 2009.

30.0%

SUPPLY

25.0% 20.0% 15.0% 10.0% 5.0% 0%

less than 1,500 sqm

1,5003,000 sqm

▄ Q1-Q2 2010

20%

3,0005,000 sqm

5,00010,000 sqm

over 10,000 sqm

▄ Q3-Q4 2010

VACANCY RATES

16% 12% 8% 4% 0%

Source: Colliers International |

2006 2007 2008

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2009 2009 2009 2009 2010 2010 2010 2010

By the end of 2010, total supply of Class A warehouse facilities in the Moscow Region amounted to 5.1 Mln Sqm, having increased during the year by approximately 400,000 Sqm. It is important to note that over 500,000 Sqm of quality warehouse space was announced for commissioning in 2010 initially; however, commissioning of about 25% of this space was postponed to the next year. Among the major projects rescheduled to be commissioned in 2011 are: Aparinki warehouse complex (61,000 Sqm), Krekshino logistics park (22,000 Sqm), and Salaryevo warehouse complex (20,000 Sqm). DEMAND

2010 demonstrated a revitalization of demand in the warehouse property market, primarily by retail operators and companies working in the FMCG segment. This was a consequence of an increase in the population’s purchasing capacity, which determined more intensive development of companies operating in the end-user goods and services market..

p. 115 | Colliers International

VACANCY RATES

The revival of demand in the warehouse property market in 2010, combined with the absence of new projects, led to take-up being more than double new construction volumes approximately 950,000 Sqm versus 400,000 Sqm, respectively. As a result, the warehouse space that had become vacant in 2009 was gradually absorbed, reducing the vacancy rate. The trend of declining vacancy began to take hold in Q2 2010, but the sharpest drop in the vacancy rates was observed in Q3 2010, from 11.7% to 7%. By end 2010, vacancy rates in the warehouse property market of the Moscow Region amounted to 6%, having contracted by more than a factor of 2 compared to the end of 2009.

Research: Tatiana.Kalyuzhnova@Colliers.com

2011 Colliers Real Estate Review » RUSSIA, MOSCOW

INDUSTRIAL MARKET DEMAND BY TENANT PROFILE IN MOSCOW Profile

Retail & Trading

31.4%

Fast Moving Consumer Goods

19.3%

Logistic Operators/3PL

12.1%

Manufacturer

9.3%

Automobiles/technics/machines

7.1%

Construction materials

5.7%

Services

5.0%

Alcohol

3.6%

Others

3.6%

Pharmaceuticals & Healthcare

2.9%

RENTAL RATES

2010 was characterized by growing rental rates and changing commercial terms. For Class A warehouse space, rental rates increased from US$100 Sqm/pa in the beginning to middle of the year up to US$110 – 115 Sqm/pa at the end of 2010. Rental rates for Class B office space increased from US$90 Sqm/pa to US$95 – 100 Sqm/pa, respectively. In addition, an increase in the length of lease agreements can be noted in 2010. While short-term agreements were common in 2009, in 2010, the minimum lease term increased to 5 years. PROGNOSIS

Despite the fact that the total area of Class A warehouse properties announced to be commissioned in 2011 is comparable with 2010 new construction volumes (350,000 Sqm), this indicator is 1.5 – 2 times lower than yearly commissioning volumes in 2007 – 2009. This fact, combined with the revival of demand in the warehouse property market allows for forecasting that the vacancy rates in 2011 will continue to decline, while rental rates will continue to grow.

At the same time, one can’t fail to note that the revival of demand that occurred in 2010 contributed to energizing developers. This was reflected in the resumption of projects previously put on hold and the search for new land plots to be developed. As a result, we expect new projects to be announced in 2011; and in the next 2 – 3 years, leading to higher construction rates and a larger supply of quality warehouse space. One other factor to consider is the potential restriction on the entry of heavy trucks into Moscow. This may become an additional incentive for the development of new warehouse complexes in the Moscow Region.

This will lead to a shortage of immediately available, quality warehouse space by mid-2011. This, in turn, will lead to an increase in demand for warehouse properties under construction, driving pre-lease agreements.

Research: Tatiana.Kalyuzhnova@Colliers.com

Colliers International | p. 116

2011 Colliers Real Estate Review » RUSSIA, MOSCOW

RETAIL MARKET KEY RETAIL FIGURES Metric

Measure

Prime High Street Rents

€453/Sqm/month

Prime SC Rents

€210/Sqm/month

SC Stock (GLA)

2,911,000 Sqm

SC Vacancy

OVERVIEW

2010 was characterized by a revival of demand in the retail property market of Moscow and the Moscow Region. This resulted in the renewed interest of international operators to the

Source: Colliers International

Russian market, the entry of new foreign brands and expansion of regional chains to the Moscow market, and active regional development. This, in turn, led to decreasing vacancy rates, growing rental rates, cancellation of bonuses for tenants and expanding “waiting lists” for the most appealing and successful retail facilities. SUPPLY

The GBA of the new shopping centers opened in Moscow in 2010 was 7% greater than in 2009: 962,000 Sqm and 900,000 Sqm, respectively. However, the GLA of the new properties opened in 2010 is 25% less than the previous year: 373,000 Sqm and 497,000 Sqm, respectively. By the end of 2010, the GBA of retail properties opened in Moscow amounted to 5,819,000 Sqm (GLA of 2,911,000 Sqm). DEMAND

2010 saw an increase in demand for retail properties on the part of practically all types of operators, not only in the largest cities but also in the cities with a population of 300 – 500 thousand people. In 2010, food retailers were active. X5 Retail Group purchased Ostrov and Kopeyka retail chains, and plans to open over 500 new stores in 2011. Magnit from Krasnodar plans to develop on a large scale this year, including opening of approximately 700 stores and the construction of distribution centers. The Lenta chain of hypermarkets is going to resume development in 2011 and build 8 hypermarkets in St Petersburg, Tver, Vologda, Cherepovets, Volzhsky, Ufa, Novosibirsk, and Omsk. French group Auchan intends to develop Raduga hypermarkets in a chain format and increase the Atac retail chain from 40 to 200 supermarkets by 2015. p. 117 | Colliers International

Foreign operators also became more active in 2010. Thomas Sabo, UNIQLO, home&you, Burger King, and Dunkin’ Donuts entered the Russian market. Moneks Trading, operating under franchise agreements, obtained the right to develop new brands in Russia, including Victoria’s Secret, Bath & Body Works, and American Eagle, and plans to develop them in Moscow and other regions in the near future. The Tashir group of companies obtained the right to develop the British brand Quiz in Russia - the first stores were opened in Moscow and Reutov & plans are to open four more stores in Belgorod, Tula, Vologda, and Yaroslavl in 2011. The French company Kiabi and Turkish brands such as LC Waikiki, Koton and Network either opened and/or continue to actively seek new opportunities to aggressively expand their network of stores all over the country in the next three years. RENTAL RATES

Growing demand for quality retail properties resulted in a decrease in vacancy rates and expansion of waiting lists for Moscow’s most attractive shopping centers. In a number of cases, this led to renegotiation of commercial terms for tenants. The fixed portion of rent started to account for a larger part of the rental rate structure, as in pre-crisis times, with a percentage of sales being preserved (a mixed scheme). Moreover, many shopping centers cancelled tenant incentives such as fit-out and rent-free periods of 1 – 2 months, which were widespread in 2009. It is noteworthy that rental rates at the most successful shopping centers have started to grow not only in Moscow, but also in some regional cities.

Research: Tatiana.Kalyuzhnova@Colliers.com

2011 Colliers Real Estate Review » RUSSIA, MOSCOW

RETAIL MARKET 4,000 3,500

TOTAL SUPPLY & NEW CONSTRUCTION (GLA) Source: Colliers International Research

3,000 2,500 2,000 1,500 1,000 500 0

2006

2007

2008

2009

▄ GLA at the beginning of the reporting period

2010

2011F

▄ New construction

High-STREET RETAIL

A recovery in demand for high-street retail premises was also registered in 2010. This was facilitated by the overall improvement of the economic environment, growing sales turnover, and increasing purchasing power. As a result, vacancy rates began to decrease, and rental rates started to grow. By the end of 2010, maximum asking rental rates reached US$3,500 – 4,000 Sqm/ pa, even though prime rental rates were only US$500 – 3,000 Sqm/pa in 2009. In Tverskaya Ulitsa, rents reached US$10,000 – 13,000 Sqm/pa from only US$2,500 to US$5,500 Sqm/pa in 2009. PROGNOSIS

According to the statements of developers and the assessment of Colliers International analysts, the GBA of shopping centers scheduled for opening in 2011 is about 1,000,000 Sqm. This is roughly the same figure as in 2010. In our opinion, an increased supply of quality shopping centers in 2011 will result in the following trends becoming more prominent. A more balanced approach of developers with regard to the quality and the architectural concept of their properties. The year 2010 demonstrated that many developers strive to make their properties more competitive, by means such as engaging experts in various areas. IKEA, for example, has temporarily frozen new project development, focusing instead on attracting new brands not yet represented in Russia to the existing shopping centers and the retail facilities due to open shortly. Thus, the tenant pool will be improved and, therefore, the competitive advantages of these properties will be enhanced, against the backdrop of increasing competition from new projects.

Research: Tatiana.Kalyuzhnova@Colliers.com

New shopping center formats emerging in the market. For instance, in 2010 development of outlet center projects picked up pace, and the first such properties will open in 2011 in Moscow. These are the new shopping centers Outlet Village Belaya Dacha in Kotelniki and Fashion House on Leningradskoye Shosse. Also, Waymart shopping center, located at 26 km MKAD, is being transformed into an outlet center, Brand City. In 2010, a more stringent policy of Moscow authorities with regard to new commercial property development was declared. In the end of 2010, the Moscow authorities made a decision to suspend development of about 400,000 Sqm of retail space in the city center with the aim of easing the burden on the traffic network. Such policy will predetermine a shortage of retail properties in the Moscow market over the next few years. The market situation in 2011 will result in the following trends taking shape. Reduction of vacancy rates and further increase in rental rates, primarily in Moscow’s most successful shopping centers with a well thought-out concept. Renewed activity and shifted focus of developers and retail operators toward the regions. This trend progressed in 2010 and we are expecting it to strengthen over the next year. In particular, 2010 saw many developers resume work on previously suspended projects. Since over the last year rental rates for premises in Moscow’s main retail corridors increased significantly, one can forecast a growth of demand in the suburban areas of the city where rental rates, on average, are lower. This, in its turn, will facilitate rapid increase in rates for the most attractive properties.

Colliers International | p. 118

2011 Colliers Real Estate Review » RUSSIA, MOSCOW

HOTEL MARKET MOSCOW HOTEL ROOM CAPACITY BY CLASSES

4* 28%

3* 59%

NEW MOSCOW HOTEL ROOM SUPPLY BY CLASS 3* 20%

4* 38%

5* 42%

MOSCOW HOTEL ROOM CAPACITY BY DISTRICTS

90%

80% 70% 60% 50% 40% 30% 20% 10% 0%

Central

▄ 5 Star ▄ 4 Star ▄ 3 Star

60%

FLOW OF ACCOMMODATED VISITORS 2004-2009

50% 40% 30% 20% 10% 0%

Source: Mosgorstat |

2004

2005

2006

2007

2008

▬ Leisure and recreation ▬ Business ▬ Other

p. 119 | Colliers International

SUPPLY

At the end of 2010 the current hotel room stock in Moscow included about 28,176 rooms in the 3, 4 and 5 star segments (the total room capacity of Moscow grew by 7.7% compared to the same period of the previous year).

5* 13%

2009

Only around 70% of the rooms announced in 2010 entered the market. This is explained by the postponement of a number of hotel openings. The opening dates for Marriott Courtyard in the Vivaldi Plaza mixed-use complex, a hotel on Krasnopresnenskaya embankment within the second phase of the mixeduse complex and Radisson Blu Hotel at Belarusskaya were all rescheduled for 2011. Last year the number of rooms increased mainly due to the 4 & 5-star hotels - they accounted for 80% of the total number of rooms introduced in 2010. Among the new supply we single out the opening of Lotte Hotel Moscow, the first project in Russia by Lotte Hotels & Resorts, the Korean hotel chain. One of the infrastructural components of the hotel is a SPA center belonging to a world-famous spa management company, Mandara Spa. A third of available accommodation is under the management of international operators, with a more recent, noticeable shift toward hotels in the upper scale (4 & 5-star) categories.

Two-thirds of the 4 & 5 star hotels in Moscow are now under the control of international operators. In the 3-star segment supply is still under the management of Russian operators. Only 3% of 3-star hotels are managed by international operators. The main share of hotel supply is predominantly located in the centre of Moscow. Upscale hotels are located in the historic center: 85% of 5-star hotels operate in the Central Administrative District. In the future we may witness other districts developing subject to the proximity of the main demand generators (i.e. the development of business areas and construction of exhibition facilities). DEMAND

According to the Tourism Committee of Moscow, 3.7 Mln foreign guests visited the capital in 2009 which is 10% less compared to the statistics of 2008. During the first 9 months of 2010 Moscow was visited by 3 Mln foreign guests which is 17% more than at the same period in 2009. It proves that tourist flow is gradually recovering. The main purpose of a Moscow trip remains the same for many years: business or professional. In Moscow recreational tourism is predominantly short-term in its nature. The RevPAR index for 2010 in the luxury hotel segment increased by 5.5% compared to the same period of 2009. Meanwhile, the occupancy level increased by 11.2% and stands at 63.9%. The average price per room (ADR) decreased by 5.2%.

Research: Tatiana.Kalyuzhnova@Colliers.com

2011 Colliers Real Estate Review » RUSSIA, MOSCOW

HOTEL MARKET PERFORMANCE DYNAMICS OF KEY INDICATORS IN THE LUXURY SEGMENT 15,000

100%

12,000

80%

9,000

60%

6,000

40%

3,000

20%

2007

2008

▄ ADR

▄ RevPAR

2009

2010

▬ Occupancy

PERFORMANCE DYNAMICS OF KEY INDICATORS IN THE UPPER UPSCALE/UPSCALE SEGMENTS 10,000

100%

8,000

80%

6,000

60%

4,000

40%

2,000

20%

2007

2008

▄ ADR

▄ RevPAR

2009

2010

▬ Occupancy

PERFORMANCE DYNAMICS OF KEY INDICATORS IN THE MIDSCALE SEGMENT 10,000

100%

8,000

80%

6,000

60%

4,000

40%

2,000

20%

2007

2008

▄ ADR

▄ RevPAR

The RevPAR index in the upscale hotel segments remained the same as the previous year. The occupancy level grew by 7.7% as compared to 2009, thus, reaching 67.9%. It is practically similar to the index for 2006 which was 67.5%. The average price per room decreased by 7.1%.

2009

2010

▬ Occupancy

In the midscale hotel segment the average price per room decreased by 8.8%. The occupancy level grew by 14.4%. It resulted in an RevPar increase by 4.3% compared to 2009. Thus, in 2010 the main features of the hotel market in Moscow were a decrease in ADR and an increase in occupancy. The increased occupancy levels may be considered as a factor that characterizes the beginning of market stabilization and potential for growth in key indicators in the hospitality segment.

PROGNOSIS

In 2011 we expect a supply increase by 6.9% (1,934 rooms). Developers and investors remain interested in upscale hotel projects. We note that the total new hotel room supply will be managed by chain operators (international and Russian operators account for 93% and 7% respectively). New brands will be introduced to the Moscow hotel market: Hilton Doubletree and Mercure by such international operators as Hilton and Accor respectively. In Q1 2011 Windham Hotel Group plans to open a hotel under the brand name of Ramada (5 km from the Domodedovo airport). The limited supply of hotels of a modern standard will also continue in the budget and middle scale segments. There is a positive tendency for continued RevPAR growth which indicates that the hotel market is gradually recovering.

HOTEL ROOMS PLANNED FOR OPENING IN 2011 3* 6.9%

5* 20.9%

Research: Tatiana.Kalyuzhnova@Colliers.com

4* 72.2%

Colliers International | p. 120

2011 Colliers Real Estate Review » RUSSIA, MOSCOW

INVESTMENT MARKET SUMMARY

In 2010, the market continued its recovery that as the total volume of deals increased by 67.8% and amounted to US$3.93 Bln. As of the end of the year, several major investment deals expected to close in the first half of 2011, were in advanced stages of development. The office segment of the market continues to be the key growth driver; this segment accounted for 72.7% of deals, which is slightly lower than in the previous year (85.5%). At the beginning of the year, end-user companies like SOGAZ, RusHydro and Evraz Group were the main buyers in the office property market. However, the acquisition of the Horus Capital development property portfolio and an unfinished business center Classic on Valovaya Ul. by OTKRITIE Financial Corporation which took place at the end of the year moved this player into the most active category.

KEY INVESTMENT FIGURES Indicator

Change

Total volume

US$3,937,410,215

Capitalization rate for office properties

9 – 10%

Capitalization rate for retail properties

9.5 – 11%

CHANGES IN DEAL VOLUME BY SEGMENT

5 Bln 4 Bln 3 Bln 2 Bln 1 Bln 0

2007

21%

2008

▄ Oﬃce

▄ Retail

2009

▄ Mixed use

2010

▄ Warehouse

▄ Hotel

CHANGES IN CAPITALIZATION RATES, %

19% 17% 15% 13% 11% 9% 7% 5%

Source: Colliers International |

2003

2004

2005

2006

2007

2008

2009

The warehouse property segment, which hadn’t seen any deals since 2008, started to exhibit signs of revival, which did not go unnoticed by investors. Three deals for a total amount of US$729 Mln were completed. Capitalization rates continued to decline for all segments of the commercial real estate market. However, by the end of the year, the decline slowed down considerably, stabilizing at 2005 levels. Higher energy prices, the contractionary policy of the Central Bank, and cautiousness of the banking sector have led to a considerable improvement in central bank liquidity, which has been evidenced by a continuous reduction in deposit interest rates. Historically, real estate sector lending has been one of the key areas for major banks, which, combined with positive market signals, allowed them to lower interest rates and relax borrower requirements somewhat. At present, it is possible to obtain a foreign currency loan at 10 – 11% for a term of up to 7 years using completed projects as collateral; compared to 2009, it is 300 – 500 basis points lower. Interest rates for Russian ruble loans are traditionally higher by 200 – 300 basis points. However, the crisis still continues to have quite a significant impact on projects at the land development stage.

Source: Colliers International

6 Bln

In the retail property segment, the volume of deals was significantly lower, amounting to US$185.5 Mln. The much smaller volume of completed deals is explained both by a smaller number of properties with purchase appeal and by the fact that the investor, rather than the end user, has always been the main buyer of shopping and entertainment centers, contrary to the trend observed in the office segment during the past 1.5 years.

Nonetheless, the volume of lending in the construction industry was higher than in 2009. During the eleven months of 2010, there were 33% more loans issued compared to the same period of the previous year. We register the growth in lending volumes to be RUR207.5 Bln higher in 2010 (accounting for the first 11 months of 2010 only), than during the entire 2009. PROGNOSIS

For 2011, we forecast an increase in the volume of deals in all market segments. The highest growth is expected in the retail property segment, as several properties under construction that may change hands are available in the market. We also expect an increase in the volume of deals in the warehouse property segment, which follows the retail property segment’s trend and at the same time is characterized, on average, by longer contract terms and less complex management. Professional investors will start to dominate in the office property market, while the volume of deals with participation of end-user companies will be declining. This process is directly related to the decrease in the vacancy rates and stabilization of rental rates, which we are currently observing in the market. We are not projecting a considerable decrease in capitalization rates in 2011. Further movement of the rates will take place at a much slower pace, because they are close to the stabilization level. A similar scenario is possible for loan interest rates, as well. Banks will be relaxing borrower requirements and more readily lending to developers, but a considerable decrease in rates should not be expected.

2010

▬ Oﬃce ▬ Retail ▬ Warehouse

p. 121 | Colliers International

Research: Tatiana.Kalyuzhnova@Colliers.com

2011 Colliers Real Estate Review » RUSSIA, MOSCOW

RUSSIA LEGAL OVERVIEW Basic Forms of Title

In Russian law, ownership consists of the unlimited rights of the owner to possess, use and dispose of the property. However, there are other forms of title, such as the right of so-called “full economic jurisdiction” ("khozyaystavennoe vedenie") and the right of operational management ("operativnoe upravlenie"), which are available only to state and municipal enterprises. These rights extend to the use, possession and disposal of the assets only within the scope of the business activity designated by the owner (the state) in the company’s founding documents and subject to mandatory provisions of law. For land, the primary forms of commercial land use are land leases and land ownership (freehold). Other forms of land use rights, such as the right of perpetual use of a plot of land are available only to state enterprises, statefunded institutions and residences of former RF presidents which have historical heritage status. The right of lifetime inheritable possession of land plots was formerly provided by the state to individuals and can now be acquired only by inheritance of the respective rights. An easement is a form of title to a plot of land owned by another person, consisting of the right to use the land for a specific limited purpose. Russian law does not allow for a trust in its Western meaning, i.e. as a split between legal and beneficial ownership. Mortgage and fiduciary management (trust management) rights to a property are not treated as rights in rem in Russia. As a result, title to the mortgaged property does not automatically pass to the mortgagee in the event of default, and a trustee is not recognised as the legal owner of the property. Acquisition of Real Estate by Foreigners

Foreigners may directly acquire real estate in Russia, with the exception of agricultural land and land plots together with the property located on them in border areas and specially designated areas.

Registration Systems

To have legal effect, all rights to real estate and transactions giving rise to such rights (except leases with a term of less than one year) must be registered in the RF Consolidated State Register. The Register is maintained by a specialised governmental agency and contains information on the property owner and any encumbrances (leases, mortgages, trust management agreements, etc.). Any party may obtain an excerpt for a property upon written request, for a fee. Before registration, all land plots, buildings, structures, premises and unfinished buildings must undergo technical and cadastral registration in the State Cadastre of Real Estate. The Cadastre is maintained by the federal cadastral agency and contains technical and other information detailing the individual and unique characteristics of the property. The cadastral agency should provide publicly available information in the Cadastre to anyone upon request. Recently it has become possible to apply for state registration of rights by post. It is also now possible to apply simultaneously for the registration of title with the Register and cadastral registration with the Cadastre. The law also provides for online access to information in the Register and the Cadastre. However, this option is not yet operational. Transfer Taxes

VAT (18%) is payable on property acquisitions (other than land plots and apartments). The buyer can generally credit this VAT against the VAT liability on its own sales (refunds are provided for by law, but are problematic in practice). The transfer of shares in a Russian company that owns property is exempt from VAT. Both the sale of property or shares in a company owning the property may incur profit tax (20%) for a non-resident seller. Property owners pay a property tax (established by law of RF constituents but not exceeding 2.2% of the average annual book value of the property). Land tax payable on freehold land is based on a number of regional coefficients.

Leases

Leases are freely negotiable. Most of provisions of law pertaining to lease agreements are optional and may be varied by the parties, but certain mandatory provisions must be adhered to. The most important restriction concerns the mandatory registration requirement for leases of property for a term of more than 1 year. In order to be effective under Russian law a lease agreement must contain the following essential terms and conditions: a definitive description of the leased property and rental payments. Privatisation Claims

A claim arising out of the transfer of assets during privatisation would qualify as a claim for a declaration of the transaction as being null and void, being contrary to the law then in effect. The statute of limitations for a null and void transaction is three years starting from the commencement of the execution of the relevant transaction. Notaries and Notarial Fees

Generally, notarial certification of real estate transactions is not required. Notarial certification is mandatory only (i) when required by law (for example, transfer of shares in a Russian LLC owning the property, contracts of annuity, spousal consents to the transfer of jointly owned real estate, mortgagor consent to out of court foreclosure of mortgaged real estate), or (ii) if the parties agree on the necessity of such certification even if it is not required by law. The notarial fees for certification of real estate contracts may be a fixed amount or a certain percentage of a contract’s value. For example, notarial certification of transactions with a subject requiring appraisal, if notarisation is required by law (such as an annuity contract) costs 0.5% of the contract value; notarial certification of contracts on the alienation of real estate costs 0.3% of the contract value when the contract is concluded with children, spouse, parents, or siblings; 0.5% of the contract value and higher (depending on the contract value) when the contract is concluded with other persons.

Colliers International | p. 122

2011 Colliers Real Estate Review Âť RUSSIA, MOSCOW

RUSSIA LEGAL OVERVIEW Language

For the purposes of state registration and/ or notarisation, real estate transactions must be executed in Russian. In practice, English is often used as a second and controlling language. Arbitration

Any transaction involving Russian real estate property must be governed exclusively by Russian law. As regards the forum for dispute resolution, although Russian law does not establish an express prohibition, judicial practice (including in the higher courts - RF Supreme Arbitrazh Court) holds to the position that disputes involving Russian real property cannot be heard in an arbitration (whether foreign or Russian), and must be submitted exclusively to RF state courts. This means there is a risk that foreign arbitration awards concerning property in Russia, even though rendered under Russian law, may not be recognized in Russia, and the registration of title on the basis of such awards will be virtually impossible to achieve. Mortgage and Foreclosure

There have been several important legislative amendments made to the RF laws on pledge (mortgage) throughout recent years. According to these amendments, the parties to a mortgage agreement may now agree an out of court foreclosure procedure at any time, rather than in the event of a default. The arrangement may also be incorporated directly into a mortgage agreement at the outset. In this case a notarised consent of the mortgagee for the out of court procedure is required.

p. 123â&#x20AC;&#x192; |â&#x20AC;&#x192; Colliers International

The mortgagee may take possession of the property (or sell it to a third party) at a price equal to the market value of such a property, which is determined in accordance with the RF laws on valuation activity, without having to foreclose via a public auction. Although these changes appear on the face of it to substantially simplify and expedite foreclosure, the practice of their application is still to be developed and there are still certain exceptions in which out of court foreclosure is impossible (for example, where the collateral is a cultural landmark, residential premises owned by individuals, or agricultural land). Unless otherwise provided for by law or contract, where a land plot or the buildings on it are purchased, constructed or are being constructed using financing from a bank or a special-purchase loan, the land plot itself together with all the building and structures on the said land plot, are considered to be mortgaged together. Such a mortgage arises by operation of law and is registered simultaneously with the registration of title to the respective real property. Information contained in this general outline does not constitute a legal opinion and is not meant to be comprehensive. As a result of pending and new legislation, laws and regulations change frequently in Russia and are often subject to varying interpretations. Professional advice should be sought regarding all aspects of real estate in Russia.

2011 Colliers Real Estate Review » RUSSIA, MOSCOW

RUSSIA TAX SUMMARY GENERAL PROVISIONS

In a view of economic recovery the Russian government is focused on economy’s stabilization and modernization. For this purpose the new approaches of tax stimulation are being developed, in particular: the Russian tax system is supposed to be harmonized with the worldwide practice by development of the new provisions to the Russian Tax Code (particularly by introduction of extended transfer pricing regulation, consolidated tax reporting and ‘controlled foreign company’ rules). Another focus of the Russian government is to re-attract foreign capital by creating positive environment for foreign investors In particular, strong focus was put on anticorruption actions. At the same time the tax authorities are still applying a stronger approach to the taxpayers for the purposes of sustaining tax yields for the Russian budget: the increased attention is paid to the nature of tax losses incurred by the companies; there are increased challenges to the tax planning schemes applying the substance over form approach to the transactions. CORPORATE PROFITS TAX & CAPITAL GAINS

Russian corporate profits tax (CPT) rate remains one of the lowest in Europe — 20%. CPT is calculated on a net basis (income net of deductible expenses, if they are economically justified and properly supported with documents). There is no special capital gains tax in Russia. Capital gains received by Russian resident corporations from the sale of property or shares in property holding companies is subject to Russian corporate profits tax at a general rate of 20% except for the following. As of 1 January 2011 capital gains received by Russian or foreign shareholder from the sale of shares in Russian company owned for a period of 5 years or longer is subject to Russian corporate profits tax at a rate 0%.

Contact: nmalioutina@kpmg.ru

Where shares in a Russian company are sold by a foreign shareholder, any capital gain arising on such transaction will be subject to tax at 20% if over 50% of the Russian company’s balance sheet is comprised of Russian real estate (RE) property. This tax can be reduced to zero under a number of Double Tax Treaties (DTT) concluded by Russia with other countries. However, under some DTTs (e.g. with UK) Russia has taxing rights for such capital gains. Furthermore, changes were introduced to the existing DTT with Cyprus so that zero rates on capital gains from the sale of shares in RE companies will no longer be applicable. The above changes have not yet been ratified by Russia. They will enter into force after 4 years from the year of ratification (i.e. not earlier than 2015). Similar changes may be introduced in future to other DTTs and incorporated in new DTTs based on the model DTT developed by the Russian government in 2010. In the recent years structures involving RE ownership via Real Estate Investment Funds (REIFs) have become widespread in Russia. A REIF’s profits is not subject to CPT until it is remitted to investors. Moreover, income of a foreign investor from participation in REIF (intermediate income, income from unit redemption or sale) may be exempt from withholding tax in Russia under a number of DTTs. Tax depreciation

Fixed assets and intellectual property with an initial value of over 40,000 roubles and a useful life of over one year can be depreciated for tax purposes. A company may depreciate fixed assets over their useful economic life using the straight-line or reducing balance method. The useful economic life (determined by law) of RE assets is usually more than 30 years. When a company starts depreciating a RE asset, it can elect to deduct a “depreciation premium” (a one-off capital allowance) in the amount of 10% of the depreciable asset’s value (30% for assets with useful lives of between 3 and 20 years). Therefore, it is

important that the value of an asset is properly allocated between the building and other assets (internal systems, lifts, etc.) The standard tax depreciation allowance is then calculated on the basis of historical cost of the asset decreased by tax depreciation premium. Russian statutory and IFRS accounting could be different from tax depreciation due to deviations between IFRS, statutory and tax accounting principles (e.g. interest costs are capitalised for accounting purposes but can be expensed for tax purposes). Accounting depreciation is deducted from the Russian company’s accounting profits which directly impacts the profit distributable by the company through dividends. This may create a “cash trap” issue in Russia. Interest expenses

Interest expenses are not capitalized into the initial value of fixed assets and should instead be deducted for Russian profits tax purposes on the last day of each reporting period or included in tax losses carried forward. Interest expenses are deductible for Russian profits tax purposes provided that they are: —— economically justified and incurred in relation to revenue-generating activities; —— compliant with thin capitalization rules; —— compliant with established arm’s length principles; and. —— the transactions involved in financing structures have business purpose and are properly documented. Under current arm’s length principles, interest should be deductible as long as the rate does not deviate by 20% from the average level of interest charged on loans issued under similar (comparable) terms in the same period. From 1 January 2011 until 31 December 2012 either if comparable loans can not be found or at taxpayer’s choice the maximum deductible interest on loans denominated in foreign currency are calculated as the

Colliers International | p. 124

2011 Colliers Real Estate Review » RUSSIA, MOSCOW

RUSSIA TAX SUMMARY refinancing rate of the Central Bank of Russia multiplied by 0.8. Hence, starting 2011 the maximum deductible interest on loans denominated in foreign currency is reduced by over half (i.e. from 15% to 6.2% based on refinancing rate effective in January’11), thus aggravating taxpayers with high volumes of foreign debt financing. On the contrary, starting 2011 the maximum deductible interest on loans denominated in Russian rubles increased to the refinancing rate of the Central Bank of Russia multiplied by 1.8 (i.e. to 13.95% based on refinancing rate effective in January’11). Thin capitalization rules apply when: —— a Russian company has an outstanding debt to a foreign company (FLE) which owns (either directly or indirectly) more than 20% of the Russian company’s share capital; or. —— the above debt is instead owed to a Russian affiliate of the FLE, or. —— a debt is guaranteed by an above FLE (or its Russian affiliate), and an unpaid loan amounts to more than three times the net assets of the Russian receiver of the debt (12.5 times for banks and leasing companies). Interest found to be excessive under these rules is treated as a dividend, meaning that it will be non-deductible for profits tax purposes and subject to withholding tax at 15% (or a lower rate if a double tax treaty (DTT) is applicable). Tax losses

Losses may be carried forward for 10 years. Since 1 January 2007, all tax losses (including carry forwards) can be deducted for tax purposes. Losses from the sale of a RE asset are tax deductible in equal installments over the remaining useful life of the asset. Withholding tax

Russian source income, which is not attributable to a permanent establishment, such as rent, royalties, interest and dividends paid to a foreign legal entity, is subject to withholding tax.

p. 125 | Colliers International

There is no withholding tax on the repatriation of profits from a local Russian office (Branch or RO) to its head office. Withholding taxes may be reduced or eliminated if the recipient is tax resident in a country operating a double tax treaty arrangement with Russia. In order to be eligible for DTT relief, the foreign recipient company must submit a tax certificate to the Russian income payer confirming it is resident in the treaty country. If the appropriate documents have not been submitted by the recipient, the income payer must withhold tax. If tax is withheld even though treaty relief is available, a refund claim may be filed by the foreign recipient. This is, however, a time-consuming process and there is no certainty that a refund will be obtained.

It should be noted, that the 0% rate is not applicable if the foreign subsidiaries of the Russian companies are situated in the offshore jurisdictions, the list of which is stipulated by the Russian Ministry of Finance. Currently, such countries as Cyprus, British Virgin Islands, Lichtenstein, and others are included into the list. Dividends distributed by Russian companies to foreign companies are taxed at a general rate of 15%, which can be reduced based on the provisions of an applicable DTT. Other income

Interest, royalties and leasing income paid by a Russian company to a foreign company is subject to Russian withholding tax at a general rate of 20%. In some cases this rate can be reduced if applied to certain types of income (e.g. interest income from state bonds).

Dividend distributions

Under the Russian Tax Code, dividends paid by a Russian company to a Russian or a foreign company are subject to Russian withholding tax at source. This tax is to be withheld and transferred to the Russian budget by the Russian income payer.

Withholding tax on the above payments can also be reduced based on the provisions of an applicable DTT. VAT Output VAT

The tax rate on any dividends distributed from a Russian company to its Russian parent is 9%.

The standard VAT rate in Russia is 18%, payable to the budget on an accruals basis. The sale of residential RE property and land plots is not subject to Russian VAT.

However, since 1 January 2008 the dividend income received by a Russian company from its Russian or foreign subsidiary may be taxed at 0% if certain criteria are met: —— the recipient of the dividends owns at least 50% of the charter capital of the distributor; —— the investment has been owned by the recipient for at least 365 days.

The sale and lease of commercial RE property is generally subject to VAT. However, the lease of property to foreign citizens or legal entities accredited in Russia is exempt from VAT if the foreign citizens are residents of/foreign legal entities are incorporated in countries included in a list provided by the Government of the Russian Federation. This is mandatory and the taxpayer must apply this exemption.

The requirement of providing investment into the distributor’s charter capital in amount of at least 500 Mln rubles (currently, approximately US$17 Mln or €11 Mln) was abolished from 1 January 2011.

The sale of shares (as well as other securities, including units in REIFs) and equity interests in limited liability companies and the contribution of property in the form of an investment (i.e. into the charter capital of the company, into a simple partnership (joint activity arrangement) etc.) are exempt from VAT in Russia.

Contact: nmalioutina@kpmg.ru

2011 Colliers Real Estate Review » RUSSIA, MOSCOW

RUSSIA TAX SUMMARY Input VAT (VATable sales) Input VAT (VAT on purchases and expenses) is recoverable if a number of requirements are met. The recoverability of input VAT does not depend on it having been paid to the supplier or on import. Input VAT is not recoverable in respect of expenses or assets used in the manufacture or sale of products exempt from VAT, including expenses or assets incurred in non-production activities. This VAT may be deducted for profits tax purposes (if incurred in an acquisition of current assets) or should be included in the initial value of fixed assets. In certain circumstances input VAT recovery may be denied if the supplier has not paid over their output VAT. Generally under current legislation, the taxpayer can offset VAT on capital construction assets (RE), before the taxpayer has completed building the RE asset. OTHER RELEVANT TAXES Property tax Property tax is levied on property of Russian companies and PEs of foreign companies qualifying as fixed assets, which includes buildings, but does not include land and RE under construction. The maximum rate is currently 2.2% of the average net book value of the fixed assets, but actual rates vary depending on the region in question. Foreign legal entities with no PE in Russia are liable to pay Russian property tax only on RE assets located in Russia (on the basis of inventory value of such assets determined by Russian authorities) As of 1 January 2011 RE assets of REIFs are the subject to property tax. The management company of REIF is obliged to pay property tax expensed by the assets of REIF. Land tax Land tax is a local tax payable on land which is owned by a company. The tax basis is the cadastral value of the land which is set by corresponding local land authorities on 1 January each year. The tax rate depends on the specific purpose of the land. The maximum rates are 0.3% for land used for housing purposes and 1.5% for other types of land. However, specific rates are set up by the local authorities. This is a self-assessed liability and is payable in quarterly instalments.

Contact: nmalioutina@kpmg.ru

Land tax is deductible for profits tax purposes. As of 1 January 2011 RE assets of REIFs are the subject to land tax. The management company of REIF is obliged to pay land tax expensed by the assets of REIF. SPECIFIC REAL ESTATE ISSUES Legal Structure Due to high tax burden on dividends and capital gains in Russia, RE project structures often involve foreign legal entities in jurisdictions with favorable tax regimes or Russian REIFs. At the same time, if the business grounds for having foreign legal entities in such structures are unclear, the tax authorities may charge additional taxes as if all entities in the structure were Russian.

Construction In several cases Russian tax authorities are unwilling to allow tax deduction of certain construction-related expenses or offset of corresponding input VAT. This in particular relates to construction costs incurred before the official construction permit has been obtained or after the object has been commissioned. It is also a common situation when a developer building residential or commercial RE in Russia is obliged to construct and transfer several RE objects to local authorities (e.g. engineering, transport or social infrastructure). The tax authorities tend to challenge tax deduction of construction costs and offset of input VAT relating to such objects. However, a draft law is currently under consideration in Russia, which may enable a developer to deduct such infrastructure costs for CPT purposes, if they have been incurred under agreements with municipal authorities. Another common issue closely investigated by the tax authorities is commonly late recognition of income under long-term construction agreements by construction companies whereas under Russian tax rules such income should be recognised evenly through the whole period of construction. In order to ensure tax efficiency of construction projects in Russia, proper documentation and justification of the above and other arguable expenses and of the method of recognition of income should be elaborated.

Financing A Russian company can only distribute dividends if it generates sufficient profits in its statutory accounts. At the same time a company owning RE is likely to have a significant nonmonetary depreciation expense, leading to low accounting profits. As a result, the company will be unable to distribute all of its available cash via dividends (“cash trap”). This issue can be mitigated if equity finance is in part or in full substituted by debt financing. At the same time tax deduction of interest expenses may be limited by general interest deductibility rules, as well as thin capitalization rules (see “Interest expenses”). Therefore, accurate structuring of the intra-group financing structure is required in order to maximize the interest expense deduction for Russian project companies and minimize the tax burden arising upon profits distribution via interest (in particular Russian withholding tax on interest paid to non-residents). Operation Local legislation in most Russian regions provides substantial tax incentives (reduced profits tax, property tax and land tax rates) for companies investing in RE in the territory of the corresponding region. The tax effect from utilization of such incentives may be significant. In order to apply the regional tax incentives a project company should meet specific requirements stipulated by regional law and prepare proper documentation confirming its eligibility for the incentives. Management The management structure of a group involving Russian project companies may be connected with tax risks. If foreign group companies are managed from the territory of Russia, this may lead to the loss of tax residence of these companies in jurisdictions of their incorporation and creation of a taxable permanent establishment status in Russia. As a result additional tax costs may arise for the group. In order to minimize the above risks it is necessary to elaborate an effective management structure. This involves setting up appropriate contractual arrangements between the management company and project companies and elaborating a reasonable methodology for management fee determination.

Colliers International | p. 126

2011 Colliers Real Estate Review » COUNTRY

Saint Petersburg MARKET

2010 was a positive year showing recovery in all segments on the St Petersburg real estate market. Renewed growth in demand in the office sector was in-line with our own expectations resulting in a decline in vacancy rates. Demand for marketable office premises in good location remains particularly strong. In the retail sector there has been evidence of construction activity resuming on previously suspended development projects as well as the re-conception of existing shopping centers which Nikolay Kazanskiy

managing director colliers international st. petersburg Address

3, Volynsky Lane 191185 Saint Petersburg, Russia

Phone

+7 812 718 36 18

Nikolay.Kazanskiy@Colliers.com

had become out-dated and ineffective. Growth in investment activity was proved by the increase in transactions in the commercial real estate sector and land plot sales for residential development. Colliers International is very proud of the fact that we assisted in about US$62 Mln volume of signed deals, which accounted for more than 60% of all investment purchases in St. Petersburg. We expect an increasing number of transactions on St. Petersburg market as we head into 2011, since investors are confident about prospects for rental growth and a further compression of prime yields. During these more favourable market conditions we look forward to working hard for our clients to help build on the positive momentum of 2010. Best regards, Nikolay Kazanskiy

p. 127 | Colliers International

Research: Firstname.Lastname@Colliers.com

2011 Colliers Real Estate Review » RUSSIA, ST. PETERSBURG

OFFICE MARKET KEY OFFICE FIGURES

GENERAL OVERVIEW

Metric

Measure

Total Stock

1,430,000 Sqm

Take-Up

130,000 Sqm

Vacancy

18%

Prime Headline Rent

US$38/Sqm/month

Demand continued to grow in 2010, following the growth trend in the end of 2009 with take-up estimated to be 150,000 Sqm per year in 2011 – 2012.

Source: Colliers International

1,800

CHANGE IN STOCK & PIPELINE (SQM, 000)

1,600

70% 60%

1,400

50%

1,200 1,000

40%

800

30%

600

20%

400

10%

200 0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F

▄ New Supply ▄ Total stock as of beginning of the year

▬ Increase, %

KEY LEASE TRANSACTIONS Tenant

Size (Sqm) Project

Gazpromneft’

11,000

Delovye linii

5,000

Pulkovo Sky

Confidential

4,000

Technopolis

Vozdushniye Vorota Severnoy Stolitsy

3,100

Pulkovo Sky Technopolis

Quattro Corti

Confidential

3,000

Baltnefteproduct

2,100

Fidel

Soft Balans

1,800

Rostra

Tele 1

1,750

Gulliver

PricewaterhouseCoopers

1,600

BolloevCenter

Logistika SeveroEvropeiskih gazoprovodov 1,500

Senator (17 and 18 line V.O.)

Medstroy

1,500

Senator (17 and 18 line V.O.)

Regus

1,350

Nevsky Plaza

Geologistika

1,200

Senator (17 and 18 line V.O.)

Web Plus

1,200

Zaslonova 7

Pronto-Peterburg

1,000

Senator (17 and 18 line V.O.)

300

VACANCY RATE & TAKE UP

25%

250

20%

200

SUPPLY

By the end of 2010, the total stock of Class A and B office space increased by 10% and amounted to 1.43 Mln Sqm. Of this total 410,000 Sqm comprises A class space, following an additional 61,000 Sqm of space being added in 2010. The majority of stock — 1,020,000 Sqm — comprises B class space, of which an extra 65,000 Sqm was added in 2010. The geographical location of the new business centers put into operation in 2010 is somewhat different to previous years. Projects are being built in peripheral districts as well as in the city center. In particular, two large-scale office centers opened in the Pulkovo area of the city in 2010 – Technopolis and Pulkovo Sky (build. A, C). DEMAND / TAKE-UP

The net-take up of modern office space amounted to 130,000 Sqm in 2010. Demand was characterized by an increasing number of large office space requests and the increasing requirements of tenants for higher quality office space.

15%

150 10%

100

50 0

Net take-up amounted to 130,000 Sqm in 2010 – against 110,000 Sqm in 2009 – this matches the provision of new supply to the market over the same period leading to a stabilization of vacancy and rents.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F

▄ Net take-up (sqm, 000)

▬ Vacancy, %

Research: Vasiliy.Dovbnya@Colliers.com

VACANCY

As of the end of 2010, vacant space in class A and B stock amounted to 250,000 Sqm. This leads to a vacancy rate of 18%.

RENTAL RATES / LEASE TERMS

Rental rates on average level stabilized by the end of 2010 and the basic lease terms for high-class business centers did not change: —— Basic lease term continue to be 3 years. In case of 5 years – lease conditions will be reviewed in 3 years; —— Contracts continue to be nominated in rubles; —— Landlords continue to provide 1 – 3 payment-free months as a discount when signing a lease agreement; —— Average rental rates for grade A offices are US$460/Sqm/year (incl. OPEX, net of VAT), for grade B offices – 340. PROGNOSIS We expect a further slight increase in net take-up of up to 150 – 160,000 Sqm over the year. According to our analysis, as of the beginning of 2011 there are a further 10 office projects under construction that are planned to be opened in 2011. In total they comprise a total rentable area of 150,000 Sqm. By our estimation, this will result in a fall in vacancy rates to 17% by the end of 2011. As this trend continues, yet with more limited new supply and smoothly growing take-up we expect the drop in average market vacancy rate down to 12% in 2012 and therefore some pressure on growth in rental rates. Thus rents should remain stable during 2011 with minimal pressure on rents later in 2011 in line with increasing occupancy. This may differ by quality, however, as the appearance of large companies in the city will entail the use of higher quality space. The fact that large and influential companies (like Gazpromneft’) are opening their offices in St Petersburg will create a strong prerequisite for further office market demand. The new office of Gazpromneft’, that will open in Quattro Corti business center should act as a magnet to a range of occupiers, drving demand for higher quality space in the city. Equally, new manufacturing development, particularly companies in the automotive and pharmaceutical sectors will impact positively on business activity and the office market.

Colliers International | p. 128

2011 Colliers Real Estate Review » RUSSIA, ST. PETERSBURG

INDUSTRIAL MARKET KEY INDUSTRIAL FIGURES

OVERVIEW

Metric

Measure

Total Stock

1,140,000 Sqm

Take-Up

170,000 Sqm

Vacancy

24%

Prime Headline Rent

US$9/Sqm/month

Source: Colliers International

CHANGE IN STOCK & PIPELINE (SQM, 000)

1,200 1,000 800 600 400 200 0

2006

2007

2008

2009

300

H1 2010 H2 2010 2011F

▄ Supply, as of the beginning of the year (half-year)

2012F

Net take up in 2010 amounted to 170,000 Sqm which is more than 2 times larger than the take-up level of 2009. The vacancy rate decreased from 36% in the beginning of 2010 to 24% by the end of year.

The main areas of concentration are in the south of the city – in the Shushary industrial zone. Proximity to the Moskovskoe highway, the key transport route in St. Peterburg, provide infrastructure for cargo flows to Moscow and most Russian regions, making this zone one of the most attractive for tenants.

Take up was spread across the city leading to a decrease in vacancy in almost all warehouse and industrial zones. The Shushary zone is the only exception as a result of the completion of the 3rd phase of the Shushary Logictic Park in Q4 2010, where most space remained vacant on completion.

The second largest warehousing and industrial zone is located in the southeastern part of St. Petersburg and is represented by the largest warehouse complex in the city – MLP Utkina Zavod’.

Average asking rental rates for warehouse premises didn’t change significantly in 2010. Class A space trades at US$85 – 110/Sqm/year, and class B – US$75 – 100/Sqm/year (triple net rental rates).

▄ New supply

RENTS

SUPPLY GEOGRAPHY (SQM, 000)

250 200

SUPPLY

150 100 50

r he Ot

yb vo

▄ H2 2010

▄ H1 2010

ar ,P

tri

rto

Za a kin

ry ha us Ut

d’

400

AVAILABILITY / VACANCY OVER TIME (SQM, 000)

300 200 100 0

DEMAND / VACANCY / AVAILABILITY

The major warehousing and industrial zones have already been formed in St Petersburg market, driven by existing cargo flows into the St. Petersburg port as well as the existing logistics distribution network inside the city,

2007

2008

▄ Net Take-up

2009

2010

▄ Vacant space, by the end of the year

p. 129 | Colliers International

2011F

By the end of 2010 the stock of high-quality warehouse premises had increased by 6%, reaching 1.14 Mln Sqm (including speculative warehouses and logistic complexes; excluding specialized warehouses and warehouses used for owner occupation). Two new speculative warehouse complexes were put into operation in 2010 — KDS Logistic and Shushary 3rd phase. Combined, these complexes increased total speculative stock by up to 930,000 Sqm. A further two new warehouse complexes are scheduled for completion in 2011 – the first phase of Nordway industrial and logistic park and the Total Terminal warehouse complex. Nordway will be located in Shushary in direct proximity to Toyota, GM and Magna plants. The Gross building area for the whole project (to be completed in 2013) – is approximately 100,000 Sqm. The Total Terminal warehouse complex will be located within the city borders and will comprise 3,000 Sqm of warehouse space.

PROGNOSIS

Provided that demand and take up volumes are at the same level in 2011 as in 2010, we forecast vacancy to fall down to 7 – 10% by the end of 2011. This will result in growing interest for new investment in speculative warehouse complexes. In line with the vacancy decrease and limited supply of the new warehouse and industrial space, we forecast slight rental growth of 7 – 12% by year end. Other major events may also move the market forward more rapidly. For example Mazda is considering the possibility to open a plant in Russia, and one of the potential locations is the St. Petersburg and Leningrad region.

Research: Vasiliy.Dovbnya@Colliers.com

2011 Colliers Real Estate Review » RUSSIA, ST. PETERSBURG

RETAIL MARKET KEY RETAIL FIGURES

GENERAL OVERVIEW

Metric

Measure

Prime High Street Rents

US$275/Sqm/month

Prime SC Rents

US$125/Sqm/month

SC Stock

2.2 Mln Sqm GLA

SC Vacancy

10%

Source: Colliers International

5,000

CHANGE IN SC STOCK OVER TIME (SQM ,000)

4,500 4,000 3,500

The retail market showed strong positive growth trends in 2010: —— retail turnover grew by 6% as compared with 2009; —— occupancy rates in quality shopping centers reached pre-crisis levels of 90%; —— the first modern department store has appeared in St. Petersburg and there has been the redevelopment of the main existing shopping centers (SC Great).

3,000

SUPPLY

2,500 2,000 1,500 1,000 500 0

2004

2005

2006

2007

2008

2009

H1 2010 H2 2010 2011F

▄ Increase ▄ At the beginning of the year

MARKET STRUCTURE (by total area) 7.9% Specialized furniture shopping centers

68.8% Shopping Centers

9.2% DYI 14.2% Hypermarkets

Address

Ulmart

Blagodatnaya Computers, technopark home appliances

Profile

GLA, Sqm 7,200

Kronverk Cinema Leto

Multiplex

4,700

Mirage Cinema

Atlantic City

Multiplex

4,300

Decathlon

Leto

Sportsware

4,200

Sportmaster

Grand Canyon Sportsware

4,100

AGAT Group Inc

Galeria

4,000

Entertainment

An additional ten shopping centers were put into operation in 2010 comprising a GLA of 268,000 Sqm. Among them were the Stockmann Nevsky Center on Vosstaniya square – the first department store in St. Petersburg (GLA 45,000 Sqm), and the first super-regional shopping center in the city centre – Galeria (GLA 93,000 Sqm).

PROGNOSIS

We expect the demand for quality retail space to continue in 2011 due to the following facts: —— Retail turnover is expected to grow by 10% in 2011. —— New operators are expected to enter the market (Decathlon, Kika and others); —— Stock is expected to increase in 2011 by ca. 200,000 Sqm GLA (less than in 2010), Large-scale shopping centers scheduled to open in 2011 such as Leto, Felicita and Great are already almost fully occupied with tenants. —— Due to expected demand growth and high existing occupancy level we forecast the growth for rental rates in quality shopping centers by 10 – 15% compared with current rates.

DEMAND

MAJOR LEASE DEALS IN 2010 Operator

By the end of 2010, there were a total of 159 retail facilities in St. Petersburg comprising a total area of 4.25 Mln Sqm (GLA of 2.7 Mln Sqm) – based on retail properties with a GLA of more than 4,000 Sqm.

In comparison with 2009, there is almost no vacant space in the highstreet retail segment on Nevsky prospect. New space is offered in Nevsky Plaza (Nevsky pr. 55) and in Taleon project (59, Moyka river emb.) at rates of €2,000 – 2,500/Sqm/year.

Although 270,000 Sqm of retail space was commissioned on the market in 2010, occupancy of shopping centers exceeded 90% at the beginning of 2011. Thus showing positive demand growth on the market. The process of tenant rotation in shopping centers still continues, however. RENTAL RATES

By the end of 2009 rental rates in shopping centers stabilized and slowly began to grow in 2010. As of the end of 2010 rental rates for premises occupied by anchor tenants increased by 5 – 10% on average (compared to 2009), and for gallery operators by 20 – 30%.

Research: Vasiliy.Dovbnya@Colliers.com

Colliers International | p. 130

2011 Colliers Real Estate Review » RUSSIA, ST. PETERSBURG

HOTEL MARKET KEY HOTEL FIGURES Metric

Measure

Hotel Number

119

Rooms Stock

17,400

Tourists Flow

4.8 Mln

Average Occupancy Rate

58%

SUPPLY

As at the beginning of 2011, the St. Petersburg hotel market comprised 119 hotels, with more than 17,400 rooms – excluding mini-hotels, departmental hotels and hostels. The supply of hotel rooms per thousand capita in St. Petersburg is 3.8.

Source: Colliers International

20,000

CHANGE IN HOTEL STOCK

140

18,000

120

14,000

100

12,000

10,000

8,000 6,000

4,000

2,000 0

Number of hotels

Number of rooms

16,000

2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F

▄ 5 Star ▄ 4 Star ▄ 3 Star ▄ 2 Star

▬ Number of hotels

HOTELS DISTIBUTION BY CATEGORY

13% 5 Star

According to the St. Petersburg Investments and Strategic Projects Committee and Economic Development, Industrial Policy and Trade Committee, St. Petersburg was visited by 4.8 Mln tourists.

38% 3 Star

37% 4 Star

DEMAND SEASONALITY BY OCCUPANCY RATE

80% 60% 40% 20% Source: Colliers International

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

3-star hotels occupy the largest share of the market – 40% of total rooms. They are followed by 4-star hotels (36%) and economy class hotels (12%). The remaining share is taken by 5-star hotels (12%). DEMAND

12% 2 Star

100%

Over 2010, five new hotels with an overall capacity of 784 rooms were put into operation – the main increase being in the segment of 3-star hotels.

Oct

Nov

Dec

Although forecasts for 2011 remain at the same level, we expect an increase in tourist flow from 2011 onwards due to the policy of the St. Petersburg administration to develop the tourist infrastructure in the city, the simplification of the visa regime and the gradual improvement of the global economy.

▬ Potential demand ▬ Pre-crisis demand ▬ Crisis demand

ACCOMODATION RATES Class

Low season

Half season

High season

5-star

5,000 – 15,000

7,200 – 20,800

12,400 – 22,600

4-star

2,600 – 6,600

3,500 – 8,800

4,900 – 11,800

3-star

1,600 – 5,600

1,600 – 7,900

1,700 – 9,700

Rack Rates by Hotel Class in different seasons (for Standard Double Room, RUR/day)

After the planned completion of the new Pulkovo airport terminal in 2014, tourist flow is expected to grow significantly — passengers’ turnover in 2010 was about 8 Mln, expected turnover in 2014 is 17 Mln, which is more than double. INTERNATIONAL HOTEL OPERATORS IN ST. PETERSBURG

Compared with the beginning of 2000, when the market was represented by only 4 international operators today there are over 10. New hotel operators are expected.

p. 131 | Colliers International

In 2011, three new international hotel operators are due to enter the market — Four Seasons Hotels & Resorts, Starwood Hotels & Resorts and Domina Hotels & Resorts (with two of them positioned in the luxury segment). In addition, Hilton Worldwide and Hyatt International have also announced their own development plans in Saint Petersburg. OCCUPANCY RATES In 2010 the average occupancy rate increased by 5 – 15% compared with 2009. In the high season most high quality hotels achieved an occupancy rate 85 – 90%. ACCOMODATION RATES There was the usual decrease in rack rates in the low season compared with the summer ‘white nights season’ in 2010. In particular: by 42% for 5-star hotels, 40% for 4-star hotels and 36% for 3-star hotels. PROGNOSIS We expect continued demand recovery and occupancy growth in 2011, rising more significantly in 2013 – 2014 influenced by the opening of the new Pulkovo airport terminal and the new Marine passenger terminal construction on Vasilievsky Island. As of the end of December 2010 there were seven hotel projects – new and rebursbishment projects – comprising 1,000 rooms, planned to be put into operation in 2011. Most of the hotel projects scheduled to be opened in 2011 are expected in the top segment (52% of rooms under construction are in 5-star hotels). This will allow existing operators to keep expanding, the new Rezidor brand — Radisson Blu was opened on the market after the rebranding of the Reval Sonya hotel on 5/19 Liteyniy prospekt. IHG will have four operating hotels in St. Petersburg in 2011 – after the planned opening of two ne Crowne Plaza hotels.

Despite the growth in stock, the expansion in tourism numbers and thus operator commitments should see hotel occupancy rates increase.

Research: Vasiliy.Dovbnya@Colliers.com

2011 Colliers Real Estate Review » RUSSIA, ST. PETERSBURG

INVESTMENT MARKET KEY INVESTMENT FIGURES Metric

Measure

Investment Turnover

US$440

Prime Office Yield

10%

Prime Retail Yield

10%

Prime Industrial Yield

12%

SUMMARY

2010 showed a return of activity to the investment market in St. Petersburg. The volume of closed sales transactions amounted to more than US$440 Mln, including the purchase of land for residential development.

Source: Colliers International

1,000

The most active group of investors in the market were construction companies specializing in residential real estate. This group made purchases totaling more than US$230 Mln (more than half of the total volume of investment transactions). Their primary focus was on plots for development which can provide large-scale projects for future development.

INVESTMENT VOLUMES (US$ MLN)

800 600 400 200 0

2007

25%

2008

2009

2010

YIELDS Source: Colliers International

20% 15% 10% 5%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

▬ Oﬃce ▬ Retail ▬ Warehouse

KEY INVESTMENT TRANSACTIONS Deal

Value

Vendor

Purchaser

South Pole shopping center

€28.5M

Fort Group

Private

Rybatsky shopping €24M center

Fort Group

Confidential

Austrian office center

€21.5M

Federal Grid Tilman Kraus Company Property Group

Renaissance Hall office and retail center

€19.1M

Desna Development Feniks-10

PNK-1 warehouse complex

€10.3M

Intertorg

Research: Vasiliy.Dovbnya@Colliers.com

FF&P

Private equity investors were also active, focused on the acquisition of small properties of US$1 – 5 Mln lot sizes, in central locations. A number of deals was made in the high-street retail sector (notably along Nevsky Prospect and Bolshoy Prospect of Petrogradskaya Side), as well as for small office premises – although these purchases were primarily for owner occupation. Despite an increase in activity, the actual number of active players on the market in 2009 – 2010 is far lower than in pre-crisis years with the majority of the deals now closed by local investors. The volume and probability of closed transactions is, however, far higher than in 2010.

Industrial and energy companies have also become much more active in their requirements for industrial/warehouse and office properties for owner occupation. PROGNOSIS

By the end of 2010, office and retail capitalization rates decreased to 11 – 12%. We expect a continuing, yet small, decrease in rates in 2011, especially as there is a noticeable trend to lower interest rates. By the end of 2010, interest rates were at a level of 12 – 15% in rubles and 9 – 13% in foreign currency. Despite the small number of transactions in 2010, many investors expect future price growth driven by yield compression and rental rates growth. Combined with the revitalization of more available bank financing, this will increase the number of large-scale properties which subsequently become available alongside the resumption of development projects. This growing number of deals should lead to renewed investor appetite and new investors in the market, leading to continuing growth in investment volume over 2011.

Foreign market participants continue to observe and wait for the proper properties which should result in further activity in 2011. Scandinavian investment funds are the most active, the majority of whom are actively seeking landmark, large-scale office properties to provide an investment for 7 – 9 years. Though the typical restriction for the local market remains – the lack of high-quality investment products.

Colliers International | p. 132

2011 Colliers Real Estate Review » COUNTRY

Serbia

Dear Friends and Partners, The last year has proven to be challenging for all of us. All of the real estate market segments suffered, each in their own manner. Although the messages we receive from banks, investors as well as the government are encouraging, 2011 will continue to be a year of caution but a slow and definite recovery. Maja Sahbaz

As a result of all this change, the one thing we can say is that the market

general manager colliers international serbia

is a lot more sophisticated than it was 2 – 3 years ago. Some difficult

Address

115D Mihajla Pupina Blvd. 11070 New Belgrade, Serbia

that the market has shifted towards tenants and buyers.

Phone

+381 11 313 99 55

It will continue to take an innovative and sophisticated approach to

Maja.Sahbaz@Colliers.com

achieve successful and sustainable real estate solutions, tapping into local

lessons were learned, and among them the most important one would be

and global experience. We hope to continue to accelerate your success. Best regards, Maja Sahbaz

p. 133 | Colliers International

Research: Firstname.Lastname@Colliers.com

2011 Colliers Real Estate Review » SERBIA

ECONOMIC OVERVIEW KEY ECONOMIC FIGURES Metric

2010E

SUMMARY

2011F

GDP Growth

1.5%

2.5%

Industrial Production

-0.5%

5.0%

Unemployment

20.0%

19.5%

Inflation

10.3%

7.5%

Retail Sales

-1.1%

n/a

Public Deficit

-4.8%

-4.0%

After a sharp decline in GDP in 2009 (-3.1%), Serbia began to show some positive signs economically, with three consecutive positive growth quarters (Q1: +.03%, Q2: +.08%, Q3: +1.6%, qoq seasonally adjusted).

Source: NBS, Raiffesen Bank, Colliers Research

25%

GDP, INDUSTRIAL OUTPUT & UNEMPLOYMENT

20% 15% 10% 5% 0% -5%

Source: NBS, Raiﬀeisen Bank Colliers Research

-10% -15%

2007

2008

2009

2010

2011F

Source: UniCredit Bank

1 0.5 |

2008

Unemployment figures remained week in 2010, in October reaching 19.2%. Consumer prices have grown beyond the National Bank’s target of 6.0% (±2%), increasing 10.3% yoy for the period January – December.

FDI (EUR BN.)

1.5

Production and export trends have improved in 2010, with industrial production in the first 11 months of 2010 increasing 3.2% compared with the same period in 2009.

2012F

▬ GDP Growth ▬ Industrial Output ▬ Unemployment

2.5

Estimated GDP in 2010 was €29.7 Bln, 1.5% above the previous year. Due to the significant drop in GDP in 2009, this brings Serbia’s GDP just above its 2007 figures.

2009

2010

Research: Mirjana.Mandic@Colliers.com

2011F

2012F

The Belgrade Stock Exchange has been plagued by poor performance and extremely low turnover, the two main indices, Belex 15 and Belexline, fell 1.8% and 2.2% in 2010 respectively. Total turnover on the exchange was only €222 Mln.

PROGNOSIS

Serbia’s GDP growth should be more robust in 2011 than in 2010, with UniCredit bank forecasting GDP growth of 2.7% in 2011. Consumer prices will continue to experience upward pressure, the target of 4.5% (± 1.5%) set by the National Bank will likely be difficult to achieve with UniCredit Bank projecting an inflation rate of 7.5%. The Serbian Dinar (RSD) is expected to continue to depreciate during 2011, with some analysts projecting the exchange rate against the Euro as high as 117 RDS. The “Serbian post-crisis economic growth and development model 2011 – 2020” study should act as the basis for the government’s economic strategy. The document calls for more focus on investment and imports as the historical reliance on privatizations and foreign direct investment may be drying up. Telekom Srbija, Serbia’s fixed phone line operator is likely to be privatized in 2011, with major players in the telecommunications industry interested in acquiring the state-run company. The sale is expected to generate at least €1 Bln in revenues to the country, significantly boosting FDI in 2011 compared to 2010.

Colliers International | p. 134

2011 Colliers Real Estate Review » SERBIA

OFFICE MARKET KEY OFFICE FIGURES

SUPPLY

Metric

Measure

Total Stock (A and B)

658,419 Sqm GLA

Vacancy (A and B)

24.24%

Prime Headline Rent

€16/Sqm/month

Despite the construction slowdown experienced by the Belgrade office market during 2010, the total stock of Class A and B office space increased by 76,100 Sqm. By year-end it stood at 658,419 Sqm.

Source: Colliers International

70,000

ADDITIONS TO OFFICE STOCK IN BELGRADE Source: Colliers International

60,000 50,000 40,000

Of this, Class A stock comprises 414,503 Sqm GLA an increase of 22.5% compared to 2009. The total stock of Class B space remained the same as in 2009 – at 243,916 Sqm.

In terms of deal size, the majority of demand (70% of requests) was for premises up to 500 Sqm. The remaining 30% of requests were for larger footplates of 1,000 Sqm and above. VACANCY / AVAILABILITY

The vacancy rate increased to 24,24% by end 2010, which equates to 159,633 Sqm. Class A vacancy increased compared to the previous year, driven in large part by additions to stock, while Class B vacancy decreased.

30,000 20,000 10,000 0

H2 2008

H1 2009

H2 2009

H1 2010

H2 2010

KEY LEASE TRANSACTIONS Tenant

Size (Sqm) Project

Location

Findomestic bank

2,500

Napred Block 26

New Belgrade

Medico Uno

1,000

Belgrade Warehouse

Pancevo

Cardiovasular Hospital

1,250

Block 24

New Belgrade

Numanovic Furniture

1,950

180,000 160,000

Garden Center

New Class A buildings delivered to the market in the second half 2010 included the Dexy Co office building of 9,056 Sqm, located in New Belgrade. Other significant additions to stock included two buildings (Belville Office Building 1 – 8,089 Sqm GLA and Belville Office Building 2 – 15,302 Sqm GLA) which opened within the University village on Jurija Gagarina Street, in New Belgrade. DEMAND

Encouraged by somewhat lower rental levels, numerous companies started their search for new business premises in 2010. These tenants came from a range of business sectors including finance and insurance, engineering, architecture and construction; IT, media and publishing and retaling. Among the companies seeking space were Findomestic Bank, KBC Securities, Meridian Balkans, SunGard, Reuters, Beneton, and others.

Zemun

VACANT SPACE IN BELGRADE Source: Colliers International

140,000 120,000 100,000 80,000 60,000 40,000 20,000 0

Q1 2008

Q2 2008

Q1 2009

Q2 2009

Q1 2010

▬ Class A ▬ Class B ▬ Overall

Q2 2010

Local and foreign government institutions and embassies were also active players in the market. The Australian Embassy took 800 Sqm in the “19th Avenue” office building in New Belgrade, and the Flight Control Agency of Serbia took up 1,200 Sqm in the “M Invest” building also in New Belgrade.

By type, there was 105,222 Sqm of vacant Class A – a vacancy rate of 25.4%. Class B vacant space account for 54,111 Sqm – a vacancy rate of 22.3%. RENTS

Although rents for all types of office space experienced a decrease, there was a greater fall in Class A rents, due to the higher level of new additions. Prime headline rents by year-end fell to €16 per Sqm. In general, headline rents for Class A space vary from €13 to €16 Sqm/pcm. Class B rents remained steady at ca. €13.5 Sqm/pcm. In cases where the whole building is offered for rent, with sizes ranging from 1,000 to 2,500 Sqm, prime headline rents range from €10 to €12 Sqm/pcm. PROGNOSIS

Over 50,000 Sqm of space is on track to be delivered to the market in 2011. This comprises of primarly Class A stock, delivered by a few key developments. The buildings expected to have a big impact on the market are the B23 office building by Verano, comprising 35,000 Sqm including state of the art systems. Another interesting new project is Tri lista Duvana by MPC Holding (8,200 Sqm GLA) in one of the top business location in Belgrade’s CBD. This will create significant competition amongst developers/owners for grade A tenants, putting further downward pressure on class A rents.

p. 135 | Colliers International

Research: Mirjana.Mandic@Colliers.com

2011 Colliers Real Estate Review » SERBIA

RETAIL MARKET KEY RETAIL FIGURES

GENERAL OVERVIEW

Metric

Measure

Prime High Street Rents

€110/Sqm/month

Prime SC Rents

€60/Sqm/month

SC Stock

155,530 Sqm

The Serbian retail market took further steps toward reaching greater maturity in terms of its overall retail offering, converging more closely with neighboring SEE countries Bulgaria and Croatia.

Source: Colliers Research

180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0

SHOPPING CENTER STOCK IN BELGRADE Source: Colliers Research

2005

€120

2006

2007

2008

2009

2010

2011F

An improvement in retail turnover was experienced, albeit to a small extent, in the last quarter of 2010. This growth trend is expected to continue in 2011.

RENTAL LEVELS IN BELGRADE

SUPPLY

€100 €80 €60 €40 €20 €0

Belgrade and Novi Sad remain at the forefront of the country’s retail development as local and international retail chains have continued to expand. More recently, however, retailers have chosen to venture outside of these two big markets into the secondary cities of Serbia.

Prime SC

Prime High Street

Prime Outlet

Total retail supply in Belgrade increased by 24,000 Sqm in 2010, predominantly driven by the growth of retail parks and outlets, including the new Tempo Center and Hiper Cort. A new Tempo Center, comprising 9,000 Sqm, opened in Kragujevac in November 2010. This represents the first phase of “Delta Retail Park.” Phase two will include DIY and other stores scheduled for opening in spring 2011. Hiper Cort (15,000 Sqm) was sold to DIS in last quarter of 2010. This is expected to mark the expansion of DIS markets which are mostly located in Central Serbia with more supermarkets expected to be opened in Belgrade in 2011.

Research: Mirjana.Mandic@Colliers.com

Traditional shopping center stock only increased by 5,130 Sqm (3.3%) in 2010, reaching 155,530 Sqm. This was driven by the opening of a new neighborhood shopping center in the latter half of 2010 — Point Centar in Kaludjerica. The center consists of approx. 5,000 Sqm GLA. Tenants include local brands sutch as Fitex, OFY Toys, Brankodex, Atrattivo, Diopta, and consumer electronic store — Technomarket. Outlet center stock remained the same over the year, with no new deliveries expected until H2 2011 through the opening of Fashion House Outlet Center in Indjija. DEMAND

Due to continuous unfavorable market conditions, the demand for retail units continued to decrease in the latter half of 2010. This created a scenario of lower rents and easier lease terms for renegotiations. This resulted in new market entries as well as expansions – Burberry opened its first store in Terazije in April, followed by Emporio Armani which opened in October. KFC expanded to Novi Sad and a new location in Belgrade near Studentski trg. High street units are traditionally the most sought-after retail type for new market entries in Belgrade – exemplified by fashion brand Peacocks opened its first store in the primary shopping area of Terazije. Crabtree & Evelyn opened their first store in Cika Ljubina Street. That said, several new market entries in 2010 were, however, made through shopping centers – examples include natural cosmetics brand, Lush, shoes retailer Nine West and Diva jewelry.

Colliers International | p. 136

2011 Colliers Real Estate Review » SERBIA

RETAIL MARKET NEW MARKET ENTRANTS OR DEVELOPMENTS Tenant

Size (Sqm)

Project

Developer

Emporio Armani

270

Terazije

High Street

Quiz

180

Usce

MPC

Nine West

100

Usce

MPC

Lush

Usce

MPC

Diva

Usce

MPC

REPRESENTATIVE PIPELINE PROJECTS IN SERBIA GLA

Project

Type

18,500

Rajiceva

Shopping ABD/Astrom Center

Investor

Old town Belgrade

Location

6,500

Pasino Brdo

Shopping Novi Dom Center a.d.

Vozdov ac, Belgrade

8,000

Pancevo Retail Park/IInd phase

Retail Park

Aviv Arlon

Pancevo

15,000

Fashion House Outlet Center Belgrade/Ist phase

Outlet Center

GVA/Black Oak

Indjija

VACANCY & RENTS

The vacancy rate in the large, existing modern international-style shopping centers – Delta and Usce – remained at 0%. Such shopping centers maintained high asking rents although some retailers did renegotiate terms to reflect difficult conditions. Prime High street rents continued to be strong at €110 per Sqm. Asking rents at the lower end of the scale, for larger units can be €40 – 50 per Sqm lower. Peripheral retail areas experienced an increase in the vacancy rate. Interest in these locations is mostly generated by local retailers, service providers and banks interested in expanding their network. Rental levels in these areas range from €15 – 25 per Sqm. PIPELINE

The retail market in Belgrade will feature several new, large shopping center commencements and completions in 2011. The Pasino brdo neighborhood shopping center, anchored by Roda market, is expected to have their big opening in the beginning of 2011. The second phase of Pancevo Retail Park featuring 8,000 Sqm GLA, as well as the second phase of Delta Park in Kragujevac are both expected for delivery during 2011.

Big CEE, an Israeli company, plans to develop a new retail park in the vicinity of Novi Sad – some 4 km away from the city. This project will feature 30,000 Sqm of GLA and 1,500 parking spaces. The building process is expected to commence during 2011 with completion set for 2012. PROGNOSIS

The Serbian retail market experienced its biggest expansion during 2007 – 2009, although it still lags behind more developed regional capitals on a Sqm per capita basis. While the potential is there, this depends on Serbia’s ability to generate economic growth and stability, which is looking ever more promising. Based on planned and committed developments, the retail offer in Serbia is clearly growing and improving. With this change comes more choice for retailers considering Serbia/Belgrade as their market entry point. Although most retailers choose Belgrade to start building their network, Mr. Bricolage and TKC opted for other cities and are planning their Belgrade expansion in 2011. A continued improvement in retail turnover, albeit it moderate in 2011, will help bring more retailers to the market.

Fashion House Outlet Center Belgrade, located between Belgrade and Novi Sad in Indjija Retail Park; will feature 15,000 Sqm in phase one and is scheduled for completion in 2011. In terms of commencements, Rajiceva shopping center — the first shopping center development in the downtown area comprising 18,500 Sqm GLA is expected to start in Q1 2011. Completion is scheduled for 2012.

p. 137 | Colliers International

Research: Mirjana.Mandic@Colliers.com

2011 Colliers Real Estate Review » SERBIA

RESIDENTIAL MARKET RESIDENTIAL SUPPLY IN SERBIA (No. of units) Tenant

2008

2009

OVERVIEW

Index

Serbia

17,967

17,408

-3.1%

Belgrade

7,306

5,759

-21.1%

Novi Sad

1,946

2,186

+12.3%

Nis

1,000

1,016

+1.6%

Kragujevac

419

532

+26.9%

Subotica

472

409

-13.3%

The Serbian residential market activity continued on a downward trend in 2010. In particular, average sales prices decreased and construction activity was lower significantly than in previous years. This is most prevalent in Belgrade, which is traditionally the most active residential market.

Source: Statistical Office of Republic of Serbia

SUPPLY AVG. RANGE OF PRICES FOR NEW DEVELOPMENTS Municipality

Belgrade

Voždovac

€1,500 – 1,700 (VAT included)

Vračar

€2,300 – 2,500 (VAT included)

Zvezdara

€1,650 – 1,850 (VAT included)

Zemun

€1,200 – 1,400 (VAT included)

New Belgrade

€2,300 – 2,600 (VAT included)

Palilula

€1,700 – 1,900 (VAT included)

Stari Grad

€3,000 – 3,300 (VAT included)

Čukarica

€2,000 – 2,300 (VAT included)

Savski Venac

€2,300 – 2,700 (VAT included)

PIPELINE

Source: Colliers International

-0.12

PRICE DECREASE TREND IN BELGRADE Source: Colliers International

-0.10 -0.08 -0.06 -0.04 -0.02

lilu

ar ac

a ric

RENTAL LEVELS Area

Average Rent (€/Sqm/pcm)

Savski Venac (Senjak)

9 – 12

Savski Venac (Dedinje)

9 – 11

Vracar

8 – 12

Stari Grad

8 – 11

New Belgrade

7 – 10

Vozdovac

7 – 9

Cukarica (Banovo Brdo)

6 – 8

Source: Colliers International

Research: Mirjana.Mandic@Colliers.com

The Serbian market witnessed a continued decrease in the number of building permits issued in 2010. On average there was a 20% decreased in building permits issued in 2010 when compared to 2009. In Belgrade, this is a continuation of the trend set in 2009 when the market experienced a 21.1% decrease in the delivery residential units compared to 2008.

Several major developments have been announced to be delivered through the phasing of developments over the next 3 years. The most notable developments include large scale complexes such as West 65 (GBA: 47,500 Sqm) in New Belgrade, Golf 8 (GBA: 15,172 Sqm) in Banovo brdo, Basal complex (GBA: 7,500 M2) and 4. Juli Government complex (GBA: 271,252 Sqm) in New Belgrade. Besides New Belgrade, which traditionally offers the largest possibilities for development, major developments will also take place in other major municipalities. DEMAND AND SALES PRICE

Sales prices dropped a further 5% in the second half of 2010, meaning prices have dropped by some 15 – 20% in the last two years as demand remains muted.

The highest sales prices of new developments are still achieved in the municipalities of Stari Grad, then Savski Venac, New Belgrade and Vracar. RENTS

In the second half of 2010, net rental levels remained similar to the first half of 2010. Traditionally the most attractive area for renting is Senjak, followed by Dedinje and Stari Grad. In the second half of 2010 demand for apartments in Stari Grad (old town) increased considerably. There was also an increase in demand for apartments in Vracar. Demand for New Belgrade showed a marked decrease. Average rental levels Sqm/pcm in Belgrade’s most popular municipalities range from €6–12. Rents differ by location – from the top of the market, such as Senjak (€9 – 12), to the lower end of the market such as Banovo Brdo (€6 – 8). FORECAST

Sales prices are expected to decline in the short term, before stabilising in the second half of 2011. It is expected that the apartments constructed by the Government will have influence on the mid- to low-class market. This should result in a slight price reduction of similarly targeted projects in order to be more competitive. At present a discrepancy in prices among similar projects in similar locations still exists. Colliers expects greater transparency and sophistication on the market to emerge in future so prices are more closely correlated to location, size and the quality of a given project.

In the last 12 months the largest decreases occured in the municipality of Cukarica (cca. 10%), followed by Stari Grad (cca. 8.25%), Savski Venac (cca. 7.25%), New Belgrade (cca. 6.85%), Vozdovac (cca. 6.75%), Vracar (cca. 6.15%), Palilula (cca. 5.55%), Zemun (cca. 5.35%) and Zvezdara (cca. 3.75%).

Colliers International | p. 138

2011 Colliers Real Estate Review » SERBIA

SERBIA TAX SUMMARY CORPORATE INCOME TAX AND CAPITAL GAINS

Corporate income tax is levied at a 10% flat rate on resident and non-resident entities. A resident entity is a legal entity which is incorporated or has a place of effective management and control on the territory of Serbia. Resident legal entities are liable for payment of tax on their worldwide income in the country. Non-resident entities pay tax on the income generated through a permanent establishment on the territory of Serbia (branches). The tax period is the calendar year. A corporate tax return has to be submitted by 10 March of the following year for the then previous year, whereas corporate income tax is to be paid during the year through monthly advanced payments (by 15th in the month for the previous month).

TAX DEPRECIATION

For corporate income tax purposes, fixed assets are divided into five groups, with depreciation rates prescribed for each group: Group

Depreciation rate

2.5%

10%

III

15%

20%

30%

Fixed assets classified under the first group are depreciated using the straight-line method, while a declining method is prescribed for fixed assets in the other groups. A depreciation rate of 2.5% is applied to the purchase value of a first group fixed asset where the real estate is classified. THIN CAPITALIZATION

Taxable income is established on the basis of accounting profit disclosed in the annual income statement, in accordance with International Financial Reporting Standards, and is subject to further adjustments in the tax balance. Capital gains are disclosed separately in the tax balance and are subject to a 10% tax. The capital gain is the difference between the sale and purchase price of assets (real estate, securities, intellectual property rights, investment units). If such difference is negative, a capital loss is reported. LOSSES

Losses generated from business, financial and non-business transactions, excluding capital losses, may be carried forward for up to five subsequent tax periods and can be offset against future taxable income. Losses carried forward into the future are not cancelled by mergers, acquisitions, spin-offs and other organizational changes. Capital losses may be carried forward for five years and offset only against capital gains.

p. 139 | Colliers International

Interest and related expenses towards related entities are deductible up to four times the value of the taxpayer’s equity (limit for banks is 10 times the bank’s equity). The non-deductible amount of interest expense may not be carried forward any longer and represents a permanent difference. WITHHOLDING TAXES

Withholding tax at the rate of 20% is deducted from dividends, share in profits, royalties, interest, capital gains and lease payments for real estate and other assets derived by non-residents on the territory of Serbia. Withholding tax may be reduced by double taxation treaties. If a non-resident taxpayer receives capital gains from a Serbian resident, other nonresident, resident or non-resident individual or open investment fund on the territory of Serbia, 20% withholding tax has to be paid if not provided otherwise by a respective double taxation treaty. The non-resident taxpayer has to submit a special tax return within 15 days of generating the capital gains via proxy, based on which the Tax Authorities assess the tax liability.

DOUBLE TAXATION CONVENTIONS

As at 1 January 2011 Serbia has 47 effective double taxation conventions on income and capital. Agreements with Egypt, France, Great Britain and Malaysia cover the avoidance of double taxation of income only. VAT

VAT is levied on the following: —— supply of goods and services by a taxpayer on the territory of Serbia in the course of doing business and. —— import of goods into Serbia. A taxpayer is any entity that independently supplies goods and services in the course of doing business. Each entity whose turnover in the previous 12 months (sales of goods and services excluding sales of real estate and equipment used in performing business activity) exceeds RSD 4 Mln is obliged to register for VAT. An entity whose turnover in the previous 12 months or forecasted turnover in the following 12 months is between RSD 2 and 4 Mln may opt to be registered for VAT (small undertakings). Only the first transfer of newly built buildings (i.e. buildings built as of 1 January 2005) is subject to VAT at the rate of 8% (residential building) or 18%. Supply of land, as well as renting of land is exempt from VAT without credit. PROPERTY TAX

In Serbia tax on property is paid by the title holder of property rights (ownership, right of use, etc.). Companies pay property tax at the maximum rate of 0.4% per year on the net book value of land and completed development property as at 31 December. REAL ESTATE TRANSFER TAX

Second and all future transfers of real-estate property, as well as the first transfer of real-estate property built before 1 January 2005, are subject to transfer tax at the rate of 2.5%. The taxpayer is the seller. However, the buyer may assume liability of paying this tax, but this has to be stipulated in the sales and purchase agreement.

Contact: vivkovic@kpmg.com

2011 Colliers Real Estate Review » COUNTRY

Slovakia

MARKET

Dear clients, colleagues and friends, Development of the real estate market reflected modest growth of the Slovak economy in 2010. Office space leasing came alive due to tenants moving from the older business centers to A class premises. Market with retail premises has been quite busy. Awaited projects have been delivered on the market: Eurovea, River park, Aupark in Piestany and in Zilina, Mirage Shopping Center also in Zilina or retail park Tesco in Prievidza. They contributed to saturation of the demand for retail spaces for a long period even in Slovak regions. The success of Zilina Mirage shopping center confirmed the skills and experience of the Colliers International Retail Agency team. As an exclusive leasing agent for Mirage shopping center we managed to introduce new brands to the local Ermanno Boeris

managing director colliers international slovakia

markets not only in Zilina, but in Slovakia as well. At the end of the year we succeeded on the industrial market due to the

Europeum Business Center 1 Suché Mýto 81103 Bratislava, Slovakia

construction of a new manufacturing plant in Kosice. This happened

Phone

+421 259 980 980

rebranding, relocation of Colliers office and new team members opened

Ermanno.Boeris@Colliers.com

way to offer our clients comprehensive services with added value. We

Address

despite continuing stagnation in this segment. The previous year has been extremely dynamic for the Slovak branch of Colliers International. Global

use the synergy of individual divisions to deliver to Client effective solutions, professional advice with local knowledge and superior care. Forecasts indicate that 2011 will be challenging for the real estate market. Balance between demand and supply of new office premises, continuing problematic access to financing for developers, changes in the future use of projects, reducing yields and presence of barriers in refinancing existing properties will be the main characteristics of this year. Despite these expectations we are awaiting positive signals from the industrial market that will move mainly in regions. Colliers International as a team of experienced professionals is prepared to meet the needs and gain the trust of each client. Best regards, Ermanno Boeris

p. 140 | Colliers International

Research: Firstname.Lastname@Colliers.com

2011 Colliers Real Estate Review » SLOVAKIA

ECONOMIC OVERVIEW 12%

GDP

SUMMARY Source: Statistical Oﬃce of the Slovak Republic, Focus Economics

8% 4% 0% -4% -8%

2006

560,000

2007

2008

2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

UNEMPLOYMENT Source: Statistical Oﬃce of the Slovak Republic

480,000

12%

320,000

240,000

160,000

80,000 |

2005

2006

2007

2008

▄ Number of unemployed

5.0%

18% 15%

400,000

Q1 2011

2009

Q1 2010

Q2 2010

Q3 2010

▬ Unemployment rate (%)

CONSUMER PRICES Source: Statistical Oﬃce of the Slovak Republic, Focus Economics

4.0% 3.0% 2.0% 1.0% 0.0%

2006

2007

2008

2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Q1 2011

Slovakia rebounded relatively quickly from the global economic slowdown. The prudent regulatory framework for the financial sector, combined with competitive tax rates, has ensured Slovakia’s transition into a flexible and vibrant economy with a considerable degree of resilience. GDP was strong over 2010 increasing by 4.7% y-o-y, even though the rate of growth declined slightly toward year end. Industrial production was particularly strong, at ca. 17% growth for the year, helping to drive GDP growth to more than double the EU27 average of 2.2% in 2010. Despite positive economic growth, the unemployment rate increased to 14.1%, up by 1.6% over the year. Despite increasing unemployment, the average nominal monthly wage of employees in the Slovak economy increased by 3.7%, amounting to €750 in third quarter. Real (inflation adjusted) wages increased by 2.6%. The average nominal monthly wages of employees increased most within the information and communication (€1,354) business sector. Consumer prices also increased in 2010 by 1% on average over the year. Prices increased the most in the food and non-alcoholic beverage sector by 6.2%, in education by 4.5% and in miscellaneous goods and services by 1.9%.

Looking forward, whilst it may dampen retail and business trade, the fact that most other countries face similar austerity dilemmas keeps Slovakia in a competitive position. PROGNOSIS

According to FocusEconomics analysis, the consensus forecasts of banks estimates that the overall GDP growth in 2011 will reach 3.1%. GDP should be driven mainly by net exports, although a moderate recovery in domestic demand is possible, stimulated by labor market improvement. Inflation shows an upward trend in 2011. Consumer prices could increase by 2% as the first quarter in 2011. Unemployment is expected to decrease further over the year, but at a moderate pace. The coalition government has proposed a consolidation plan to cut the deficit from a revised 7.8% of GDP in 2010 to 5% in 2011 and confirmed a target of 3% for 2013. Roughly half of next year’s consolidation should come from revenue measures (raising VAT by 1 pp, excise taxes on beer and tobacco, energy taxes, etc.) and half from cost-cutting in public administration this could dampen economic growth prospects accordingly, with retail sales set to suffer as a result.

In addition to market changes, the basic rate of value added tax increased over the year from 19 to 20%. The changes are part of a government package to reduce the public finance deficit which reached nearly 8% of gross domestic product last year. These are suggested as temporary measures which will expire when the deficit is below 3%, the EU target. This will take a number of years to reach.

Research: Diana.LiptajovaColliers.com

Colliers International | p. 141

2011 Colliers Real Estate Review » SLOVAKIA

OFFICE MARKET 50,000

CHANGE IN STOCK OVER TIME

SUPPLY

Source: BRF/Colliers International 40,000 30,000 20,000 10,000 0

Q1 2009

200,000

Q2 2009

Q3 2009

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

OFFICE MARKET INDICATORS

18%

Source: BRF/Colliers International

160,000

12%

120,000

80,000

40,000

-6%

Q1 2009

Q2 2009

▄ Vacant space (sqm)

Q3 2009

Q4 2009

▄ Take-up (sqm)

Q1 2010

Q2 2010

Q3 2010

-12%

Q4 2010

By the end of the fourth quarter 2010, the total office stock in Bratislava stands at 1.367 Mln Sqm which remains unchanged from the previous quarter. More than 60% of the space is Grade A space and almost 40% is Grade B space. Over the year, total office stock in Bratislava increased by approximately 70,000 Sqm – 48% fall in new supply in comparison with 2009. Over 102,000 Sqm of the office space is currently under construction, of which 60,000 Sqm is planned to be completed by the end of the year 2011. These include Pannon Office (6,000 Sqm) in the City Centre and Westend (18,000 Sqm) in Outer City.

▬ Vacancy ▬ GDP (variation %)

DEMAND

30,000 25,000

Transactions in the last quarter of 2010 rose significantly in the final quarter of the year, reaching 53,000 Sqm. This represents a 45% increase over Q3 take-up and is indicative of much larger take-up levels for the year.

TAKE UP BY SUBMARKET AND QUARTER Source: BRF/Colliers International

20,000 15,000 10,000 5,000 0

Q1 2010

Q2 2010

▄ City Centre

Q3 2010

▄ Inner City

▄ Outer City

Q4 2010

The total take-up for 2010 reached almost 154,000 Sqm, what represents a very significant increase in activity in the office market – a 60% increase on 2009. In fact this appears to be Bratislava’s record year for take-up, 50% higher than the previous highs of take-up in 2006/7. Almost one quarter of all activity is represented by pre-leases and renegotiations represent almost 10%. Total take-up in 2010 was mostly driven by companies from the IT sector (24%) followed by the Finance/Banking/ Insurance sector (24%) and Professional services (13%). The majority of transactions were in units of less than 500 Sqm (70%). Units in the range of 501 – 1,000 Sqm accounted for 3% of signed deals and a further 27% comprised leases signed for units of 1,001+ Sqm.

p. 142 | Colliers International

VACANCY/AVAILABILITY

The vacancy rate reached 9.6% by year end, which represents the lowest rate compared to the previous quarters. However, there is still 132,000 Sqm of vacant space that has not been leased. In first quarter of 2010 vacancy rate reached its top, as it was 14.2%. The highest vacancy rate was recorded in the City Centre (13.5%), followed by Outer City (8.4%) and Inner City (7.2%). Among the five Bratislava districts Bratislava V remains the location with the least office amount of space available for lease (2.5%). RENTS

Prime office headline rents recorded slightly increasing trend in 2010. Rents now range from 14 to €18 Sqm/pcm in the City Centre, 11 to €14 Sqm/pcm in the Inner City and 9 to €12 Sqm/pcm in the Outer City. The Prime headline rent currently stands at €15 Sqm/pcm, while average headline rents stand at €11 Sqm/pcm. Landlords and developers continue to provide discounts and incentives to keep their existing clients and attract potential tenants. For a client above 1,000 Sqm developers are offering a rent-free period of ca. 6 months. PROGNOSIS

The situation on the market is becoming more optimistic due to a higher number of closed transactions. Although several projects came back from standby, the pipeline only matches up to 50% of 2008 delivery. We expect the overall vacancy rate to decrease continuously during the next 6 to 12 months. The best case scenario would be a decrease of up to 7 – 8% by the end of 2011. Prime rents as well as effective rents are expected to increase slightly during the next 6 – 12 months.

Research: Diana.LiptajovaColliers.com

2011 Colliers Real Estate Review » SLOVAKIA

INDUSTRIAL MARKET TOTAL STOCK BY REGIONS Trencin 5.87%

SUPPLY

Zilina 0.80%

Presov 2.98%

Bratislava 68.87%

Trnava 21.48%

100,000

By the end of the year the total modern stock of industrial space increased by 5,000 Sqm and reached 1,005,500 Sqm. Approximately 69% of total stock is located in the Bratislava region, 21.5% in the Trnava region, 5.9% in the Trencin region, while the rest is split between the Zilina and Presov region. There are no logistic parks providing class A warehouse premises in other regions of Slovakia.

VACANCY / TAKE UP Source: Colliers International

80,000 60,000 40,000 20,000 0

Q1 2009

Q2 2009

Q3 2009

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

▄ Vacant Space ▄ Take Up

1,020,000

TOTAL STOCK / VACANCY RATE

10%

Source: Colliers International

995,000

970,000

Colliers represented Martinrea Fluid Systems Svaty Jur in expansion of current operation. Colliers executed market research and site overview. Colliers assisted Delphi in market research and site search as part of optimalization project which resulted in extension of Delphi Hungary operation. VACANCY/AVAILABILITY

Across the country, the vacancy rate has steadily decreased since the beginning of the year 2010. It reached approximately 8% in the first half of year 2010 and in the second half of the year the rate declined below 8%, reaching 7.4% by end Q4. This leaves only ca. 74,820 Sqm of leasable space available for take up.

945,000 4%

920,000

895,000 870,000

Developers share of the total stock (as a ratio between total stock of a developer and the total stock of the market) stayed at same level for the whole of 2010. The biggest developers share is held by ProLogis (38%), providing 384,000 Sqm of leasable class A warehouse premises, followed by HB Reavis (12%) and AIG Lincoln (11%). Other developers share of the total stock is below 10%.

—— Lease renegotiation and extension in AXA Logistic park Trnava (Q4) – 10,500 Sqm. —— Lease extension of Faurecia exhaust division in Zilina (Q4) – 1,700 Sqm.

Q1 2009

Q2 2009

Q3 2009

Q4 2009

▄ Total Stock

Q1 2010

Q2 2010

▬ Vacancy Rate

Q3 2010

Q4 2010

DEMAND

Total leasing activity in 2010 reached 43,150 Sqm, what represents a decrease of 69% compared with 2009. After no leasing activity in the first quarter, the industrial market slowly woke up in second and third quarters, reaching 24,850 Sqm and 13,300 Sqm respectively. At the end of the year industrial market recorded transaction in Presov (5,000 Sqm in Chemako industrial park leased by Kolormax). Regionally, the largest volume of demand was accommodated in the Bratislava region (81%), followed by the Presov region (11%), Trnava (5%) and Trencin (3%). Corporate client services.

Colliers represented Faurecia in following transactions: —— Lease renegotiation and extension in AIG/Lincoln park Lozorno (Q1) – 11,500 Sqm. —— Swap of facilities in DaK Kuester DNV park (Q1 – Q4) – 3,200 Sqm.

Research: Diana.LiptajovaColliers.com

RENTS

Rental levels either remained stable or increased slightly over the year, in response to the falling levels of vacancy and low supply. Typical rents at year-end are now as follows (€Sqm/pcm): —— Base warehouse area: 3.60 – 4.15 —— Base production area: 3.95 – 4.60 —— Base office area: 8.00 – 9.00 PROGNOSIS

Due to low vacancy rates Colliers expects developers in the Senec area to launch new developments. We predict strong pre-lease campaigns for Zilina, Presov and Kosice at rents higher than current levels. Developers continue to focus on 'Permit ready' locations with the possibility to launch pre-lease developments. So far they secured land plots on an option-to-buy basis.

Colliers International | p. 143

2011 Colliers Real Estate Review » SLOVAKIA

RETAIL MARKET NEW COMPLETIONS OF SC IN 2010 BY REGIONS Nitra Presov 2% 5% Trnava 5%

Bratislava 45%

Trencin 8% Zilina 35%

500,000 400,000

SHOPPING CENTER STOCK, BRATISLAVA

Concurrently, the boom in the construction of shopping centers continued unabted despite the crisis. Across 2010 Slovakia, approximately 190,000 Sqm of new shopping center space was registered, the largest increase in the last 20 years.

Source: Colliers International

300,000 200,000 100,000 0

2005

2006

2007

100,000

2008

▄ Traditional SC

2009

2010

▄ Specialized SC

CHANGE IN SC STOCK OVER TIME, BRATISLAVA Source: Colliers International

80,000 60,000 40,000 20,000 0

OVERVIEW

The retail market in Slovakia came back to life in 2010, although retailers remain very cautious. Declines in retail sales, decreasing disposable income and purchasing power of inhabitants, increasing unemployment and job insecurity caused some retailers to close unprofitable stores in order to focus on those units which were profitable.

The largest increase was in the Bratislava Region, representing 44% of all completions in Slovakia. The second most popular destination was the Zilina Region with 36%, including the schemes Aupark (25,700 Sqm) and Mirage (20,900 Sqm). SUPPLY

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Total shopping centre stock in Bratislava reached 452,000 Sqm in 2010, as 85,000 Sqm was added in 2010 – this is approximately 50% more new supply than in 2009. The most significant projects, completed 2010 in Bratislava were Eurovea (55,000 Sqm), River Park (5,500 Sqm), Galeria Cubicon (7,800 Sqm) and Storeland (16,500 Sqm).

RENTS

For the past few months rental rates in shopping centers and high street have remained at the same level. Average prime rents in traditional shopping centers are typically €35 Sqm/pcm, high street rents are around €30 Sqm/pcm. Average rents in traditional shopping centers in Bratislava are as follows: —— Fashion units: €11 – 35 Sqm/pcm —— Sport units: €10 – 31 Sqm/pcm —— Shoes units: €13 – 34 Sqm/pcm —— Lingerie units: €30 – 38 Sqm/pcm —— Fast food units: €18 – 37 Sqm/pcm —— Café units: €27 – 39 Sqm/pcm PROGNOSIS

The gap between successful and unsuccessful centers will deepen, with location and accessibility the most crucial for their success. The importance of marketing is also increasing. Retailers will also remain cautious in terms of expanding in 2011. Expiration of lease agreements will create a relatively new leasing market. Rents will remain stable and the market will remain tenant driven. Strong and popular tenants are still demanding concessions such as fit-out contribution, rent-free periods, turnover or step-up rents. Landlords and tenants need to be creative and pro-active to address their message as the competition is stronger.

The majority of total stock is located in Bratislava II district, where there is now a total of 200,900 Sqm (44%) and Bratislava V (22%). The least amount of stock is located in Bratislava IV, with only 9% of total stock in Bratislava.

p. 144 | Colliers International

Research: Diana.LiptajovaColliers.com

2011 Colliers Real Estate Review » SLOVAKIA

INVESTMENT MARKET 12

YIELDS

8 6 4 2 |

2006

2007

2008

2009

Mid 2010

2010

▬ Oﬃce ▬ Retail ▬ Industrial

INVESTMENT VOLUMES (€ MLN)

600 500 400 300 200 100 0

Most of institutional investor focused their investment mostly in Poland and Czech Republic. As typical investment transactions, in Slovakia we recorded one hotel deal in Bratislava and three TESCO Stores (representing two transactions).

For 2011 we expect the realization of transactions that have been postponed during 2010 as well as more investors re-entering the Slovak market based on the solid macroeconomic fundamentals of the Slovak economy.

Source: Colliers International 2005

700

Development activity appears restricted by requirements for high levels of presales/preleases. And rightly so. The market needs to consolidate before it can underpin further development activity without over-saturating the office and retail markets in particular.

SUMMARY

During 2010, the investment market in Central and Eastern Europe continued to witness a recovery in transaction volumes and market sentiment, more than doubling the activity witnessed in 2009.

2004

2005

2006

2007

2008

2009

2010

Completed transactions confirmed the actual investment trend for our market: single and strong tenant with lease agreement over 10 years. Pricing, reflected in yields, has witnessed dual behavior with prime and secondary stock showing a widening pricing/risk gap. On the one side, there is a reduced group of top class properties where net initial yields range between 7.0 – 7.5%. On the other side, there is an expanding group of properties presenting a range of risk (i.e. low occupancy or location) factors, where net initial yields move in a range of 8.5% and higher. Development and investment finance remains available on the market, and at non-prohibitive rates in terms of loan to value/loan to cost ratios. Whilst the product may not be there, the money appears to be.

PROGNOSIS

This will be supported by a more stable office occupier market, for good quality product at least. Industrial production is reporting steady growth with a number of companies considering possible expansions. The logistics market is already receiving the attention of developers seeking land purchase opportunities. Inflation may become an important issue during 2011 and many investors may see the investment on income producing properties offering indexed rents as a good protection against potential inflation risks. From a regional perspective, the pressure on returns in the Polish market reflected in low yields, currently make Slovak yields look more attractive for those investors less concerned with local market liquidity. This should increase overall activity in the market.

Development Finance, loan to costs: —— 60 – 70% LTC; —— High ratio of presales/preleases required; —— Interest rate: 3M euribor + margin (3 – 4%). Investment Finance, loan to value: —— 70% LTV; —— Debt Service Cover Ratio: min. 1.2; —— Interest rate: 3M euribor + margin (2.5 – 3.5%).

Research: Diana.LiptajovaColliers.com

Colliers International | p. 145

2011 Colliers Real Estate Review » SLOVAKIA

SLOVAKIA LEGAL OVERVIEW Basic Forms of Title

With some exceptions, land may be owned, used and transferred freely in Slovakia. The most common title to real estate is full ownership (“vlastnícke právo", ius proprietas), which is similar to a “freehold” title and entitles the owner to a full range of perpetual rights to use and enjoy real property. It is also possible to use real estate on the basis of (i) an easement ("vecné bremeno") or (ii) a lease ("nájomné právo"), which can be either for a definite or for an indefinite period of time. Acquisition of Real Estate by Foreigners

With limited exceptions concerning forestland and agriculture land in the outer areas of a municipality (“extravilán”), foreigners may freely acquire real estate in Slovakia as of May 1, 2004. Foreigners who are EU nationals may acquire commercial real estate directly; they may also directly acquire forestland and agriculture land in the outer areas of municipality, but only under certain conditions. Indirect acquisitions may be made through the establishment of a Slovak legal entity, such as a limited liability company (spoločnost s ručením obmedzeným), which may be wholly owned by a foreigner. Registration System

The Cadastral Register ("kataster nehnuteľností”) discloses the property owner and indicates the extent to which the land is encumbered by mortgages and other servitudes. Any right in rem becomes effective through registration in the Cadastral Register as of the day the registration decision is issued. Registration is performed by cadastral offices ("správa katastra"). As a general rule, “good faith” purchasers of land are entitled to rely upon information contained in the registers, unless such information is proven to be unreliable. Non-binding data from the Cadastral Register is also available online. Accelerated registrations (subject to higher fees) of any changes relating to real estate registered in the Cadastral Register take a maximum 15 days.

p. 146 | Colliers International

Taxes

Presently, there is no real estate transfer tax, inheritance tax or gift tax applicable in the Slovak Republic. Value Added Tax may be payable in certain cases on the transfer of real property. Following fiscal decentralisation, municipalities administer real estate tax. Leases

Leases in the Slovak Republic are freely negotiable, but are subject to certain mandatory provisions of the Civil Code and the Act on the Lease and Sublease of Non-Residential Premises. These mandatory provisions may not be varied by contract. The most important restrictions concern lease commencement and termination rights, where the contractual freedom is limited, or even excluded. Restitution Claims

There are comprehensive restitution laws in the Slovak Republic. All deadlines for claims have passed. However, certain proceedings may still be pending. Notaries and Notarial Fees

Legal agreements establishing the sale of real estate and the transfer of usufruct rights to real estate (such as easements, preemption etc.) that are to be registered in the Cadastral Register do not need to be in notarial form to be enforceable in the Slovak Republic. However, in certain cases, the signatures of transferors in such legal agreements have to be certified by a notary public, local municipality or advocates. Language

Any document that is to be submitted to any Slovak state authority (such as the Cadastral Register or the Commercial Register) must be translated into Slovak. However, it is common for English or other languages to be used as a second and governing language. Information contained in this general outline does not constitute a legal opinion and is not meant to be comprehensive. As a result of pending and new legislation, laws and regulations change frequently in Slovakia and are often subject to varying interpretations. Professional advice should be sought regarding all aspects of real estate in Slovakia.

2011 Colliers Real Estate Review » SLOVAKIA

SLOVAKIA TAX SUMMARY GENERAL

The Slovak tax system has been relatively stable since the implementation of major tax reforms effective from 2004. The amendment to the income tax law passed at the end of 2007 introduced some potentially significant changes in a number of areas including transfer pricing documentation requirements. In 2009 the amendment to the Slovak tax legislation introduced a new tax treatment for business combinations effective from 1 January 2010. In December 2010 the Parliament approved an amendment to the Slovak tax legislation introducing tax on emission quota and, among other changes, defining withholding tax as the final tax with certain exceptions, with effect from 1 January 2011. The amendment to the VAT legislation passed in 2009 introduced the possibility of VAT grouping and accelerated VAT refunds for qualifying taxpayers. In addition the EU VAT Package was passed by the Parliament and implemented with effect from 1 January 2010. The amendment to the VAT Act effective from 1 January 2011 extended the period for the application of capital goods scheme to real estate from 10 to 20 years and temporarily increased the basic VAT rate from 19% to 20%. CIT AND CAPITAL GAINS

CIT in Slovakia is levied on all taxable income at the standard corporate tax rate of 19%. Income is computed as taxable revenues reduced by eligible costs incurred to generate, assure or maintain taxable income. There is no separate capital gains tax in Slovakia and gains on the disposal of fixed assets and intangibles are included in a taxpayer´s total income. On disposal, the taxpayer can deduct the net tax value of the assets (after accumulated depreciation) and associated disposal expenditures. Taxable income can be reduced by tax losses available for utilization. Losses on the sale of buildings are generally tax deductible but losses on the sale of land are not deductible. With effect from 1 January 2011 capital gains on sale of real estate, rental income or other income from real estate situated in Slovakia is under the local rules subject to income tax also if both parties involved in the transaction

Contact: zblazejova@kpmg.sk

are Slovak tax non-residents not having a permanent establishment in Slovakia. In the case of a sale of shares in a Slovak company held by a non – Slovak shareholder, the double tax treaties Slovakia has concluded with other countries normally provide for the right to tax the capital gain in the jurisdiction of the shareholder. However, some double tax treaties allow the gain to be taxed in Slovakia, either generally in the case of the double tax treaty with Germany or specifically in the case that the Slovak company which is being disposed of comprises substantially real estate as in the case of the double tax treaty with Ireland. There is no concept of fiscal grouping for corporate income tax purposes in Slovakia. TAX DEPRECIATION

Depreciation of fixed assets is calculated on a straight line or accelerated basis using rates laid down in legislation. Depreciation is based on categorization of assets into groups with depreciation periods between 4 and 20 years. Buildings are normally depreciated over 20 years. It is possible to decide to interrupt (not claim) depreciation in any particular year. This prolongs the depreciation period. Land is not depreciated for tax purposes. It is also possible to divide fixed asset into separate detachable components if the acquisition value of each respective component is higher than €1,700 and in the case of certain components of real estate depreciate them separately in a different tax depreciation group. TAX LOSSES

Tax losses may be carried forward and utilized for 7 years if the loss was incurred after 31 December 2009. Tax losses incurred in tax periods ending before or on 31 December 2009 may be carried forward over five years. Under current rules there are no restrictions on the amount of loss which can be utilized each year. Prior to 2004 highly complicated tax loss rules applied which significantly restricted loss carry forwards and imposed reinvestment requirements. These rules still apply to „old“

losses being carried forward. The ability to utilize tax losses is unaffected by a change of ownership of a company but can be affected by a merger or other reorganization if a main purpose is to obtain a tax advantage. THIN CAPITALIZATION

Thin capitalization rules originally included in the income tax legislation which were supposed to apply from 1 January 2010 were deleted from the Slovak tax legislation by an amendment to the Slovak Income Tax Act and thus did not come into effect. WITHHOLDING TAX DIVIDENDS

Dividends are currently not subject to any withholding tax if paid out of profits generated from 1 January 2004 onwards. Dividend withholding tax is applicable at the rate of 19% for profits generated prior to this date. This is generally reduced under double tax treaties to which Slovakia is a party. To apply the reduced rate, it is advisable for the payer to be in possessions of a tax residence certificate of its shareholder. Dividends paid to, EU/EEA resident companies are exempt from Slovak withholding tax if the terms of the Parents-Subsidiary Directive as applied in Slovak law are met. INTEREST, ROYALTIES AND INTANGIBLE SERVICES

Under Slovak domestic legislation, withholding tax of 19% applies on payments of interest, royalties and fees for intangible services made abroad. This is generally reduced or eliminated under the double tax treaties to which Slovakia is a party. However, in order to apply the treaty rates, the payer should have a certificate of tax residence of the recipient. Furthermore, the Interest and Royalties Directive fully applies in Slovakia. With effect from 1 January 2011 withholding tax is regarded as the final tax with certain exceptions, e.g. certain income of tax non-residents listed by the tax legislation. SECURITY TAX

Payments to an entity which has or may have a Permanent Establishment in Slovakia

Colliers International | p. 147

2011 Colliers Real Estate Review » SLOVAKIA

SLOVAKIA TAX SUMMARY are subject to a 19% security tax. This is not applied if the receiving entity holds a certificate proving it makes advance payments of tax or from 2007 onwards if the receiving entity has its registered seat or address in the EU. BUSINESS COMBINATIONS

With effect from 1 January 2010 taxpayers in Slovakia may decide that in the case of certain business combinations the fair value will be used not only for accounting, but also for tax purposes. In such a case the revaluation difference arising from the restructuring must be included in the taxable base in line with the tax law, but on the other hand the company may depreciate assets from their fair value and must not continue in the tax depreciation of assets from their tax residual value. In addition, the amortization of goodwill may under certain conditions be tax deductible. TAX ON EMISSION QUOTA

Tax on emission quota applies to emission quota issued for 2011 and 2012. REAL ESTATE TAX

Real estate tax is in general applied to companies and individuals owning land and buildings. The tax is based on the area of the land and building, number of floors of a building, usage and location. There is considerable flexibility for local authorities in setting the rates of tax. REAL ESTATE TRANSFER TAX AND OTHER TRANSFER TAXES AND DUTIES

Real Estate Transfer Tax was abolished from 1 January 2005. There are no significant stamp or other duties on the transfer of land or buildings. Acquisition of shares in Slovak companies is not subject to any transfer tax or significant stamp duties.

Slovakia if sold within 5 years of first occupancy permit or first use. The sale of building land is also subject to VAT. The standard VAT rate in Slovakia is with effect from 1 January 2011 set at the rate of 20% for building land and buildings. To the extent real estate sales do not meet these conditions they are VAT exempt but the supplier has the option to choose to charge VAT. Rental of real estate is exempt from VAT but the supplier may elect to charge VAT if the supply is made to a VAT registered entity. VAT GROUPING

According to an amendment to the tax law passed in February 2009, VAT grouping is possible in Slovakia with effect from 1 January 2010. The application for the VAT group registration should be filed by the member of the group who is appointed as the representative of the group. The tax authorities should register the VAT group with effect from 1 January of the calendar year following the year in which the application for registration was submitted if the respective application has been filed by 31 October of the current calendar year. Should the application for the VAT group registration be filed after 31 October of the current year, the tax authorities will register the group with effect from 1 January of the second year following the calendar year in which the application for the registration of the VAT group was filed. This means that the first VAT groups may exist in Slovakia from 1 January 2010 subject to filing the respective application by 31 October 2009. VAT grouping can positively affect the cash flow of companies in a VAT group since VAT will not be charged on transactions between the group members. VAT REFUND

VAT GENERAL PROVISIONS REGARDING REAL ESTATE

The basic VAT rate was temporarily increased from 19% to 20%. Generally the sale of the property is subject to VAT in

p. 148 | Colliers International

Slovak entities may apply for a refund of VAT incurred. Generally the refund takes approximately 90 days if the supplier is a monthly VAT payer. According to an amendment to the VAT

legislation passed in February 2009, VAT will be refunded to qualifying taxpayers within 30 days of the deadline for filing the tax return for the respective taxable period. The new rule should effectively accelerate VAT refunds for eligible VAT payers by 30 days as compared with previous rules. The accelerated refund mechanism should be applied to VAT payers whose taxable period is a calendar month, who have been registered for VAT purposes for at least a period of 12 months before claiming the excess tax deduction, and who did not have any outstanding liabilities towards the state budget and towards social/health insurance institutions during 12 calendar months before the end of the calendar month in which the excess VAT deduction arose. Taxpayers who comply with these conditions will have to note this in the respective VAT return. For other VAT payers the refund procedure remains unchanged. Slovakia applies the capital goods scheme to modify VAT recovery on assets if the use of a building changes within a 20 year period. SLOVAK ACT ON VALUE ADDED TAX (VATA) GENERAL RULE FOR DETERMINING THE PLACE OF SUPPLY OF SERVICES

The amendment to the VAT legislation passed in October 2009 introduces a change in the general rule for determining the place of supply of services (i.e. the “place of taxation”). The new rules stipulate that: the place of supply of service to a taxable person (so – called B2B – business to business service) is the place where the customer is established; and the place of supply of service to a person other than a taxable person (so – called B2C – business to consumer services) remains in the Member State of the service supplier. Exceptions to the general rule will apply for specific kinds of services. There are also changes to the determination of: the date of supply for services received from foreign suppliers (where the person obliged to pay tax is the recipient of the service); date of supply of services procured in one’s name but on behalf of another person; and also the date of supply of partially and recurrently supplied

Contact: zblazejova@kpmg.sk

2011 Colliers Real Estate Review » SLOVAKIA

SLOVAKIA TAX SUMMARY services. TRANSFER PRICING

Prices use in transactions between related parties must comply with arm´s length principles. Under the Slovak tax law, if the agreed price for a transaction is different from a fair market price and the difference would lead to the decrease of the taxable base of the Slovak related party, a fair market price will be substituted for tax purposes. Related parties are generally defined as economically or personally connected individuals or legal entities. Economic connection is understood as a participation of more than 25% in share capital or voting rights. Personal connection is understood as a participation in the management or control of the other person. From 1 January 2004 to 19 July 2005 and again from 15 December 2005, strictly transfer pricing rules do not apply between Slovak entities although these continue to apply to transactions between Slovak and foreign related parties. The Slovak tax authorities are however of the opinion that they have other mechanisms under general Slovak principles to challenge non-arm´s length prices between Slovak entities. Based on transfer pricing principles the remuneration of the supplier should reflect the risks borne and functions performed. In principle any method recognized by OECD could be used for the price determination (e.g. cost plus, resale minus, comparable uncontrolled price). It should be stressed however, that regardless of the method used if the price charged for the service or goods supplied is significantly different compared to the prices charged for similar transactions by independent companies, the tax authorities would probably challenge the structure in place. Formal transfer pricing documentation requirements are effective from 1 January 2009. The Ministry of Finance issued guidelines to transfer pricing documentation rules which should be followed by related parties in Slovakia.

Contact: zblazejova@kpmg.sk

Colliers International | p. 149

2011 Colliers Real Estate Review » COUNTRY

Ukraine

MARKET

Dear Friends and Clients, I believe that for most of players on the Ukrainian real estate market 2010 was a difficult time and represented a logical continuation of 2009. The major difference between 2010 and 2009 was the absence of panic, which paralyzed the Ukrainian economy and real estate industry in particular in 2009. Whilst 2010 was still quite difficult there were many positive changes leading to an improvement in sentiment with signs of confidence in the future prospects of the market showing though. For most market players 2010 represented a time of change in approach. Many reconsidered their strategies and adjusted to new realities. Some managed to set new businesses and expansion plans. Alex Nosachenko

managing director colliers international ukraine Address

19 – 21 Bohdana Khmelnytskoho Street 01030 Kyiv, Ukraine

Phone

+38 044 499 00 00

Alexander.Nosachenko@Colliers.com

All major difficulties didn’t disappear, however and Ukraine is still not considered a priority by a number of foreign investors as they consider it to be a risky market. There are others who believe that the Ukrainian real estate market today represents a window of opportunity – it is still quite young and undeveloped, but it is a big European country. I believe that 2011 will be a challenging year for all. But in the end it may become to be known as the time when very important and timely decisions were made. Knowledge and information has always been a key for the right decisions and a foundation to a successful business. I have a pleasure to present you our annual report for the Ukrainian property market, which our team of professionals made for you. This report is the essence of our knowledge and expertise that we’ve been collecting for many years of our presence in Ukraine. Please remember that we are always ready to be of help and support to you no matter what challenges you have in your real estate business. Yours sincerely, Alexander Nosachenko

p. 150 | Colliers International

Research: Firstname.Lastname@Colliers.com

2011 Colliers Real Estate Review » UKRAINE

ECONOMIC OVERVIEW KEY ECONOMIC FIGURES Metric

Year end

GDP Growth

Industrial Production

17.4%

Unemployment

8.8%

Inflation

9.1%

Retail Sales

POLITICAL OVERVIEW.

The pro-presidential Party of Regions continued to further consolidate power, having received majority votes in regional councils. Thus, at present, the Party of Regions has all the resources necessary to carry out their reforming plans unhindered. In fact, this points to a stabilization of the internal political situation over the next five years.

Source: Focus Economics

250

GDP

15% 10%

200

5% 150

0% -5%

100

-10% 50 0

-15% |

1998

2000

2002

2004

2006

▄ Nominal GDP volume, $ bln

25% 20%

2008

2010

2012F

2014F

-20%

▬ Real GDP growth, % yoy

CPI Source: Focus Economics

15% 10% 5% 0%

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

▬ 2008 ▬ 2009 ▬ 2010

Oct

Nov

Dec

INDUSTRIAL PRODUCTION.

Due to the growth of external demand, the industrial sector was the leading component of recovery of the Ukrainian economy in 2010. Monthly industrial production growth, as compared to 2009, ranged from 5.4% to 17.4%. With these rates of growth, by the end of 2010, the level of industrial production in Ukraine — expressed in monetary terms — reached about 85% of its absolute peak recorded in the summer of 2008.

INFLATION

The consumer price index for the end of 2010 is projected to be within the range of 11 – 13%, which roughly corresponds to 2009 the levels. The 10% inflation rate indicator planned for 2010 was not achieved, due to crop failures caused by the summer heat, leading to an increase in food prices in August and September. We should recall that since 2009, the government of Ukraine — with the assistance of the IMF — has been implementing a policy to gradually reduce inflation, in order to bring it down to 5 – 6% by 2014 – 2015. In the event that the government adheres to its planned inflation reduction tempo, this will automatically bring about a reduction of interest rates on deposits and loans, indirectly improving the dynamics of business activity in the country.

A key reason behind the growth of external demand is the government’s injections of cash into the economy, as part of a policy aimed at artificial stimulation of demand. However, considering that, since 2011, many countries are planning to significantly reduce these outlays, the medium-term prospects for the further development of the industrial sector, both in Ukraine and in other European countries, remains somewhat murky. GDP

Realistic expectations of growth of real GDP in Ukraine for 2010 amount to about 4%, well above the overall average of 1% for the 27 EU countries. Thus, real GDP growth in Ukraine is among the highest of all European countries. This phenomenon can be explained in part by the fact that the decline in Ukraine’s GDP in 2009 was a very severe -15%, as opposed to -4% for the EU 27. Since Ukraine hit the economic “bottom” so severely, the pace of economic recovery is also higher.

Research: Igor.Alekseev@Colliers.com

Colliers International | p. 151

2011 Colliers Real Estate Review » UKRAINE

ECONOMIC OVERVIEW FDI

UNEMPLOYMENT AND CONSUMPTION.

Source: National Bank of Ukraine

8 6 4 2 0

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011F

The increase in disposable income in 2010 amounted to about 11% compared to that of 2009, thus returning the nominal income in local currency to the level of 2007 – 2008. Growth in retail sales in 2010 amounted to approximately 6% over 2009, surpassing last year’s expectations by 2 – 3%. This was mainly due to improvement in the dynamics of consumption of apparel and consumer electronics.

INDUSTRIAL OUTPUT

15 10 5 0 -5 -10 -15 Source: Focus Economics

-20 -25

1998

2000

2002

2004

2006

2008

2010

2012F

2014F

▬ Industrial Output

100

Unemployed decreased at a modest pace over the course of the year, amounting to 8.8% by the end of 2010. This indicates a stabilisation of the corporate sector. According to experts, the normalization of the labor market (returning to an indicator of 6.5%) is expected by 2013 – 2014.

Overall, the situation regarding consumption in 2010 can be described as relatively stable. According to expert forecasts, the indicators of 2010 will be duplicated in 2011, with minor deviations.

EXTERNAL TRADE

80 60

The lion’s share of FDI in 2009 and first half of 2010 came in the refinancing of foreign banks’ subsidiaries in Ukraine. However, since the second half of 2010, there has been a trend towards resumption of investment in the real economy. For the first time in the last 1.5 years, the volume of investments in the real sector exceeded the volume of investment in the financial sector. A sure sign of improving business sentiment toward doing business in Ukraine.

EXTERNAL SECTOR.

40 20 0

FDI

Net inflows of foreign direct investment (FDI) in the first three quarters of 2010 amounted to approximately US$3.6 Bln. The corresponding figure for 2009 was US$3.4 Bln and US$8.8 Bln in 2008. This sharp decrease since 2008 results from the fact that foreign investors initiated practically no new projects in 2009 and 2010, focusing exclusively on the completion of projects previously begun.

1998

2000

2002

2004

▄ Import

2006

2008

▄ Export

2010

2012F

2014F

Revenues from exports in 2010 increased to US$48 Bln — up from US$40.4 Bln in 2009 — while imports increased from US$45 to US$52.8 Bln in relative terms. This equates to an increase of 16% for exports and 15% for imports, indicating nearly equal growth according to both of these indicators. The trade deficit therefore remained virtually the same, amounting to US$4.8 Bln, versus US$4.7 Bln in 2009. Since nearly identical growth is projected for exports and imports in 2011, the trade deficit is expected to reach US$5.8 Bln. EXCHANGE RATE

Cash exchange rates in 2010 remained stable at around 8 UAH per U.S. dollar. In connection with the stabilization of the economic situation in 2011 – 2012, experts predict that the current exchange rate will be maintained, or that the hryvnia will be slightly strengthened by 2 – 5%.

p. 152 | Colliers International

Research: Igor.Alekseev@Colliers.com

2011 Colliers Real Estate Review » UKRAINE

OFFICE MARKET KEY OFFICE FIGURES

SUPPLY

Metric

Measure

Total Stock

1,205,000 Sqm

Take-Up

110,000 Sqm

Vacancy

14%

Prime Headline Rent

€25/Sqm/month

New offers of professional office space in 2010 totaled approximately 110,000 Sqm, which is identical to new offers for 2009, but 45% less than that of 2008. In total, the total supply of office premises in Kyiv reached just over 1,200,000 Sqm.

Source: Colliers International

1,400

In terms of square meters per 1000 residents, the amount of office space in Kyiv now stands at 445 Sqm, less than one-quarter of the amount available in Warsaw.

KYEV DELIVERY & PIPELINE (SQM, 000)

1,200 1,000 800 600

As before, all new office buildings in 2010 were built by Ukrainian companies exclusively.

400 200 0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F

▄ Total supply as of beginning of the year ▄ New supply during the year

TAKE-UP STRUCTURE 4% Similar area 6% With contraction 90% With expansion

In 2010, most construction was self-financed. As a result, construction volumes remain relatively low, and planned commissioning dates are constantly being revised. For 2011, developers have announced plans to commission approximately 200,000 Sqm (about 150,000 Sqm in 2010). However, according to the practice of previous periods, we do not expect that actual new offers for office space in 2011 will amount to more than 150,000 Sqm.

The ratio of consumption of office space between the financial and non-financial sectors is almost back to its traditional proportions, on the order of 1/3. In particular, in 2010, the share of the financial sector’s demand surpassed previous moderate expectations, and returned to 36%, as opposed to 6% in 2009. The share of international tenants in the structure of demand continued to grow, reaching 76% of the total volume of consumption of office space, compared to 68% in 2009. There was practically zero absorption from companies newly arrived in the Ukrainian market in 2010. As in 2009, it was equivalent to only 1% of the total. About 90% of tenants who moved in 2010 simultaneously expanded their occupied areas. 89% of tenants who moved office in 2010, improved the quality of their office space. The largest volume of lease transactions concerned office space of 1,000 Sqm or more (80% of the total number of leased premises). As a rule, the demand for this type of space came from large international companies.

DEMAND

The volume of absorption of classic office space in 2010 totaled approximately 100,000 Sqm, which is a significant improvement over the indicator for 2009. Compared to recent years, a similar volume of absorption was last seen in 2005 (110,000 Sqm. This substantial increase in demand came partly as a result of the renewal of growth in the financial sector, from companies’ moves from non-classified to classified office space and the expansion of space occupied by existing tenants.

Research: Igor.Alekseev@Colliers.com

Colliers International | p. 153

2011 Colliers Real Estate Review » UKRAINE

OFFICE MARKET KEY LEASE TRANSACTIONS

VACANCY & RENTS

Tenant

Size (Sqm) Project

Developer

EPAM

6,800

Vremena Goda

NEST

Kraft Foods

3,800

Alliance Centre

Yaroslavov Val

Atlantic Group 3,600

Fabula Plaza

Ukrainian Developer

Amway

3,000

BC on 87, Bozhenko St

Ukrainian Developer

2,600

BC on 16, NemirovichaDanchenko, St

Ukrainian Developer

EBRD

25%

Growing demand for professional office buildings led to a decrease in the vacancy rate, from 20% to 14%, over the course of 2010. As a result, an in light of such large peak-trough fall in rental rates, basic rental rates for high-quality office space in Kyiv increased slightlyby 5 – 10% in the latter half of 2010.

VACANCY DYNAMICS BY CLASS

Vacancy rates are still unevenly distributed, due to differences in the quality of commercial premises and lease terms: the market features buildings with zero vacancy and 50 – 100% vacancy, simultaneously.

20% 15% 10% 5%

Overall, the lowest vacancy rate at the end of 2010 was observed in the market for Class A office space, reaching 4%.

Source: Colliers International 0%

1 Jan. 2009

1 Jul. 2009

1 Jan. 2010

1 Jul. 2010

1 Jan. 2011

▬ Class A ▬ Class B ▬ Class C

80 70

PRIME RENTAL RATES, 1997-2011 (US$/SQM/MONTH) Source: Colliers International

60 50 40 30 20 10 0

‘97

‘98

‘99

‘00

‘01

‘02

‘03

‘04

‘05

‘06

‘07

‘08

‘09

‘10

‘11

PROGNOSIS

The growth of new supply in 2011 should be close to 160 – 170,000 Sqm — around 1.5 times more than the volume of space delivered in 2010.

Over the mid-long term it is difficult to draw an unambiguous conclusion regarding the future development scenario for the office market. If new offers in the pipeline from developers for the 2011 – 2014 period (about 800,000 Sqm) are realized in full and on-time, oversupply may result. However, based on the experience of previous years, the commissioning dates for several pipeline business center projects will, in all likelihood, be reviewed leading to a slower tempo of the delivery of new space. In addition, uncertainty reigns with regard to the pace of recovery of both the European and, in particular, the Ukrainian economies. Assessing the growth dynamics of demand over the long term is very blurry. Over the short-term, we expect demand and supply to remain in balance in 2011 – 2012, which should lead to a stable office market in Kyiv, resembling the situation in 2010, with possible minor variations. A similar forecast for market development after 2012 is, for the time being, impossible.

We expect absorption of leased office space to be similar to 2010 levels, within the range of 140 – 170,000 Sqm. Concurrently, similar or slightly larger volumes of purchases of office space. in 2011, primarily by end-users, are expected. As a consequence, a further moderate decrease in the average market vacancy rate is expected in. 2011 to 12 – 13%. In the event that the “Continental” business center (GLA ~ 52,000 Sqm) is commissioned in 2011, however, the vacancy rate for high-quality office space may temporarily exceed 20%. If these new premises are offered at. a significant discount, it could put downward pressure on prime. rental rates.

p. 154 | Colliers International

Research: Igor.Alekseev@Colliers.com

2011 Colliers Real Estate Review » UKRAINE

INDUSTRIAL MARKET KEY INDUSTRIAL FIGURES

SUPPLY

Metric

Measure

Total Stock

887,000 Sqm

Take-Up

150,000 Sqm

Vacancy

19%

Prime Headline Rent

€3.6/Sqm/month

New offers of warehouse space in 2010 totaled approximately 81,000 Sqm, which is 12.7% lower than the level of new completions in 2009. Overall, as of the end of 2010, the total volume of stock of warehouse space in Kyiv reached 887,000 Sqm.

Source: Colliers International

1,200

New completions of storage space in 2009 – 2010 was only 34% of the levels built during 2007 – 2008 (168,000 Sqm, as opposed to 494,000 Sqm).

KYIV DELIVERY & PIPELINE (SQM, 000) Source: Colliers International

1,000 800 600 400 200 0

2005

2006

2007

2008

2009

2010

2011F

Despite the slowdown of new entries into the market, there was no restraining effect on rents due to the large volume of available stock accumulated in 2007 – 2008.

Compared to 2009, the structure of demand has not changed: retail chains (operators) and logistics service providers accounted for the largest shares (45% and 26%, respectively). Demand from distributors fell to 16%, while the share of overall demand on the part of manufacturers hovers around 8%. It is worth noting that demand from logistics operators increased slightly, following a record decline in 2009 when their share of overall demand fell to18%, from 70% in 2008. The recovery of demand is primarily due to the stabilisation of logistic operators market forecasts, driven by the gradual improvement of retail trade.

▄ Total supply as of beginning of the year ▄ New supply during the year

All new storage facilities in 2010, with the exception of the Terminal Brovary warehouse complex (which accounted for 42.5% of the total amount of new space in 2010), were built by Ukrainian companies.

TAKE-UP STRUCTURE, 2010 14% Manufacturer

7% Other

15% Distributor

22% Logistics

42% Retailer

By location, approximately 43,000 Sqm (53%) of new warehouse space were built on the left bank of Kyiv, with about 38,000 Sqm (47%) on the right bank. Despite a trend towards decreasing sizes of new warehouse facilities, large facilities continue to be brought to market. An example is the “TerminalBrovary” warehouse complex comprising a total leased area of 42,800 Sqm, the commissioning of which had previously been planned for 2008. DEMAND

The total volume of lease transactions in 2010 totalled approximately 140,000 Sqm, a decrease of 14.5% compared to the same period of 2009. A significant portion of transactions (45%) took place upon the initiative of retail chains.

Research: Igor.Alekseev@Colliers.com

One particular transaction of interest was a large-scale transaction for the purchase of a warehouse complex by an end-user. Raben Group acquired a logistics center with an area of approximately 20,000 Sqm from the Parkridge. Due to frequent traffic jams on the bridges between Kyiv’s right and left banks, most tenants choose warehouse facilities according to their destination locations. As a result, demand for storage facilities in 2010 was almost evenly distributed between the right (54% of total) and left bank (46% of total) areas of Kyiv. The average size of a transaction in 2010 was 5,400 Sqm, which is almost completely in line with those for 2009 (5,250 Sqm), but less than half the size of the average transaction in 2008 (12,400 Sqm). In terms of specification, there has been increasing demand for heated facilities within the city limits and high-end refrigerated warehouses.

Colliers International | p. 155

2011 Colliers Real Estate Review » UKRAINE

INDUSTRIAL MARKET INDUSTRIAL SALE & LEASE TRANSACTIONS Tenant

Type

Object

Size (Sqm)

Fozzy

Retail

Technopolis

14,000

ATB

Retail

BF Sklad

11,500

Eldorado

Retail

Comodor

11,400

Ukrainian Company Distributor ESMA

11,000

Ukrainian Company Retail

Impeco

10,000

Rhenus Logisitcs

Logistics

West Gate Logistics 10,000

Fozzy

Retailer

BF Slkad

100%

VACANCY & RENTS

8,000

The share of vacant warehouses at the end of 2010 fell from 30% to 19%, as a consequence of the recovery of demand.

DEVELOPERS BY COUNTRY OF ORIGIN

Existing low levels of new construction create further potential for reduction of the vacancy rate in 2011 – 2012.

90% 80% 70% 60% 50% 40% 30% 20% 10% 0

2007

2008

2009

2010

▄ International

14,000

2011

▄ Local

AVERAGE DEAL SIZE, SQM Source: Colliers International

12,000 10,000 8,000 4,000 2,000 0

2006

2007

2008

2009

2010

VACANCY & PRIME RENTAL RATES

30%

US$10

25%

US$8

20%

US$6

15%

US$4

10%

US$2

US$0

2005

2006

2007

▄ Vacancy Rate

2008

2009

2010

▄ Prime Rental Rates

p. 156 | Colliers International

2011F

As of the end of 2010, the average basic rental rate (excluding maintenance and utility costs) for quality warehouse space in the Kyiv region was US$5.6/ Sqm. This average was reached in the first quarter of 2010 and did not change during the year, indicating a stabilization of rental rates in the warehouse segment. Most leases in 2010 were for a three-year period. Many owners expect to see an increase in rental rates in 2012 – 2013, while the majority of tenants are uncertain regarding long-term development strategies.

6,000

US$12

In particular, the growth in demand for high-end refrigerated storage space influenced the Iceberg Logistics’ decision to begin construction in 2011 of a new warehouse complex, with a total area of approximately 17,000 Sqm.

Nevertheless, the gap in expectations between owners and tenants began to decline from the second half of the year, and tenants are ever more eager to conclude not one-year, but three-year leases (in contrast to the situation in 2009).

PROGNOSIS

In 2011, the estimated volume of new completions on the open market will be 95,000 Sqm, roughly equivalent to the volume of new supply in 2009 (87,000 Sqm) and 2010 (81,000 Sqm). As a consequence, there is an expected reduction in vacancy rates and the stabilization of rental rates during 2011. As the market improves, there may even be a possible increase in rental rates for some warehouses, especially in warehouses located on the right-bank, in specialized warehouses and in storage space within the city limits. New completions will be dominated by local developers. The share of foreign real estate developers in 2011 will fall slightly, down to 40% of the total amount of pipeline warehouse projects. New completions will include the start of construction of specialized storage facilities, designed for medium and small tenants (inner-city warehouses). It is noteworthy that, in their plans for future development, warehouse developers are no longer guided by locations close to the projected new ring road, unlike in the 2007 – 2008 period. The timing of completion of the ring road is under review, due to the fact that the Ukrainian government is currently unable to implement such a massive project on its own, and raising capital abroad is, for the time being, problematic. A revival of demand for warehouse space in the regions is expected in 2011, due to anticipated expected growth in retail trade resulting in an expansion of existing retail operators or entry of new retailers to the market.

Research: Igor.Alekseev@Colliers.com

2011 Colliers Real Estate Review » UKRAINE

RETAIL MARKET KEY RETAIL FIGURES

SUPPLY

Metric

Measure

Prime High Street Rents

€150/Sqm/month

Prime SC Rents

€135/Sqm/month

SC Stock

600,000 Sqm

SC Vacancy

3.5%

During 2010, new offerings of retail space in Kyiv were limited to the commissioning of the second phase of the regional Sky Mall, with a total lease area of 45,500 Sqm. This is the lowest amount of new stock to enter the market in four years.

Source: Colliers International

1,000

CHANGE IN SC STOCK OVER TIME (SQM, 000)

800

Overall, as of January 1, 2011, there was approximately 600,000 Sqm of operating retail space in Kyiv’s shopping centers and malls.

On the basis of past practice, the most likely situation is that the completion of these projects will be delayed, with completions resulting in less than half the planned amount. Due to the anticipated increase in competition, a number of owners of the shopping centers/malls with outdated or ineffective concepts are reviewing various options to re-conceptualize, reconstruct and/or alter the format of their properties.

600 400 200 0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F

▄ Total supply as of beginning of the year ▄ New supply during the year

$120

RENTS (US$/SQM/MONTH) Source: Colliers International

$100 $80 $60 $40 $20 $0

2005

2006

2007

2008

2009

2010

2011F

Commissioning of the many SCs/ SECs planned for 2010 was postponed, due to delays in construction financing. Thus, the majority of owners continue to self-finance construction, as a result of which the construction schedule is directly dependent on the tempo at which owners can accumulate financial resources. It is worth noting that in late 2010, owners of high-quality projects have been able to find project financing on acceptable terms. Kyiv’s retail space saturation is still very low, compared to that of the other capital cities of Central and Eastern Europe. In addition, the market saturation of high-quality shopping centers/malls is even lower. As a consequence, shopping centers with a professional concept and a good location currently boast a vacancy rate near to zero. In 2011 – 2012, there are plans to commission new shopping centers/malls, with a combined total leased area of 330,000 Sqm. This in addition to a number of quality shopping center/mall projects under commission, the construction of which may begin in 2011 – 2013.

Research: Igor.Alekseev@Colliers.com

Currently, the retail segment is the only commercial real estate segment garnering large-scale interest from both foreign and local players. In particular, two major partnership transactions were completed in 2010 (OLEDO – Sky Mall, DUPD – Arricano), and new financial partners were found for the implementation of the Ocean Plaza shopping center. This included the sale of a large plot of land in the city center, for the construction of a shopping mall (the former Nest City project). In addition to the transactions already completed, a number of projects are still under negotiation and new transaction may be finalized in the near future, leading the development of new commercial projects. DEMAND

Despite some experts’ negative forecasts in 2008, only a few tenants left the market in 2009 – 2010. In 2009 and 2010, the majority of retailers adapted their business processes to the changing conditions, by downsizing and/or reorienting themselves towards other price segments. At the same time, new brands entered the market in 2010. As a result of the deficit of professional commercial space in Ukraine, in 2009 and — especially 2010 — demand for this space slightly outstripped supply. In fact, all new shopping centers/malls entering the Kyiv market in recent years with a professional concept and a good location have occupancy rates of 95 – 100%.

Colliers International | p. 157

2011 Colliers Real Estate Review » UKRAINE

RETAIL MARKET 250

SATURATION OF LARGEST UKRAINIAN CITIES By professional retail premises (GLA/1,000 inhabitants)

200 150 100 50 0

Kyiv

Dnipropetrovsk Odessa

Donetsk

Kharkiv

Lviv

Zaporizhya

The following serve as examples: —— SEC Dream Town, GLA ~45,000 Sqm, Kyiv, 2009; —— SEC Sky Mall, GLA ~45,500 Sqm, Kyiv, 2010. The current shortage of retail space in Kiev is not acute. Despite clear improvement in terms of financing over the course of 2010, most retailers are still forced to self-finance, which clearly holds back the pace of their development. There were no significant changes in the structure of tenants actively developing, in comparison to 2009. It is also worth noting that retailers of the “average plus” segment have noted a modest increase in sales, and may activate their development plans in the coming year. Based on conservative forecasts of retail growth and per capita income, it is likely that 2011 will see market structure and size indicators comparable with those of 2010. VACANCY & RENTS

As of the end of 2010, average rental rates for retail areas of 100 – 300 Sqm in successful shopping centers/malls in Kyiv increased by 7%, to US$85/Sqm. If we compare this with previous periods, the current level of rental rates achieved levels seen in 2007.

PROGNOSIS

2011 is likely to see continued growth in development activity, starting with the beginning of large-scale projects for shopping centers/malls in Kyiv and the regions. This will run alongside developers undertaking reconstruction/ re-conceptualization of underperforming shopping centers/malls which currently exist. There should also be a continued increased in demand for retail space in a successful shopping centers/malls, the main shopping streets of Kyiv and major regional cities. This will lead to a continuation of the policy of the majority of retail operators to develop stores in Kyiv and cities with a population of 500,000+. Collectively, this should lead to moderate growth in rental rates and maintenance of existing low vacancy rates in successful shopping centers/ malls. In turn, this should lead to greater interest in the retail segment of Ukraine by international investors, developers and retailers. Some of them may enter the Ukrainian market in 2011.

In line with earlier forecasts, the average vacancy rate in the market has dropped from 5 to 3.5%. In successful shopping centers/malls, however, there is practically no vacant space.

p. 158 | Colliers International

Research: Igor.Alekseev@Colliers.com

2011 Colliers Real Estate Review » UKRAINE

HOTEL MARKET SUPPLY

The total supply of 1 – 5-star hotels in Kyiv at the end of 2010 amounted to 47 properties which together supply 6,061 rooms to the market. The average hotel room supply for Kyiv amounts to 2.2 rooms per 1,000 inhabitants. For the city of Warsaw this figure is closer to 5, and for other European capitals about 10. The upscale hotel market in Kyiv started its active development (new construction) in 2005 marked by the delivery of the 4-star Radisson SAS hotel, Kyiv’s first global branded hotel. At the present moment, Kyiv has only 3 hotels which are managed by international operators: two 5-star hotels operating under the InterContinental and Hyatt Regency brands, and one 4-star hotel operating under the Radisson Blu brand. None of the low or medium class hotels are operated by international operators. Most of the hotels in Kyiv are located on the right bank of the Dnipro River, in the central business and tourist area of the city. Similar to other commercial real estate markets around the world, 2010 put previously announced hotel projects on hold. Considering the duration of the construction process and complete absence of project financing at present, the probability of new completions in 2011 – 2012 is rather low.

1,800

1,400 1,200 1,000 800 600 400 200 |

2004

2005

2006

Overall, it can be concluded that the Kyiv hotel market is currently undersupplied with quality hotel projects. Moreover, the situation is unlikely to change dramatically in the medium-term.

2007

2008

2009

2010

▄ 5 Star Hotel Rooms ▄ 4 Star Hotel Rooms

2011F

2012F

ROOM RATES & OCCUPANCY

Historically, 4 – 5-star hotels in Kyiv enjoyed high room rates and occupancy due to an undersupplied hotel market. The minimum racked room rates in 2006 – 2007 achieved €250 – 400 per room for top hotels (namely, Premier Palace, Radisson SAS, Opera and Hyatt). The market situation changed at the end of 2008 and in 2009 when waning demand was followed by a 20% increase in room supply with the delivery of the InterContinental (272 rooms) to the Kyiv market. In terms of performance, ADR experienced a decline of 10% from 2009. 2009 had already declined by 22% from the previous year. Average annual occupancy in Kiyv’s top hotels during 2010 was 50 – 55%. In 2009 this indicator ranged within 45 – 50%; in 2008 it was about 65 – 70%.

DEMAND

According to the National Service of Tourism and Resorts, during Q1–Q3 of 2010 the number of visitors in Ukraine stabilized at 16.6 Mln visitors — the same level as 2009. The estimated number of international tourists as of the end of 2010 is around 21 Mln tourists. Typically, demand for hotels is driven by foreign guests and domestic visitors. The major portion of demand in 4 & 5-star segment is generated by foreigners — about 80%.

HOTEL STOCK

1,600

Nevertheless, in 2010 some developers resumed construction works. In particular, in its final stage of construction is the Fairmont hotel (5-star, 257 rooms), located at 1A, Naberezhno-Kreshchatytska Steet. New financial partners were found for the Hilton hotel (5 *, 257 rooms) which will be located on 28 – 30 Shevchenko Boulevard, where active construction is now underway. Also in early 2010, the KDD Group company signed a letter of intent with the FRS Hotel Group International S.a.r.l for the management of a new Swissotel branded hotel (5-star, 513 rooms), to be part of the Sky Towers Multifunctional Centre (MFC) located on Sholudenko Street.

During the economic downturn which took place in 2008 – 2009 however, the number of guests in Kyiv’s hotels decreased due to the reduction of business visits to the country, as well as the decline in activity from the domestic business segments.

PROGNOSIS

Moderate growth of new hotel supply is expected in 2011, in all pricing categories. We should also see the resumption of construction on previously frozen hotel projects, although delivery will not be until 2012. Moderate growth of both the occupancy and average daily rates are expected in upper scale hotels, due to increasing business activity in the country. We also anticipate renewed interest in Ukrainian hotel projects from international operators, especially with the UEFA 2012 European Championships on the horizon.

During 2010, when analyzing the occupancy rate, there was noted insignificant increase of demand (about 5%) for hotel services comparing with 2009.

Research: Igor.Alekseev@Colliers.com

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2011 Colliers Real Estate Review » UKRAINE

INVESTMENT MARKET KEY INVESTMENT FIGURES

SUMMARY

Metric

Measure

Investment Turnover

€160M (approx.)

Prime Office Yield

10 – 13%

Prime Retail Yield

10 – 13%

Prime Industrial Yield

11 – 14%

In 2010, investor interest was focused mainly on Kiev and cities with populations of more than 1 Mln. The retail segment received the greatest levels of investor interest, as it showed the quickest transition to the recovery phase illustrated by moderate growth in rents, lower vacancy rates and construction of a few new facilities.

Source: Colliers International

20%

KYIV PRIME YIELDS Source: Colliers International

18%

The situation in the office segment in 2010 remained stable and despite a significant rise in vacancy/fall iun rents from peak to trough had already seent rents recover by year-end.

16% 14% 12% 10% 8%

2005

2006

2007

2008

2009

2010

2011

▬ Oﬃce Segment ▬ Retail Segment ▬ Warehouse Segment

In the warehouse segment there were signs of rapid stabilization toward the end of the year, although vacancy is still quite high. INVESTORS AND TRANSACTIONS

As before, the most active group of investors comprised local and international companies long-present in Ukraine, wielding both capital and an understanding of the particularities of doing business in the country. Buyers continued to focus on buying stakes in development projects, primarily in the retail segment. The encouraging macroeconomic outlook, relatively stable political situation, strong demand from tenants, low vacancy rates and high rental rates are the chief foundations for interest in this segment of commercial real estate. It should be noted that in 2010, only a few asset transfers took place in Kyiv, and not a single class investment transaction. Overall, three large equity purchase transactions took place: —— Dragon Ukrainian Properties and Development Plc (DUPD) acquired a 35% stake in Arricano Trading Ltd, which owns a 100% share in the construction of a shopping center (“SQM6”, Kyiv), as well as in the existing shopping centers “Solar Gallery” (Krivoy Rog), SC City Mall

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(Zaporozhye), SC Inter Mall (Simferopol) and a 50%-1 share in the SKY Mall SEC (Kyiv). The global leased area of all sites in the portfolio totals approximately 230,000 Sqm. —— Somewhat earlier, the OLEDO company purchased a 50%+1 share in the SEC SKY Mall development project from the company Astra Property — the development branch of Arricano Trading LTD. At the time of the purchase, the SEC was nearing completion and was commissioned in the third quarter of 2010. —— Private investors acquired 50% of the shares in the Hilton Hotel development project in Kyiv. The hotel will offer 234 rooms, with commissioning scheduled for 2012 – 2013. A land sale transaction was also completed, for a plot (formerly, the “Nest City” complex) in the center of Kyiv, for the construction of a shopping mall. At the same time, demand from end users began to recover. In particular, the Raben Group acquired — for its own use — a logistics center, where Raben had previously been the principal tenant, from the Parkridge company. The total area of the center is approximately 20,000 Sqm. The office segment saw the purchase of a business center at 105 Saksaghanskoho Street for the use of the purchaser, Russian Standard Bank (GBA ~ 3,100 Sqm), as well as that of the “Polygrapher” Business Center (GBA ~ 4,500 Sqm) by the INGO insurance company).

Research: Igor.Alekseev@Colliers.com

2011 Colliers Real Estate Review » UKRAINE

INVESTMENT MARKET KEY INVESTMENT TRANSACTIONS Deal

Value

Vendor

Purchaser

50% of Hilton Project

€56.25M

St. Sofia Homes

Private Entity

Deviation Site

€45M

NEST

n/a

50% + 1 Stock in €26.25M SEC Sky Mall

Astra Property Ltd Private Entity

Portfolio of 5 Shopping Centers €22.5M

Arricano Trading Ltd

Dragon Ukrainian Properties & Development PLC

CAPITALIZATION RATES

The prognoses made at the beginning of 2010, forecasting a 2 – 3% decline in the capitalization rates of high-quality commercial real estate assets in Kiev was fully confirmed. This was for two main reasons. Firstly, previous expectations for capitalization rates for the best assets at rates of 14 – 19% were hypothetical in nature and driven by the paniced markets reaction of early 2009 to the severe falls in economic growth and sentiment. Secondly, the subsequent reaction of the market has been positive, with the risk of further declines in rental rates and excessive availability decreasing substantially (especially for commercial and high-quality office space). Most market participants agree that capitalization rates for the best and least risky assets have been reduced as to the 10 – 14% range and should continue at this rate in 2011.

Only the very best projects per sector with complete permit documentation and ownership rights to land can gain finance. In these instances the borrower can only achive LTVs of 40 – 60% of the cost (development finance) of the project under discussion. Equally important is the fact that U.S. dollars loans are expensive within the range of 11 – 14% APR, for a maximum loan term of 7 years. These debt financing costs in the current environment makes both the investment and development process practically unprofitable, most projects under construction — as in 2009 — are being self-financed. Nevertheless, a number of major players are in substantive negotiations with banks. A good example for the market was the opening of credit lines to complete the construction of such landmark projects as the “Toronto-Kiev” complex (GBA ~ 80,000 Sqm) and Ocean Plaza SEC (GBA ~ 130,000 Sqm). PROGNOSIS

BANK FINANCING

The situation in debt financing definitely improved in comparison with 2009, but the recovery of the banking system has been very modest. Despite the nominal restoration of liquidity to almost pre-crisis levels, the monies raised cannot be used as long-term loans for the following reasons: —— A substantial portion of bank deposits comes from personal short-term deposits, under programs ranging from two weeks to several months. —— Expert evaluations of Ukraine’s ability to service its foreign loans in a timely manner are mixed, which negatively affects the country’s sovereign rating and rules out the hope of cheap foreign loans. As a result, no more than a dozen banks are willing to discuss the possibility of participating in the financing of commercial real estate projects, and terms for borrowers remain fairly tough. Research: Igor.Alekseev@Colliers.com

A modest increase in investment demand, primarily in development projects in the high-quality retail real estate segment is expected in 2011. The price forecasts of owners of completed high-quality assets continue to differ significantly from the expectations of potential buyers. As a result, the development of new projects is the most acceptable alternative. Despite anticipated improvements in credit terms in 2011 (as compared to 2009 and 2010), local developers will most often raise funds by seeking financial partners, or by selling a portion of their assets. At the same time, several new professional foreign players are expected to enter the Ukrainian market in the very near future.

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2011 Colliers Real Estate Review » UKRAINE

UKRAINE LEGAL OVERVIEW Basic Forms of Title

Ownership under Ukrainian law provides for the rights of owners to possess, use and dispose of property. However, there are other forms of title, such as the right of operative management, which are available only to state-owned and municipal enterprises. These represent the rights of use, possession and disposal of the assets only within the scope of business activity specified by the owner (the state) in the company’s founding documents and subject to mandatory provisions of law. As regards land, the primary forms of commercial land use are land lease and land ownership (freehold); however, agricultural land may not be owned by foreigners, and ownership of other types of land by foreigners is also limited. Other forms of land use rights (including the right of permanent use of a plot of land) are available only to state-owned and municipal enterprises and institutions, and public organisations of disabled persons. Easements, servitudes and superfices rights for construction also are registrable land rights. Mortgage rights to property are not treated in Ukraine as rights in rem. Consequently, title to mortgaged property does not automatically pass to the mortgagee in the event of default, but can pass if so specified in the agreement. Fiduciary management (“dovirche utrymannya”) is also a registrable right in respect of land, but not yet in respect of real property. Acquisition of Real Estate by Foreigners

Foreigners may directly acquire real estate in Ukraine subject to certain restrictions, except for agricultural land. However, in order to acquire land from state or municipal ownership, a foreign legal entity will be required to establish a permanent representation office with specific tax status in Ukraine, and receive approval from government and local authorities. Whollyforeign owned Ukrainian entities may acquire real estate, but land ownership generally requires another layer of Ukrainian entities (i.e. grandchild entities).

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Registration System

Currently, to have legal effect, all real estate acquisitions (except land) must be registered with a municipal bureau of technical inventory, as well as with the State Registry of Legal Acts. Land is registered in another land rights registry. Mortgages are recorded in a separate state mortgage registry. These registrations are to be consolidated into a single registry for all rights to real estate (including land), as well as transactions from which such rights arise (except for real property leases with a term of less than one year). This Unified State Registry of property rights and encumbrances is not yet operable but is scheduled to be operational in 2012. Value Added Tax

Generally, sales of real property between legal entities are subject to 20% VAT. Land plots cannot be sold separately from the building that sits on such land plots. VAT does not apply to greenfield. Sales of residential premises (except for first sales by constructors) are not subject to VAT. Contributions of real property to the authorised capital of a Ukrainian company are subject to 20% VAT. The VAT paid by the purchaser (if a VAT payer) may be generally credited against VAT liability on its own sales (refunds are provided for in law, but are very problematic in practice). Sales of shares in a Ukrainian company that primarily owns only property are exempt from VAT.

Construction Law

As a general rule, all major construction requires a building permit in the form of an administrative decision. Privatisation Claims

A claim arising out of the transfer of assets through privatisation procedures would qualify as a claim for recognition of such transaction as null and void on the grounds of its non-compliance with the law then in effect. However, such claim can only succeed if the court recognises the transaction as null and void and the bona fide purchaser principle does not apply. Notaries and Notarial Fees and Transfer Taxes

Mortgages, the alienation of real property, and leases of real property in excess of three years must be certified by a notary. The notarial duty for certification of alienation of real property is 1% of the contract value. The notarial duty for certification of a mortgage contract is 0.01% of the contract value. The notarial duty for notarisation of leases is 0.01% of the contract value but in practice may reach up to 0.1 – 0.2% (the same comment applies to the notarisation of mortgage contracts). The buyer of property (except for land plots) must also pay, upon closing, a contribution to the national pension fund (amounting to 1% of the contract value of the property). Language and Law

Leases

Leases are freely negotiable, subject to the inclusion of certain mandatory provisions. The most important restriction concerns the mandatory registration requirement for real property (buildings, premises) leases in excess of three years with the State Registry of Legal Acts and the notarisation of the same. Land lease is regulated by specific legislation setting forth a number of mandatory conditions, including notarisation and subsequent registration in a separate land register.

For the purposes of state registration and/ or notarisation, real estate transactions need to be executed in Ukrainian and governed by Ukrainian law. Dual language options are possible. Information contained in this general outline does not constitute a legal opinion and is not meant to be comprehensive. As a result of pending and new legislation, laws and regulations change frequently in Ukraine and are often subject to varying interpretations. Professional advice should be sought regarding all aspects of real estate in Ukraine.

2011 Colliers Real Estate Review » UKRAINE

UKRAINE TAX SUMMARY GENERAL PROVISIONS

Effective from 1 January 2011, Ukrainian tax legislation has been codified into the Tax Code of Ukraine (the “Tax Code”). As a result, the Ukrainian tax system has undergone certain changes and developments, including in terms of tax rates, rules of depreciation, introduction of new taxes (like property tax), etc. Similar to previous tax legislation, provisions of the Tax Code remain, to a great extent, ambiguous and may be further subject to numerous interpretations. The major taxes and statutory charges in Ukraine include corporate profits tax (CPT), value added tax (VAT), personal income tax (PIT), withholding tax (WHT) and payroll (social security and pension) charges. In addition, land tax, real estate tax and state duties and statutory charges are associated with real estate and land owning and disposition in Ukraine. CORPORATE PROFITS TAX and CAPITAL GAINS

The current CPT rate is 25%. The indicated CPT rate is to decrease gradually as follows: —— 23% since 1 April 2011 —— 21% since 1 January 2012 —— 19% since 1 January 2013 —— 16% since 1 January 2014 CPT is calculated on a self-assessed and currently adjusted basis for each reporting period. The reporting period consists of three full calendar months (a quarter). CPT is levied on the worldwide income of all legal entities that are resident in Ukraine for CPT purposes. The taxable CPT base is calculated as adjusted gross worldwide income less deductible expenses and tax depreciation allowance. Gross worldwide income includes any income from the sale of goods (works, services), gains from dispositions of fixed assets, foreign exchange gains, gratuitous transfers and other taxable receipts that are received or accrued by the taxpayer in the reporting period either in cash, in kind or in intangible form. Such gross worldwide income is then adjusted to factor certain items that are exempt from taxation in Ukraine (e.g., dividends received from

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Ukrainian companies, etc.). The taxable CPT base of certain taxpayers (e.g., banks, insurance companies, etc.) is determined using special tax rules. From a CPT perspective, most businessrelated costs are deductible for tax purposes, with some exceptions for costs whose tax deductibility is restricted (e.g., costs of receptions, celebrations and similar events for advertising and promotion purposes; expenses incurred by legal entities on the purchase of goods and services from private entrepreneurs-payers of unified tax) or disallowed (e.g., contractual penalties and expenses not connected with business activity). The Tax Code introduces the following novelties with regard to the deductibility of expenses for CPT purposes (the full list of non-deductible expenses is much more comprehensive): —— expenses incurred on consulting, marketing and advertising fees paid by Ukrainian companies to non-resident service providers (except for payments made to Ukrainian permanent establishments of non-residents) in excess of 4% of sales proceeds (net of VAT and excise duty) of the previous year. If the above service fees are paid to nonresident service providers located in the so-called black-listed offshore jurisdictions (the list of such jurisdictions is to be established by the Cabinet of Ministers of Ukraine) they will not be deductible for CPT purposes regardless of the amount paid; —— fees for engineering services paid to non-resident service providers (except for payments made to Ukrainian permanent establishments of non-residents) in excess of 5% of the customs value of the imported equipment, as well as engineering service fees paid to nonresident service providers located in black-listed offshore jurisdictions or to non-residents who are not beneficial owners of the engineering service fees; —— advance payments for goods and services made both to residents and non-residents.

dividends paid by a Ukrainian company are usually subject to advance CPT at a standard CPT rate that is paid on or before the dividend distribution. The advance CPT can be credited against current or future CPT liabilities of the Ukrainian company. Until recently, Ukrainian companies, in most cases, enjoyed full participation exemption in relation to all dividends received from other Ukrainian companies. At the same time, dividends received from foreign companies were taxable in the hands of the recipients. This rule has been amended so that to extend the participation exemption to dividends from foreign affiliates of Ukrainian companies. As a result of amendment, CPT exemption of dividends received by Ukrainian corporate shareholders from Ukrainian-controlled businesses and foreign controlled affiliates located in non-tax haven jurisdictions has been introduced . However, according to the new rules, a shareholding of not less than 20% of the capital of the dividend paying company is required for the dividend recipient to benefit from the abovementioned participation exemption. CAPITAL GAINS

There is no separate capital gains tax, but gains on the disposal of fixed assets and intangibles are added to the taxpayer’s mainstream income (gains from the sale of real estate property are taxed at regular CPT rate). For the seller, profit on the sale of assets is added to the mainstream income subject to corporate income tax at normal rates. On disposal, the taxpayer can deduct the net tax value of the assets and associated disposal expenditures. In case of a sale of shares in a Ukrainian company held by a non-Ukrainian shareholder typically the double tax treaties Ukraine has concluded with other countries provide for a taxation right of respective capital gains in the jurisdiction of the shareholder. However, in some double tax treaties sales of shares in a Ukrainian company, the value of which relates primarily to immovable assets may be subject to a 15% withholding tax in Ukraine.

Subject to certain limited exceptions,

Contact: craigrichardson@kpmg.ua

2011 Colliers Real Estate Review » UKRAINE

UKRAINE TAX SUMMARY Tax Depreciation Depreciation rules currently in effect until 1 April 2011

All depreciable assets (except for intangibles) are pooled in four groups as follows: —— Group 1: buildings, premises and their integral parts; —— Group 2: vehicles and vehicle spare parts; electronic, optic, electro-mechanic devices and instruments; furniture and office equipment, etc; —— Group 3: other fixed assets which are not included into Groups 1, 2 and 4; —— Group 4: computers, servers and other electronic devices, information systems, computer software, telephones, microphones, etc. Capitalized costs can be depreciated (amortized) starting from the taxation period (quarter) following the quarter in which the depreciable assets are put into operation. The undepreciated (declining) balance method is prescribed for all four classes of depreciable assets, except for intangibles which are accounted for separately and are amortized using the straight-line method over their useful life up to 10 years. The undepreciated tax balance can be indexed on an annual basis to factor annual inflation. Technically, depreciation charges are usually calculated by multiplying the undepreciated tax balance of a group at the beginning of the relevant quarter by the prescribed depreciation rate, except for real estate that is depreciated on an item-per-item basis. The quarterly tax depreciation rates for depreciable assets which were put in use after 1 January 2004 are as follows: —— Group 1: 2%, Group 2: 10%, Group 3: 6%, Group 4: 15%. The cost of each real estate object is depreciated separately until the undepreciated balance reaches UAH 1,700 (which currently is approximately US$215). Depreciation rules which will take effect from 1 April 2011

The Tax Code provides for new depreciation rules starting from 1 April 2011. It, thus, provides for 16 groups of fixed assets

Contact: craigrichardson@kpmg.ua

and 6 groups of intangible assets which can be depreciated under one of 5 depreciation methods chosen upon the tax payer’s discretion. The Tax Code specifically provides for the following amortization methods for depreciable assets: —— 1) the straight-line method, whereby the annual depreciation amount is determined by division the depreciable value by the term of the asset`s usage; —— 2) the residual value reduction method, whereby the annual depreciation amount is determined as the product of the residual value of the object as of the beginning of the reporting period or the initial value as of the date of commencement of the depreciation, and the annual depreciation rate. The annual depreciation rate shall be calculated as the difference between one and the result of the root of the degree of the number of years of t the term of the asset`s usage taken on the result of the division of the disposal value of the object by its initial value; —— 3) method of accelerated reduction of a residual value, whereby the annual amount of depreciation shall be determined as a product of the residual value of an object as at the beginning of a fiscal year or the initial value as at the date of the beginning of depreciation accrual and annual depreciation allowances to be calculated on the basis of the term of the asset`s usage, and doubled; —— 4) the cumulative method, whereby the depreciation amount is determined as the product of the depreciable value and the cumulative factor. The cumulative factor shall be calculated by dividing the number of years remaining till the end of the term of the asset`s usage by the sum of the years of the term of the asset`s usage; —— 5) the production-based method, whereby the monthly depreciation amount is determined as the product of the actual monthly volume of products (work, services) and the production depreciation rate. The production depreciation rate shall be calculated by dividing the depreciable value by the total volume of

products (work, services) the enterprise expects to produce (perform) using the depreciable object. Costs incurred in connection with construction/acquisition of fixed (production) assets are generally tax depreciated. Annual costs related to repair, reconstruction, modernization and other improvements of fixed assets may be deducted for CPT purposes within the limit of 10 percent of the historic tax value of the plant. Costs above this limit should be included into the tax value of a plant and depreciated. TAX LOSSES

In Ukraine, operating and capital losses (i.e. losses realized on the sale of securities and corporate rights) may be carried forward to the first quarter of the following tax year. No loss-carry back is allowed. It appears that this approach can be used without time limitations. In practice, the Ukrainian Parliament often enacts legislation that effectively “cuts-off” operating losses available for carry-forward. Specifically, pursuant to the 2007 Budget Law, pre-2006 operating losses which were not utilized in 2006 could not be utilized in 2007, or in subsequent tax periods. The 2008 Budget Law as well as the 2009 Budget Law did not introduce any provisions limiting the carry-forward of 2007 or 2008 losses to 2009. The 2011 Budget Law did not introduce any loss carry-forward restrictions. However, it remains possible that further tax losses carry forward limitations may be enacted by special tax laws later. In addition please note that if the taxpayer reports losses during four subsequent tax periods (quarters), the tax authorities may perform an ad hoc tax audit. Capital losses (i.e., losses realized on the sale of securities and corporate rights) are accounted for separately and can be used to shelter capital gains realized in subsequent taxation periods without any limitation. However, cumulative net capital losses realized on the sale of one type of securities (e.g., shares) may not be set off against capital gains realized on the sale of another

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2011 Colliers Real Estate Review » UKRAINE

UKRAINE TAX SUMMARY type of securities (e.g., investment certificates). VAT

In general terms, VAT is levied on the supply of goods and services in Ukraine, and on the importation of goods and services to Ukraine, at a rate of 20%. Starting from 1 January 2014 the VAT rate will be reduced to 17%. Export supplies of goods and related services are zero rated. VAT charged on goods and services imported by Ukrainian VAT taxpayers from non-residents (with no permanent establishment in Ukraine) is collected through the reverse-charge mechanism. This mechanism implies self-assessment and payment of VAT by the Ukrainian importer in (or for) the tax period (month) by the Ukrainian importer as and when the goods or services are imported to Ukraine, and this paid VAT can usually be claimed as an input VAT credit in the subsequent tax period (month). Under the VAT law, VAT payable to the state budget is determined as the difference between VAT collected from customers (output VAT) and VAT paid to suppliers (input VAT). Input VAT can be credited against VAT liabilities in computing the final VAT payable to (or refundable from) the budget. If a taxpayer makes both supplies subject to VAT (VAT-able) and VAT-exempt supplies, the input VAT credit is determined on a pro-rata basis. A Ukrainian company must be registered for VAT purposes if its VAT-able supplies exceed the threshold of UAH 300,000 (approximately US$38,000) for any 12-month period preceding the particular date. VAT is applicable to acquisitions of real estate, e.g., purchase of a building, purchase of a building together with a land plot; purchase of a building to be demolished, etc., but not to acquisition of undeveloped land or land transferred separately from a building. Supplies of certain goods and services are exempt from VAT. For example, transactions related to disposal of shares and/or

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participatory interests in Ukrainian entities are classified as VAT exempt transactions. RESTRICTIONS REGARDING OBTAINING A VAT REFUND

Generally, input VAT can be recovered by the VAT payer provided it was paid in connection with the purchase of (i) goods or services which are used in the VAT-able business transactions of the VAT-payer, or (ii) fixed assets that are used by the VAT-payer in its VAT-able business activity. To be eligible for VAT credit (i.e., a deduction from output VAT), VAT paid should be supported by VAT invoices or customs declarations. VAT invoices can only be issued by VAT payers. VAT can potentially be recovered by means of (1) a credit against output VAT, or (2) a refund from the budget.

capped at UAH 14,115 (approximately US$1,775) per person per month. Companies are also liable for withholding a 15% personal income tax (17% in case the individual`s income exceeds 10 minimal wages) along with various payroll charges of up to 3.6% due by employees (but, again, the payroll withholdings – other than for personal income tax – apply only up to the capped amount). WITHHOLDING TAX

Certain income (mostly passive-type income such as interest, dividends, royalties, rents and similar payments) paid to nonresident persons from Ukrainian sources is generally subject to a 15% withholding tax, unless mitigated or reduced by a relevant double tax treaty. LAND TAX

There are certain restrictions in respect of VAT refunds in cash. Specifically: —— a person must be registered as a VAT payer at least 12 months prior to filing for a VAT refund in cash except for in-put VAT incurred on the purchase/construction of fixed assets, as determined by the Cabinet of Ministers of Ukraine; —— VAT-able transactions for the 12-month period preceding the date of filing a VAT refund request must exceed the amount of VAT claimed as a refund in cash except for in-put VAT incurred on the purchase/ construction of fixed assets; —— a VAT payer cannot claim a cash refund of VAT that would exceed VAT actually paid to its suppliers in the preceding tax periods (including the first 12 months of operation). In practice, the government has been very inconsistent in providing VAT cash refunds, and it can be very difficult to receive a cash VAT refund. Only VAT receivables that are audited and confirmed by the tax authorities are eligible for conversion. PAYROLL CHARGES

Payroll charges due from a company (including various pension and social security charges) amount to approximately 38% of the salaries paid. However, the tax base for the calculation of such charges is currently

In general terms, land tax is levied on land owners or land users (where land is owned by the state or municipal authorities and is rented to such users). The specific rate of land tax is calculated individually depending on the nature and location of the land, and is paid on an annual basis. The tax rates also vary from one administrative district to another. The land tax rates tend to be relatively small for the rural areas, but can be significant for large cities. Land tax rates are usually smaller for agricultural lands, and bigger for lands of industrial designation. REAL ESTATE TAX

At present there is no real estate tax in Ukraine. Starting from 1 January 2012, real estate tax will be levied on the owners of residential real estate if the area of the property exceeds minimum thresholds (120 Sqm for apartments, 250 Sqm for stand-alone houses). The tax rates should be determined by the local authorities per 1 Sqm The tax rate for real estate with the area below 240 Sqm for apartments and 500 Sqm for stand-alone houses may not exceed 1% of the minimum monthly wage established as of 1 January of the reporting (tax) year (currently – UAH 941 (approximately USUS$117)). The tax rates for apartments and stand-alone houses larger than 240 and 500 Sqm

Contact: craigrichardson@kpmg.ua

2011 Colliers Real Estate Review » UKRAINE

UKRAINE TAX SUMMARY respectively shall not exceed 2.7% of the minimum monthly wage established as of 1 January of the reporting (tax) year. As a related matter, it should be noted that upon acquisition of the real estate the following charges will apply: State Duty —— Land: 1% of sale price —— Real estate: 1% of sale price Pension fund duty —— 1% of sale price of real estate Statutory fees

Statutory fees are payable by all legal entities and individuals in respect of the issuance of certain real estate documents by state authorities and notaries (including formalization of title documents, certifications of sale and purchase agreements, etc). The rates vary depending on the nature of the executed deed. STATUTE OF LIMITATIONS

The Ukrainian tax law provides for a three-year statute of limitations. Generally, tax underpayments identified after the elapse of a three-year period can no longer be enforced. However, this statute does not apply if an intentional underpayment of tax is proved or if returns for a particular period were not filed with the tax authorities.

Contact: craigrichardson@kpmg.ua

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