Lima, Perú. Office Overview, Q GDP Annual Growth: Peru vs. Latin America. CPI and Policy Interest Rates. Economic Overview

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1 , Economic Overview The Peruvian economy is projected to grow by 3% in 2017, according to midyear estimates. This represents a slight deceleration from previous forecasts, though it continues to outperform the rest of the region, and analysts expect the economy to grow at an accelerated pace again in Peru was devastated in March of 2017 by flooding caused by "El Niño Costero, leading to the displacement of over 666,500 mainly in the center and north of the country, and hurting the agricultural and fishing segments of the economy disproportionately. Another important development in 2017 has been the ongoing investigations into the Odebrecht scandal. This has affected public confidence in Peru s political and business leaders, and has stalled the advance of critical public and private investments as the vetting process has greatly intensified. In the first half of the year, the country has been fueled by a strong dynamic in exports of traditional products such as metals, natural gas, and fishery products. Mining, which represents between 1 and 1 of fiscal revenue and around 6 of exports, has particularly buoyed the economy. Copper, Peru s top export, saw a particular boost in price amidst increase Chinese imports and the stoppage of production at some mines in Congo, Canada and Chile. To finance reconstruction after the flooding and provide additional stimulus to the economy, the administration of Pedro Pablo Kuczynski is implementing a fiscal stimulus package worth 0.8% of GDP in 2017, to be followed up by a 3 year rebuilding program financed by credit lines as well as reserves accumulated over the past decade. The move comes with a commitment to establishing a public debt ceiling of 30.0 % of GDP. One of the administration s top priorities, keeping consistent with its predecessors, is the continued development of national infrastructure. Several projects, either under construction or being structured, offer the potential to greatly enhance the country s logistical context, bringing economic and time benefits to consumers and businesses. Some of the key projects already underway are the TrujilloSullana and ChinchaIca highways, the modernization of the San Martin port in Pisco, the future construction of the Chancay port, the construction of a new airport in Cuzco, the proposed airport expansion in Lima, and the construction of lines 2, 3, and 4 of the Lima Metro. Inflation rose sharply in the wake of the flooding, with Peru in March seeing its largest monthly hike in inflation in a long time. However inflation more broadly is on the decline since 2016, and is expected to fall to 3% YoY this year, as price shocks caused by the coastal Niño phenomenon should relax. The Peruvian Sol depreciated 0.8% YoY, affected most by the rise in interest rates of the U.S. Federal Reserve. The Peruvian Central Bank is expected to cut interest rates throughout 2017 to provide yet another stimulus to the economy and to induce currency depreciation, which will ultimately help promote Peruvian exports. Peru continues to struggle with political gridlock. The 2016 presidential election left a hostile divide between President Kuczinsky and the Fuerza Popular party of his leading rival, Keiko Fujimori. The hostility mainly stems from the FP s insistence on the pardoning of her father and polarizing former president Alberto Fujimori. Fuerza Popular will maintain control of congress for the entirety of PPK s term; this has created a political stalemate and even led to the firing of 4 of PPK s ministers. Time will tell whether the two parties can put their differences behind them and come together to work on important legislation % 6% 4% 2% Source: Oxford Economics GDP Annual Growth: Peru vs. Latin America GDP Annual Growth Rate, Peru GDP Annual Growth Rate, Latin America & Caribbean CPI and Policy Interest Rates Source: Oxford Economics CPI Change YoY Peru Interest rate, central bank policy

2 Rentable Area m2 Market Overview Mirroring the greater Peruvian economy, Lima continues to be an attractive office market because of its young and dynamic labor force, economic stability and great openness to foreign direct investment. As of midyear 2017, the office market contains approximately 1,850,000 m 2 of leasable area, having doubled in total stock since Of the main office submarkets, contains the highest stock distribution with 3 of the overall market. This district is considered the business heart of Lima, and therefore of Peru. Following in market inventory is the submarket of Este (conformed of the districts of Surco, San Borja and La Molina), with 28% of the total stock. Este contains the fastest growing parts of the city and offers comparatively low rents for high quality properties. Other major submarkets include Miraflores, which despite being one of the main tourist sectors in Lima only contributes 1 of the total stock, and, a core area that has one of the most important business clusters in Lima, also with 1 of the overall stock. However as traditional parts of the city become increasingly expensive to invest in, the office market is decentralizing into new areas. These include Magdalena, which this year will feature the delivery of several new projects, obtaining 8% of the total stock. Another is the old city downtown, where a rediscovered dynamism has induced some developers to purchase assets for cheap and invest in their renovation. Finally, new and mostly lowcost projects in isolated pockets of the city like Santa Anita, San Miguel, and Lince make up 4% of the stock, and provide opportunities for users looking to optimize their real estate. In the past year production and absorption have each reached historically high levels for Lima. New office deliveries in 2016 surpassed 300,000 m 2, with demand absorbing approximately 180,000 m 2 of that. This year production is estimated to reach 232,000 m 2, in 27 new projects, while net absorption boosted by a surprisingly dynamic first half of the year, should exceed 200,000 m 2. Not only is this significant historically, but it makes Lima one of the most dynamic markets in all of Latin America for this year and last. Despite higherthanexpected absorption, vacancy remains historically high due to the extremely high level of new supply. Lima s vacancy rate has jumped from just 3 years ago to over 2 in However vacancy seems to have fallen since December to 17% today, beating many analysts forecasts. It is worth noting that the majority of new supply to be delivered in 2017 about 7 will happen in the second half of this year. This should push vacancy back up towards 2 by the end of this year. An analysis of future construction shows approximately 375,000 m 2 to be delivered over the next 30 months, with nearly half of this to be completed by the end of By comparison, stock delivered over the past 30 months amounts to approximately 650,000 m 2. JLL therefore concludes that Lima is entering into an adjustment period where the coming supply pipeline is drying out. This should give the market time to absorb excess space, putting downward pressure on the vacancy rate. By 2019, the vacancy rate should fall back below 1, bringing the market back to a healthier dynamic. Falling vacancy will give landlords more leverage in negotiations, which will push rents up. We are already beginning to see these trends manifest themselves: the current context of high vacancy and low rents has hurt investor cash flows and compressed office cap rates. As a result, many projects are being postponed or cancelled altogether due to skepticism in the market both by small and institutional investors. Lima Office Market Map Historic Production, Absorption and Vacancy Production (m2) Net Absorption (m2) Fundamentals 2017 net absorption forecast (m2) 208, production forecast (m2) 242,000 Under construction (m2) 405,000 Total vacancy rate 17% Total vacant area (m2) 316,000 Asking rent: Class A (USD/m2/month) * $1522 Asking rent: Class AB (USD/m2/month) * $1120 Average Sale: Class A (USD/m2) $1,7002,350 Average Sale: Class AB (USD/m2) $1,5002,200 Typical Cap Rate 812% Sample Size 290 buildings * Rents do not include parking, which is quoted separately. Parking are between USD $ per space per month.

3 Rentable Area (m2) Rentable Area (m2) Rentable Area (m2) Supply and Demand For this year, expected that net absorption exceeds 200,000 m 2, reflecting more than a 5 increase over last year. High demand is a result of several factors, most notably the strong economic growth of the Peruvian economy that has attracted many companies to establish operations here. Another key factor is the scaling up of operations: many multinationals and local companies first began to lease quality space around when the market began to open up. A good number of these companies are now close to reaching, or have already reached, the expiration of those leases and have likely grown in headcount, and they are now leasing larger areas. Some companies are selling owned assets to free up capital and are leasing their offices instead. Others are simply taking advantage of the plethora of options available on the market to upgrade their facilities. All of these types of office seekers are enticed by rents that have reached their lowest point since the early 2010s as a result of the oversupplied market Stock and Vacancy by Submarket Stock Clase B+ Stock Clase AB Stock Clase A Centro Este Magdalena Miraflores Others This year newlydelivered buildings show a vacancy rate of 6, while buildings delivered in 2016 show a vacancy rate of 5; this implies that the reduction in the overall vacancy rate in Lima is not due to a lack of demand which stands at record levels but rather too many new buildings being completed at the same time and therefore taking a long time to fill up. The most widely available submarkets are precisely those where production is highest: Magdalena (24% vacancy), Miraflores (2), (19%), and Este (14%). Vacancy has fallen sharply in the Este submarket from a year ago due to significant absorption in new buildings like Panorama Plaza, Lima Central Tower, and Capital Derby, where landlords have dropped rents to as low as USD $14/m2/month, a lower rent than many Class B buildings. In the first half of the year, the Este submarket has accounted for approximately 61,000 m 2 of the 116,000 m 2 of total net absorption. This is followed by Magdalena with 36,000 m 2 of new net absorption and with just over 20,000 m 2 in the first half of the year. Net absorption was very low in Miraflores,, and Others due to a lack of new supply in these areas. Compared to other key markets in the region, Lima shows a relatively higher proportion of simplified buildings meaning buildings that are owned completely by one entity as opposed to strata title buildings which are characterized by a fragmented ownership structure with many landlords. The Lima market is 43% simplified, 44% fragmented, and 13% single user (buildings occupied by one company, such as La Positiva, BBVA, Scotiabank, or Movistar). However the market has moved towards a more fragmented structure in recent years as many smaller and less recognized developers look to build projects and finance them through presales. Since 2015, approximately 6 of the new construction in Lima is characterized by strata title ownership, and these types of buildings show a higher vacancy rate than simplified properties. Currently, strata title buildings account for close to 6 of the vacancy on the market while simplified ownership buildings account for 4. The divide is more pronounced in submarkets that are dominated by strata title properties such as Magdalena and Este. Also notable among the new class of office buildings in Lima is the prevalence of LEED certified architecture, which offer users cost savings in energy efficiency. In Peru there are approximately 50 LEED certified projects, however there are another 160 that are in process of Production and Absorption by Submarket, Q Production, 2017 (m2) Centro Este Magdalena Miraflores Net Absorption, MY 2017 (m2) Vacancy MY 2017 (%) City : 17% Other Vacancy by Submarket and Ownership Structure Centro Este Magdalena Miraflores Vacancy: Simplified : Simplified Other Vacancy: Strata Title : Strata Title

4 Asking Rents (USD/m2/month) certification, suggesting that they are recently becoming more common. Rents and Sale Prices Oversupply and high vacancy have led to a sharp decline in office rental prices since 2013, as the market has become highly favorable to tenants and landlords must offer extremely competitive rents to attract demand. Average Class A and Class AB rents have also converged in recent years as Class A landlords have had to lower rents to the point where there is little if any premium awarded to Class A buildings; this trend is especially strong in strata title buildings, where landlords in the same building or even the same floor must compete against each other. It is highly likely that rents will hit bottom this year before rising again moderately in 2018 and beyond, due to the decrease in new supply and a lower expected vacancy rate. $24 $22 $20 $18 $16 $14 $12 $10 Historic Rents and Vacancy Class A Class AB The highest prices are seen in the submarket, which offers great amenities and has not been bogged down by oversupply. In this submarket, tenants are generally closing leases between USD $1924/m 2 /month. and Miraflores have maintained rents generally in the range of USD $1620/m 2 /month. Este and Magdalena, the areas that are most affected by oversupply, have seen rents fall to USD $1418/m 2 /month. Rents are lowest in the Centro and Others submarkets, where users can find spaces for as low as USD $10/m 2 /month. It is worth noting that these rents do not include the cost of parking, which is obligatory in Lima, and adds between USD$ 35/m 2 /month. Rents by Submarkets, Office sale prices are typically between USD$ 1,7002,350/m 2 for Class A spaces and between USD$ 1,5002,200/m 2 for Class AB, not including the price of parking. Sale prices are generally the lowest in the submarkets of Este and Magdalena, though there are an abundance of sale opportunities in as well. Office investors can expect to earn cap rates of between 812%, though cap rates have fallen recently given the market context. Latin America Office Rental Clock Market Outlook The JLL Office Rental Clock has positioned Lima at 5:00, which indicates that rents are bottoming out. Falling rents and high vacancy have made office investments less attractive, and the market has responded by postponing or cancelling many projects that otherwise may have broken ground. JLL estimates that annual production will fall in 2018 to 148,000 m 2, and to only 71,000 m 2 in This will return the market to a context of reasonable vacancy levels, which will embolden landlords and cause rents to moderately rise. Macroeconomic conditions in Peru continue to breed optimism. A multitude of new infrastructure projects will boost the economy in the long term, and the fiscal stimulus should provide a push in the short term. While the government faces political turmoil, this should not significantly affect the generally positive direction that Peru is heading in.

5 Standard Unit of Measurement Unit of Measurement Square Meters (m 2 ) Rent Typical Lease Term Frequency of Rent Payment Deposit / Lease Guarantee Security of Tenure Statutory Right to Renew Basis of Rent Increases or Rent Review Frequency of Rent Increases or Rent Review Foreign Ownership Land Title Strata Title (Partial ownership of the building) Security Deposit Legal Fees Other Transaction Costs Local Property Taxes VAT / GST Payable on Rent & Service Charge (known as IGV) Lease Contracts Quoted in US$ /m² /month 35 years Monthly Casebycase, usually 2 months rent are required. Only for the duration of the tenancy. No guarantee beyond the original lease term No (unless an option to renew is agreed at the outset and specified in the lease) Typically equal to US CPI or between 3. Annual Purchasing Properties No restrictions Mainly freehold Common, but less so than most other markets Casebycase 3% paid by the Seller and split between the two brokers Typically paid by Buyer Taxes Landlord, annually 18%, payable by tenant Incentives Rent Free Period Casebycase basis, often 13 months The rent free period is not standardized in the local market, however typically occurs. The length of this period is negotiated between the parties and is also a factor of how much (if any) tenant improvement allowance is provided. Service Charges, Repairs and Insurance Service Additional to the rental charge and Charges/Managements Fees payable monthly in advance Utilities (Separately metered) Electricity, telephone, AC, etc. paid by tenant according to consumption Car Parking 1 space per 4050 m2 obligated in lease contract. Spaces cost US $ /space/month depending on submarket and building. Storage Deposits Depends on availability, not obligatory. Cost is between US$1012/m²/mes Internal (Tenant Space) Tenant Common Areas Landlord (charged back via service (reception, lift, stairs, etc.) charge) External / Structural Landlord Building Insurance Landlord Disposal of Leases SubLetting & Assignment Typically yes, subject to landlord s approval Early Termination Case by Case Tenant's Building Reinstatement Responsibilities at Lease End Transaction Fees 2 month s rent + VAT Landlord / Tenant (payable by Landlord / Tenant) Stamp Duty 50/50 Legal Fees (payable by Landlord / Tenant) Public Registry Fee Class A+ Class A Class AB Class B+ Typically requested in original condition, given normal wear and tear. Buildings Clasiffication The best buildings in the city, which have a good location, the size of plant is over 800m2, high standards of construction, good corporate image and a simplified or unified ownership structure. Buildings of superior quality which meet at least 4 of the abovementioned criteria. Buildings that meet at least 3 of the abovementioned criteria. They are buildings of quality, although they are typically smaller and inferior to Class A properties. B + buildings fall between AB and B. Although they have notable deficiencies, it is worth referencing them because they have some important feature (location, quality of construction, etc.). JLL Peru Zach Cheney Director Zach.Cheney@am.jll.com Karla Peña Senior Consultant Karla.Pena@am.jll.com Anette Matienzo Research Analyst Anette.Matienzo@am.jll.com