Economic Overview BRAZIL I SÃO PAULO RESEARCH & FORECAST REPORT. MARKET INDICATORS 2 ND SEMESTER 2010 INDUSTRIAL

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1 2 ND SEMESTER 2010 INDUSTRIAL BRAZIL I SÃO PAULO RESEARCH & FORECAST REPORT Economic Overview COLLIERS OFFICES IN BRAZIL Exceeding market expectations, 2010 was marked by an economy steaming and sustained by an increase in consumption and investments. The Focus Report - a publication from Banco Central do Brasil - previsions point to a GDP growth of 7.6% over the period, the highest rate seen since the 80 s when the growth achieved 7.85% (in 1985). Retail activities were benefited by increasing rates of employment as well as of income, and by a greater availability of credit. The accumulated growth from January to November in 2010 was 11%. According to IBGE data (the national statistics office), 2010 could finish with a two-digit growth rate for retail trade, an unprecedented annual variation. IBGE should publish a 2010 real figure in early February Regarding to the industrial sector performance, general activity suffered a variation during A strong growth took place from January to April, still influenced by the fiscal measures adopted by government in 2009 to serve as protection against the effects of the international financial crisis. On the other hand, from April to October the industrial activity was subject to a slow-down and there was a weak performance in all regions, due the increased Selic rate and the exchange rate which favors imports and is harmful to exports. MARKET INDICATORS November presented some signs of growth in several regions such as São Paulo, Rio de Janeiro, Rio Grande do Sul, and Pará, which suggested a resumption of business, mainly in São Paulo where manufacturing is more diversified and structured, and hence broadly represents the general performance of industrial production. The country s accrued industrial production for the year presented a 10.5% growth rate, in excess of the 2004 record (8.3%). PRICE ABSORPTION st SEMESTER nd SEMESTER The expectation for 2011 is a growth continue in retail and industrial sectors, which fact may preserve the attractiveness of industrial condominiums. However, a more moderate growth trend is also expected owing to the expected increases in interest rates, in addition to the difficulties faced by manufacturing industry owing to an overvalued local currency, which are already in effect. VACANCY CONSTRUCTION

2 Market Overview The industrial condominiums market is relatively new in Brazil less than 15 years old and remained stagnant until mid-2005 when an expressive change in circumstances took place. The economy s expansion created an industrial activity increase in the country, and encouraged a growth in storage operations and products distribution. Despite this brief existence, condominiums are a new trend in the industrial real estate market, whether by the effects of cost reducing, or due to the flexibility of placing together in one single environment in independent or joint modules all the sectors from a same company s (management, production, storage, and logistics sectors). The confidence created with the market s expansion gave rise to riskier investments considered speculative (without a previously defined tenant during construction). Investors of the industrial condominiums market are confident with the favorable growth outlook, with the long-term agreements possibilities, and the more attractive returns, roughly 1.5% per year (in São Paulo) or about 0.5% above the corporate office market. The nature of investors in industrial condominiums covers two different groups: In the case of condominiums with modules from 700sq.m to 1000sq.m, traditional individual investors are the majority. On the other hand, modules above 1000sq.m attracts the interest of family groups, pension funds, and real estate investment funds. These investors seek to diversify their portfolios, which used to be concentrated on office buildings. This last group s major differential is the actual savings in time, money, and space, as costs with services are allotted among the condominiums tenants. Security is also an important item in industrial condominiums transactions. In addition to being the creation of renowned architects, the more recent industrial condominiums provide state-of-the-art technology and comply with sustainability concepts, one of the key requirements by actual large corporations. The Green Building certification may cost roughly 5% of the value of the property, yet in the long run it is possible to create savings of as much as 25% in condominium expenses and utilities. Potential tenants of industrial condominiums are on the lookout for the best accesses to the country s consumer regions. In the Southeast, demand concentrates on the surroundings of the Road Ring, despite the constant rise in properties prices, a result of the high land values in the region. This situation may also happen in Rio de Janeiro during the conclusion of the Arco Rodoviário, which will attract large numbers of companies with a logistics strategy based on local access. The new consumers market consolidation, the variety of distribution points and the high land prices in the Southeast region have encouraged properties development in other parts of the country, among which the South and Northeast regions. Recife stands out with a potential to become the Northeast region s hotspot as the latter s most recent growth area, due the Port of Suape project. This area s potential availability has led an intensive real estate speculation, strongly inclined to expansion owing to fiscal incentives and inter-modal facilities. This region has a growth possibility of 70% over the next two years, with a considerable expansion of available industrial condominiums in the country. The Southeast region is responsible for 85% of the country s inventory. Most of these condominiums are located within a 150-km radius of São Paulo s city. The metropolitan region of Campinas and the city of Guarulhos presents the biggest part of their industrial areas under construction and/or in project. According to the growth expectation for the industrial condominium market, the new one million square meters that will be deliver in 2011 should indirectly influence the stand-alone warehouses market, which should lose a part of their occupants to more modern and comprehensive properties. EXISTENT TOTAL INVENTORY (sq.m) FUTURE INVENTORY (in million sq.m) P. 2 COLLIERS INTERNATIONAL

3 VACANCY The vacancy rate in the domestic market for industrial condominiums reached 8.7%, directly influenced by the Southeast region, which is responsible for 85% of the 315,102sq.m vacant area of the country. VACANCY AREA DISTRIBUTION PER REGION The North and South regions together account for 14% of these vacancy areas, owing to developments that were delivered but not absorbed from mid The state of São Paulo, with a major portion of this inventory, ended the year with a 7.8% vacancy rate, or 0.9% below the country average rate. This rate should decline in 2011 due to the smaller modules occupation - a trend that presented a significantly growth in AVALIABLE AREA X BRAZIL INVENTORY ABSORPTION The absorption during the 2nd semester of 2010 was 100,297sq.m in Brazil. Though on the upswing, the market did not absorb the biggest portion of the delivered areas, because this areas just took place in the end of the year. These properties will probably be absorbed in early As opposed to the corporate office market, in industrial condominiums decisions may take time, as logistics and installation costs are normally considered in detail. COLLIERS INTERNATIONAL P. 3

4 PRICES The Southeast region is more structured, developed and with the higest demand regarding to industrial condominiums. For this reason, it has the country s highest average prices, R$ 18.50/sq.m, a figure influenced by the high land values. The lowest average price may be found in the South region, at R$ 13.00/sq.m The greatly expanding Northeast region may experience a price rise in the coming years owing to overvaluing as a result of the Port of Suape project. Leasing prices in class A+ and A condominiums in some states have risen in the second half of The highest price presented in São Paulo was R$ 28.00/sq.m, and the state s average leasing price R$ 18.50/sq.m. The country s highest average leasing price, R$ 20.60/sq.m, was found in Rio de Janeiro. MAXIMUM AND MINIMUM LEASING PRICES PER STATE - R$/SQ.M/MONTH $30.00 $28.00 $23.00 $20.00 $20.00 $20.00 $19.00 $18.00 $18.00 $17.00 $17.00 $17.00 $16.00 $16.00 $16.00 $15.00 $15.00 $15.00 $15.00 $14.00 $10.00 $12.00 $12.00 $11.00 $10.00 AM DF ES MG PA PE PR RJ RS SC SP STAND-ALONE WAREHOUSES The market for high-quality stand-alone warehouses covers a total of roughly 4.5 million sq.m in the cities of Guarulhos, Osasco, Barueri, Jandira, and Itapevi. General vacancy in these five regions is 1.2%, with emphasis on Guarulhos with 2% and Barueri with 0.4%. These figures may be considered low as opposed to the country s average of 7.9%. Market prices rose slightly, to an average of R$ 20.00/sq.m. Guarulhos which accounts for 60% of the market, will have an increase of 100,000 sq.m in The nearby Ayrton Senna and Presidente Dutra highways encourage a brisk demand by logistics companies. Properties located close to the Guarulhos airport presents prices 10% to 20% higher than similar properties located in more distant districts. The regions along the Castelo Branco highway showed a similar performance as the 1 st half of 2010, with slight price rises. Region Inventory Vacancy Vacancy (%) Absorption Avarage Leasing Prices (R$ / sq.m/ month) Barueri 427,098 1, % 17,442 R$ Itapevi 324, % 21,500 R$ Jandira 212, % 7,000 R$ Osasco 843, ,0% 4,625 R$ Guarulhos 2,745,064 55, % - R$ Total 4,552,366 56, % 50,567 R$ P. 4 COLLIERS INTERNATIONAL

5 OCCUPATION PROFILE - INDUSTRIAL CONDOMINIUMS Currently, 48.8% of the inventory of Brazil industrial condominiums are occupied by logistics and transportation companies. However, petrochemical and pharmaceutical companies also have a significant participation in the occupation of large industrial areas, not only for production operations, but also for distribution centers and/or storage. Some industrial areas under construction use to be pre-leased by companies seeking for facilities offered by modern industrial parks (including, technology and sustainability). Regardless of other industries, the logistic activity should keep the first position in occupancy of industrial parks in Brazil. INDUSTRIAL CONDOMINIUM OCCUPANCY PROFILE IN BRAZIL Logistics 48,8% Textiles 9,3% Pharmaceuticals 5,9% Petrochemicals 5,6% Services and Public Utilities 5,2% Tecnology 4,3% Agribusiness / Food 4,1% Electrical Materials 3,6% Metallurgy 2,5% Machines and Equipments 2,5% Consumer Goods 2,0% Automotive 2,0% Packaging 1,6% Communications 1,1% Personal Services 0,4% Construction 0,3% Health 0,3% Hygiene and Cleansing 0,3% Furniture and Decorations 0,2% COLLIERS INTERNATIONAL P. 5

6 STATISTICS REGION CONDOMINIUMS INVENTORY (SQ.M) VACANCY VACANCY % AVARAGE LEASING PRICE Midwest 2 33, % R$ North 1 107,787 23, % R$ Northeast 1 39, % R$ South 6 429,245 23, % R$ Southeast 64 3,008, , % R$ Total 74 3,618, , % R$ REAL ESTATE MARKET GLOSSARY Absorption area: Area occupied (sq.m) since the previous period Building Classification: Properties are classified as A+, A, B and C Stock / Inventory: Built-up area in sq.m Vacancy Rate: Relationship between available area and total area Free Ceiling Height: Height from finished floor to the first structural interference Build-to-Suit: Built and customized for the company occupying the building 480 offices in 61 countries on 6 continents United States: 135 Canada: 39 Latin America: 17 Asia Pacífic: 194 EMEA: 95 US$ 2 billion annual revenues 2,4 billion sq.m under management Over 15,000 professionals CONTACT AND OFFICES IN BRAZIL R. Olimpíadas, andar São Paulo SP TEL Av. Almirante Barroso, 63 - sl Rio de Janeiro RJ TEL Av.Gov. Agamenom Magalhães, sl Recife PE TEL LEANDRO ANGELINO RESEARCH AND MARKET INTELLIGENCE COLLIERS INTERNATIONAL BRAZIL SERVICES FOR OFFICE, RETAIL, INDUSTRIAL, LAND, URBAN AND RURAL AREAS Sales and Leasing Build-to-Suit and Sale & Leaseback transactions Tenant and Landlord Representation Investment Real Estate Consulting and Appraisal TEL langelino@colliers.com.br This document was prepared by Colliers International only for publicity and general information. Colliers International gives no warranties, representations or assumes responsibilities of any kind, express or implicit, regarding to this information, including - but not limited to - warranties of contents, accuracy and reliability. All interested parties should undertake their own investigations on the accuracy of information. Colliers International unmistakably excludes all inferred or implicit terms, conditions and responsibilities arising from this Research and Market Intelligence Disposals Lease Administration Portfolio Advisor Investments Accelerating success. P. 6 COLLIERS INTERNATIONAL