SLOVAK REPUBLIC RESEARCH & FORECAST REPORT Q Accelerating success.

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1 SLOVAK REPUBLIC RESEARCH & FORECAST REPORT Q3 211 Accelerating success.

2 211 RESEARCH & FORECAST QUARTER REVIEW SLOVAK REPUBLIC TABLE OF CONTENTS Executive Summary 3 Economic Overview 4 Investment Overview 5 Industrial Market 6 Office Market 7 Retail Market 8 Key Metric Definitions 9

3 RESEARCH & FORECAST REPORT Q3 211 SLOVAK REPUBLIC Executive Summary RECENT TRENDS Economy: In reference to the flash estimate of the Statistical Office of the Slovak Republic the GDP growth slowed slightly to 2.9% in the Q Analysts estimate that the growth was based on strong exports, while the domestic consumption continued to stagnate. Investment: The activity in the Real Estate investment sector is being narrowly linked to the evolution of financial international markets and the uncertainty in these markets is strongly affecting the current situation of the real estate investment sector. Investors are currently looking for absolute prime income producing properties seeking for secure cash flow. Offices: In Q3 211 there was 4,4 m² of new office space (Supply) added to the market. Although the demand for office space is weaker this year than last year, the majority of developers committed to continue their projects. MARKET INDICATORS GDP GROWTH UNEMPLOYMENT WAGES 21* 211* Industrial: By the end of Q3 211 the total modern stock of industrial premises increased by approximately 22,6 m². There are currently 4 new developments under construction, one of which is built on a speculative basis and other are built for specific clients. The demand for industrial space was weaker this quarter in comparison with previous quarter. Retail: Shopping centers with its wide range of assortment, services, entertainment and parking options clearly overshadowed the attractiveness of the main streets of cities as shopping destinations. MARKET PROGNOSIS INFLATION INVESTMENT VOLUMES OFFICE RENTS INDUSTRIAL RENTS RETAIL RENTS YIELDS * COMPARED TO THE PREVIOUS YEAR Economy: The global economic slowdown and the deteriorating condition of Euro Zone might have a negative influence on Europe economics including Slovakia. Next years prognosis are slightly pessimistic and 212 GDP growth is expected to reach 1.5%. Investment: In the second half of 211 we have seen several projects focused on First Home Buyers that have proven to be successful. We expect this trend to continue in the next year. From a regional point of view, we identify potential in the retail sector as many new retail concepts are currently expanding into regional cities. Offices: From our perspective, the office market will be most affected by the instability of the next year. We expect an increase of the renegotiations. Developers are trying to be more effective, focusing on buildings that meet the requirements and needs of clients. Industrial: With the upcoming crisis we expect a reduction in production due to reduced demand for products. Due to this fact we can assume that developers will rather focus on tailor-made buildings for particular clients as a speculative buildings. Retail: We expect, that there will be increasing pressure on the quality of the shopping centers in future, for this reason rents of retail premises in less attractive locations and premises requiring significant investment shall further decrease. 3 COLLIERS INTERNATIONAL

4 RESEARCH & FORECAST REPORT Q3 211 SLOVAK REPUBLIC ECONOMIC OVERVIEW Economic Overview Key Economic Figures GDP Growth 3.3% Unemployment 13.1% Inflation 4% FDI (bn) Source: Statistical Office of the Slovak Republic / Ministry of Finance of the Slovak Republic UNEMPLOYMENT % 2, 16, 12, 8, 4,, Source: Statistical Office of the Slovak Republic / Ministry of Finance of the Slovak Republic INFLATION % 9, 8, 7, 6, 5, 4, 3, 2, 1,, GDP ANNUAL CHANGE % SUMMARY In reference to the flash estimate of the Statistical Office of the Slovak Republic the GDP growth slowed slightly to 2.9% in the Q Analysts estimate that the growth was based on strong exports, while the domestic consumption continued to stagnate. Parliament approved an amendment to the Labor Code with several improvements leading to greater flexibility of the labor markets (effective as of 1st September this year). According to the Labour Force Survey methodology from the Statistical Office of the Slovak Republic, the unemployment rate decreased to 13.1 % year-onyear in the second quarter 211. In the Q2 211 the average nominal monthly wage of an employee increased by 3 % to 781. Higher increase of consumer prices compared with a growth of the nominal wage was affected by the development of the real wage that was decreased by.9 % year-on-year. The seasonally adjusted nominal wage increased by.7 % compared with Q The average nominal monthly wage of an employee in all regions was higher than in the second quarter of 21. The wage increased most in Region of Trnava (by 4.9 %). The year-on-year increase of the wage in the rest of the regions was recorded between.9 % (Region of Košice) and 4.4 % (Region of Nitra). Only in Bratislava region the average nominal monthly wage was higher than the average of the whole economy ( 997). The value of the wage in the rest of the regions was between 592 (Region of Prešov) and 729 (Region of Trnava). Consumer prices increased in total by 4 % in Q3 211, compared with the corresponding period in 21. Prices increased in the following divisions: education by 2.2 %, health by 1.1 %, housing, water, electricity, gas and other fuels by 1 %, hotels, cafés and restaurants by.6 %. Prices of food and non-alcoholic beverages decreased by 1.7 %, clothing and footwear by.1 %. The Slovak industry is highly export-oriented. Recent months industrial production figures show that the demand for Slovakia s exports is cooling off. PROGNOSIS The global economic slowdown and the deteriorating conditions of the Euro Zone have a negative influence on European economics including Slovakia. According to the Ministry of Finance the Slovak economy growth is expected to slow down to 3% at the end of this year. Next years prognosis are slightly pessimistic and the expected 212 GDP growth shall only be 1.5%. Unemployment rate will increase further. It is expected that the overall unemployment rate will reach 13.5% at the end of 211. Analysts estimate a weak industrial production performance in the coming months. Inflation shows an upward trend in 211. According to the NBS, overall consumer prices will increase up to 4% at the end of 211. By the end of 211 the FDI will have reached up to 1.5 billion. Source: Statistical Office of the Slovak Republic / Ministry of Finance of the Slovak Republic 4 COLLIERS INTERNATIONAL

5 RESEARCH & FORECAST REPORT Q3 211 SLOVAK REPUBLIC INVESTMENT OVERVIEW Investment Overview Key Investment Figures Q3 Investment Turnover Asking Office Yields 7-8% Source: RCA 72.9 mln. Asking Retail Yields 7.5-9% Asking Industrial Yields 9% PRIME (NET INITIAL) YIELDS 12% 1% 8% 6% 4% 2% % Office Industrial Retail SC INVESTMENT VOLUME ( M) SUMMARY The activity in the Real Estate investment sector is being narrowly linked to the evolution of international financial markets and the uncertainty in these markets is strongly affecting the current situation of the real estate investment sector. Investors are currently looking for absolute prime income producing properties seeking for secure cash flow. Other types of properties are encountering several difficulties just to identify prospective purchasers and in case that any offer is received, it usually includes an important discount. The few closed transactions have been completed basically off market (Sekyra / JF Hamilton Group, HB Reavis / Unibail Rodamco) Prime properties, as required by institutional investors, are just few in Slovakia and prime yields are in the level of 7, 7,5%. At this institutional level, Slovakia has strong competition from Poland and Prague. Beside these prime properties, we identify demand from investors for income producing properties yielding a minimum of 9-1% as average. Nevertheless, in the development sector we have seen active buyers looking for good opportunities in the residential development in very specific segments. They are focused on projects with no more than 1 residential units, with possibility of phasing up the project and with a target buyer in the middle segment, able to pay / obtain mortgage to purchase flats at an average price level of in Bratislava. PARAMETERS FOR OBTAINING FINANCING: Loan to costs: Loan to value: PROGNOSIS 3% - 4% of equity High ratio of presales/preleases Interest rate: 3M euribor + margin (3% - 4%) 3% of equity DSCR: min. 1.2 Interest rate: 3M euribor + margin (2.5% - 3.5%) In the second half of 211 we have seen several projects focused on First Home Buyers that have proven to be successful. We expect this trend to continue in the next year. From a regional point of view, we identify potential in the retail sector as many new retail concepts are currently expanding into regional cities. The confidence on this segment of the market is being backed up by the appetite of banks to provide financing for such projects and by the demand of retailers. 5 COLLIERS INTERNATIONAL

6 RESEARCH & FORECAST REPORT Q3 211 SLOVAK REPUBLIC OFFICE MARKET Office Market Key Office Figures Total Stock 1.43 mln m 2 Take-up 21,12 m 2 Vacancy 1.3% Prime Headline Rent 15 m 2 /pcm SUPPLY By the end of Q3 211, the total modern office stock in Bratislava reached 1,43 million m 2. Class A office space accounts for 59% of the stock, and the remaining (41%) are Class B office premises. Due to completion of the CBC III-V by HB Reavis (22,6 m² ) and the Westend Square project by J & T (17,8 m²) the office market was supplied with additional 4,4 m² in Q TOTAL STOCK/ VACANCY RATE Million m² 1,5 1,3 1,,8,5,3, Total Competitive Office Stock (A+B Class) Vacancy rate Source: BRF / Colliers International TAKE-UP Thous. m² Total Occupational Market Activity (Take-up) Net take-up Source: BRF / Colliers International TAKE-UP COMPOSITION (Q3 211) 15% 12% 9% 6% 3% % Currently there is a lack of compact office spaces of 2, m² on one floor on the market. DEMAND Although the demand for office space is weaker this year than last year, the majority of developers are committed to continue their projects. Transactions that were concluded in Q3 211 represent a total amount of 21,12 m 2. This is 8,712 m 2 less compared to Q3 21. It should be mentioned that 35% of all transactions consisted of renegotiations, 9% represented expansions and 55 % were lease contracts. In this quarter the majority of transactions were signed in the IT sector (4,955 m 2 ), followed by the Telecoms (2,81 m 2 ) and professional services companies (2,29 m 2 ). Similarly, as in the previous quarters, the majority of transactions closed in Q2 211 were within the units of less than 5 m 2, which represents 55% of all the transactions closed. Units in the range of 51 1, sq m accounted for 26% of signed deals in this quarter and a further 19% comprised the leases signed for units of 1,1+ m 2. VACANCY/AVAILABILITY The overall vacancy rate for Bratislava has increased from 9.1% in the previous quarter to 1.8% in the third quarter of 211. In comparison to Q2 211 the A Class office space vacancy rate (9.8%) increased by.3% and the B Class vacancy rate (12.1%) decreased by 1%. RENTS Prime headline office rents remained stable in Q Monthly rents for A Class premises are as follows: City Centre from 14 to 18/ m 2 /pcm Inner City from 11 to 14 / m 2 /pcm Outer City - from 9 to 12 / m 2 /pcm The Prime headline rent currently stands at 15/ m 2 /pcm, while average headline rents stands at 11 /m 2 /pcm. Landlords and developers continue to provide discounts and incentives to keep their existing clients and to attract potential tenants. PROGNOSIS 35% 55% NEW LEASES EXPANSIONS From our perspective, the office market will be most affected by the instability of the next year. We expect an increase of renegotiations. We register, that the premises of standard B are trying to provide greater advantages to their clients and compete this way with the premises of standard A. 1% RENEGOTIATIONS Developers are trying to be more effective, focusing on buildings that meet the requirements and needs of clients. This effort is reflected by realization of the energy-saving office projects. Therefore we consider the construction of the BBC I PLUS project in Bratislava as a very interesting project. Source: BRF / Colliers International 6 COLLIERS INTERNATIONAL

7 RESEARCH & FORECAST REPORT Q3 211 SLOVAK REPUBLIC INDUSTRIAL MARKET Industrial Market Key Economic Figures Total Stock 1.32 mln. m 2 Take-up 28,2 m 2 Vacancy 2.8% Headline Rent /m 2 /pcm SUPPLY By the end of Q3 211 the total modern stock of industrial premises reached 1,32 mln. m 2. In this period 22,6 m 2 in Košice were added to the market. Approximately 67% of total stock is located in the Bratislava region, 21% in the Trnava region, 6% in the Trenčín region and the rest is split among the Prešov, Košice and Žilina regions. The biggest developers share of the total stock (as a ratio between the total stock of a developer and the total market stock) is held by ProLogis (37%), providing 384, m 2 of leasable Class A premises, followed by HB Reavis with 11% and CPI with 11%. Other developer share of the total stock is below 1%. There are currently 4 new developments under construction, one of which is built on a speculative basis and other are built for specific clients. NEW DEVELOPMENTS - UNDER CONSTRUCTION Location Size (m 2 ) Developer Malacky 14 5 VGP Žilina 4 8 IL Development Galanta 18 ProLogis Lozorno 26 3 Pointpark Properties Voderady 15 Pointpark Properties DEMAND TOTAL STOCK / VACANCY RATE Total Competitive Stock VACANT SPACE / TAKE UP ,% 8,% 6,% 4,% 2,%,% Vacancy Rate The demand for industrial space was weaker this quarter in comparison with previous quarter, as the total amount of transactions in third quarter reached 28, m 2, what is approximately 21, m 2 less then previous quarter. Key Transactions in Q3 211: Faurecia lease Goodman International, Košice (22,6 m 2 ) Carcoustics expansion ProLogis, Nové Mesto nad Váhom (5,5 m 2 ) VACANCY/AVAILABILITY The vacancy increased to 2.8% by the end of Q3 211, with total vacant space amounting to 28,9 m 2. Most of this space is located in the Prešov region (12%), followed by Trenčín region (4%) and Bratislava region (3%). RENTS Monthly headline rents for logistic premises currently range between / m 2. This may be decreased by developers contributions. Monthly headline rent of office space in industrial halls ranges between / m 2. PROGNOSIS With the upcoming crisis we expect a reduction in production as a result of reduced demand for products. Due to this fact we can assume that developers will rather focus on tailor-made buildings for particular clients than speculative buildings (the only exception is current facility in construction in VGP park in Malacky). For new development, we expect that developers will require a longer rental period and higher rental prices. As we have seen in 28, after the outbreak of the crisis many projects have been stopped and companies began to think about optimizing plans rather than expansion plans. The experience 29/21 indicates that only spaces available on the market were leased to new tenants. Vacant Space 7 COLLIERS INTERNATIONAL Take Up Clients will continue to focus on the same target locations. Warehouse logistics is centered at a distance of about 25 km from Bratislava to site D2 (Zohor/Lozorno) and D1(Senec). Manufacture companies are looking for premises in the area that best suits their collection of inputs and outputs of transport, such as JIT (just-in-time), suppliers of the automotive sector is focusing on the proximity of factories producing cars Volkswagen, Peugeot, KIA.

8 RESEARCH & FORECAST REPORT Q3 211 SLOVAK REPUBLIC RETAIL MARKET Retail Market Key Economic Figures (% Change) Total SC Stock 475 thou. m 2 Average SC Rent 38 m 2 /pcm Average High Street Rent 4 m 2 /pcm TOTAL SC STOCK BY LOCATION 13% 21% BRATISLAVA I BRATISLAVA II 1% BRATISLAVA III 11% 45% BRATISLAVA IV BRATISLAVA V CHANGE IN STOCK OVER TIME Thous. m² OVERVIEW Shopping centers with its wide range of assortment, services, entertainment and parking options clearly overshadowed the attractiveness of the main streets of the cities as shopping destinations. A higher vacancy rate of facilities on main streets are the result of relocating the stores in to the shopping centers, creating downward pressure on rental premises. Rents are also related to the size of Slovak cities, purchasing power, and tourism. This is incomparable with the cities of Europe, which form the basis for similar statistics. Premises in city centers are filling up more with food facilities and cafes or services. SUPPLY Total shopping center stock in Bratislava reached 474,7 m 2 in Q3 211, this quarter additional 8, m 2 were added due to Glavica project in Bratislava IV. The majority of total stock is located in the Bratislava II district (46%) and Bratislava V (21%). The least amount of stock is located in Bratislava IV, with only 1% of total stock in Bratislava. RENTS For the past few months rental rates in shopping centers and high street locations have remained stable. Average high street rents range around 35-4 /m 2 /pcm. Average rents in quality shopping centers, with a good location, high traffic, well-considered concept and a good mix of tenants are around 38/ m 2 /pcm. Average rents in traditional shopping centers in Bratislava are as follows: Fashion units: /m 2 /pcm Sport units: 1 31 /m 2 /pcm Shoes units: /m 2 /pcm Lingerie units: 3 38 /m 2 /pcm Fast food units: 18 37/m 2 /pcm Café units: /m 2 /pcm SELECTED PROJECTS PLANNED FOR Project Size (m 2 ) Year Developer P Alfa Group Central Immocap Avion (IV. Phase) Traditional SC Specialised SC Inter Ikea 3nity VARA Group PROGNOSIS We expect, that there will be an increasing pressure on the quality of the shopping centers in the future, for this reason rents of retail premises in less attractive locations and premises requiring significant investment shall further decrease. A new project Centrál is expected to be added to the market in Bratislava. This project has the potential to attract customers, especially due to its location. However the main point of its success will be an excellent mix of tenants, enough parking space and delivering of new entertainment and leisure activities. Project P13, next to the Avion, could be an interesting alternative for tenants of retail parks. There is an interest in new concepts, that will be able to attract its customers, but the overall revenue from sales will not increase, as it will be divided into a higher number of shopping centers. The less attractive centers change their focus, reduce rents and possibly close certain stores. 8 COLLIERS INTERNATIONAL

9 RESEARCH & FORECAST REPORT Q3 211 SLOVAK REPUBLIC 512 offices in 61 countries on 6 continents United States: 125 Canada: 38 Latin America: 18 Asia Pacific: 214 EMEA: 117 $1.5 billion in annual revenue million square feet under management Over 12,5 professionals COLLIERS RESEARCH Colliers Research Services Group is recognised as a knowledge leader in the commercial real estate industry, providing clients with valuable market intelligence to support business decisions. Colliers research analysts provide multi-level support across all property types, ranging from data collection to comprehensive market analysis. Across the CEE-SEE-Russia region of EMEA, Colliers researchers regularly collect and update data on key real estate metrics, set to consistent definitions. This information is constantly managed using databases, enabling staff to readily produce analysis on key regional markets including supply, demand, absorption, pricing and transaction data on capital markets and the office, industrial and retail sector. In most CEE-SEE-Russian markets, the office definitions used are consistent with those set out by the CEE Research Forum an umbrella group, of which Colliers is a founding member - established to ensure consistent research methodologies are used, bringing greater transparency and reliability to the analysis of real estate markets in the region. Definitions of the key metrics used in our regular reports are highlighted below. KEY METRIC DEFINITIONS SLOVAKIA: Colliers International Europeum Business Center Suché Mýto 1 Bratislava Slovakia TEL FAX research@colliers.sk The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. Prime Headline Capital Value (derived): This is a calculation of market value derived from the annual prime headline rent divided by the prime (net initial) yield. Prime Net Initial Yield: The yield an investor is prepared to pay to buy a Grade A building, fully-let to high quality tenants at an open market rental value in a prime location. Lease terms should be commensurate with the market. As a calculation Net initial yield = First years net income/purchase price (prior to deducting fees and taxes) Prime Headline Rent: Represents the top open-market tier of rent that could be expected for a unit of standard size commensurate with demand, of the highest quality and specification in the best location in the market at the survey date. This should reflect the level at which relevant transactions are being completed at the time but need not be exactly identical to any of them, particularly if deal flow is very limited or made up of unusual one-off deals. If there are no relevant transactions during the survey period, the quoted figure will be more hypothetical, based on expert opinion of market conditions, but the same criteria on building size and specification will apply. Prime Net Effective Rent: Prime Net Effective Rent is the lowest rent payable, based on a calculation of the Prime Headline Rent, less the monetary equivalent of the highest of either the rent-free period or fit-out contribution available at the time of the survey date. Average Headline Rent: Average Headline Rent represents the average open-market tier of rent that could be expected for a unit of standard size commensurate with demand, based on a blend of Grade A & B space across a range of locations in the market at the survey date. Total Competitive Stock: Includes the gross leasable floor space in all A and B class buildings. Space Under Active Construction: Represents the total amount of gross leasable floor space of properties where construction has commenced on a new development or in existing properties where a major refurbishment/renovation is ongoing at the survey date. Space Under Construction Inactive: Represents the total amount of gross leasable floor space of properties where construction had started/where a major refurbishment/renovation was ongoing, but activity has since stopped for a period of 3 months or longer. Vacant Space: The total gross leasable floor space in existing properties that meet the Competitive Stock definition, which is physically vacant and being actively marketed at the survey date. Space should be available for immediate occupation.

10 Accelerating success.