Strong office development activ ity continues

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1 Riga Offices, Q4 217 Strong office development activ ity continues Total Modern Stock 616,858 sq m Overall Vacancy Rate 3.5% (-.5 p.p) Completions 8,495 sq m Absorption 23,31 sq m Prime Yield 6.75% Figure 1: Brand new Arvato Systems Latvia office located at Zala 1 *Arrows indicate change from the corresponding quarter in the previous year KEY POINTS Along with the recovery of the external market, growth of manufacturing and absorption of EU funds, Latvia showed steep economic growth in 217. Estimations of real GDP growth for the full-year 217 has been increased to 4.5% as renewed investment and consumption reinforced the export growth during H The unemployment rate constituted 8.5% as of the end of Q Compared to the previous year, the unemployment rate decreased by 1. percentage points. At the beginning of 218 the total Riga modern office stock amounts to 612,3 sq m showing an increase by ca. 26, sq m or 2.8% on an annual basis and ca. 3,95 sq m or.1% on a quarterly basis, respectively (taking into account withdrawals of 3,2 sq m from the stock in Q4 217). In Q4 217, take-up exceeded 17,435 sq m, while the overall vacancy rate showed a slight decrease by.5 pp on an annual basis comprising 3.5% of the total modern Riga office stock. Prime net rent (including landlord contributions for a standard fit-out) remained unchanged and stood at the level of 16.5 EUR/sq m/month during Q Net rents for modern B class offices also remained stable between EUR/sq m/month during the year. Credit: VASTINT Latvia NEW SUP P LY STI LL LI M I TED At the end of Q4 217, the total modern office stock in Riga amounted to ca. 617, sq m. As of the end of Q4 217, most of the stock was multi built-to-let amounting to 68% or 42,5 sq m. In Q4 217 one project Loftoffice with a GLA of 3,95 sq m located at Mukusalas district was completed. Also, an existing building located at 11 November Embankment 17 (which was fully refurbished for Euro Live Technologies) was added to the stock (OO). The overall growth of modern leasable office stock constituted 3.6% or ca. 3,5 sq m during 217. Four office projects totaling 24,34 sq m were built as speculative multi-let schemes, while ca. 1,65 sq m was built-to-let for the single tenant during 217. During Q4 217 construction of four new multi-let office schemes (including reconstruction ca. 32% or 17,1 sq m) were started with estimated total leasable area of ca. 53,4 sq m, all of them are planned to be completed by the end of 219. The most significant and largest completed project in 217 was the newly built office building Place Eleven developed by Hanner, thus supplementing Skanste district with 15, sq m of modern multi-let office space. Other newly-built office schemes completed in 217 were Katrinas Osta and Loftoffice. Both projects have available office space for lease. NEW COM P LETI ONS W I LL GA I N M OM ENTUM IN 218/ office buildings were under construction or reconstruction during Q4 217, totaling ca. 164,5 sq m, 19% of it being developed for specific occupiers, for example, AB LV bank, MikroTik, Salmo, Dyninno etc. Q4 217 CBRE Research 218 CPB Real Estate Services, Affiliate of CBRE 218 1

2 Thous sq m Growth, y/y Figure 2: Modern Office Stock Development in Riga: and Forecast* for F 219F 35% 3% 25% 2% 15% 1% 5% % -5% Existing stock, sq m New Supply, sq m Total Stock Growth (rh scale) *Only projects which are currently under construction are included Source: CPB Real Estate Services, part of the CBRE Affiliate Network; January 218 The largest projects under construction are Z-Towers, two office buildings Teodors & Henrihs located in Jauna Teika (developed by Hanner), New Hanza (1st stage) developed by Pillar, Business Garden Riga developed by Vastint, façade buildings of SWH Office Centre developed by SWH group, Origo ONE offices (Linstow) and the multifunctional complex Akropole Riga (Akropolis Group). Many other substantial new office developments are at the planning stage or undergoing architectural and technical design. Extensive growth of office stock is expected in the next few years. To be precise if all office buildings currently under construction are completed, the total modern stock will increase by 25% in the next two years. INCREASING SUPPLY OF FLEX IBLE OFFICE SPACE Over the past five years, flexible office space operators have expanded rapidly in all major global cities, and the are no exception. Currently, such market players as Regus with their concept Spaces, BPT with Workland and Technopolis with their UMA concept are actively searching the market for new locations. Also during Q4 217, there was a new co-working project launched to the Riga market: People Work - providing flexible office space with a GLA of 3,5 sq m. Flexible offices are not a new concept, but over the past decade the global market has been growing at an average of 13% per annum (Instant Group, Flexible Workspace Review UK, 216). Broadly speaking, the sector can be split into five different formats traditional serviced and managed offices on the one hand, and newer formats co-working, incubators and accelerators on the other. ONE- FLOOR LA YOUT A ND FLEX I BI LI TY: CHANGE OF M I NDSETS During 217 many companies opted in favour of modern, more flexible office space by relocation to newly built offices and this trend will continue this year. According to CBRE, international companies whose activities are related to projects, often create teams for a particular project and the workplace has to be adjusted for convenient team work. When the project is over, teams divide or new groups of employees are linked together, and each new situation requires a different approach. Such reorganization of the workplace does not include only moving desks but also adjustment of communication systems such as electricity, ventilation etc. It is important that such re-modeling does not end up in high costs and interrupted work. Therefore flexibility of office space is extremely important in order to provide the best efficiency this is how companies benefit in the most direct way. The mindset of occupiers is changing as new tendencies appear to solve problems that employees and companies face. We re moving from the idea that an open space office is the same old office with partition walls being removed to the perception that an office can have many functions covered by dividing zones and adjusting the fit-out. Part of an office with an open area is devoted for workstations and part to various other functions, e.g. a quiet isolated environment for work that requires high-concentration levels and at the same time also entertainment areas with different types of games and sports. This all is getting more important for companies which hire young employees in the market where they are competing for talent. Human resource specialists now see more value in the opportunities and environment that an office provides in the hiring process than ever before. More and more companies tend to choose a one-floor policy layout to ensure greater efficiency which also leads to interaction, better internal communication and more engagement of employees. Growing levels of occupier interest in wellness, amenity, the quality of the working environment and user experience will increasingly drive occupiers building selection and management decisions, with a growing focus on quality. I NCR EA SI NG DEM A ND In Q4 216, overall demand was mostly driven by international companies, while the most active sectors were Financial institutions, IT companies and Law offices. During Q4 two large pre-lease transactions were announced in the market, both tenants: Accenture Latvija (45 FTE) and DNB Bank ASA client service centre with 29 FTE have chosen their future location in Jauna Teika, building Teodors which will be completed by the end of 218. Q4 217 CBRE Research 218 CPB Real Estate Services, Affiliate of CBRE 218 2

3 Vacancy Thous sq m Figure 3: Main Supply and Demand Indicators in Riga: and Forecast* for F 219F Absorption, y/y, sq m New Supply, sq m Vacancy Rate, % (rh scale) 3% 25% 2% 15% 1% 5% % *Refers to new supply forecast: included only projects which are currently under construction Source: CPB Real Estate Services, part of the CBRE Affiliate Network; January 218 Q4 217 was the strongest quarter in 217 providing the previously mentioned pre-leases in the market. The total take-up in Q4 217 stood at the level of 17,435 sq m with the average transaction size of 68 sq m. Demand for modern office space in Riga was largely driven by existing local and international occupiers, however, the interest from newcomers such as SSC s and BPO s remained stable in 217. Several newcomers entered the market, the largest of them were WebHelp (France), Arvato Systems (Germany), and Genpact Latvia. Global IT specialist Arvato extended their operations in Riga by ca. 6 new employees, based in the new location at Zala 1. The overall take-up for 217 reached ca. 48, sq m, showing an increase by 35.5% if compared with the same period in 216, however, it has remained unchanged if compared with 215. Analyzing office lease transactions in 217 by the size of the tenant, transactions up to 3 sq m are still dominating with a share of 52% of total office market transactions (Figure 5), although in terms of total area leased they make up only a 16% share (Figure 6). V A CA NCY Overall vacancy in the Class A and B1 office segment stood at the level of 2.7% at the beginning of 218. Considering the speculative built-to-let stock only, the vacancy rate decreased by 1. p.p, reaching the level of 5.%. Class A office vacancy is close to zero and prime locations are taken by other tenants before they become available in the market. Overall modern office vacancy has decreased by.5 p.p (3.5% in Q4 217) during 217 and currently there is ca. 22, sq m of vacated offices in the market within the existing centres. In 218 the vacancy rate could show an upward trend, taking into account the activity in the market for previous periods and assuming all new developments scheduled to be completed in 218 will be delivered in the market. Figure 4: Distribution of Take-Up by Location in Riga, % 21% 22% 43% 16% 25% 3% 19% Skanste Centre Pardaugava Other Figure 5: Distribution of Office Lease Transactions by Size of the Accommodation in 217 8% 3% 3% -149 sq m 24% sq m sq m 16% sq m 18% 28% 1,-1,499 sq m 1,5-2,999 sq m 3,-1, sq m Figure 6: Distribution of Leased Office Space by Size in terms of Total Area Leased in 217 3% 2% 13% -149 sq m sq m sq m 12% sq m 14% 1,-1,499 sq m 1,5-2,999 sq m 17% 21% 3,-1, sq m Q4 217 CBRE Research 218 CPB Real Estate Services, Affiliate of CBRE 218 3

4 Sq m EUR/sq m/month M A R K ET R ENTS Office market activity is set to continue together with economic growth during 218. Rent rates remained stable during 217 and at the beginning of 218 asking headline rents for large office areas (starting from 3, sq m) in new developments currently under construction are starting from 12. up to 14. /sq m/month (excluding service charges, utilities and VAT), depending on the office location. During Q4 217, the net rent ranged between /sq m/month for A class office buildings, while the average rental levels for B1 class office buildings varied between /sq m/month. ANOTHER STR ONG YEAR FOR OFFICE- BASED EM P LOYM ENT GR OW TH IN 218 In 217 unemployment decreased below its natural rate and the cyclical unemployment component became negative. With registered unemployment shrinking below 7% and the headline (official) unemployment rate declining to 8.5% of the economically active population, the number of vacancies is rising rapidly. The growth of active population was noticed by around.6% in Q3 217 if compared with Q At the end of 217, there were ca. 487,6 occupied posts with time registration accounted in Riga, of which 25% comprised of office building occupiers. No considerable changes have been registered however the total number has continued to grow since 211. Nevertheless, the total estimated number of office occupied posts increased by 1.4% during 217 and this trend will continue in 218. Figures reveal that the information and communication sector (IT) is the fastest growing sector in 217, showing a 6% growth in Riga occupied posts. Table 7: Vacancy Distribution by Office Class, Q4 217 Vacancy Rate Q4 217 Q4 216 Overall 3.5% 4.% Class A.% 1.3% Class B1 3.7% 5.% Class B2 4.5% 4.% Figure 8: Net Office Rent Ranges by Class Class A Class B Figure 9: Take-Up* by Quarters, sq m Riga 2, 15, 1, 5, Q4 216 Q1 217 Q2 217 Q3 217 Q4 217 * Excluding renewals Figure 1: Selected Office Projects in 218/219 (currently under construction or reconstruction*) Project Address District Developer Office GLA, sq m Year Imperial Palace* Brivibas blvd. 21, Riga CBD Baltic RE Group 4, Jauna Teika, Teodors Gustava Zemgala Gatve 78 Teika Hanner 16,3 218 Z-Towers Ranka dambis 3, Riga Ulmana district SPI Group 24, 218 InDI BC expansion* Uriekstes St.2a, Riga Ganibu dambis Ganibu Dambja BC 4, 218 Jeruzalemes 1* Jeruzalemes 1, Riga CBD Dyninno Group 7,7 218 Business Garden Riga, 1st stage Liela St. 3, Marupe Ulmana district VASTINT 14,2 219 Akropole Riga Salaspils St.4, Riga Maskavas district Akropolis Group 9, 219 Origo ONE Stacijas laukums 2, Riga CBD Linstow 11, SWH Office Centre* Skanstes St.5/52, Riga Skanste/New CBD SWH Grupa 12, 219 Jauna Teika, Henrihs Gustava Zemgala gatve 78 Teika Hanner 22, 219 TELEGRAPH Offices* Audeju St.15, Riga CBD NBP Group 2, RedLine offices* Ganibu dambis 24a, Riga Ganibu dambis Dambis biroji 4,4 219 New Hanza, 1st stage Pulkveza Brieza street, Riga Skanste/New CBD Pillar/AB LV 14,3 219/22 *Ungoing full refurbishment/reconstruction process Q4 217 CBRE Research 218 CPB Real Estate Services, Affiliate of CBRE 218 4

5 Millions EUR Figure 1: Investment into Cash Flow Generating Property by Segment: Latvia, Office Retail Industrial Mixed-Use Hotel Other I NV ESTM ENT AND ACQUI SI TI ONS 217 In Latvia total investment amounted to ca m in 217. The most attractive asset type in Latvia during 217 proved to be the office sector (44.8%), leaving the retail and industrial sectors in second and third place with 23.8% and 23.55% of all investment volume, respectively. In 217 CBRE recorded the total investment volume for cash flow generating office buildings (including properties acquired by investment funds for redevelopment purposes, taking into account only the value of the existing property) at 86.2 m in total, showing a slight decrease by 2.8% if compared with 216. During 217 there were several office investment transactions, including the Stabu 1/4 office building, Ostas Skati located in Kipsala, Preses nams, United Oils office building and many others. New Hanza Capital expanded its currently managed real estate portfolio by acquiring three office buildings, which are located in the territory of the former State Electro-technical Factory (VEF), investing 8.46 million. In Q4 217 Northern Horizon Capital AS as the management company of Baltic Horizon Fund announced the signing of a purchase agreement regarding the office building located at Vainodes 1, Riga for ca million corresponding to an approximate acquisition yield of 7%. This was the largest investment into the office segment during 217. Average yields for prime office assets remain at around %, with the most attractive properties up to 25 basis points lower and secondary properties standing between 7.5 and 8.%, depending on location, technical condition and weighted average unexpired lease term. During 217 the most active investment funds and private investors originated from the Baltic region (5%) and Nordic region (3%). Private investors from Russia were also active in the market. Figure 11: Investment* by Segment in Latvia % 1% *Only cash flow generating commercial properties, with transaction volume above 1 meur Source: CPB Real Estate Services, part of the CBRE Affiliate Network, Q1 218 Figure 12: Investment in the Riga Office Segment by Country of Origin in % 13% 24% 7% 7% 28% 45% 3% Office Retail Industrial Mixed-Use Hotel Nordics Source: CPB Real Estate Services, part of the CBRE Affiliate Network, Q1 218 Estonia/Lithuania Latvia Russia Other Q4 217 CBRE Research 218 CPB Real Estate Services, Affiliate of CBRE 218 5

6 DEFINITIONS Total Modern Stock represents the total completed class A and B space (occupied or vacant) in the private and public sector at the survey date. Includes owner occupied (OO) space. Vacancy Rate - represents the percentage ratio of total Vacant Space to Modern Total Stock. Take-Up represents the total floor space, excluding renewals, known to have been pre-let, sold or pre-sold to tenants or owner-occupiers during the survey period. Prime Rent represents the top open-market tier of rent that could be expected for a unit of standard size (commensurate with demand in each location), of the highest quality and specification and the best location in a market at the survey date. The Prime Rent should reflect the level of which relevant transactions are being completed in the market at the time. If there are no relevant transactions during the survey period, the quoted figure will be more hypothetical, based on an expert opinion of market conditions. Absorption represents the change in occupied stock within a market during the survey period. Net Effective Rent represents a rent that would be achieved, less the incentives paid by the owner. The average net effective rent for a market is the market net base rent less incentives which are amortised over the term of lease. ABOUT CPB R EAL ESTATE SER V I CES: Part of the CBRE Affiliate Network Headquartered in Riga, Latvia from 211 Representative offices in Vilnius and Tallinn Headcount 32 people Providing services in: Valuation, Consulting & Research, Property Sales, Property & Asset Management, Tenant Representation, Agency Services Retail, Offices, Industrial & Logistics, Financial Services, Accountancy CONTACTS Kristine Jansone Vineta Vigupe Director Advisory&Transactions Head of Research & Consulting M M kristine.jansone@cbre.lv vineta.vigupe@cbre.lv OFFI CES Riga Plaza QUADRUM Baltic Business Centre METRO Plaza Mukusalas street 71, Konstitucijos pr.21a, 3.korrus, Viru valjak 2, Riga, Latvia, LV-14 Vilnius, Lithuania, LT-813 Tallinn, Estonia, EE-1111 To learn more about CBRE Research, or to access the additional research reports, please visit the Global Research Gateway at: Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CPB Real Estate Services.