Offices – Q1 2021

MARKET IN MINUTES Savills Research Office Market

Prague office market in Q1 2021

3.69 million sq m Total office stock in Prague

3,500 sq m Office supply in Q1 2021 (down by 85% y-o-y)

7.60% ECONOMIC OVERVIEW OFFICE MARKET HIGHLIGHTS - Q1 2021 Vacancy rate (up by 62 bps q-o-q) GDP GROWTH CPI INFLATION • Total modern office stock in Prague totalled 3.69 million sq m at the end of Q1 2021. -5.8% 2.3% • The volume of construction completions in Q1 2021 ranked 2020 AVERAGE MARCH 2021 among the lowest quarterly levels in the history of the Prague market, with only 3,500 sq m added to the office inventory.

NATIONAL GROSS MONTHLY • The share of unoccupied office premises rose to 7.60% UNEMPLOYMENT SALARY (up by 62 bps q-o-q) and reached the highest level since 90,200 sq m Q2 2017. Translated to square meters, the volume of Gross take-up in Q1 2021 3.3% immediately available office space in Prague at the end of (up by 30% y-o-y) FEBRUARY 2021 €1,445 Q1 2021 totalled 280,600 sq m. (CZK 38,525) COUNTRY AVERAGE, 2.6% Q4 2020 • Total leasing activity in Q1 2021 reached 90,200 sq m, being 2020 ANNUAL AVERAGE 30% above the gross take-up levels recorded in the first three months of 2020. However, compared to the previous EXCHANGE RATE RETAIL SALES quarter the activity was down by 9%.

• Net demand recorded in Q1 2021 amounted to 45,100 sq m, indicating a 3% q-o-q increase, but a 15% drop against Q1 45,100 sq m 26.07 -3.0% Net take-up in Q1 2021 CZK/EUR Y-O-Y CHANGE, 2020, when the net demand totalled 53,300 sq m. Q1 2021 AVERAGE FEBRUARY 2021 (down by 15% y-o-y) • The Prague office market continues to feel the effects of the pandemic seeing negative absorption of 15,500 sq m in Sources Czech Statistical Office, Czech National Bank, Q1 2021. Sources Ministry of Finance PRF, Savills Research Czech Republic - Economic Overview Q1 2021

ECONOMIC OVERVIEW GDP Growth (y-o-y change, %, 2015 constant prices)

8% • The Czech economy closed 2020 with a year-on-year GDP drop of 5.8%. A Czech Republic Eurozone deep fall in all areas of GDP components, except the general government spending, was recorded. The worsening pandemic situation at the turn 6% of the year resulted in the reintroduction of strict measures involving mobility restrictions and closure of restaurants, cafés and stores with 4% non-essential goods. As these restrictions are expected to be gradually lifted during Q2 2021 and the vaccination program is in progress, the Czech Ministry of Finance is predicting that the Czech economy will 2% slowly recover throughout the year and reach an average growth of 3.1% in 2021. The year of 2022 should bring further increase and according to 0% the macroeconomic prognosis of Ministry of Finance, GDP growth should 2011 2017 2012 2015 2013 2018 2016 2019 2014 2010 2007 2020 2008 reach 3.4%. 2009 2021(f)

-2% 2022(f)

-4% INFLATION -6% • The inflation rate in 2020 was characterized by oscillation around the upper band of the 2% inflation target. The annual average inflation rate in 2020 reached 3.2%, being the highest since 2012. However, a significant -8% slowdown was seen towards the end of 2020 and in March, the inflation Source Oxford Economics, Czech National Bank, Ministry of Finance rate fell to 2.3%. The Czech National Bank expects for the inflation rate to get nearer to the 2% target and close the year of 2021 at 2.1%. The inflation CPI Inflation and 10Y Government Bond rate in 2022 is predicted to oscillate around the inflation target and average at 2.2%. 8% 10Y Government Bond Inflation rate (Czech Republic) 7% Inflation rate (Eurozone)

RETAIL SALES 6%

• Even though the tighter pandemic restrictions were partially eased in 5% December 2020 and non-food sales reached positive figures (+1.4% year- on-year), in January 2021, retail sales fell more than expected. Compared 4% to the same period of 2019, a drop of 6.4% was recorded. Although weaker sales are foreseen in Q1 2021 due to the unfavourable pandemic situation, 3% a slight recovery was visible in February sales. At the beginning of April, the pandemic started showing signs of improvement and therefore the 2% restrictions are expected to be lifted in the course of Q2 (including the reopening of stores and services). As a result, retail sales are expected to 1% gradually increase in the course of 2021 and reach more positive levels. 0% 2011 2017 2012 2013 2015 2018 2016 2019 2014 2010 2007 2020 2008 2009 2021(f) 2022(f) UNEMPLOYMENT 03/2021 Source Oxford Economics, Czech National Bank • The effects of the deep economic recession caused by the COVID-19 pandemic on the labour market were significantly lowered by the government measures aimed at employment support. However, the Retail Sales (y-o-y change, %) unemployment rate in the Czech Republic rose by 60 bps compared 25% 25% to 2019 and in 2020 reached an annual average of 2.6%. According to Retail sales (excl. automotive) the macroeconomic prognosis of the Czech Ministry of Finance, the Food Non-food 15% 15% unemployment rate will rise to 3.3% in 2021. The unemployment growth Automotive will, however, be slowed down by continuing government measures and renewed demand for labour. 5% 5%

• In 2020, unemployment rate in the regions changed significantly. Prague -5% -5% traditionally reports one of the lowest annual rates in the country. 11/2020 01/2021 12/2020 02/2021 01/2020 10/2020 07/2020 02/2020 03/2020 05/2020 08/2020 06/2020 09/2020 However, in the final quarter of 2020, Prague unemployment reached 04/2020 -15% -15% 3.10% (a y-o-y increase of 180 bps), making it the region with the fifth highest unemployment rate. This was mainly caused by Prague's high dependence on tourism, which was severely impacted by the pandemic. -25% -25% The same effect was also visible in the Karlovy Vary region, which is also highly dependent on tourism. The unemployment here increased to 6.10% -35% -35% in the last quarter of 2020 (being up by 230 bps y-o-y). In Q4 2020, the lowest unemployment rate was recorded in the regions of Pardubice and -45% -45%

Zlín, where it remained under 2.0%. Source Czech Statistical Office, Savills Research Czech Republic - Economic Overview Q1 2021

Unemployment Rate

14% Czech Republic Prague Eurozone

12%

10%

8%

6%

4%

2%

0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021(f) 2022(f)

Source Oxford Economics, Czech Statistical Office, Ministry of Finance

Czech Republic Regional Unemployment Rate

7% Q4 2018 Q4 2019 Q4 2020 6%

5%

4%

3%

2%

1%

0%

Source Czech Statistical Office

Czech Republic Regional Gross Monthly Salary

48,000 CZK Q4 2018 Q4 2019 Q4 2020 44,000 CZK

40,000 CZK Country's Average in Q4 2020

36,000 CZK

32,000 CZK

28,000 CZK

24,000 CZK

20,000 CZK

Source Czech Statistical Office Prague Office Market - Q1 2021

EXISTING OFFICE STOCK AND NEW SUPPLY New Supply (sq m) and Vacancy Rate (%)

• The first quarter of 2021 saw a major decrease in new supply. Only New completions: Q1 Q2 Q3 Q4 Vacancy rate: 3,500 sq m of office space was added to the Prague office stock (the Expected completions least since Q1 2016), demonstrating a 82% drop compared to the previous quarter. The decline is even more significant in a year-on-year comparison, showing a 85% drop.

• The new supply in Q1 2021 consisted of two refurbishment projects, Hybernská 1 in bringing additional 1,500 sq m to the office stock, and the Olbrachtova 5 in with 2,000 sq m of new office space.

• Total modern office stock in Prague stood at 3.69 million sq m in Q1 2021. The largest office districts were Prague 4 (965,000 sq m), (636,000 sq m) and (579,000 sq m).

• The development pipeline of under construction and refurbishment projects increased from 136,000 sq m at the end of 2020 to 200,000 sq m in March 2021. The annual new supply in 2021 is expected to reach 91,300 sq m, which would be 40% less than in 2020 and the lowest annual volume of new completions since 2016. The largest developments, anticipated to be delivered in 2021, are the Harfa Business Centre - B in (30,700 sq m) and the Bořislavka Centrum in (25,600 sq m).

• The most extensive construction was under way in the Prague 8 city district, with development pipeline amounting to 43,400 sq m. Prague Source PRF, Savills Research 7 followed thanks to the PORT 7 construction commencement. Once completed, this project should bring an additional 36,000 sq m to the Largest Projects Under Construction Prague office stock. On the other hand, Prague 4 and did not see any construction activity in Q1 2021. PROPERTY SIZE DEVELOPER DELIVERY Harfa Business Center - B 30,700 Kaprain Group 2021 PORT 7 30,600 Skanska 2023 OCCUPIER DEMAND Bořislavka Centrum 25,600 KKCG 2021 Masaryčka (A+B) 22,800 Penta 2023 • The overall office leasing activity in Q1 2021 came to 90,200 sq m. DOCK IN FIVE 21,600 Crestyl 2022 Despite a 30% y-o-y rebound in gross take-up levels, the volume of new transactions reflected a 9% decline compared to the previous quarter and Source Savills Research a 17% drop against the 12-quarter average. Total Vacant Stock and Take-up • Gross leasing activity recorded in Q1 2021 was mainly generated by companies from the Pharmaceutical and IT sectors. Together, these two occupier groups accounted for 40% of the Q1 gross take-up.

• From a geographical perspective, the total leasing activity in Q1 2021 was traditionally dominated by the Prague 4 city district, where tenants signed lease commitments for offices totalling 36,700 sq m. This represented 41% of the city’s Q1 gross take-up. The second most active was Prague 5 with leases totalling 13,000 sq m, and ranked third with a gross take-up of 11,500 sq m.

• With 45,100 sq m of net demand recorded in the first quarter, Prague's market deal volume remains below pre-pandemic levels, specifically 15% down on the largely pre-pandemic Q1 2020 and 31% below the 12-quarter average. However, tenants were slightly more active as evidenced by the 3% increase in transaction volume compared to the previous quarter. Additionally, Q1 2021 was Prague’s most active in the past four quarters.

• The share of renegotiations declined from 51% recorded in Q4 2020 to 46% in Q1 2021. This converts to a transaction volume of 41,500 sq m. The share of subleases decreased to 4% and stood at 3,600 sq m.

• The largest transaction in the first quarter was signed by the pharmaceutical company Novartis, who renewed their 14,300 sq m lease at Gemini B in Prague 4.

Source PRF Prague Office Market - Q1 2021

OFFICE VACANCY Vacancy and Premises Under Construction

• Overall vacancy rate in the Prague office market rose to 7.60% in the first quarter of 2021 from 6.98% in the fourth quarter of 2020. In a year-on- year comparison, vacancy increased by 220 bps and reached the highest level since Q2 2017. This vacancy rate translated into 280,600 sq m of office space immediately available for lease.

• The volume of office space offered for sublease grew by 17% compared to the previous quarter and totalled 75,500 sq m. Adding these sublease opportunities to the officially unoccupied premises, the citywide vacancy rate would reach 9.6%, being the highest since the end of 2016.

• The lowest occupancy levels can be found in Prague 6, where the vacancy rate increased to 14.5%. The Prague 9 submarket followed with 19,600 sq m of vacant stock and vacancy rate of 13.0%. On the contrary, the highest occupancy levels were registered in the districts of and Prague 8, however, even there the vacancy rate exceeded 5.0%.

Source PRF, Savills Research

RENT LEVELS Largest Transactions of Q1 2021

• Regardless of the slowdown in net take-up and significant increase in TENANT PROPERTY SIZE (sq m) DEAL TYPE vacancy rate caused by the Covid-19 pandemic, prime headline rents Gemini B, remained flat. Novartis 14,300 Lease renewal Prague 4 • The Prague city centre (CBD) offers premium-grade buildings as well as BB Centrum B, FLEKSI prostor 3,300 New lease lower quality office space in B-class and historic buildings. The highest Prague 4 quality offices on top floors in the city centre continue to be offered for more than €25.00 per sq m per month, but there are also modern Sweco Táborská 31, 2,900 Lease renewal premises with rent levels spanning from €16.50 to €20.00 per sq m a Hydroprojekt Prague 4 month. Monthly headline rents for modern offices outside the city Aspira Business Centre, centre remained between €13.00 and €16.50 per sq m. Livesport 2,200 Expansion Prague 5

Source PRF

Quarterly Gross Take-up in Prague Districts (sq m)

60,000 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 50,000

40,000

30,000

20,000

10,000

0 Prague 1 Prague 3 Prague 4 Prague 5 Prague 6 Prague 7 Prague 8 Prague 9 Prague 10

Quarterly Office Supply in Prague Districts (sq m)

45,000 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Prague 1 Prague 2 Prague 3 Prague 4 Prague 5 Prague 6 Prague 7 Prague 8 Prague 9 Prague 10

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Research team Lenka Pechová Katarína Mizerová Senior Research Analyst Junior Research Analyst 00420 604 387 407 00420 220 413 004 [email protected] [email protected]

Office Agency Team Pavel Novák David Gajdoš Kajetán Čásenský Head of Office Agency Office Consultant Office Consultant 00420 724 032 844 00420 220 413 004 00420 727 943 680 [email protected] [email protected] [email protected]

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