MARKET OVERVIEW REPORT

H1 2018

Summary Recent Trends Market Prognosis

GDP growth in the Q2 2018 marked the 16th consecutive quarter of We expect the investment volumes to continue economic growth. Stable growth is expected in the rest of the year and postive trend in H2 2018 and 2019. Interest from serves as a basis for increased investment activity. In H1 2018 total investors and developers is expected to increase investment volume in commercial real estate was over €600 million and across all asset classes. Yields are expected to surpassed total amount from year 2017. Most of the transactions were remain stable. recorded in hotel and retail sectors.

Contents

Economic Overview 3 Office Market 4 Retail Market 5 Industrial / Logistics Market 6 HTL Market 7 Investment Overview 8 Our Services 9

Economic Overview

Summary & Prognosis Economic Growth (GDP, annual var. Croatian GDP grew by 2.8% in Q2 2018 according to Croatian Bureau of in %) Statistics, which is a 16th consecutive quarter of economic growth. The 3.5 2.9 2.7 2.7 largest positive contribution of the GDP volume change in the second 2.4 2.5 quarter of 2018 was caused by an increase in the export of goods and services. Focus Economics panellists see GDP growth in 2018 at 2.7%, moderating -0.1 slightly from 2.9% in 2017, but remaining healthy overall. Unemployment should further decrease, which should, together with strong tourism, support private consumption. Moreover, growth in fixed investment will likely accelerate thanks to stronger EU funds inflows. The inflation should remain low.

The share of non-performing loans (NPLs) in Croatia’s banking system fell to 11.2% in H1 2018 with expectation of further decreasing. Sale of non- Inflation (CPI, annual variation in %, performing loan portfolios further increased in the last two years in Croatia aop) compared to 2014 and 2015 due to the higher NPL investors’ interest for the CEE region and the greater willingness by banks to dispose of 1.9 1.9 portfolios. 1.6 Agrokor, the largest Croatian company, currently operating under the Act 1.1 on the Exceptional Administration of Companies of Systemic Importance to the Republic of Croatia, reached the Settlement Plan between the -0.2 company creditors. Settlement Plan of Agrokor’s creditors was voted in -0.5 favour by 80.20% of total claims on 4 July, 2018. -1.1 Major credit ratings for Croatia stand at: Fitch BB+ (positive outlook), Standard & Poor’s BB+ (positive outlook) and Moody’s Ba2 (stable outlook). Standard & Poor’s was the last of the three major credit rating Private Consumption (annual var. in agencies to upgrade Croatia’s outlook from stable to positive on the %) grounds of a budget surplus and steady economic growth. 3.6 3.6 Although the investor interest is growing, administrative and bureaucratic 3.4 2.9 barriers as well as lack of structural reforms continue to prevent the full 2.6 investment potential in commercial real estate sector in Croatia. 1.0 Building permits issued & planned value of works (€)

4,000 10 -1.6

9 3,500 8 3,000 7 Unemployment (% of active 2,500 6 population) 2,000 5 19.4 17.6 4 14.7 1,500 12.2 3 9.7 8.8 1,000 8.8

2 Issued b. p. in thousands in p.b. Issued 500 1

Value of planned work in millionsin work of planned Value 0 0 2013 2014 2015 2016 2017 H1 2018

Planned value of works (€) Issued building permits

Source: Croatian Bureau of Statistics Source: Colliers International / Focus Economics

3 Market Overview | H1 2018 | Croatia | Colliers International

Office Market

Supply Office Market Stock and Vacancy Total competitive office stock in Zagreb amounts to approximately 1.33 1,400 18% million m2. A class stock accounts for 44% while B class accounts for 56% 16% of the total supply. Second-tier cities with significant office stock in Croatia 1,300 are Split and . 14%

1,200 12% Significant office schemes delivered to the market in H1 2018 in Zagreb: 10% > TRIUS completed business building CENTAR ŽITNJAK, located in 1,100 Radnička Street, Zagreb. The building comprises office and warehouse 8% premises. The entire office building amounts to 16,000 m2 GLA and is Thousands 1,000 6% available for occupation. 4% 900 2% Demand 800 0% 2013 2014 2015 2016 2017 H1 Demand for office spaces was strongest for A class buildings. Gross take- 2018 up in Zagreb in H1 2018 amounted to approximately 30,000 m², an Total Stock e.o.y Yearly addition increase of approx. 40% compared to same period last year. Majority of Vacancy

lease transactions occurred in the city centre, central business district and Source: Colliers International business district east where the concentration of office buildings is the most significant. Transactions were driven by the tenants’ needs in Building permits issued for office relocation and lease renewal. We expect that take-up will further buildings & planned floor area strengthen in 2019. (Croatia) Vacancy Rate and Rents 70 180

160

60 Vacancy rate in the competitive office stock is low, currently standing at 140 50 around 4.5%, which was last recorded in 2008. Zagreb office market is 120 characterized by strong demand in A class buildings and continuous 40 100

vacancy rate drop due to slow delivery of new supply. thousands in ) 30 80 2 Prime headline rent in Zagreb has been stable during the last few years 60 20

ranging from €14 to €15/m²/month. Average rent for A class also remained 40 Building permits issued permits Building stable, despite drop in vacancy rate, standing at €12/m²/month. Average 10 20 rent in B class buildings ranges from €8 to €10/m²/month. (m area Floor 0 0 2013 2014 2015 2016 2017 H1 Pipeline 2018 Issued building permits Floor area The following projects are under construction in Zagreb area: Source: Croatian Bureau of Statistics > Developer VMD GRUPA started construction of a new office building in

Otok business district. The scheme is scheduled to be completed in H1

2019 and is already fully preleased. Zagreb Office Market – Factsheet H1 2018 > GTC group started development of Matrix Business Park on Slavonska 2 Avenue. The project will comprise two office buildings each totalling Total Stock in m 1,330,000 approx. 10,000 m² of leasable area. Matrix will be designed and Gross Take up H1 2018 30,000 constructed according to the highest efficiency standard featuring a Vacancy Rate 4.5% LEED Gold certification. Prime Headline Rent €14-15/m2 > Completion of D3 scheme within CENTAR 2000 business complex is expected in H2 2018. The new building will have 15,500 m2 GLA and Average Monthly Rent Class A €12/m2 will comprise two segments: office and hotel. Average floor size in the Average Monthly Rent Class B €8-€10/m2 2 office segment will be 1,000 m . Source: Colliers International

4 Market Overview | H1 2018 | Croatia | Colliers International

Retail Market

Supply Retail Sales & GDP growth Economic growth, high consumer spending and booming tourism have 6.0 4.7 positive impact on the retail market (retailers’ turnovers are increasing, 5.0 vacancy rate is dropping). 4.0 3.6 4.0 3.3 The most significant retail scheme delivered to the market in H1 2018 was 3.2 Designer Outlet Croatia, Zagreb, which opened its doors in June. The 3.0 2.4 3.5 outlet features a 15,000 m² NLA and more than 100 fashion and lifestyle 2.9 2.0 2.7 2.7 brands. Designer Outlet Croatia is a project delivered by IKEA Centres, 2.4 2.5 MUTSCHLER Outlet Hoding group and ROS Retail Outlet Shopping. The 1.0 latter is also engaged in the outlet’s property management. 0.0 Market newcomer Mömax, Austrian furniture store chain, opened its first big-box on Slavonska Avenue, in the east part of Zagreb.

Zagreb and Split, the biggest cities in Croatia, have the most mature and Retail Sales (annual variation in %) saturated retail markets. Development opportunities can still be found in Economic Growth (rhs, GDP, annual var. in %) secondary and tertiary cities while there is still room for offer improvement on the high street as well as through older shopping centres and department stores repositioning and convenience shopping schemes.

Source: Colliers International / Focus Economics Demand Zagreb Shopping Centre – Factsheet H1 2018 Occupiers demand is firm and comes from all types of occupiers; local and international brands already present on the Croatian market as well as Total shopping centre stock in m2 455,000 from market newcomers. High street locations and prime shopping centres Approximate prime shopping centre / are remaining to be the most sought-after premises. weighted average rent (excl. turnover €19/m2 rent) Discount fashion retailer PEPCO continued with strong expansion across Prime shopping centre vacancy rate <4% Croatia while SPAR supermarket is further strengthening its position through new openings. One of SPAR’s most significant openings in H1 2 Source: Colliers International 2018 is the new hypermarket in Rujevica (Rijeka) spreading on 3,100 m . *SC stock excludes Outlet centres, Big-boxes and The investment is worth €23 million. department stores

Vacancy & rents Shoping mall stock in m2 per 1,000 Vacancy rate in prime shopping centres stands below 4% while weighted capita, H1 2018 average rent currently stands around €19/m²/month. High street rent levels range from €30/m2 to €120/m2 greatly depending on micro location, size, 880 900 visibility and window display width. 1,381 850 770 730 740 750 Projects under construction 610 620

> Max City, (30,000 m2 NLA) is expected to be completed in Q4 2018. Max City will feature the first CineStar cinema in and once completed, will represent the largest shopping centre in the county. Total investment value is around €400 million. > Branimir Centar and Centar Kaptol in Zagreb, both acquired by Supernova group, will undergo an extensive reconstruction process and should be completed by the end of 2019, beginning of 2020, respectively. Source: Colliers International > Arena Centar, Zagreb, regarded as a prime shopping centre, will add 6,000 m2 to their current scheme and with it bring new store concepts to the market. > Shopping centar Špansko in the west part of Zagreb, is currently under construction, complex will have over 30,000 m2 and should be completed by the end of 2019.

5 Market Overview | H1 2018 | Croatia | Colliers International

Industrial / Logistics Market

Supply

Industrial and logistics market continues to be the least developed market Prime Warehouse Headline Rent 2 segment in Croatia characterized by absence of new developments and a (€/m /month) H1 2018 very limited supply of modern stock. 5.5 5 5 Majority of stock is concentrated in and around Croatian capital - Zagreb. 4.7 4.5 4.7 In H1 2018, total logistics stock in Zagreb equalled to approximately 4.1 935,000 m². Besides Zagreb and its surroundings, the most important industrial and logistics zones are Kukuljanovo near Rijeka and Dugopolje near Split.

Demand

In H1 2018 the demand has further increased for logistics stock, especially in Zagreb area. The demand was driven mainly by logistics providers, pharmaceutical and food & beverage distributors, appliance distributors Source: Colliers International and other consumer goods retailers. Due to lack of quality supply, some of the largest companies in Croatia are deciding to build logistic centres and in such way secure long term needs. The demand is strong for warehouses between 2,000 m² and 5,000 m², Zagreb Logistics and Warehouse – Factsheet H1 2018 but there is also a significant interest for modern warehouse premises above 5,000 m². Total stock in m2 935,000 Vacancy <2.5% Vacancy & rents Prime headline rent €4.5 - €5.5/m²

As a result of increased demand and limited supply, vacancy rate currently Source: Colliers International stands below 2.5%. Prime monthly headline rents for logistics premises in Zagreb ranges between €4.5/m² and €5.5/m². Average rents for older and refurbished industrial premises range from €2/m² to €4/m². Industrial Production (annual var. in %) Pipeline 5.0

> Croatian Post’s new logistic centre in Velika Gorica near the Zagreb International Airport is currently under construction. The total estimated 2.7 value of this investment is approx. €46 million. The facility is scheduled 2.5 2.5 to be built in two phases. The investment of first phase if approx. €21 1.9 million and its completion is expected at the end of 2018. On 1.5 1.2 completion of all phases, the total surface area of the complex will be 38,200 m2 on the surface of 70,000 m2. > Atlantic Group and Kamgrad signed contract for construction and long- term lease of new logistics distribution centre that is planned near Velika Gorica. Investment amounts to €18.5 million. Centre is currently under construction and completion is expected at the end of 2018 or at the beginning of 2019.

> We expect a gradual return of developers as a result of very strong Source: Colliers International / Focus Economics demand, lack of modern supply and technology trends (e.g. growth of online shopping).

6 Market Overview | H1 2018 | Croatia | Colliers International

HTL Market

Supply & Demand Croatia - Tourist overnights and arrivals (in million) In the first six months of 2018, tourists realised 6 million arrivals and 22 100 20 million nights in commercial accommodation establishments, which is an 80

increase in tourist arrivals of 12% and in tourist nights of 9% compared to 15 the same period of 2017. 60 There is a strong demand for hotels in Croatia from existing investors, 10

40 Arrivals

market newcomers and brands and operators. The investors often face a Overnights 5 lack of projects with necessary quality standard. Value-add/distressed 20 properties and brownfield opportunities are also in the focus of investors. 0 0 Performance of 5* hotels in Croatia has improved in H1 2018 yoy 2013 2014 2015 2016 2017 H1 according to Hotel Benchmarking by Faculty of Tourism and Hospitality 2018 Overnights Arrivals Management in . Occupancy rate (full capacity) for hotels in Croatia increased from 38% in H1 2017 to 41% in H1 2018. Average daily room rate increased from 8% yoy in H1 2018, from €72 to €78. Total revenue Source: Croatian Bureau of Statistics per available room increased from €44 in H1 2017 to €50 in H1 2018. Total revenue per overnight increased by 6.3% in H1 2018 compared to same period previous year. Passengers in , Split and There were several new large hotel developments in H1 2018, delivered Zagreb Airports in H1 2018 mostly by large hotel companies. Valamar Riviera d.d. made the largest 500,000 investment in Croatian tourism sector in H1 2018. In Rabac, Istria, 400,000 Valamar opened new Valamar Collection Girandella Resort 4*/5*, while on 300,000 Island of Rab and in Dubrovnik company upgraded hotels with new “adults 200,000 only” concept; 4* Valamar Collection Imperial Hotel on Island of Rab and 4* Valamar Argosy Hotel in Dubrovnik. 100,000 0 Several new hotels will open throughout the country in H2 2018. Large investments in hotel sector, predominantly in 4* and 5* hotels, are expected to continue in coming years. The investors and owners of 2* and 3* hotels are expected to continue upgrading their hotels to higher Dubrovnik Airport categories. Croatia is lagging behind other Mediterranean countries in number of large-scale mixed-use tourist resorts. There is a substantial interest from investors and developers for HTL Source: Zagreb Airport, Split Airport, Dubrovnik Airport projects across the whole coast and in two largest cities, Zagreb and Split. However, administrative barriers, one of the highest rates of VAT in the Mediterranean, lack of (skilled) work force and uncertainty over the introduction of new taxes can limit the HTL sector's potential for further investment. Floor area (m2) in issued building permits for hotels and similar Large projects under construction buildings in Croatia

> Maistra (Adris Group) is developing a new 5* hotel in on the site 250,000 of old Hotel Park. The new Hotel Park will comprise 193 rooms and 16 200,000 luxury suites. Total investment amounts to approx. €80m (market 150,000 record of €380,000 per room). Completion of the hotel is planned for the 100,000 end of 2018. 50,000 > The construction works on the tower B in Westgate complex in Split 0 started in H1 2017. The new mixed-use tower will become home to first 2013 2014 2015 2016 2017 H1 Marriot International Hotel in Croatia. Planned opening of hotel is 2018 postponed for season 2020. Floor area (m2)

Source: Croatian Bureau of Statistics

7 Market Overview | H1 2018 | Croatia | Colliers International

Investment Overview

Summary

Retail and hotel sectors recorded highest investment volumes in the Average prime yields in 2017 - Croatia Croatian commercial property market in H1 2018. According to information available and our estimate H1 2018 brought more than €600 million A class Office Yield 7.50% investment in 7 investment deals (including portfolio transactions). This Prime Retail Yield 7.00% does not include pending transactions or confidential deals. Prime Warehouse/Logistics Yield 9.25% Several transactions are currently at the closing phase. We expect investment volumes in H2 2018 to exceed the same period of previous Prime Hotel Yield 6.5% year. Hotel sector is expected to have the largest share in total investment volumes in 2018. Demand is strongest for income-producing hotels across Source: Colliers International the coast, followed by office buildings in Zagreb. We expect the yields will remain stable in the rest of 2018. Yield is calculated as NOI/Price excluding taxes and transaction costs Top transactions

Retail market > Hyprop, largest South Africa’s listed real estate investment trust, Zagreb prime blended commercial acquired over 90% stake in Zagreb shopping centres City Center one real estate yields and Croatia 10yr East and City Center one West from Morgan Stanley Real Estate Fund. bond yields (%) Total transaction amounted to around €315 million. CC Real d.o.o. 10 continued to manage centres that continue to operate under the same 09 brand. 08 07 06 Hotel market 05 04 > Most transactions in H1 2018 were privatization of state-owned hotel 03 companies. Centre for restructuring and selling (CERP) sold 77.74% 02 stake in Jadran d.d. to PBZ CO pension fund and ERSTE pension fund. 01 Jadran d.d. portfolio consists of 8 hotels, pavilions & bungalows and 00 two camps. Total transaction amounted to around €27 million. > Valamar Riviera d.d. and AZ Mandatory Pension fund acquired 55.48% stake in Hotels d.d. from Centre for restructuring and selling (CERP). Hotels Makarska d.d. portfolio consist of 4* Hotel Meteor, 3* Zagreb blended CRE yield Hotel Dalmacija and 2* Hotel complex Riviera. Total transaction Croatia 10yr bond yields amounted to around €23 million. Hoteli Makarska d.d. finally found their buyer after more than ten years of attempts to sell the state share.

> Gravosa d.o.o. from Dubrovnik has acquired 23.25% stake in HTP Source: Colliers International, Eurostat Orebić from CERP for around €1,170,000. HTP Orebić portfolio consists of 3* Hotel Orsan and 4* Hotel Bellevue, Villas Bellevue and Depadansa Bellevue.

> Croatian conglomerate Adris Grupa acquired 77.8% stake in Expertus CRE - Capital Markets Transaction which holds 58.6% stake in HUP-Zagreb. HUP-Zagreb owns 9 hotels in Volumes (€) by property sectors in H1 2018 Zagreb and Dubrovnik; mostly 4* and 5* hotels. In Zagreb the share of acquired hotels in total rooms is 27% and 73% in 4* and 5* categories respectively. > Sport-recreation centre Učka was bought by Rudan d.o.o., dominantly energy efficiency consulting company, for around €700,000. Centre consits of neglected hotel and sport-recreation zone in Nature Park 49% 51% Učka. After the renovation, it is planned to open a new tourist complex.

Retail Hotel

Source: Colliers International

8 Market Overview | H1 2018 | Croatia | Colliers International

Our Services

Summary

Colliers International Group Inc. (NASDAQ:CIGI, TSX:CIGI) is an industry- leading global real estate services company with more than 15,400 skilled professionals operating in 69 countries. Colliers International provides specialised services to owners and occupiers on a local, regional, national and international basis. The foundation of our service is the strength and depth of our specialists. Our clients depend on our ability to draw on years of direct experience in their local market. Our professionals know their communities and the industry inside out.

Whether you are a local firm or a global organization, we provide creative solutions for all your real estate needs.

LANDLORD REPRESENTATION

VALUATION & TENANT ADVISORY REPRESENTATION

REAL ESTATE COLLIERS CORPORATE MANAGEMENT SOLUTIONS SERVICES

PROJECT TECHNICAL DUE MANAGEMENT DILIGENCE

WORKPLACE SOLUTIONS

9 Market Overview | H1 2018 | Croatia | Colliers International

w

COLLIERS INTERNATIONAL 413 offices in CROATIA, SLOVENIA AND BIH Petrinjska 3, Zagreb 69 countries on +385 1 4886 280 [email protected] Colliers International Croatia 6 continents

United States: 145 Canada: 28 Latin America: 23 Asia Pacific: 86 EMEA: 131

$2.7 billion in annual revenue

€116 billion completed transactions in 2017

2 billion square feet under management

15,400 professionals and staff

About Colliers International Group Inc. Colliers International Group Inc. (NASDAQ: CIGI; TSX: CIG) is an industry leading global real estate services company with more than 15,400 skilled professionals operating in 69 countries. With an enterprising culture and significant employee ownership, Colliers professionals provide a full range of services to real estate occupiers, owners and investors worldwide. Services include strategic advice and execution for property sales, leasing and finance; global corporate solutions; property, facility and project management; workplace solutions; appraisal, valuation and tax consulting; customized research; and thought leadership consulting.

Colliers professionals think differently, share great ideas and offer thoughtful and innovative advice that help clients accelerate their success. Colliers has been ranked among the top 100 outsourcing firms by the International Association of Outsourcing Professionals’ Global Outsourcing for 11 consecutive years, more than any other real estate services firm.www.colliers.com

Copyright © 2017 Colliers International. 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.