Office Market in Georgia PREPARED FOR: 2017 Contents

Executive Summary 3

Country Profile 4

Business Environment 5

Economic Outlook 6

Tbilisi Office Market Overview 8

Regional Overview 17

Conclusions and Outlook 19

Appendix 1 - Real Estate Registration and Construction Permit 20

Appendix 2 - Primary Information Sources, data used for the study, definitions and assumptions 23

Disclaimer 25

Colliers Georgia at a Glance 26

Colliers Global Stats at a Glance 27

Axis Towers

2 Colliers International Georgia EXECUTIVE SUMMARY

Executive Summary Office Market is becoming more favourable for tenants. The addition of King David to the modern office stock began Tbilisi’s shift to a more tenant-oriented market. Axis Towers will only increase competition in the sector, improving the city’s quality-to-price value. Meanwhile, excess supply resulted in lower rents, a trend likely to continue. Owner occupied offices still make up half of the Georgia’s office stock. Though the volume of Georgia’s leasable office space outgrew that of owner-occupied stock in 2017, the country’s lack of available space remains a challenge. Over the last decade, the majority of Georgian banks were underserved by the city’s office offerings and chose or were required to buy or build their own offices to meet their needs. Most state organizations have owned their offices since the Soviet era. Owner-occupied office stock is expected to increase in the next few years as the government continues development on a new area for administrative offices, and the TBC Bank begins construction on their new headquarters near Lisi Lake. Business House development is scheduled to begin in 2018 in the Ortachala District. It will be Georgia’s first official LEED certified building, offering every available public service in one location. On the other hand, declining prices in modern business centres (BCs) are creating an opportunity for the market to shift towards leasable office areas. Though Tbilisi’s modern office stock is growing, the city remains far behind comparable cities. In 2017, the King David BC opened in Tbilisi, adding another 12,000 sq m to the city’s A class portfolio and representing a 32% increase in the class. Axis Towers, another prominent BC project scheduled to open by the end of 2018, will add 15,000 sq m to the city’s A class stock. While the addition of King David and Axis Towers will increase the city’s A class business centre area by 72%, Tbilisi’s total stock will remain low as compared to major Eastern European cities. Since 2015, net take up has grown at half the pace of supply growth. Tbilisi’s leasable modern office stock has grown by 33k since 2015, while net take up amounted to just 14k in the same period. More than half of the increase in leasable stock was generated by A class space, while B+ class represented 33%. Net take up, on the other hand, was boosted primarily by B+ class, which has accounted for 56% of the net take up since 2015. Tbilisi remains Georgia’s top supplier of office space. With regional office markets still largely undeveloped, Tbilisi provides 94% of the country’s total office space, and is characterized by its high stock of owner-occupied offices. Outside of Tbilisi, office spaces are primarily low-quality King David commercial properties and residential units. No major changes occurred during the past few years.

3 Colliers International Georgia COUNTRY PROFILE Background Georgia is the most active economic center in the region. With a liberal tax code, corruption free government, and significant opportunities for foreign investment, it provides a highly supportive business environment.

At the crossroads of Europe and Asia, Georgia borders Turkey, Armenia, Azerbaijan, and Russia. The country KEY FACTS occupies an area of 69,700 square kilometers (sq km) and is home to a population of 3.7 million people. The country’s land borders run a length of 1,839 kilometers (km), while the Black sea coastline is 315 km. During last two decades, Georgia has implemented large-scale reforms that have led to political and economic transformation. It has strengthened its democracy and furthered its relationship with the European Union (EU). Georgia has also made business development within the country a top priority through encouraging 3.7million sq km entrepreneurship, attracting private investments, and shifting tax incentives, thereby positioning itself as an 69.7K attractive option to the international business world. With its unique cultural heritage and exuberant hospitality, Georgia’s tourism industry continues to grow and POPULATION AREA thrive, further bolstering economic growth. Government CAPITAL CITY OF GEORGIA TBILISI Georgia is a parliamentary republic. Parliamentary elections are held every four years. Georgia’s parliament is located in Kutaisi City and acts as the representative body for the country, exercising legislative power and OFFICIAL LANGUAGE GEORGIAN developing domestic and foreign policy. As an executive council of government ministers, Georgia’s cabinet is CURRENCY GEORGIAN LARI (GEL) headed by Giorgi Kvirikashvili, who is a member of the majority “Georgian Dream Party.” Based on accountability, citizen participation, technology, and innovation as its guiding values, today’s government GDP PER CAPITA, 2016 3864.6 USD continues to make European and Euro-Atlantic integration a primary strategic objective. UNEMPLOYMENT RATE, 2016 11.8% Legal Framework AVERAGE MONTHLY SALARY, 2016 375 USD The Georgian Constitution, adopted in 1995, lays out the structure of the national government and defines its authority and function. Georgia’s court system has three branches: the Courts of First Instance (District or City LIFE EXPECTANCY 72.7 years Courts), the Appellate Courts, and the Supreme Court. The Courts of the First Instance have jurisdiction over all civil, criminal, and administrative cases. Decisions from the Courts of the First Instance may be appealed to the Appellate Courts and further appealed to the Supreme Court. Labor Market Overview As an alternative to litigation, Georgian laws allow arbitration both in local as well as international arbitration institutions. Georgia is a member of the International Centre for Settlement of Investment Disputes (ICSID). Georgia’s labor force comprises approximately 1,998,300 people. The Public service hall in Georgia provides customers with state services including business registration and unemployment rate is 11.8%, which is lower than the 14.8% average property registration through ‘one-stop-shop’ principle that ensures efficient service delivery. over the last decade. As of December 2016, 14.9% of the working population are employed by public sector, while 85.1% work in the non- Property Ownership & Non-Agricultural Lands public sector. Georgia’s labor force is well-educated, multi-lingual and relatively low cost. In Georgia property rights are recognized and protected by the Law. An owner has the right to possess, use and dispose of his or her property. The rights of individual owners to possess, use and dispose of land are regulated by the land legislation. There is no restriction on non-agricultural land ownership in Georgia. According to the Heritage Foundation Index, Georgia has substantial improvement in property rights and is 11% above the world average.

4 Colliers International Georgia BUSINESS ENVIRONMENT

International Rankings GLOBAL COMPETITIVENESS INDEX 2017-2018 Georgia has improved its status as a free economy thanks to its fiscal policy, regulatory efficiency, and open market policies. According to the World Bank’s Doing Business report 2018 , Georgia ranks 9th for ‘ease of doing business’ among 190 economies, 4th for ‘ease of starting business’, and 4th for ‘ease of registering property’. In 2017 Fitch Ratings has affirmed Georgia's Long-Term Foreign Currency Issuer Default Rating at 'BB-' with a Positive Outlook. Standard &Poor’s and Moody’s rated Georgia as ‘BB-’ and ‘Ba2’ respectively. Georgia has been among the top ‘most improved’ countries four times in the past 13 years. Registering a new business takes a maximum of two days and requires no minimum capital requirements. According to the ‘Heritage Foundation Index of Economic Freedom 2018,’ Georgia’s economy is categorized as Mostly Free, ranking 16th across 180 countries. Georgia remains the least corrupt country in the region. According to Transparency International, Georgia remains the top performer among the Eastern Partnership countries. Foreign investors in Georgia are guaranteed equal rights to those of Georgian citizens. After payment of taxes foreign investors are entitled to repatriate the earnings (income) gained from investments and other funds abroad.

Tax Climate Source: World Bank, Colliers International In order to attract investments and boost economic growth, an Estonian-type tax model was adopted in 2017 that exempts undistributed earnings from profit tax, and instead taxes distributed earnings only. Georgia has a liberal EASE OF DOING BUSINESS 2018 tax code that includes only six types of taxes: Profit Tax (15%), Personal Income Tax (20%), Value Added Tax (18%), Import Tax (0%, 5% or 12%), Excise Tax (on selected goods), and Property Tax (up to 1%). Georgia has 9 Double Taxation Avoidance treaties with 52 countries. Georgia Lithuania THE WORLD CORRUPTION RANKING, 2017 Latvia Belarus Moldova Romania 46 Armenia 59 Bulgaria 71 68 81 Georgia Azerbaijan Romania Turkey Bulgaria Belarus 107 Turkey Ukraine 122 122 76 130 Armenia Azerbaijan Moldova Ukraine

Source: Transparency International, Colliers International Source: World Bank, Colliers International

5 Colliers International Georgia ECONOMIC OUTLOOK

Overview

Georgian economy performed well in 2017; GDP growth picked up to 4.8%.This boost was largely driven by REAL GDP GROWTH double-digit export growth that worked to improve the trade balance. Based on preliminary data, it is estimated that the annual export rate grew by 29% year-over-year (y-o-y). According to the National Bank of Georgia’s %, year preliminary data tourism revenues grew by 27% and money transfers also increased by 20%, narrowing the 6.4 current account deficit. 5.5 As Georgia’s principal trade partner economies such as Russia, Iran, and the EU are recovering, we should expect 4.8 5.0 to see an increase in Georgia’s export capacity. Georgia has free trade regimes with countries of Commonwealth 4.6 4.5 of Independent States and Turkey; Georgia has already signed free-trade agreements with the EU (DCFTA), the 4.2 4.8 European Free Trade Association (EFTA) states, and China, and negotiations are currently underway for free- 3.4 trade with India. 2.9 2.8 3.6 According to the International Monetary Fund’s forecast, Georgia will maintain the economic growth at around 4- 3.3 5.5% in 2018-2021. The Georgian government is committed to fiscal sustainability and restraining current 2.9 3.0 3.0 spending. Therefore, the fiscal deficit is expected to narrow through 2018-20. 2.5 2.1 Exports 1.0 -0.1 Georgia’s leading trade export partners in 2017 were Russia, Azerbaijan, Turkey, Armenia, and China. Exports to 2012 2014 2016 2018 2020 the EU countries increased by 13% y-o-y and represented 24% of the total exports; exports to the CIS countries that rose significantly by 60% y-o-y amounted to 43.3% of the total exports. Georgia Caucasus F'cast Fast-growing Sectors Source: Colliers International, Geostat, IMF The fastest growing sectors during the first nine months of 2017 were construction (up 12%), hotels and restaurants (up 11.9%), mining and quarrying (up 7.2%), financial intermediation (up 7%), and real estate NOMINAL GDP STRUCTURE, 2016 operations (up 6.9%).

REMITTANCES, 2012-2017 CURRENCY FLUCTUATIONS (LCU PER USD), Y-O-Y % CHANGE 1,600,000 30% 90% 1,400,000 20% 1,200,000 70% 10% 1,000,000 800,000 0% 50% 600,000 -10% 400,000 30% -20% 200,000 10% - -30%

2012 2013 2014 2015 2016 2017

2017

2013

2015

2012

2014 2016 -10% Ukraine Azerbaijan Armenia Total Remittances, thousands USD (LHS) -30% Growth, y-o-y (RHS) Russia Turkey Georgia

Source: National Bank of Georgia, Colliers International Source: World Bank, Colliers International Source: Geostat, Colliers International

6 Colliers International Georgia ECONOMIC OUTLOOK

Foreign Direct Investment (FDI) FDI INFLOWS BY YEARS (mln, USD) Based on preliminary data FDI inflows in 2017 increased by 16.2% y-o-y and amounted to USD 1.86 billion (bn). FDI growth in the construction, and hotel and restaurant sectors accelerated by 114% and 58%, respectively. FDI is expected to remain high into the 2020s due to two factors. The first will stem from Chinese road and rail investments that plan to link with new, long-distance trade routes (boosting traffic via Turkey, 1,818 1,862 Azerbaijan, and Iran). The second increase is expected to come from foreign investors seeking to do 1,653 1,603 business in a low-tax, lightly-regulated regional base. Approval by the European Bank for Reconstruction and Development (EBRD) to finance the Nenskra Hydropower Plant project (HPP) and the offer of USD 1,023 1,021 285mln in extended funds from the IMF also worked to strengthen external financing assurances. Inflation 2012 2013 2014 2015 2016 2017* Although the headline inflation in 2017 was at 6%, above the central bank’s target (3%), inflation is expected to slow down starting in early 2018. According to the IMF, Georgia’s monetary policy rightly *Preliminary data places emphasis on price stability. In addition, reforms continue to support price stability. Georgia’s Source: Geostat, Colliers International Larization program has triggered the decrease in the dollarization of deposits and loans.

INFLATION, % 9.0

8.0 8.6% 7.0 16.3% Transport and Communication 10.1% 6.0 Headline Inflation Construction

Core Inflation 5.0 4.8% Financial Sector FDI BY SECTORS 15.8% Real Estate 4.0 2017 Energy 3.0 16.0%

2.0 Hotels and Restaurants Others 1.0 28.3%

0.0

Jul17

Jul15

Jul16

Jan17

Jan15

Jan18

Jan16

Apr17

Oct17

Apr15

Oct15 Apr16 -1.0 Oct16 Preliminary data Source: Geostat, Colliers International Source: Geostat, Colliers International

7 Colliers International Georgia Tbilisi Office Market Overview 2017

Axis Towers TBILISI OFFICE MARKET OVERVIEW

Supply Tbilisi’s total office space amounts to about 1 million sq m. 51% of the stock is a leasable area, that GROSS LEASABLE AREA OF MODERN OFFICE STOCK comprises of two major types: Modern BCs and traditional BCs. A, A-, B+ and B classes are part of the Forecast modern office stock, whereas C and D classes are represented in traditional BCs. 211,417 196,253 7,020 Due to regional and country-wide economic stability, Georgia’s modern leasable office stock has grown 7,020 over the past few years, now amounting to 176,000 sq m (38% of total leasable area). Y-o-Y growth in 176,253 7,020 leasable modern office stock for 2017 saw a 15% increase. The most important market player to appear 153,531 recently is King David (BC), offering A class offices with a total of 12,000 sq m GLA. 143,468 7,020 103,375 133,805 131,253 7,020 97,911 7,020 7,020 The share of owner occupied office stock stands at 49% and has not seen any important changes in the past 111,049 92,911 decade. 7,020 82,189 82,189 Supply has grown in Tbilisi’s central districts and on the city’s periphery. Two BCs opened in Didube in 2017, 75,100 72,548 29,487 with a third scheduled to open in 2018. Containing 38% of the modern office stock supply, the Saburtalo 56,874 26,787 26,787 district remains Tbilisi’s primary office location. Tiflis and IG Development are planning to build new BCs in 26,787 22,724 the district, which will add a total of 12,464 sq m to the supply. 20,150 20,150 20,150 64,535 71,535 49,535 37,535 Mtatsminda is the most prestigious office district, represented by only A and A- class BCs. While it contains 27,005 31,535 31,535 31,535 20% of the current supply, no major projects are under construction. 2012 2013 2014 2015 2016 2017 2018F 2019F

The most important project under development is Axis Towers in the Vake district. This project, along with A A- B+ B S-1 development, will double Vake’s available office stock.

7,020 5,000 12,760

49,535 292,250 16,911 LEASABLE 54,332 LEASABLE MODERN MODERN TOTAL SPACE OFFICE SPACE 456,017 OFFICE SPACE DISTRIBUTION DISTRIBUTION DISTRIBUTION (sq m) BY DISTRICTS (sq m) 18,316 92,911 (sq m)

26,787

176,253 11,025 25,124

Saburtalo Mtatminda Didube Vake Owner Occupied Modern BCs Traditional BCs A A- B+ B Chughureti Krtsanisi Isani

Source: Colliers International Source: Colliers International Source: Colliers International

9 Colliers International Georgia TBILISI OFFICE MARKET OVERVIEW

Demand Demand for leasable modern offices has grown over the past two years. After a 29% depreciation of the Georgian OFFICE SPACE NET TAKE UP Lari in 2015, the currency stabilized, giving the market an opportunity for growth. A class business centres experienced low tenant flow during 2015-2016, due in large part to superior tenant stability as compared to other classes. In contrast, net take up in 2017 amounted to 2,166 sq m as a result of new offerings in the class (such as the King David BC) and lower rental prices that allowed companies to upgrade to more prestigious offices. 5,443 4,665 3,819 2,299 Demand for A- class space increased in 2015-2016 , attributable to the opening of the new MGI and Belinski BCs 2,166 in 2015, which were fully occupied in a short period of time. The Ministry of Economy leased the largest portion of 884 space, which moved to Belinski after selling its previous building. In 2017, net take up for the class decreased by A A- B+ B 1,500 sq m, while 6,000 sq m worth of leases were terminated. 63% of this area was vacated by companies who (1,522) purchased their own offices, with the remaining 37% moving to more prestigious A class spaces. . (2,886) When Georgia’s currency depreciated in 2015, the B+ class office space market was hit the hardest, dropping by 2015 2016 2017 2,900 sq m in total leased space. In 2016, a new BC at Chavchavadze 29 appeared and quickly reached full occupancy, driving positive net take up. In 2017, new demand in B+ class stock was mainly generated by a number of small companies. Source: Colliers International The major international tenants include: EY, Deloitte, PwC, KPMG, Samsung, BBC, EBRD, ADB, Microsoft, JTI, Phillip Morris, Booking.com, Rompetrol etc.

DEMAND DISTRIBUTION IN BUSINESS CENTRES CUMULATIVE NUMBER OF REGISTERED COMPANIES BY REGIONS Forecast

30% 30% 37% 37% 35% 46,797 47% 41,465 18,489 8% 10% 36,272 15,867 22,520 8% 10% 31,853 11% 14,186 16% 10% 19,649 10% 12,563 17,184 20% 18% 20% 12% 14,816 16% 24% 8% 8% 11% 18% 141,073 126,334 15% 15% 103,152 113,923 3% 13% 14% 5% 19% 12% 12% 11% 14% 15%

2012 2013 2014 2015 2016 2017 2014 2015 2016 2017 Tbilisi Adjara Imereti Rest of Georgia Professional Services Banking, Insurance & Investment Public Trade Pharmacy, Beauty & Healthcare Other

Source: Colliers International Source: Colliers International

10 Colliers International Georgia TBILISI OFFICE MARKET OVERVIEW

AVERAGE AREA LEASED IN MODERN OFFICE CENTRES (sq m) The average leased area has been under 500 sq m for the past six years, and there are a limited number of companies requiring a larger space. Demand is also partially satisfied by the availability of owner occupied office spaces. Even though, B+ has the largest number of International tenants, 41% of the leased area is in A class. International companies that require A class offices, on average lease about twice as much area (446 sq m) as in B+ (229 sq m) and B (216 sq m) class BCs.

432 Share of international companies, both in numbers and total area 394 378 leased, is the highest in A class business centres. 70% of tenants in 335 338 351 the class are international and they occupy 78% of total area leased in A class offices. Performance indicators

2012 2013 2014 2015 2016 2017 The weighted average rental rate in A class BCs has declined over the past six years, decreasing by 26% since 2012 to USD 21.9. This Source: Colliers International drop was driven in large part by the rise in competition, as the class’s leasable office stock increased by 77% from 2012-2017. Data suggests that this trend is likely to continue and we expect prices to stabilize at about USD 20 by 2021.

WEIGHTED AVERAGE RENT BY CLASS (USD) PRICE DYNAMICS IN A CLASS BUSINESS CENTRES

29.7

27.7

$23.5 $22.8 $21.9 $20.3 24.7 $19.0 23.5 $16.5 16.8 14.7 14.1 22.8 15.3 16.4 15.8 14.5 14.6 13.3 12.2 14.8 21.9 12.2 6.9 6.9 6.3 4.6 5.8 6.0

A A- B+ B 2016 2017 Previous tenants New tenants Before Renewal After Renewal 2012 2013 2014 2015 2016 2017 Source: National Agency of Public Registry, Colliers International Source: National Agency of Public Registry, Colliers International

11 Colliers International Georgia TBILISI OFFICE MARKET OVERVIEW

Since 2015, the vacancy rate has been increasing in A class BCs VACANCY RATE BY CLASS 37% because of the Tabidze 1 expansion (in 2016) and the opening of King David BC (in 2017). The 2015 currency depreciation saw B+ class BCs experience higher vacancy rates rather than reduced prices. After a small increase in occupancy during 2016, the vacancy rate reached 20% 25% due to new BC stock. 23% 23% 24% Today, A- and B class seem to have stabilized, with only minor 20% 18% changes in rent prices and vacancy rates. 18% 16% 16% 16% Mtatsminda is the most prestigious district for BCs with Tbilisi’s highest weighted average prices. Vake is close behind, with rates 12% 12% 11% 16% 11% only USD 0.7 less than Mtatsminda’s. Completion of Axis Towers 14% 9% 8% should increase Vake’s attractivness and prices in coming years. 5% Saburtalo has exceeded Krtsanisi, due primarily to the King David 4% 8% 4% BC; it is expected to overtake Isani as well. Didube remains the least prestigious district for BCs, with largely B class space. 3% Business centres offer leasable parking spaces to their tenants, 2012 2013 2014 2015 2016 2017 with prices varying by class. In A and A- class BCs, parking spaces A A- B+ B cost approximately USD 100-150 per month, while B+ spaces run Source: Colliers International around USD 50-100. In the majority of BCs tenants pay additional service charges for property management that usually includes: cleaning of common areas, security, repair & maintenance, common area electricity, HVAC and utilities. The service fee for A and A- ranges between WEIGHTED AVERAGE RENTS BY DISTRICTS (USD) USD 2.5-8 and between USD 0.5-2.5 in B+ per sq m.

28.4 26.6 22.6 22.3 20.5

23.9 16.8 16.2 22.0 15.5 23.0 21.9 19.3 13.5 13.8 20.6 20.6 18.1 17.7 17.7 13.3 18.3 17.7 16.9 15.5 15.8 15.6 14.5 14.6 13.9 13.6 14.4 14.8 14.1 13.7 13.6

6.9 6.9 6.4 4.6 5.8 6.0

Mtatsminda Vake Isani Saburtalo Krtsanisi Chughureti Didube 2012 2013 2014 2015 2016 2017

Source: National Agency of Public Registry, Colliers International

12 Colliers International Georgia TBILISI OFFICE MARKET OVERVIEW

TOTAL SUPPLY OF MODERN BUSINESS CENTRES IN TBILISI BY DISTRICTS (sq m) TOTAL LEASABLE AREA IN TBILISI MODERN BUSINESS CENTRES BY DISTRICTS (sq m) 5,000 No modern BCs 12,760 5,000 Didube 12,760 16,911 1-10,000 5,000 12,760 16,911 36,016 10,001-20,000 5,000 16,911 5,000 12,760 33,316 20,001-40,000 5,000 5,000 12,760 16,911 18,316 26,747 12,760 12,760 16,911 21,747 26,747 40,000+ 5,000 19,463 16,911 18,316 12,760 18,316 35,187 12,680 12,680 11,025 19,463 7,020 7,020 11,025 35,187 35,187 35,187 12,680 22,550 22,550 25,124 Chughureti 7,020 18,020 78,796 Isani 54,332 54,332 54,332 54,332 66,332 66,332 36,106

Saburtalo 2012 2013 2014 2015 2016 2017 2018F 2019F Saburtalo Mtatsminda Didube Vake Chughureti Krtsanisi Isani Source: Colliers International Vake VACANCY RATE BY DISTRICT IN TBILISI MODER BUSINESS CENTRES 40%

35%

30%

25%

20%

15%

10% Krtsanisi 5% Mtatsminda 0% 2012 2013 2014 2015 2016 2017 Mtatsminda Vake Isani Saburtalo Krtsanisi Chughureti Didube

Source: Colliers International

13 TBILISI OFFICE MARKET OVERVIEW

Benchmarking While Tbilisi’s modern office stock is much lower than that found in comparable cities, it is distinct from TOTAL MODERN OFFICE STOCK (sq m), FUTURE SUPPLY (sq its eastern European counterparts in almost every way. m) AND GDP PER CAPITA (USD) In Bucharest, Belgrade, Krakow, and particularly in Kiev, the mature IT sector consumes the largest 27,811 share of modern BC supply, whereas in Tbilisi IT is not represented in the top five sectors leasing space. 345 26,031 Further differences include the share of international tenants. With the exception of Kiev (where the 23,626 share is just under 70%), almost every comparable city is 80% occupied by international companies while the share of such companies in Tbilisi is only 52%.

71 Thousands Lease size is perhaps the most important distinction between Tbilisi and comparable cities. In 14,512 274 Bucharest, Belgrade, and Krakow, more than 75% of companies lease spaces that are at least 1,000 sq 2,268 m. In Kiev, spaces between 500 – 1,000 sq m are the most popular, while in Tbilisi, 83% of companies 27 9,997 8,272 lease areas under 500 sq m. 137

1,558 Investment in Tbilisi’s office market still has one of the highest yields in Europe. Kiev has a higher prime 1,100 693 626 35 yield of 13%, due to political instability in recent years. 176 Bucharest Kiev Krakow Belgrade Riga Tbilisi

2017 Under Construction GDP per Capita

Source: Colliers International

PRIME CBD RENT (USD/sq m/MONTH) CBD PRIME YIELD VACANCY RATE

28.0 28.0 13.0% 22.6% 21.3 21.6 10.0% 19.0 19.0 17.9 9.0% 14.4% 16.0 16.9 16.0 16.3 15.5 7.5% 14.0% 6.5% 13.1% 5.9% 9.8% 9.8% 7.6% 9.0% 7.2% 6.0% 5.0% 4.0%

Kiev Tbilisi Bucharest Belgrade Riga Krakow 2017 Tbilisi Bucharest Krakow Kiev Belgrade Riga

2016 2017 Kiev Tbilisi Belgrade Bucharest Riga Krakow 2016 2017 Source: Colliers International Source: Colliers International Source: Colliers International

14 Colliers International Georgia TBILISI MODERN BUSINESS CENTRES MAP TBILISI OFFICE MARKET OVERVIEW

MDM

BCV IG Development Tiflis BC

King David BC

S-1 Axis Towers Grato Aword

Green Building

Pixel 34 Merani MGI GMT PLAZA

Belinski BC

Mantashevi Rows Besiki BC

Tabidze 1 Metekhi BC A Class Business Centres

BCL Maidan Palace A- Class Business Centres

Business Centres under construction TBILISI OFFICE MARKET OVERVIEW Major Existing Business Centres Outdoor Underground Business Centre Class Location GLA (sq m) Opening Date Owner/Operator Type Parking Parking

King David BC A 12 Aleksidze Street 12,000 2017 Rezid Holding Greenfield 0 130

Aword A 3-5 Tatishvili Street 3,500 2007 BOG Greenfield 0 0

Tabidze 1 A 1 Tabidze Street 8,000 2009 Redix Brownfield 145 0

Grato A 37-39 Kostava Street 4,800 2012 Grato Passage/Grato Manager Greenfield 73 0

Pixel 34 A 34 Chavchavadze Avenue 11,200 2010 Pixel Invest Group / Pixel Management Greenfield 0 60

GMT Plaza A 4 Freedom Square 3,000 2003 GMT Hotels Brownfield 0 100

Merani A 31a Griboedov Street 4,500 2013 SJS Poti Greenfield 0 42

Green Building A 6 Marjanishvili Street 2,400 2007 Green Office Brownfield 6 14

Besiki BC A- 4 Besiki Street 3,000 2010 Multiple Greenfield 0 46

BCL A- 4 Lortkipandze Street 1,650 2010 Solo-laki Investors / Tiflis City Greenfield 13 12

BCV A- 71 Vazha-pshavela Avenue 7,000 2008 Redix Greenfield 10 92 Metekhi BC A- 22 Metekhi Street 1,500 2004 Metekhi Greenfield 0 6 Maidan Palace A- 44 Apkhazi Street 4,500 2000 Maidan Group Brownfield 204 20 Mantashevi Rows A- 7 Bambis Rigi Street 2,500 2006 Maidan Group Brownfield 30 MGI A- 2 Tarkhnishvili Street 2,570 2015 Vere Business Center Greenfield 10 15

Belinski BC A- 10a Chovelidze Street 4,000 2016 Tiflis Business Group Greenfield 0 75

Estimated Amount of Total Investment Volume: USD 130,000,000

Upcoming Projects

Business Centre Class Location GLA (sq m) Completion Date Owner/Operator Construction Status Type

Axis Towers A 37 Chavchavadze Avenue 15,000 2018 Axis Group Under Construction Greenfield

MDM B+ 43a Beliashvili Street 5,000 2018 MDM Group Under Construction Greenfield Tiflis Business B+ 10 Kvernadze Street 5,464 2019 Redix Early Stage Greenfield Center S-1 A- 23a Chavchavadze Avenue 2,700 2019 S-1 Under Construction Greenfield

City Mall BC A 70 Vazha-pshavela Avenue 7,000 2019 IG Development Early Stage Greenfield

Estimated Amount of Total Investment Volume: USD 50,000,000

Source: Colliers International, Owners/Operators Regional Office Market Overview 2017

Kutaisi Public Service Hall REGIONAL OFFICE MARKET OVERVIEW

Regional Overview Following Tbilisi, Batumi and Kutaisi are Georgia’s two largest cities. Despite this, there are no modern business centres in Batumi or Kutaisi, and the supply of modern offices is quite limited. Like other cities in Georgia, the stock offered or already leased is often called 'commercial', bearing in mind that the area can be interchangeably used for either office or retail activities.

Kutaisi became the legislative capital of Georgia in 2012. Moving Georgia’s parliament to Kutaisi increased 19,061 the office stock, though the decision did not impact the market otherwise. 75% of offices are owner occupied, in large part by the state. The weighted average rent increased slightly to USD 7.2. The Government’s plan to TOTAL SPACE build logistic centre in Kutaisi, might attract new companies to the city, thus increasing the demand for DISTRIBUTION IN quality office spaces. BATUMI (sq m) Batumi is a port city, the capital of the Autonomous Republic of Adjara, and one of the most popular touristic destinations in Georgia. Though the city’s leasable office market is larger than Kutaisi’s, it is still small when 40,000 compared to Tbilisi’s. Today, 68% of the stock is leasable, and the market is comprised largely of old Soviet- era office spaces, street retail spaces, and flats. There are no business centres under construction in Batumi or Kutaisi, thus the markets are not expected to experience any major changes in the foreseeable future. Owner Occupied Leasable Source: Colliers International

WEIGHTED AVERAGE PRICES IN BATUMI AND VACANCY RATES IN BATUMI AND KUTAISI KUTAISI (USD)

20,000

7.9 12.5% 12.5% TOTAL SPACE 12% DISTRIBUTION IN KUTAISI (sq m) 7.5 7.2 9%

59,845 6.7

Kutaisi Batumi Kutaisi Batumi 2015 2017 2015 2017 Owner Occupied Leasable Source: Colliers International Source: Colliers International Source: Colliers International

18 Colliers International Georgia CONCLUSIONS AND OUTLOOK

The Georgian office market is undergoing important changes, though Tbilisi remains the country’s primary market. The supply of A class business centres grew by 12,000 sq m in 2017, representing a 32% increase over the same figure in 2016. In 2018, this number is expected to expand by an additional 15,000 sq m after Axis Towers reaches completion. Over the years, vacant spaces were scattered between different business centres, making it challenging for larger companies to find sizable high-class office accommodations. The King David BC is the market’s biggest player by gross leasable area, though it will fall to second once Axis Towers is complete. These additions will ease the challenge of finding large office areas, at least in the short-term. Tbilisi now has 176,000 sq m of modern, leasable office stock and an additional 290,000 sq m of older, low-class space. Currently, there is no specific business district in Tbilisi, but Chavchavadze Avenue and Rustaveli Avenue may evolve in to one in the near future. The area between Hero’s square and station square also has characteristics to become the city’s CBD. The regional office market has remained unchanged over the past few years, and there are no modern business centres - currently functioning or planned - outside of Tbilisi. One of the Georgian office market’s defining characteristics is its high share of owner occupied offices which comprise roughly half of the supply. These are owned in large part by government institutions, state owned organizations, and commercial banks. Declining prices in the office market, create favourable conditions for the tenants to move into the modern leasable offices. Individually-sold units in business centres still remain a challenge for the sector, making management more difficult and decreasing the overall asset value. Tbilisi’s business centres have relatively high rental prices and yield as compared to the other Eastern European cities. The vacancy rate, however, has increased in the high class (A, A-) sector, making up to 28%. Currently, the demand for office space is absorbing new supply, thus relocations and price reductions are to be expected. However, new entrants have an advantage over the existing business centres in that they can offer higher quality offices. Currently 35,000 sq m of business centre space is under development, meaning increased competition and improved tenant conditions. Colliers International Georgia Office

19 Colliers International Georgia APPENDIX 1

Real Estate Registration and Construction Permit REAL ESTATE REGISTRATION AND CONSTRUCTION PERMIT

Application Submission Public Service Hall or territorial Property Acquisition office of National Agency of Purchase / Gift Public registry

Document Preparation Service Fee Payment Documents needed: - Within 4 business days - 50 GEL - Proof of identity document - Within 1 business day - 150GEL - Duly attested Purchase Contract / - On the day of application - 200 GEL deed of gift on immovable item

Property Registration In Georgia, the National Agency of Public Registry is the state institution responsible for the In the case the property being purchased from the state/municipality (privatization, auction registration of property, registering both transfers between private entities and state-owned or other form of purchase) the documents should be submitted directly to the Agency. properties. Times and fees for registration In case of private transfer, the purchaser has two options: • 4 working days upon the submitting of documents (ordinary time) - the day of • Via a notary - contract drafting and legalization by the notary and subsequent submission of documents is not counted - GEL 50 (registration fee per one property) + registration. The notary assumes responsibility for the content of the draft and its GEL 5 for certifying the document (GEL 5 per each document subject to submission) legalization. The presence of a translator and his signature on the bilingual purchase • 1 working day - GEL 150 + GEL 5 for certifying the document document is required and the translator assumes responsibility for the authenticity of texts. Time for preparation of the bilingual document and its legalization varies • On the day of submitting the agreement in the Agency - GEL 200 + GEL 5 depending on the notary Times and fees for renewal of public registry information • Via the National Agency of Public Registry - direct submission of the purchase contract Online for legalization and registration. In this case, the bilingual purchase document is to be • 1 working day - GEL 10 (USD 4.4) drafted directly by both parties or by their authorized representatives. The Agency’s • Same working day - GEL 40 (USD 17.6) representative certifies the signatures and may provide recommendations if the Justice House document is not accurately drafted, but does not carry any responsibility for the validity or its content. • 1 working day - GEL 15 (USD 6.6) • Same working day - GEL 50 (USD 22) • The National Agency of Public Registry is represented in: a) Public Services Halls (Tbilisi, Gori, Kutaisi, Batumi, Ozurgeti, Mestia, Zugdidi, Rustavi, Marneuli, Gurjaani, Telavi, Kvareli and Akhaltsikhe) and b) regional departments of the National Agency of Public Registry (located in cities throughout the country).

21 Colliers International Georgia REAL ESTATE REGISTRATION AND CONSTRUCTION PERMIT

Construction Permits Stage II 18 days for II and III class buildings For the purposes of construction, buildings are divided into five types: 20 days for all IV class buildings, for Bakuriani, Bakhmaro, Ureki-Shekvetili recreation st 1 class buildings - no construction permit is required; territories , for all buildings that require ecological expertise and for V class buildings. nd 2 class buildings - buildings with low risk factors; Stage III rd 3 class buildings - buildings with medium risk factors; 5 days for II, III and IV class buildings th 4 class buildings - buildings with high risk factors; 10 days for V class buildings th 5 class buildings - buildings with very high risk factors. Exceptions: The permit issuance process is divided into three stages: The special terms for permission process: Stage I - Statement of urban construction terms; Construction permits concerning: Stage II - Approval of architectural-construction project; III class buildings with an intensity coefficient up to 1,500 p/m2 and for buildings with a Stage III - Issuance of Construction Permit; height of up to the 14 meters that will be located on the territories where urbanization State organs responsible for the issuance of permits: regulatory plans do not exist and are organized according to land use or which are organized according to the perspective development regulatory plans on the territory of Tbilisi - the Local self-governmental (municipal) organs - for II, III class buildings within the municipal permission process may involve II and III stages only territory (at stages I and II) except from Gudauri, Bakuriani, Bakhmaro, Ureki-Shekvetili recreation territories and for special regulatory zones on the territory of Borjomi. The simplified permit procedure may involve just two stages and the permit is issued in the second stage. Local self-governmental (municipal) organs - for IV class buildings (at stages I and II) with the participation of corresponding state organs The terms for the simplified procedure are as follows: Local self-governmental (municipal) organs - for II, III and IV class buildings (at III stage) Stage I - 12 days for II and III class buildings independently (including Gudauri, Bakuriani, Bakhmaro, Ureki-Shekvetili recreation 15 days for all IV and V class buildings, for Bakuriani, Bakhmaro, Ureki-Shekvetili recreation territories and for special regulatory zones on the territory of Borjomi) territories and for all buildings that require ecological expertise. Tbilisi City Hall - for II, III and IV class buildings in Tbilisi Municipality (at all stages) Stage II (issue of permit) - 20 days for all classes independently Permission fees Corresponding local organs of Adjara Autonomous Republic and Abkhazia Autonomous The municipal organs determine the permission fees though the maximum limits are Republic - for II, III and IV class (at all stages) on the territory of the Autonomous Republics envisaged by the Law: Local self-governmental (municipal) organs - II, III and IV class buildings (at stages I and II) For all territory of Georgia - 1 (one) GEL (USD 0.4) p/m 2 of construction territory for Gudauri, Bakuriani, Bakhmaro, Ureki-Shekvetili recreation territories and for special regulatory zones on the territory of Borjomi - with the participation of the Ministry of For construction of industrial buildings at resort areas- 5 (five) GEL (USD 2.2) p/m2 of Economy and Sustainable Development. construction territory Ministry of Economy and Sustainable Development - for V class buildings Exceptions: Ordinary terms per each stage (working days): Investors seeking the construction of hotels in free tourism zones and investing not less than Stage I 1,000,000 (one million) GEL (USD 440,494) per each hotel are exempted from paying the 10 days for II, III and IV class buildings permission fee. 15 days for Bakhmaro, Bakuriani and Ureki-Shekvetili recreation territories (excluding V class buildings), also for all buildings that require ecological expertise. 30 days for V class buildings

22 Colliers International Georgia APPENDIX 2

Primary Information Sources, data used for the study, definitions and assumptions PRIMARY INFORMATION SOURCES, DATA USED FOR THE STUDY, DEFINITIONS AND ASSUMPTIONS

In the process of preparing the research, we were guided by the information provided by property managers, owners, Prime Yield: When considering the yield to be quoted, the Prime Central Business District (CBD) yield should reflect developers, governmental institutions (The National Agency of Public Registry, the National Statistics Office of what an investor would be prepared to pay for a fully-let, prime rented asset within the CBD area of the city at the Georgia, the National Bank of Georgia, the Ministry of Economy and Sustainable Development of Georgia, Georgian time of reporting. It should be quoted in relation to recent comparable transactions, where possible/available, but Civil Aviation Agency, City Halls, World Economic Forum). The following web-portals is also used: should not be skewed by one-off transactions. Nor should it simply be an average of recent prime CBD transactions. Gross Yield is considered in calculations. Gross Yield = First years' passing rent (i.e. net effective rent) / Property Price www.geostat.ge (irrespective of transaction costs). www.nbg.ge www.gnta.ge Prime Rent: The Prime Headline CBD Rent represents the rent that could be expected for a unit of standard size commensurate with demand (typically 500-1,000 sq m for offices), for space of the highest quality and specification www.tas.ge (Grade A) in the CBD area at the survey date. This rent should reflect the level at which relevant transactions are being www.worldbank.com completed at the time, but need not be exactly identical to any of them, particularly if deal flow is very limited or www.imf.org 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 www.cia.gov specification will still apply.

Definition and Assumptions Net Take Up: is a difference between leased areas by the end of current and previous periods. EMEA: Europe, Middle East and Africa FDI: Foreign Direct Investment Gross Building Area: is total construction area of the building including common and technical spaces. IMF: International Monetary Fund GDP: Gross Domestic Product Net Leasable Area: is calculated by deducting common and technical area from the gross building area. It is GEL: Georgian Lari considered that net leasable area amounts 80% of gross building area for business centres. GLA: Gross Leasable Area Occupancy rate: is calculated by deducting percentage amount of vacancy rate from 100%. It is considered that sq m: Square metre occupancy rate in Tbilisi will be the following: in the first operational year – 50%, in the second operational year - 70% USD: The United States Dollar and in stabilized year - 85%. Batumi and Kutaisi will have the following occupancy rates: in the first operational year – HVAC: Heating, ventilation, and air conditioning 50%, in the second operational year - 80% and in stabilized year - 90%. VAT: Value added tax Office Monthly Rent: is based on the market data. It is increased by long term inflation rate of The United States Rent Prices: Are calculated based on registered lease transactions in the National Agency of Public Registry. all rents Dollar. are calculated in USD /sq m per month net of VAT and service charges. Growth of Owner Occupied Office Stock: is calculated by increasing the area of 2015 as much as the net take up in Vacancy rate: Vacancy rate is calculated as ratio of total vacant stock to total stock within the specified area. Vacant leasable modern office centres during the same period. Stock is calculated as total currently vacant within the specified area. Weighted Average Rent and Vacancy Rate in Regions: is calculated using online listings.

24 Colliers International Georgia Disclaimer

Colliers International is a leading commercial real estate services company Established by the Ministry of Economy and Sustainable Development of operating in 67 countries, providing a full range of services to real estate Georgia, “Enterprise Georgia” is a legal entity of public law aimed at occupiers, developers and investors on a local, national and international basis. development of Georgian enterprises. As the first state-owned institution Services include brokerage sales and leasing (landlord and tenant mandated to facilitate development, growth and internationalization of representation), real estate management, valuation, consulting, project country’s private sector through use of different mechanisms, Enterprise management, project marketing and research, and a recently added GIS Georgia operates within its three pillars: EG – Business, EG – Invest, and EG services. Colliers International provides services across the following core – Export. sectors as well as many specialized property types: retail, office, hotel, industrial and logistics. As one of the EG Pillars, Investment Promotion and Support Divisions play a role of moderator between foreign investors and the Government of Georgia, ensuring that the investor gets different types of updated information and has means of effective communication with the Government bodies. The aim of the Invest division is to attract, promote and develop foreign direct investments in Georgia. It serves as a “One-stop- shop” for investors to support companies before, during & after investment process.

CONTACT DETAILS CONTACT DETAILS DIR +995 32 222 4477 DIR +995 32 296 0010 12 M.Aleksidze Street 18 Uznadze Street King David Business Centre 0102 Tbilisi Georgia 0193 Tbilisi Georgia [email protected] [email protected] www.investingeorgia.org www.colliers.com/georgia www.enterprisegeorgia.gov.ge

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25 Colliers International Georgia COLLIERS GEORGIA AT A GLANCE

5 100* MILLION GEL REVENUE FROM REAL MARKET & ADVISORY REPORTS ESTATE SERVICES 50 25,000 RUSSIA PROFESSIONALS VALUATIONS CONDUCTED BLACK 13 $2,9** SEA CERTIFIED IVS VALUERS TOTAL AGGREGATE VALUE OF VALUED PROPERTIES ** 2 $1.3 TURKEY RICS MEMBERS BILLION CONSULTING PROJECTS’ AZERBAIJAN TOTAL DEVELOPMENT VALUE ARMENIA

* Accomplished by team members during last several years ** 2015-2017 figure COLLIERS GLOBAL STATS AT A GLANCE

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