2014 / 2015

ROMANIA MARKET OVERVIEW ON THE RISE AGAIN

HIGHLIGHTS Record demand and pre-leasing Revival of the industrial sector, Highest investment volume volumes put office market in the marked by cca. 70% market growth since 2007 − €1.2 bn spotlight again CONTENTS

03 INTRODUCTION

04 ROMANIAN ECONOMIC OVERVIEW

06 OFFICE MARKET

09 LAND MARKET

10 INVESTMENT MARKET

12 RETAIL MARKET

12 SHOPPING CENTRES

14 HIGH STREET

15 INDUSTRIAL & LOGISTICS MARKET

17 RESIDENTIAL MARKET

19 HOTEL MARKET

21 PROPERTY TAXATION

22 LEGAL ASPECTS MARKET OVERVIEW 2014/2015

INTRODUCTION

pre-leasing activity also recorded becoming an increasingly a high, triple the volume registered attractive location in the region. in 2013. The next 24 months will Investor demand registered a high see the completion of several large in 2014, resulting in a post-recession developments on the Bucharest record transaction volume of market, mostly speculative. There €1.2 bn. Judging by the number of are reasons to believe that this transactions, the office and retail Romanian market, expected new supply will be sectors were equally preferred by gradually absorbed and will not investors, each attracting seven on the rise again significantly affect the vacancy rates, transactions throughout the year. as pre-leasing activity will strongly However, the retail sector generated the largest share of total transaction The local commercial market continue beyond the first half of 2015. volumes (cca. 40%). Yields are most continues to show signs of strong likely to further contract for the very improvement, especially the office The industrial sector, previously best office and industrial assets. and the industrial sectors, which more resilient to recession, also performed exceptionally well and experienced a remarkable revival recorded double-digit growth in 2014. in 2014, with increased demand for Looking forward we remain industrial space nationwide (up by confident that steady growth is on the cards for the Romanian property As expected, the office market nearly 70%) and positive investor market over the coming years, continues to flourish. Bucharest saw sentiment reflected in a slight yield against the backdrop of the again the highest level of take-up on compression for prime properties. evolution of a new market cycle record, and up by 22% year-on-year. and its inherent opportunities. In tandem with the continued More robust occupier fundamentals strong demand and the tightening along with improved quality assets HORATIU FLORESCU supply, development activity has supported the long-awaited revival Chairman & CEO considerably increased. Moreover, of the investment market, with THE ADVISERS/KNIGHT FRANK

countries and the Baltics currently risk has grown as they focus their seeing a significant improvement interest increasingly on secondary in occupier sentiment and a most opportunities and alternative sectors. encouraging trend in Ireland and parts of Southern Europe. Regional However, the really good news for property markets in the wider both occupiers and investors is that Central and Eastern European area rents in most markets remain lower are also expected to perform well than their pre-recession peaks. European outlook on the back of limited availability. This should provide a further boost to activity in 2015, with more While there are some lingering doubts European commercial investment occupiers looking to take advantage about the strength and uneven nature volumes totalled €177.6 billion of good deals, while investors will of Europe’s economic recovery, both in 2014, up 21% on 2013 and seek to cash in on better rental growth prospects as the economic the EU and the Euro area are poised the highest since 2007. Following outlook continues to improve. for positive growth in 2015. a period of yield compression Occupier markets are likely to in major European cities in 2014, DARREN YATES continue to move in line with wider particularly in the office and retail Partner, Head of European Research economic trends, with the Nordic sectors, investors’ appetite for KNIGHT FRANK

3 HIGHLIGHTS ROMANIA 2015

Following a moderate economic MACRO OUTLOOK recovery in the Eurozone and despite the external events — MACROSTABILITY: that could influence Romania’s development, we estimate GOOD, BUT NOT ENOUGH 2015 economic growth at 2.2%, by Radu Craciun, Chief-Economist, BCR driven mainly by domestic demand. and Eugen Sinca, Senior Analyst, BCR

The very low inflation rate, along with Looking at the next 1–2 years, Romania’s a moderate economic recovery in the major task is to improve its economic Eurozone, monetary policy divergence growth while preserving the fiscal and between the FED and the ECB, balance of payments equilibrium. Finding political tensions between Russia and proper financing for higher economic Ukraine and the outcome of the Greek growth could prove challenging in sovereign debt problem are key external the current environment, but better events that could influence Romania’s absorption of EU funds, stronger lending economic development in 2015. in the local currency to the private There is potential political volatility ahead sector and a better allocation of public related to a possible reconfiguration of resources among different projects the political landscape triggered by the could solve the puzzle. Real GDP growth results of the 2014 presidential election rates of close to 2% are definitely not and by a rebalancing of power within the suitable to Romania’s goal to enter the two main political parties: the Liberal single European currency area sometime Party (PNL) and the Social-Democrat around 2019. History has shown that, Party (PSD). A number of senior Liberal for some countries, fulfilling the nominal politicians recently suggested they Maastricht criteria was not enough for would like to form a new government and providing a smooth integration into the a no-confidence vote against the current euro area. Therefore, real convergence government cannot be ruled out. criteria such as the GDP/capita gap

FIGURE 1 Contribution to GDP growth by category of expenditure (pp)

6

5

4

3

2

1

0

-1

-2 NET EXPORTS INVESTMENTS GDP -3 GOVERNMENT CONSUMPTION HOUSEHOLDS CONSUMPTION -4 2011 2012 2013 2010 2014f 2015f 2016f 2017f Source: National Institute of Statistics, BCR Research

4 ROMANIA MARKET OVERVIEW 2014/2015

could provide a measure on how the lower end of the range targeted by in 2015, as we believe that the NBR is challenging would be the adoption of the the central bank. This situation was likely use the exchange rate as a tool in euro for a potential candidate. the consequence of a combination fighting deflation. It is therefore expected of factors, among which the deficit of to favor the current y/y depreciation of We estimate 2015 economic growth demand, the imported deflation and the RON. Moreover, the expected rate at 2.2%, driven mainly by domestic the lower oil prices played major parts. and MRR cuts should also weigh on demand, while exports are likely to Although with fading impact, such the RON. Temporary spikes of volatility offer lower support compared to 2014. developments are likely to continue to might occur depending on local political Public investments are again a big weigh on price developments, keeping news as well as on regional geopolitical unknown for economic growth and we inflation below 1% during the first half developments. We expect the NBR to read with skepticism the government’s of 2015, which might lead to a year-end remain in control in order to avoid rapid plans in this area, as laid down in the figure of close to 1.7%. Surprises cannot FX movements. 2015 state budget. The main threat for be ruled out and we see more downside 2015 economic growth comes from The current low yield environment for potential for our forecasts, with the NBR the stretched consolidated budget, local currency bonds is likely to be having to limit any further decline in which targets a deficit of 1.8% of GDP preserved in 2015 as long as the global inflation. against a backdrop of the late 2014 context is supportive. Inflation rate social insurance tax being cut by five Monetary easing is likely to continue in below the NBR’s target most of the percentage points and a 5% rise in 2015, centered upon fresh reductions in time in 2015, the international low yield pensions. Given the low flexibility offered minimum reserves. Ideally, the additional environment as well as the generous by the already ambitious expense liquidity and lower rates provided by the liquidity provided by the ECB and the targets, Romania runs the risk that a cut central bank should have a triple impact: NBR are likely to continue to support in investments would be the main source stimulating consumption/investment the current prices of the Romanian of any major expenditure adjustment, by rewarding savings less, pushing sovereigns, despite the imminent start with the surprising fall in 2014 investment banks into more aggressive lending of rate hikes in the US. activity being a precedent. Moreover, and preserving a moderate level of given the time required to resume the depreciation for the currency in order to investment process, when it is mainly prevent deflation. EU funded, it is hard to expect overnight The EUR/RON exchange rate is likely to results in 2015. fluctuate more than in 2014, due to the Next to boosting growth and keeping external and political risks previously the budget in balance, exceptionally low mentioned, but the NBR is expected to inflation is likely to be the next challenge keep a close eye on the FX market and in 2015, but this time for the central to continue to intervene occasionally bank. The end of 2014 brought very low to tame volatility. We do not expect to inflation of only 0.8%, significantly below see a repeat of 2014 exchange rates

5 HIGHLIGHTS OFFICE MARKET

With a record take-up volume In terms of transaction type, relocations Overview and new entries accounted for 36% in 2014, a drop of 5.5% in the of the total transacted area, while availability of Class A office space, After a strong year with robust tenant activity which maintained pressure renegotiations and pre-leases each a record high in pre-lease activity on supply, pre-leasing is expected to achieved 26% of the market. and improved development activity, continue on the office market in the Bucharest market outlook stays Of particular note is the record strong coming 12 months, following a record optimistic in the medium-term. pre-lease activity, which tripled in high volume in 2014, triple the previous volume compared with 2013 year. Bucharest availability fell by 5.5% (cca. 80,000 sq m in 13 transactions). year-on-year for Class A office space. In 2013 this type of transactions only Optimism is underpinned by increased achieved 9% of the total transacted development activity, mostly speculative area, with cca. 25,000 sq m. This trend as several major projects have already is likely to continue into and beyond the commenced construction, most of them first half of 2015. with expected delivery in 2016. The total number of transactions signed on the market in 2014 increased by cca. Supply 30% compared to the previous year, yet the average size remained broadly H2 2014 saw the delivery of five Class similar (cca. 1,500 sq m). Still, large A buildings to the Bucharest market, transactions over 5,000 sq m dominated totaling cca. 45,000 sq m, and bringing market activity in 2014, accounting for the total modern stock of Class A and B cca. 32% of the total gross take-up, office space to 2.06 mn sq m. which represents a slight decrease Overall cca. 140,000 sq m office space compared to the 2013 percentage of were delivered to the market in 2014, a over 41%. level nearly 20% higher than 2013. New By location, more than 40% of the total deliveries accounted for cca. 88% of number of transactions were registered the total new stock, while reconversions in Calea -Barbu Vacarescu, only represented cca. 12%. The most which saw increased activity among important office schemes delivered large tenants and captured two large to the Bucharest market were AFI pre-leases, both involving IT&C tenants. Park 2 and 3 (24,400 sq m), Green As a result, as opposed to 2013, when Court Phase I (19,500 sq m) and annual demand was stronger in Dimitrie Hermes Business Campus Phase I Pompeiu submarket (28% by area), the (18,000 sq m). In terms of submarkets, preferred business hub of 2014 was cca. 37% of the total new supply was Calea Floreasca-Barbu Vacarescu, delivered in the Center-West area, attracting over 31% of the total demand followed by Calea Floreasca-Barbu in terms of area. However, both Vacarescu area, with cca. 23%. submarkets have attracted the highest At a national level, 2014 recorded only demand in the last five years. the delivery of Phase I of The Office Major transactions included Orange’s project in Cluj-Napoca (19,000 sq m) pre-lease of 13,700 sq m in the first in Q2 2014. phase of Green Court, Vodafone’s pre-lease of 16,000 sq m in Bucharest One, Renault’s renegotiation (20,000 sq Demand m) in North Gate Business Center and Telekom’s pre-lease of 25,000 sq m in Total take-up for 2014 reached a record Globalworth Campus. high of cca. 303,000 sq m for Class A and B office space. This is the highest Leasing among IT&C tenants level of take-up recorded in the last comprised a large share of market 10 years and it is significantly higher activity throughout 2014. Similar to than the previous year’s volume of cca. previous years, this sector remained Stefan cel Mare Project 250,000 sq m. the biggest source of demand with

6 ROMANIA MARKET OVERVIEW 2014/2015

FIGURE 2 FIGURE 3 FIGURE 4 Demand by leased area Demand by type of transaction Demand by submarket 2014 2014 2014

>5,000 SQ M 32% RELOCATION 27% CALEA FLOREASCA

3,001–5,000 SQ M 17% PRE-LEASE 26% −BARBU VACARESCU 31% DIMITRIE POMPEIU 18% 32+ 1,001–3,000 SQ M 29% 17+2922A27+ RENEGOTIATION / RENEWAL 26% 26+129A31+ 18+1197641A CBD 11% <1,000 SQ M 22% EXPANSION 12% PIPERA 9% NEW DEMAND / NEW ENTRY 9% Source: The Advisers / Knight Frank BANEASA 7% Source: The Advisers / Knight Frank PRESEI LIBERE SQUARE 7% CENTER 6% CENTER-WEST 6% WEST 4% EAST 1%

Source: The Advisers / Knight Frank

FIGURE 5 Demand by tenant activity sector 2014

IT & COMMUNICATION 43% PROFESSIONAL SERVICES 10% 43+ FINANCE/BANKING/INSURANCE 10% 10+9764321A PHARMA 9% AUTOMOTIVE 7% MANUFACTURING INDUSTRIAL & ENERGY 6% FMCG 4% OTHER 3% TRANSPORT & CARGO 3% MEDIA & MARKETING 2% ADMINISTRATION 1% CONSTRUCTION & REAL ESTATE 1% RETAIL 1% Oregon Park Source: The Advisers / Knight Frank

7 43% of the total take-up. The finance/ The vacancy rate is expected to tighten However, given the continued strong banking/insurance sector and in the coming months, as demand will levels of demand and the limited professional services continued to help probably stay strong and most of the existing supply, the new stock arriving drive the Bucharest take-up, each with new developed space is anticipated to on the Bucharest market within the 10% of the total, followed closely by be delivered in late 2016. next 24 months is not likely to impact the pharmaceutical sector with 9%. significantly on the overall vacancy rate. Furthermore, the increased Forecast development activity is supported by several ongoing infrastructure projects, Rents Deliveries of cca. 120,000 sq m of particularly in the Center North office space are expected in 2015, Though demand for space has been of Bucharest, among which is the picking up, prime rental levels in a similar level to 2014. Noteworthy extension of Fabrica de Glucoza Road Bucharest have remained stable at projects include AFI Park 4 and 5 and a series of roundabouts allowing €18/sq m/month. (32,000 sq m) and Green Court better vehicular access, and therefore Phase II (17,600 sq m). improving the overall traffic movement Service charges remained largely in in the area. the range of €3.50–4.50/sq m/month. Moreover, established developers have announced significant projects due for Prime office rents are expected to remain completion in 2016, mainly in the Calea stable throughout the coming months. Floreasca-Barbu Vacarescu, Dimitrie Vacancy Pompeiu and Center-West areas, which In the rest of the country, Cluj-Napoca remains the most active city in terms of By the end of 2014, there had been a will have a positive impact on pre- development, with estimated deliveries leasing activity, expected to continue noteworthy decrease in the vacancy of cca. 40,000 sq m in 2015. Regional in the coming year. Of particular rate for Class A and B office space, cities are expected to further attract note, most of this space is under which dropped from 17.4% in Q4 2013 outsourcing demand on the back of construction speculatively, as schemes to 15.8%. Furthermore, availability for improving stock along with attractive such as Oregon Park (72,000 sq m) Class A office space fell significantly underlying fundamentals, as compared or Hermes Business Campus Phase to 12.5% from 18% in Q4 2013. to other countries. II (22,000 sq m), have already Some of the lowest vacancy rates commenced on site. With several were recorded throughout 2014 in projects currently planned, the CBD is the established submarkets of West, also preparing to take on new supply in Dimitrie Pompeiu and Presei Libere the following couple of years, the most Square (each finishing at 5%) and significant project being The Landmark in the Center-West submarket (6%). business park (23,000 sq m).

TABLE 1 FIGURE 6 FIGURE 7 Prime headline rent Vacancy rate by submarkets Modern office stock by submarkets 2014 (%) Annual evolution and forecast (sq m) €/sq m/month 30 2,500,000 CLASS B CBD 16–18 CLASS A 25 Presei Libere Square 14–16 2,000,000 Calea Floreasca 20 14–16 -Barbu Vacarescu 1,500,000 Center-West 13–15 15 1,000,000 Baneasa 12–14 10

500,000 East 11–13 5 Dimitrie Pompeiu 11–13 0 0 West 11–12 East CBD 2011 2010 2012 2013 2014 West

South Center 2015 F Square South 10–11 Baneasa Center–West Presei Libere Source: The Advisers / Knight Frank Pipera 8–10 Barbu Vacarescu Dimitrie Pompeiu Calea Floreasca – Calea Floreasca

Source: The Advisers / Knight Frank Source: The Advisers / Knight Frank

8 ROMANIA MARKET OVERVIEW 2014/2015

LAND MARKET HIGHLIGHTS

Moreover, investors’ interest in land 2014 was one of the most active Overview plots in Bucharest continues to rise with periods in recent years on the With transactions amounting to cca. several major infrastructure developments local land market, with the most €110 mn, 2014 saw buoyant activity currently ongoing in the capital city. notable transaction being a 4 ha on the land market. Developers’ land plot acquired by Portland confidence in the revival of the market Trust for the largest office became obvious especially during H2 Prices development post-recession. 2014, which brought a clear positive trend, with several key transactions Prices remained at constant levels closed for office, retail and residential during 2014 with minimal movement recorded and variations in land values developments alike. depending mostly on their location. Currently, the most sought-after submarket in the semi-center of the city, Supply Calea Floreasca/Barbu Vacarescu, still generates the highest prices outside the Following the general trend of previous city center, up to €800/sq m. years, supply in the Romanian land market was further increased, as major banks and insolvency companies have put up for sale substantial land plots as Forecast distressed properties. Supply is forecast to remain stable throughout 2015, with office and residential developments attracting the Demand strongest demand on the market, as a result of the growing market confidence In 2014, demand continued to come and the rebalancing economy, boosting mainly from office developers, followed construction in the entire real estate closely by retail and residential ones. sector. An increasing number of players The most significant deal for office interested in residential development are development in 2014 was the acquisition currently setting this particular sector on by Portland Trust of a 4 ha land plot from an ascending trend. Nusco Group, in a transaction brokered by The Advisers/Knight Frank. Set in 4 ha land plot acquired by Portland Trust in Center-North of Bucharest the northern part of Bucharest, in the city’s most preferred business hub, the land plot is intended for developing the largest office project post-recession FIGURE 8 (est. GLA 72,000 sq m). In the same Bucharest land price evolution area, later in the year, investment fund €/sq m NEPI took over a conveniently available 3,000 land plot located near Promenada Mall, planning to expand the successful 2,500 shopping center. The additional space built will accommodate a cinema and a 2,000 hypermarket. 1,500 Retailers continued to be active in 1,000 the market, with several transactions recorded in the South of the city including 500 those involving Leroy Merlin (4.3 hectare land plot) and Dedeman (4.7 ha land plot). 0 2004 2005 2006 2007 2008 2009 20 10 20 11 20 12 20 13 2014

Other notable transactions of 2014 2015F involved land plots for residential CENTER OF THE CITY SEMI-CENTER OF THE CITY EDGE OF THE CITY development planned by Opus Land and Impact SA. Source: The Advisers / Knight Frank

9 HIGHLIGHTS INVESTMENT MARKET

Revetas Capital which also took over Strong investor demand for Overview the seller’s €20 mn debt. Romanian property resulted With confidence improving in the The office sector saw increased investor in a record-high transaction occupier markets and investor interest, with seven transactions closed volume of €1.2 bn in 2014. sentiment distinctively positive, throughout the year 2014. In H2 2014, This trend is expected to investment activity in Romania reached Globalworth Real Estate Investments continue in the coming months, record volumes of €1.2 bn in 2014, continued to expand its portfolio by on the back of more robust surpassing and doubling the previous acquiring three major office projects. occupier fundamentals. high of 2010 (€543 mn). Green Court Phase I, developed Underpinned by Romania’s recent good by Skanska Group was acquired by economic performance, increased Globalworth for an estimated €44 mn, international interest was witnessed Nusco Tower office building was throughout the year for the best transacted for cca. €46 mn, while performing sectors: office and retail. Unicredit HQ was sold for over €43 mn. Over the first half of the year transaction As far as industrial sector is concerned, activity was largely dominated by one major acquisition was completed domestic restructuring deals, whereas by P3 which bought Europolis Logistic H2 saw the completion of a series of Park (215,000 sq m), one of the largest major transactions. logistics parks in Romania, previously owned by CA Immo. Supply The moderate investment activity Yields recorded over recent years can partly Improved activity in the investment be explained by the limited availability of market in 2014 resulted in moderate yield financing and the relatively tight supply compression, especially in the office of prime, quality assets, which remain sector, where prime yields hardened by keenly sought-after. 25 bps to 8%. Prime industrial yields also hardened, to 10%. However, more recently, new deliveries of high-quality projects have led to a higher pace of market activity. Established developers, with recognized TABLE 2 track records, continue to deliver Bucharest prime yields 2014 high-quality projects to the Bucharest % market that can be expected to trigger significant investment activity. Office Retail Industrial

8.00 8.00 10.00 Demand

Although the Bucharest office market Source: The Advisers / Knight Frank has been the main focus of investor interest, the largest transactions of 2014 were recorded for retail and industrial assets. Retail purchases accounted for 43% of the total transaction volume, Forecast with the Promenada Mall acquisition by Sustained investor interest is expected NEPI for cca. €148 mn and Immochan’s in 2015, especially in the office sector. purchase of 12 retail properties for Continuing the trend of previous years, an estimated €280 mn. Other notable increased investor interest is expected retail transactions included distressed to maintain the pace of investment assets of Equest Balkan Properties, activity. such as Moldova Mall, sold for €20 mn and Vitantis Retail Park, purchased by

10 ROMANIA MARKET OVERVIEW 2014/2015

FIGURE 9 FIGURE 10 Transaction distribution Romania investment transaction volumes by property type in 2014 Annual evolution/€mn

2000 1800 1600 1400 1200 1000 800 600 400 200 0 2004 2005 2006 2007 2008 2009 20 10 20 11 20 12 20 13 20 14 RETAIL 43% OFFICE 31% Source: The Advisers / Knight Frank 43+ INDUSTRIAL 13% 31+13121A RESIDENTIAL 12% HOTEL 1%

Source: The Advisers / Knight Frank

Promenada Mall, Bucharest

11 HIGHLIGHTS RETAIL MARKET SHOPPING CENTRES The outlook for the retail sector remains positive in view of the expected continued economic Overview Jiu (27,000 sq m GLA), both developed improvement. With new retail by NEPI, as well as Auchan Drumul supply expected to reach a record As the economic recovery continues Taberei hypermarket (21,800 sq m GLA), high of over 200,000 sq m in the and consumer confidence is back on developed by Immochan. coming year, a cautious optimism track, prospects have improved for the The current retail property stock in is anticipated in the market. Romanian retail sector. Throughout Bucharest stands at cca. 920,000 sq m, 2014, fashion retailers have maintained while the total Romanian retail inventory their expansion plans, with most of comprises cca. 2.04 mn sq m. the openings being recorded in the capital city. Even though 2014 saw the Romanian retail stock increasing by Demand only 75,000 sq m, the lowest level of annual completions in recent years, a Demand in 2014 came mainly from well- remarkably high level of new supply known fashion brands such as H&M which has been announced for 2015, of cca. opened eight units of which two were in 226,000 sq m. Bucharest, CCC with six units, Ecco with five units and Takko with four units.

One significant transaction signed in Supply 2014 saw the opening of the 16th store of JYSK in Shopping City Sibiu, where While there were no deliveries in the first it occupies a total GLA of 1,300 sq m. six months of 2014, the second half of Another important source of demand 2014 saw the completion of three retail remained established food retailers. projects, totaling just under 75,000 sq m: Brioche Dorée opened two more units in Vulcan Value Center (25,000 sq m GLA) Bucharest, reaching a total of five shops in Bucharest and Shopping City Targu in the capital city.

FIGURE 11 Retail stock in various Romanian cities Stock / 1,000 Inhabitants

1,000,000 RETAIL STOCK SQ M 1,200 900,000 SQ M / 1,000 INHB. 1,080

800,000 960

700,000 840

600,000 720

500,000 600

400,000 480

300,000 360

200,000 240

100,000 120

0 Iasi Sibiu Galati Pitesti Brasov Ploiesti Oradea Craiova Suceava Timisoara Constanta Bucharest Cluj Napoca

Source: The Advisers / Knight Frank

12 ROMANIA MARKET OVERVIEW 2014/2015

will bring on the market two major Rents schemes developed by NEPI: Mega Rents for the leading retail schemes Mall in Bucharest (70,000 sq m GLA) in Bucharest are currently in the range and the first phase of Timisoara of €60–70/sq m/month, representing Shopping City (55,000 sq m). a similar level to 2013, while in the The Bucharest market will also see the rest of the country rents vary between delivery of Pipera Plaza Shopping 25–35/sq m/month. € Center, developed by Alpha Property Group, part of Intercora, with a first phase of 7,500 sq m expected in Q2 2015. Forecast 2015 is set to be remarkably active in terms of new supply, with an additional four new retail schemes and FIGURE 12 three extensions of existing projects Bucharest shopping center stock expected to be delivered across the and pipeline country, providing a total retail area of cca. 226,000 sq m. Brasov remains one 1,000,000 of the most competitive cities for future ANNUAL COMPLETIONS shopping center developments, with STOCK 800,000 Immochan announcing the delivery of Coresi Shopping Center (45,000 sq m 600,000 GLA) in Q1 2015.

NEPI continues to be a major player on 400,000 the retail market as it has scheduled expansions of three shopping 200,000 centres: City Park Constanta 0 (21,000 sq m), Deva Shopping Center

(10,000 sq m) and Severin Shopping 2010 2011 2012 2013 2014 Center (10,000 sq m), with investments 2015 F totalling up to €60 mn. Moreover, 2015 Source: The Advisers / Knight Frank

Auchan – Tricodava, Bucharest

13 HIGH STREET HIGHLIGHTS

Following a steady evolution in 2014, the outlook remains positive for the high street market over the coming months.

Starbucks – Hanul lui Manuc, Bucharest

areas. The operator opened in Q3 2014 Overview new units in Novo Park’s Building and The second half of 2014 saw positive in the Old City Center’s Hanul lui Manuc. trends in the high street market. Demand La Placinte opened two new units in for retail space in Bucharest slightly Romana Square and in AFI Park 2, improved, with the food sector driving reaching a total of six units in Bucharest most of the activity on the market. by the year’s end.

Development of this type of retail has expanded outside traditional areas Supply such as the Old City Center, which has No major new high street space was been retailers’ preferred destination delivered to the market in 2014. With in recent years. having undergone a There has been a moderate increase in series of infrastructure improvements, activity from banks as well, which have increased interest in prime retail secured several key locations in prime locations in this area is expected areas. Some examples include Garanti throughout the coming months. Bank in Victoriei Square and in the area and Libra Bank on the ground floor Demand of Magheru One office project. Pharmaceutical retailers have gained Following the trend of previous years, momentum on the Bucharest high street food retailers continued to be the main FIGURE 13 market, influenced mostly by changing Bucharest high street prime rents drivers of demand. Retailers such as market conditions, with well-known evolution Mega Image, Profi and Carrefour have players taking over additional locations. €/sq m/month continued their expansion in high street 75 locations. With its new 1,600 sq m unit opened on Magheru Boulevard 70 in Eva Center, Mega Image reached Rents 410 shopping units at the end of 2014. In the second half of the year rents 65 Moreover, the retailer took over the remained fairly stable, continuing the local food chain, Angst, after the latter same trend of the first half of 2014. 60 withdrew from its partnership with Carrefour. 55 H2 2014 witnessed increased demand Forecast from the HORECA segment, mostly 50 restaurants and cafes. Starbucks For 2015, we expect an improvement in continued its expansion in Bucharest overall activity, as new retailers will enter 2010 2011 2012 2013 2014

2015 F opening new outlets both in business the market or existing ones consider Source: The Advisers / Knight Frank locations and established high street resuming their expansion.

14 ROMANIA MARKET OVERVIEW 2014/2015

INDUSTRIAL HIGHLIGHTS & LOGISTICS MARKET Confidence is clearly improving in the industrial sector, with or expansions of owner-occupied increasing demand for industrial Overview premises, such as Otter Logistics space nationwide, up by 68% As opposed to the rather scarce activity (3,000 sq m) in Bucharest. year-on-year. in recent years, the Romanian industrial Bucharest's total industrial stock sector recorded a revival in 2014, fuelled currently stands at 1 mn sq m, out of by significantly increased demand, which more than 85% is located around especially in the regional markets. the West Ring Road and A1 highway, In addition to the growing leasing level, the main industrial area of the city. the strong investment activity of 2014 represents a positive sign of the long- awaited return of confidence to this sector. Demand Total industrial take-up across Supply the country in 2014 reached cca. 335,000 sq m, a 68% growth as With only 49,500 sq m of new supply compared to 2013, out of which delivered on the market in 2014, a similar 103,000 sq m were transacted in level to 2013 (54,000 sq m), the total Bucharest, though in a relatively large stock of industrial space in Romania number of transactions (20). reached cca. 1.9 mn sq m. A total of 38 transactions were New developments brought to the recorded in 2014, of which six were market in 2014 were for the most part for over 20,000 sq m. Demand was built-to-suit, such as the 12,000 sq m largely focused on the western region warehouse for Lear Corporation in Iasi, (Timisoara claimed cca. 33% of the 7,500 sq m in VGP Park in Timisoara total take-up) and in the key markets and 27,000 sq m in Ploiesti West Park of Bucharest and Ploiesti. In general

FIGURE 14 FIGURE 15 FIGURE 16 Demand by tenant activity sector Demand by region Demand by type of transaction 2014 2014 2014

MANUFACTURING 42% TIMISOARA 33% PRE-LEASE 30% 3PL 26% BUCHAREST 31% RENEGOTIATION/RENEWAL 29% 42+ DISTRIBUTION 25% 26+2561A33+ PLOIESTI 22% 31+22653A30+ RELOCATION 19% 29+19976A E-COMMERCE 6% DEVA 6% NEW DEMAND 9% PHARMA 1% BRAILA 5% EXPANSION 7% ARAD 3% NEW ENTRY 6%

Source: The Advisers / Knight Frank Source: The Advisers / Knight Frank Source: The Advisers / Knight Frank

15 “We are confident in the evolution the sources of demand were rather of the local market, as it displays evenly distributed, with pre-leases, Rents increasingly positive metrics. renegotiations and relocations Rental levels across the country Our Group’s decision to enter registering 30%, 29% and 19% remained constant throughout the Romanian market was marked respectively of the overall leasing 2014, standing between by the acquisition of the largest volume. €2.90/sq m/month–€4.20/sq m/month, industrial park of Bucharest in In terms of tenant profile, the while service charges range between 2014. Generally we are a long term manufacturing sector was the most €0.5/sq m/month–€0.95/sq m/month. owner of high-quality industrial active, accounting for 42% of the total properties being able to follow demand in 2014. The eastern part of our customers anywhere they go the country appears to be an especially Forecast from Madrid to Bucharest with preferred destination for automotive Against the backdrop of improving sites being located in key industrial companies, given its attractive offer of confidence in the Romanian hubs around the whole of Europe, existing industrial platforms and the economy, speculative development nearby large, developed cities. availability of a qualified labor force. is anticipated in the industrial sector, We expect improved activity in the In H2 2014 the leasing market saw the with several developers considering Romanian industrial and logistics negotiation of a contract by Unilever in the commencement of construction at sector, with increased demand Ploiesti for 27,000 sq m of warehouse selected sites in the coming months. which will further encourage the space and the signing by Yazaki Europe Demand for space is expected to further market to grow.” with WDP for a built-to-suit property improve, yet asking rents will remain in located in Braila. the same ranges. CORA STOLZ Country Head Cca. 38,000 sq m of industrial space are P3 ROMANIA currently under development and are Vacancy set for completion by the end of 2015, in As a result of the recent volume of 4 projects: Industrial & Logistic Park transactions, along with the absence of Turda (3,500 sq m), Olympian Park Cluj (11,000 sq m), VGP Park Timisoara FIGURE 17 speculative development, the vacancy Bucharest modern industrial stock rate dropped to 10% in the Bucharest (7,500 sq m) and the WDP Yazaki unit Yearly evolution (sq m) area, representing the lowest recorded in Braila (16,000 sq m). P3 is also vacancy in the last three years and planning the expansion by an additional 1,200,000 much lower than the high point of 15%, 75,000 sq m of the recently acquired P3 1,000,000 reached in 2013. Improving leasing Bucharest Park (which was the subject

800,000 activity is likely to result in vacancy levels of the largest logistics acquisition on the stabilizing or possibly reducing over the Romanian market), formerly known as 600,000 coming period. Europolis Park Bucharest. 400,000

200,000

0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

2015 F TABLE 3 TABLE 4 Source: The Advisers / Knight Frank General market practice Prime rental and service charge overview ranges

FIGURE 18 Vacancy 10% Bucharest area Rent Bucharest Rest Bucharest industrial take-up €/sq m/ of the Yield 10.00% sq m month country Typical Logistics 3–5 years 250,000 contract Logistics €3.90–€4.20 €3.50–€3.80 Production 5–7 years length (<3,000 sq m) 200,000 BTS 7–10 years Logistics (3,000 €3.75–€4.00 €3.20–€3.50 150,000 Average BTS –10,000 sq m) construction 16–40 weeks 100,000 duration Logistics €3.30–€3.60 €2.90–€3.20 (>10,000 sq m) 50,000 Incentives Rent-free months depending on the contract length Manufacturing €3.50–€4.25 €3.50–€3.75 0 Indexation HICP Service charge €0.5–€0.95 2005 2003 2004 2006 2007 2008 2009 20 10 20 11 20 12 20 13 20 14

Source: The Advisers / Knight Frank Source: The Advisers / Knight Frank Source: The Advisers / Knight Frank

16 ROMANIA MARKET OVERVIEW 2014/2015

RESIDENTIAL MARKET HIGHLIGHTS

SALES* In step with the improved economic landscape, the Supply compared to the previous year and Bucharest residential market a fairly healthy level of demand, registered a steady performance The market was moderately active in considering the marked cautiousness of throughout 2014, continuing to terms of new supply in 2014, following a buyers, following the recession years. rely on Prima Casa program reduction in the number of vacant units to generate sales, mostly of in completed residential projects and the mainstream units. Nevertheless expansion of well-performing projects. Prices an increased appetite for upper- Noteworthy deliveries to the market end and luxury homes has Prices have remained broadly stable included the City Point Phase I and been recorded, albeit it is still throughout 2014, with average values Circului Park Tower projects, totalling limited, which has opened new varying between €650–1,100/built sq m close to 150 units. Having delivered its and medium-range projects recording an opportunities for developers first phase (45 units) in 2014, City Point, average of €910/built sq m. active in the sector. located near the Barbu Vacarescu- Calea Floreasca office hub, will finish construction of its second phase in H1 2015. Circului Park Tower, a 15-story Trends residential building located near In the coming years, the Bucharest FIGURE 19 Average prices Stefan cel Mare Boulevard, completed residential market may be supported €/usable sq m 1 bedroom apartment construction of its 101 units in H2 2014. A by the growth of the office market, notable construction start in the second 1,600 which is expected to see the MIN. half of 2014 belonged to Gafencu 49, delivery of an increased number of 1,400 AVG. whose developers announced 110 luxury MAX. mixed-use projects. The Dimitrie 1,200 apartments to be delivered in 2016, near Pompeiu office hub already hosts the 1,000 the Nordului area. Approximately 20 small Upground mixed-use scheme which 800 scale projects which started construction accommodates 571 residential units in 2014 in the Dorobanti-Primaverii along with its 83,000 sq m leasable 600 area are expected to end construction office space. Already a popular option 400 throughout 2015. in prime city markets around the world, 200 Two major residential projects are such as London or New York, mixed- 0 awaiting the start of their construction use projects are a sign of a more on the Barbu Vacarescu Boulevard, from mature real estate market, as they imply higher budgets for development and Low End Opus Land (developer of Cosmopolis) Upper End Medium End and Impact (developer of Greenfield), buyers with more sophisticated lifestyle both land plots having been bought in considerations. With designated access Source: The Advisers / Knight Frank for each use, tall buildings can easily 2014. accommodate luxury apartments Furthermore, as compared to 2013, as well as class A offices. With the FIGURE 20 the number of approved residential economic recovery forecast to continue, Loan guarantees, Prima Casa 2014 construction authorizations in 2014 Bucharest is likely to see more of the

increased by 25% in the Bucuresti-Ilfov synergy of mixed-use projects, in the 30,000 area (according to the Romanian National years to come. Institute of Statistics), indicating a likely 25,000 increase in construction activity over the 20,000 next 12–24 months. 15,000 Demand 10,000 5,000 Approximately 3,500 new apartments *NOTE: This analysis only considers new developments 0 were sold in 2014 in Bucharest, with an with more than 100 announced units, located within the capital’s city limits or in sizeable residential projects in

average of 5–6 apartments sold each 2009 2010 2011 2012 2013 2014 month in new residential projects. satellite locations of Bucharest. The research addresses more than 70 active residential projects, both existing This represents a slight increase schemes and projects under construction. Source: FNGCIMM

17 “When I arrived in Bucharest twelve years ago, most expats CORPORATE were housed in old villas restored LETTINGS to varying degrees or in the small After formerly leasing units mainly as number of more modern flats Forecast a solution when failing to sell them, scattered throughout the city. developers are now starting to consider As both market sentiment and Rents were sky high – akin to projects specifically developed for the consumer confidence are recovering, what one might expect to pay rental market. Thus, the corporate letting the residential sector is expected to in other emerging market capitals, supply is beginning to expand, with maintain a sustained growth rate over and generally the offer was low several properties being delivered to the the coming months, in line with the quality housing stock. market exclusively for rental purposes. increasing purchasing power of the Currently there is a large variety population and the growing availability Primaverii 30 is such a project, located of options at more appropriate of financing in the market. near the Square, and costs, including a number of offering 18 apartments mainly for letting, newly constructed villas with starting Q2 2015. Alia, one of the few gardens, for example in Pipera. tower residential projects of Bucharest, With a wealth of choices, the has also become popular for leasing challenge now remains to have lately. the knowledge of the market and find the right options, geared for expats.”

PERRY ZIZZI Partner DENTONS BUCHAREST

Primaverii 30

18 ROMANIA MARKET OVERVIEW 2014/2015

HOTEL MARKET HIGHLIGHTS by Lucian Marinescu, Senior Associate TrendHospitality While the market registered a positive trend in 2014, with improved supply (27 new hotels) Overview dip mainly because of a cold summer and an increase in international which affected summer vacation tourist arrivals (6.7% y-o-y), During the second half of 2014 the tourism and because of the presidential 2015 is expected to witness positive evolution of hotel activity elections in November 2014 which kept better activity, particularly registered in the first half of the year all economic activities at lower levels for encouraged by the government’s continued, but at a slower pace. a couple of months. decision to reduce VAT on The number of overnights increased One positive trend in terms of arrivals tourism (from 24% to 9%). by 3.9% compared with the same period was the increase of international tourists: of 2013, while a 6.4% increase was a 6.7% increase compared with the recorded in the first half. Overall, 2014 same period of the previous year. recorded a 4.8% increase in the number Bulgaria, Israel and Portugal were the of overnights and a 7.7% increase in the countries with the highest increases in numbers of arrivals, indicating a further tourist numbers, while Spain and France decrease of the average length of stay registered the largest decreases. to 2.39 nights. In terms of destination, the highest percentage of overnights was registered in the secondary cities of Romania Supply (county capitals) followed by medical Limited investments in new projects led resorts. Compared with the previous to a very slow increase in hotel supply in year’s figures, the highest increase 2014. The number of hotels in Romania was registered in the Danube Delta reached 1,456 at the end of 2014, with a (+30%), a unique tourist attraction, while total of 185,172 beds, an increase of 1.6% the largest decrease was recorded in compared with the end of the previous seaside locations (–11.7%), due to year. A large share of the room inventory the rather unfriendly cold summer. is located at the seaside (33%). If we take a closer look at the most 27 new hotels opened last year, with preferred destinations, specifically two high-profile new openings, namely the major cities in Romania, we notice Mercure City Center Bucharest**** a differentiated evolution across the (114 rooms) and Privo Hotel Targu country: while some cities posted Mures**** (46 rooms). double-digit increase in terms of arrivals (Oradea, Ploiesti, Sibiu), other cities saw International hotel chains currently a negative evolution (Braila, Craiova, account for 7.3% of the total room Galati, Tulcea). inventory, a percentage significantly lower than the European average, which is close to 32%. Currently there are 12 hotel groups present in Romania, the Investment largest being Wyndham Hotel Group Transactions with 1,875 rooms and 11 hotels in 7 cities and Accor Hotels Group with Hotel investment transaction volumes 1,335 rooms and 7 hotels in 3 cities. totalled an estimated €30mn in 2014, decreasing by cca. 7% compared Mercure Bucharest City Center by Accor with 2013. No portfolio transactions Demand were recorded and the single asset transactions were fuelled mainly estimated amounts of €4mn and €1.5mn Although the first half of 2014 ended on a by banks and insolvency houses respectively. Currently, around 200 hotel positive note, the second half of the year liquidating distressed assets. For properties are on the market but, despite did not follow a similar pattern despite example Diplomat Hotel in Bucharest their low prices, most of them are not increases in both arrivals and overnights. and Rowa Dany Hotel in Sinaia were attractive for investors due mainly to The hotel market experienced a slight both acquired by local investors for their locations.

19 activity especially in relation to leisure Bucharest*** (210 rooms), Best Western Forecast segments. For 2015 we expect a Premier Bucharest**** (80 rooms) and 2015 raises many questions especially 15–20% increase in tourist arrivals, Ramada Plaza Craiova**** (162 rooms). regarding the macro-stability of the which will also create the conditions Hotel investment activity is not expected region considering the geopolitical for increasing hotel rates and will most to pick up in the following months, events happening to the east probably attract investor interest as of Romania. Nevertheless, the as most hoteliers see the next period a consequence. government’s decision to decrease more as an opportunity for business VAT on tourism to 9% from 24% A series of important openings are consolidation and development and less will have a positive impact on hotel already announced for 2015: ParkInn for sale of properties.

FIGURE 21 FIGURE 22 FIGURE 23 Arrivals by destination Overnights by destination Guest segmentation 2014 2014 2014

SEASIDE RESORTS 33.3% COUNTY CAPITALS 25.1% BUSINESS TOURISM 43% COUNTY CAPITALS 25.8% MEDICAL RESORTS 21.4% LEISURE TOURISM 36% 33+ MEDICAL RESORTS 13% 26+1391A25+ SEASIDE RESORTS 15.9% 21+161411121A43+ MEDICAL & HEALTH TOURISM 20% 36+201A MOUNTAIN RESORTS 9% MOUNTAIN RESORTS 13.8% OTHER TYPE OF TOURISM 1% OTHER DESTINATIONS 9% BUCHAREST 11.5% BUCHAREST 8.9% OTHER DESTINATIONS 11.3% Source: TrendHospitality DANUBE DELTA 0.9% DANUBE DELTA 1%

Source: TrendHospitality Source: TrendHospitality

FIGURE 24 FIGURE 25 Evolution of domestic and Evolution of hotel investment volume international arrivals € mn

9,000 INTERNATIONAL ARRIVALS 50 DOMESTIC ARRIVALS 8,000 7,000 40 6,000 30 5,000 4,000 20 3,000

2,000 10 1,000 0 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014

Source: TrendHospitality Source: TrendHospitality

20 ROMANIA MARKET OVERVIEW 2014/2015

PROPERTY TA X ATION — A NEW ERA BEGINS? By Alexandra Smedoiu, CFA, Senior Manager With the possible PwC Romania amendment of the Romanian Fiscal “May this year be better than the property and to reap the benefits of previous” – says a popular new year the potential upside of the real estate Code, property greeting. Should this be the case when it market. However, the increased tax rate tax might be comes to property taxation? for buildings kept at historical cost (not revalued) is capped at 10%, as opposed applied consistently 2015 started off with good news to maximum 40% at present. regarding the abolition of the depending on the construction tax (colloquially referred Where the usage is mixed (commercial use of the building, to as the “pole tax”) for fit-out works. and residential), the property tax will be The application of the construction determined on a pro-rata basis, while be it for residential tax in 2014 had significantly affected when the usage cannot be determined or commercial landlords and tenants alike, discouraging precisely, the commercial activity purposes. investments in the refurbishment and criterion would prevail. modernisation of properties. In the case of residential property, do What will 2016 bring us in terms of not think in terms of fixed amounts per property taxation: a change of strategy, square meter, but instead think about an to say the least? ad valorem quota of between 0.08% and 0.2% applied to a tax base determined As we know it and apply it today, the in accordance with certain coefficients level of the property tax is a function (as opposed to 0.1% currently). It is of the type of owner (legal entity also worth mentioning that certain or individual) and certain intrinsic tax exemptions may be available for characteristics of the property. There are dwellings in case of certain fit-outs that significant discrepancies between the improve the quality of the building. levels of tax applied to the same building for different types of owners. While it is difficult to estimate the amount of saving that the new property A proposal to amend and modernise tax rules will yield to taxpayers, we can the Romanian Fiscal Code launched by certainly salute the end of discrimination the Romanian tax authorities in early between legal entities and individuals 2015 brings about the wind of change. that carry out similar commercial Property tax is to be applied consistently activities with real estate. We can only depending on the use of the building, be hope that such changes will indeed be it for residential or commercial purposes. enacted starting January 1st, 2016. In a nutshell, a property intended for commercial use (e.g. office, retail, industrial) should trigger from 2016 onwards the same level of tax irrespective of the status of its owner(s). The tax will be ad valorem, determined as a percentage of the property value, the proposed percentage being between 0.2% and 1.3%. The percentages are slightly lower than the building tax rates applicable today to legal entities (0.25% to 1.5%).

At the same time, the requirement to revalue the property at least once every three years remains applicable, allowing the tax authorities to apply a tax quota to an updated (market) value of the

21 LEASE AGREEMENTS — WRITS OF EXECUTION Landlords faced by by Simona Chirica, Ph.D., Partner tenants defaulting on and Madalina Mitan, Senior Associate the payment of rent Schoenherr & Associates SCA may start directly, on the basis of the What are the options for a landlord the landlord is registered as tax payer. faced by tenants defaulting on the The registration procedure implies lease agreements, payment of rent? the submission by the landlord with the fiscal authority of the following the enforcement In practice, it is quite usual for landlords documents: proceedings against to chase their tenants to recover the rent such tenants, due. There are cases when landlords fail A standardized form for the registration to cash in their receivables, as tenants of the lease agreement with the registry provided that the become insolvent and do not hold of the lease agreements kept by the lease agreements enough resources/assets to cover all fiscal authority – original and copy; and creditors’ receivables. the lease agreement – original and copy. observe certain In order to avoid such a situation, There is no legal term during which the formal requirements. the landlords may start directly the landlords - legal persons must register enforcement proceedings against the lease agreements. their tenants, on the basis of lease Considering the benefits of the lease agreements. However, the enforcement agreements – writs of execution, it is of lease agreements is possible provided strongly recommended for landlords to that said agreements are concluded (i) conclude their lease agreements with in notarization form or (ii) under private observance of the formal requirements signature and registered with the mentioned above. In the end, it is solely competent fiscal authority where the the option of the landlords to decide on landlord is registered as tax payer. which of the two alternatives is to be Under the Romanian Civil Code, lease implemented. agreements observing the above formal requirements are considered writs of execution, entitling the landlords to begin enforcement proceedings against tenants in default, without the need to prior obtain a judicial order to this end.

Therefore, landlords have two alternatives for having writs of execution against their tenants: (i) to conclude the lease agreements in notarized form or (ii) to conclude the lease agreements under private signature and to observe the registration formalities.

The costs for the authentication of a lease agreement may be rather high, depending on the amount of the rent and the other amounts paid on the basis of said agreement (e.g. guarantee deposit).

A cheaper alternative to the authentication of the lease agreement is the registration of the lease agreement concluded under private signature with the competent fiscal authority where

22

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