MARKET OVERVIEW REPORT

2017 OVERVIEW & 2018 FORECAST

Summary

Recent Trends Market Prognosis

Hotel, and industrial/logistics market recorded highest investment We see retail and HTL as the most active sectors volumes in 2017. No new significant developments were delivered to in terms of development volumes in the coming the office market in the past year, but the investment activity was the year. Road and air infrastructure expansion in highest in this segment. Banks have continued freeing up capital and pipeline will attract new investments, especially in cleaning their balance sheets by disposing of NPL portfolios secured HTL and industrial/logistics market, while private by mortgages on properties of low quality, but a large amount of consumption increase should encourage retail industrial/logistics and office buildings are still locked as distressed development in smaller BiH cities. assets.

Economic Overview

Summary & Prognosis

The economy of Bosnia and Herzegovina (BiH) recorded a 3.0% yoy GDP growth in Q4 2017 compared to the same quarter of the previous Economic Growth (GDP, %) year. The slightly faster GDP growth is based on revival of exports in steel, energy and other heavy industries, as well as in growing sectors such as tourism. On the other hand, the economy in BiH is heavily 3,2 dependent on external funding for the chronic budget and account deficits. 3,0 3,0 3,0 3,0 The inflation rate in Bosnia and Herzegovina was recorded at 0.00% in December 2017. However, it is projected to grow at a stable 2.20% 2,9 rate by 2020. The number of employed persons was 790k in January 2018 which is a 3.1% yoy growth, while number of unemployed persons was recorded at 475k in January 2018 and or a 7.0% yoy drop. Nevertheless, according to Labour Force Survey, number of unemployed persons is much lower, estimated at 211k in 2017. The Unemployment rate (% of active reason for such discrepancy is grey economy and low transparency on population) labour market. 43,2 Moody’s credit rating for BiH stands at B3 with stable outlook for three consecutive Reports since July 2012. Standard & Poor’s credit rating for BiH hasn’t changed for six years and stands at B with stable 41,7 41,6 outlook. The mentioned credit ratings are 5 grades below investment 41,3 41 level. Fitch credit rating agency doesn’t cover BiH. In general, a credit 40,6 rating is used by sovereign wealth funds, pension funds and other investors to gauge the credit worthiness of Bosnia and Herzegovina thus having a big impact on the country's borrowing costs. BiH growth forecast is set at 3.0% trend by 2019 due to rising exports, low inflationary pressure and increase in private consumption. Inernational Monetary Fund recently issued a First Review of Inflation (CPI, %) Extended Fund Facility Arrangement with BiH in which it was concluded that: “BiH has made progress in lowering internal and external imbalances and enhancing growth potential.” 2,4 2,2 2,2 Further opportunities for improvement which should be solved in order 1,8 to stabilize GDP growth in the long run are: political fragility based on -1,0 ethnic tensions, structural weaknesses and bureaucratic barriers. -0,4 Average gross earnings (€/month)

Private consumption (% yoy) 674 5,8 664 658 659 658 658 644

621 3,0 3,2 3,0 2,8 1,5 2010 2011 2012 2013 2014 2015 2016 2017

Source: Agency for statistics of Bosnia and Herzegovina Source: Colliers International on Oxford Economics

2 Research and forecast report | 2017 | Bosnia and Herzegovina | Colliers International

Office Market

Supply & Demand Pipeline

Office stock in BiH is mostly located in , the capital of BiH, Three office buildings are currently in pipeline, all where majority of international companies have their headquarters. of them brownfield projects which were not in use Significant stock is also located in Banja Luka, the capital of Republika since construction: Srpska entity and in Zenica, , Bijeljina and , cities with more than 100,000 residents.  Government of Federation of Bosnia and Herzegovina acquired an 8,829 sq m unfinished Current office class ‘A’ and class ‘B’ stock in Sarajevo amounts to office building in Mostar for €2.97m or €336/sq around 120,000 m² GLA (gross leasable area). Of this, class ‘A’ office m from Gospodarska Banka Mostar. The space accounts for 67% and class ‘B’ and ‘B+’ account for the construction of the building started 30 years remaining 33%. ago, but only to the level of concrete shell. The demand for office buildings comes primarily from numerous Additional €4.86m is required for the completion government institutions due to complex BiH government system, of the building which will house four banks, insurance companies and other global corporations present in Government Ministries. BiH. IT and domestic start-up companies have recently started to  Office part (7,000 sq m) of Sarajevo City Centar record growth in demand structure. remains in pipeline in 2018 as well. The There is a lack of premises with floor area above 1,000 sq m. construction of 74 m tower was finished in Therefore, the companies such as banks and government offices, 2009, but the office part is still in “roh-bau” which have a need for large office space, decide to buy or build their phase, while Swissotel will start operating the own buildings. hotel part in H1 2018. Two such projects were developed in 2017:  Kumrovec, a 15,800 sq m GBA, 16 floor office tower in Čengić Vila neighbourhood in Sarajevo  Koncern Agram, an insurance company opened an office building in was acquired by Syrian entrepreneur in Banja Luka, capital of Republika Srpska in June 2017. Investment September 2017. The office building in the 20,900 sq m building with 11 above ground and 3 constructed in 2008, but was never used. The underground floors was worth €28m or €1,340/sq m. Total office new owner invested €4m and is announced to NLA is 9,500 sq m. open 10,000 sq m of office space in Q2 2018.  Union Banka, the only government owned commercial bank, The building was rebranded and named Capital acquired a 5,410 sq m office building from Hidrogradnja in tower. Skenderija, downtown Sarajevo neighbourhood in April 2016. The distressed asset deal was worth €5.6m or €1,034/sq m. The Sarajevo office market key figures 2017 building was renovated to a B class office building and the bank Total stock in m2 120,000 m² started to use it as its headquarters from January 2018. "A" class buildings stock 80,000 m² Rents & Vacancy rate "B" class buildings stock 40,000 m² Vacancy <15% The monthly rents range between 12 and 18 EUR/m²/month for class Average Monthly Rent A class €12-€18/m2 ‘A’ office space and between 9 and 13 EUR/m²/month for class ‘B’ 2 office premises. The monthly rent in Sarajevo suburban areas ranges Average Monthly Rent B class €9-€13/m 2 between 5 and 9 EUR/m /month. The rents haven’t changed Source: Colliers International compared to 2016. Total average vacancy of Class ‘A’ buildings ranges between 10% and Pipeline office project: Capital Tower 20%. Estimated average vacancy in ‘B’ class buildings stands between 5% and 15%. Prognosis

Both rental levels and vacancy rate are expected to remain stable during the next year. We expect that Middle East and Turkish investors as well as government institutions will continue with investment and development activities.

Source: Klix.ba

3 Research and forecast report | 2017 | Bosnia and Herzegovina | Colliers International

Retail Market

Supply & Demand

Improved macroeconomic indicators such as GDP and wage growth Shopping centre stock have positively affected the retail sector of BIH and Sarajevo. 150.000 1.000 However, high youth unemployment (which forces emigration) and political uncertainty are causes for concern. 120.000 800 BiH retail market consists of contemporary shopping malls with 90.000 600 international brands, located in bigger cities and local owner-occupied 60.000 400 department stores that are a combination of F&B, fashion, furniture and DIY stores, located in both bigger and smaller cities. 30.000 200 Food retailer market was very active in 2017. , Croatian 0 0 retailer and the second biggest food retailer in BiH left the market and was replaced by . Both retailers are a part of concern which has entered a restructuring process after becoming insolvent in April 2017. Meanwhile, Bingo, largest BiH food retailer, has further GBA (m²) Shopping Centre stock (m²/capita) strengthened its leading position and opened several big-box stores with solid pipeline ahead. The remaining top retailers such as Robot Source: Colliers International have also increased their turnover and profits as a result of continued growth trend of private consumption. Rents & Vacancy rate Year 2017 was relatively quiet with no new shopping mall The monthly weighted average rent ranges from developments, while big-box market saw several new developments in 2 secondary and tertiary cities. €13 to €20 per m depending on each modern mall. In addition to base rent some tenants Retail developments in 2017 (usually the anchor tenants) pay the turnover rent. Name Investor, Country City Type GBA (m²) Average vacancy rate in the modern shopping Bingo Bingo, BiH Mostar big-box/retail park 14,460 malls is around 10%. Vacancy rate in other malls ETNA Edo-Slad, BiH Gračanica department store 12,000 is much higher. Belamionix Belamionix, BiH Gračanica big-box 6,000 Prime shopping malls in BiH Robot Robot, BiH Velika Kladuša big-box 6,000 Monthly rent/m² per category (range) Bingo Bingo, BiH Donji Vakuf big-box 5,000 Sports source: Colliers International Restaurants and caffe Paper and Book Pipeline Leather and Shoes Household and Electro On the other hand, pipeline is relatively strong with 150,000 sq m Food and Tobacco under construction or in concept phase: Sarajevo Big Box, Termalna Fashion Rivijera and BBI Galerija. Beauty and Health Three new shopping malls were in pipeline in Banja Luka at the end of 0 10 20 30 2016, but only Delta Planet entered the construction phase and is expected to be completed by the end of 2018. Source: Colliers International Bingo opened around 20 new stores in 2017 and started the Prognosis construction of two new big-box stores in Šamac and Jajce.

Pipeline retail developments, +5,000 m² We expect new retail developments in secondary and tertiary BiH cities due to continued private Name Investor, Country City Type GBA (m ) ² consumption growth. It will be interesting to see Delta Holding, Delta Planet Banja Luka shopping mall 62,500 how Mercator will handle the return to the BiH Serbia market regarding strong expansion of local Sarajevo Big Lake, BiH Ilidža, Sarajevo shopping mall 30,300 retailers. Box Termalna Smart Investment, BiH food retail market is still very domestic as 7 of Ilidža, Sarajevo shopping mall 21,100 Rivijera BiH 10 largest retailers are local companies. Food retailer Kaufland and DIY store Bauhaus were Bingo Bingo, BiH Šamac big-box 14,700 rumoured as newcomers in 2016, but no new Bingo Bingo, BiH Jajce big-box 14,700 information was announced afterwards. After BBI Real Estate, BBI Galerija Bihać shopping mall 6,700 opening their first store Belgrade, Serbia in August Saudi Arabia 2017, IKEA declared that they are looking at BiH source: Colliers International market as their next step in the region.

4 Research and forecast report | 2017 | Bosnia and Herzegovina | Colliers International

HTL Market

Supply & Demand Pipeline

BiH has become an emerging tourist destination in recent years with  Neretva d.o.o. from Visoko invested €8.7m in an average 10% yoy growth in arrivals and overnights since 2010. reconstruction of 83 room Hotel Neretva in Sarajevo accounts for most of the country’s growth as has 36% share Mostar. It is a landmark hotel built in 1892 in total arrivals with yoy growth 4pp above the country’s benchmark. which was unused the past 30 years. Largest number of tourist arrivals in BiH comes from domestic tourists, with 32% of total arrivals. In recent five years, BiH has become an Tourist arrivals in BiH attractive market for Middle and Far East countries which achieved 1.000.000 more than 30% yoy tourist arrivals growth. 800.000 Such demand increase has initiated strong international hotel brands 600.000 investment activity during 2017 and beginning of 2018, driven by Orbis Group/AccorHotels and Marriot. 400.000 200.000  AccorHotels opened Mgallery by Sofitel, a 55 room 4* hotel in Tarčin Forest Resort & SPA, 30 km west of Sarajevo. 0 2009 2011 2013 2015 2017  Tareq Hospitality, 3* Hotel Sarajevo owner signed a franchise deal Republika Srpska Federation BIH in March 2018 with Orbis Hotel Group to rebrand the hotel into 3* Kanton Sarajevo Ibis Styles, budget hotel. Tourist arivals from Asian countries  4* Hotel Bristol changed its name into Hotel Novotel in September to BiH 2017 after the hotel owners, Al Shiddi Group signed a franchise 400.000 deal with AccorHotels. 300.000  Al Shiddi Group signed another franchise agreement with AccorHotels for the completion of hotel segment in Sarajevo City 200.000 Center. The 5* Sarajevo Swissotel will offer 218 luxury rooms and is 100.000 expected to open in H1 2018. 0  Mostar Marriot, 182 room 5* hotel on the location of former Hotel 2013 2014 2015 2016 2017 Ruža will be completed in H1 2018. Other Asian Countries Saudi Arabia Kuvait China  Courtyard by Marriott, 118 room 4* hotel is under construction in South Korea Turkey Banja Luka with expected completion in H1 2019. 4* and 5* hotel openings in Federation BiH  Hilton brand could be a potential hotel operator of a new 56 room 5* hotel in downtown Sarajevo. The investment estimated at €13m is 30 conducted by Turkish entrepreneur Fatih Kol. 25 20 Luxury resorts 15 10 Middle East investors have started buying land sites around Sarajevo 5 for the construction of luxury resorts which in majority function as 0 gated communities for Arab population. It is estimated that around 100,000 beds in villas and apartments are in pipeline on 1,700,000 sq m in BiH at the moment. Majority of the projects are marketed only in Source: Colliers International on Agency for statistics the Middle East with prices around €100k to €400k per villa. The table of Bosnia and Herzegovina, Statistics Department of below gives insight in major resort investments, their size and current Republika Srpska, Informatics and Statistics status. Department of Kanton Sarajevo

Luxury Resorts around Sarajevo Units Prognosis Name Location Investor, Country Status Villas App. Sarajevo Resort Tarčin Gulf Real Estate, Saudi Arabia 160 completed Current trend shows high growth rates in tourism Aljazeera Residential Dobroševići Al Jazeera, Kuwait 34 completed sector in BiH and the investors recognized the Poljine Hills Poljine Al Shiddi, Saudi Arabia 211 260 U/C potential in this sector. We expect further Golden Hills Tarčin Dido Group, Turkey 29 U/C expansion in 4* and 5* hotel supply, especially Tarčin Forest Resort Tarčin TIDC, - 135 176 U/C those intended for growing number of Asian Green Hills Hadžići UAE 86 U/C Country Side Resort Crepljani Raw asi Real Estate, Kuwait 128 114 U/C tourists, particularly those from the Middle East. Ilidža Pearl Resort Ilidža Al Diyar, Kuwait ca. 80 ca. 500 U/C There are several brownfield opportunities to be Westgate - Al Shiddi, Saudi Arabia 35 pipeline Buroj Ozone Trnovo Buroj International Group, UAE 1,000+ on hold found in the country which will be initiated in the Source: Colliers International coming years.

5 Research and forecast report | 2017 | Bosnia and Herzegovina | Colliers International

Industrial / Logistics Market

Supply & Demand Prognosis

The industrial and logistics sector has gained momentum in recent two One of the key factors for new industrial and years mostly due to strong international investments in manufacturing, logistic developments is good infrastructure energy and steel industry. Besides recently built industrial facilities the connection which puts completion of Pan sector is characterized by small scale properties or large industrial European Corridor 5c on the country’s top priority complexes, leftovers from Yugoslav legacy that are mostly ruined and list as it will attract new retail players and in need of renovation, but with strong upside potential. investments in logistic facilities. Demand is propelled by both domestic and international production Huge investment potential lies in large amount of companies which invest heavily in construction of new built-to-suit industrial/logistics supply (450,000+ sq m) which is manufacturing facilities in car, furniture, construction products and locked as distressed asset throughout the country. textile industry.

Industrial/logistic developments in 2017 Seasonally adjusted industrial production index (φ 2010 = 100) Investor, Country City Type Industry GBA (m²) Ferreto Group, Italy Usora, Doboj production regal production 16,900 120 Alternativa, BiH Sarajevo production constr. products 15,000 115 Export-City, BiH Prnjavor production textile 10,500 AKM Commerce, BiH Tuzla w arehouse w holesale 6,500 110 Pipeline industrial/logistic developments 105 Investor, Country City Type Industry GBA (m²) Pirnar, Slovenia production constr. products 22,000 100 Yavuz, Turkey Brčko production constr. products 12,000 95 Sinkro, BiH Vlakovo, Ilidža production furniture 12,000 Prevent, Germany Goražde production textile, car industry 11,000 90 Elsta Mosdorfer, Austria Živinice production electricty/energetics 11,000 DHL, Germany Sarajevo w arehouse logistic 6,700 HST CNC, Germany Gračanica production car industry 4,000 source: Colliers International Source: Colliers International on BiH Agency for statistics

Investment Transactions Overview

Summary Investment market volume was low in 2017, with several recorded  Government of Herzegovina-Neretva County transactions in office segment, particularly by Arab investors and the acquired 9,500 sq m Hotel Ero in March 2018 local government. There were several acquisitions in industrial market from the Federal Pension and Disability as Bingo expanded its portfolio with a detergent production company Insurance Institute for €5.37m or €565/sq m. DITA from Tuzla, and German companies Webo and PASS invested The government which was a minor tenant in in car production companies in Derventa and Bijeljina. The market the building plans to adapt it into an office lacks transparency and it is hard to obtain yield evidence. building which would house all required county institutions. Capital Markets  Metalurg City Center, a 3,624 sq m office building in Zenica was bought on a public Office market tender by Metalurg City Center d.o.o. for €7.7m  Syrian entrepreneur Abdulah Mehdi bought a 15,800 sq m, 16 floor or €2,120/sq m in September 2017. The tender office tower in Čengić Vila neighbourhood in Sarajevo. The was organized by HETA for the third time. distressed asset deal was worth €8m or €506/sq m, while estimated additional €4m were invested in fit out as the building was in use Prognosis since its construction in 2008. We expect that highest activity in 2018 will be in  Qatar Royal family Al Thani acquired a large share of Bosmal City development land and brownfield transactions of Center, a twin tower mixed-use development for €17.9m. It is office and industrial/logistic buildings as there are rumoured that the buyer acquired majority of apartments, office and numerous distressed opportunities all around the parking places in the two buildings from Bosmal d.o.o. country.

6 Research and forecast report | 2017 | Bosnia and Herzegovina | Colliers International

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