Slovakia MARKET OVERVIEW Q3 2018 Contents Economic overview 3 Investment 4 Office 5 Industrial 7 Retail 9 2 Market Overview | Q3 2018 | Slovakia Economic overview > In Q2 2018 Slovak economic growth accelerated to 4.2% Forecasts year-on-year, which in real terms represented the most rapid expansion since the end of 2015. Growth was largely fuelled > GDP growth is expected to equalise at 4.2% in 2018 by investment in manufacturing of motor vehicles, while real and accelerate further to 4.5% in 2019, driven mainly by the private consumption growth, on the other hand, slowed down expansion of production capacity in the car industry. Consumer to 2.2% year-on-year after its 1.5 years of stable upwards trend. demand is expected to benefit from the labour market’s improving situation, with increasing growth in both employment and wages. GDP growth is forecasted to slow down to 3.9% in > Unemployment continued to fall reaching a new minimum of 2020, as impulses from the car industry fade. 5.4% in Q2 2018 with a slight increase to 5.5% in July 2018. The lowest unemployment was recorded in Trnava and Bratislava regions (2.6% and 2.9% accordingly), while somewhat higher > The labour market is expected to see net job creation and rates were apparent in the Eastern part of the county in Presov further growth in employment. Continuous recruitment of and Kosice regions (9.1% and 8.9%). foreign workers is likely to persist, while skilled labour shortages will have an upward impact on wage growth over the medium term. Annual inflation rate is forecasted to remain within 2.5% > In August 2018, an average nominal monthly wage reached a for the period between 2018 and 2020. level of €1,101. The highest Q2 average of €1,246 was recorded in Bratislava region, while the lowest, €711, was recorded in Presov –region with the highest unemployment level. Accelerating Main economic indicators annual wage growth is driven mainly by the ongoing tightening of the labour market, coupled with growth in economic output and 14,40% less favourable demographic developments, which negatively Unemployment 12,50% affect the availability of workforce. 12,30% GDP CPI > In September 2018 average CPI inflation slowed down to 8,80% 2.7% after peaking at 2.8% in August. Ministry of Finance of the 8,40% Slovak Republic projects the annual figures for 2018-2021 to stay within stable 2.5% level. 5,60% 5,40% 5,00% 4,6% 4,20% 3,6% 3,30% > Overall economic risk is estimated as moderate to low. 2,80% 2,6% Slovakia is ranked lower in terms of risk than its Central and 1,70% Eastern European peers. Moody’s credit rating for the country 1,0% -0,1% was set at A2 with positive outlook (April 2017), while the last -0,5% reported evaluations of Standard & Poor (July 2015) and Fitch (February 2017) are both at A+, stable outlook. 2011 2017 2013 2015 2016 2014 2012 2010 2009 2008 2019f 2021f 2020f Q2 2018 Source: Statistical office of Slovak Republic/Symsite Research/National Bank of Slovakia 3 Market Overview | Q3 2018 | Slovakia Investment > Even though the third quarter of the year lacked investment Investment by Asset Class (mil €) 2006-2018* activity, overall market fundamentals remain strong. A number of on-going deals are looking to be closed until the end of the year, 1 000 including off-market transactions, currently at the negotiation stage. Retail 900 Residential > Investors remain interested mainly in core high quality product, 800 the lack of which remains the major activity deterrent. Office 700 > With the absence of transactions, yields remain at the stable Industrial levels, even though the seller expectations on marketed properties 600 are towards compression for prime offices and traditional shopping Hotel centres. The highest yields of 7.25% were recorded in industrial 500 sector, followed by 6.50% for offices and 6.00% for retail. 400 Forecast 300 > We expect significant increase in market activity in the next 200 quarter with investors looking to close the ongoing deals before the end of the year. 100 - > Domestic and cross-CEE capital is likely to maintain/grow in importance, in line with an overall regional trend. 2011 2017 2013 2015 2018 2016 2014 2012 2010 2007 2008 2006 * Q1-Q3 2018 excluding pending and confidential transactions > The fact that the number of high quality offers in the market is Source: Colliers International/RCA limited will result in increases in prices for all core investments able to demonstrate high quality standards and strong fundamentals. Prime (Net Initial) Yield 9,50% Industrial Office Retail 9,00% 8,00% 8,25% 7,50% 7,50% 7,75% 7,75% 7,25% 7,30% 6,50% 7,50% 6,50% 7,25% 7,25% 7,00% 6,00% 5,75% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Q3 2018 Source: Colliers International 4 Market Overview | Q3 2018 | Slovakia Bratislava Office Supply office premises under active construction in Bratislava. By the end of 2020, city’s modern office stock is expected to > As at Q3 2018, the total stock of modern office premises increase by at least 13%. in Bratislava was equal to around 1.74m sqm , 60% of which can be classified as grade A and 40% as grade B. > One new project, Bluemental Offices II with a total area of 10,200 sqm was introduced in the third quarter. Other two > Most of the modern office spaces are currently located projects - Twin City Tower and Landererova 12 – with a total in BA II and BA I districts (36% each), the same districts are area of around 53,400 sqm are expected to be introduced being the hubs for the new development schemes. until the end of the year. Change in Office Stock over Time (sqm) Demand 2 000 000 > Total take up in Q3 2018 was equal to around 30,000 sqm. Most of the transactions involved new occupation (55%), 1 600 000 followed by renegotiations (23%), preleases (15%) and expansions (7%). Majority of the transactions took place in 1 200 000 BA II district (43%), followed by BA I (36%) and BA V (10%). 800 000 > In Q3 2018, the majority of transactions were recorded with the IT sector (50%), followed by professional services 400 000 (22%) and finance, banking and insurance (11%). 0 > The largest number of transactions was recorded in the segment of less than 200 sqm office premises, the most 2011 2017 2013 2015 2016 2014 2012 2010 2009 f2019 f2020 of the take up in terms of the total area was attributed to Q3 2018 transactions between 1,000 and 4,999 sqm. Previous Stock New Supply Source: Colliers International/BRF > Most significant office transitions of the quarter included: > 29 buildings with an approximate area of 559,000 sqm > 3,672 sqm - Galvaniho Business (around 32% of the total stock) are certified with either LEED Center III, Renegotiation (IT) or BREEAM (including buildings currently undergoing the certification process). Green certification allows developers > 2,459 sqm - Landererova 12 (under construction), Pre-lease (IT) to attract tenants and cut operating costs, as well as stimulate higher tenants‘ emoployee productivity and well being. > 1,835 sqm - BA Business Center I, New lease (IT) > 1,795 sqm - ROSUM, New lease (IT) Pipeline > Overall vacancy rate demonstrated slight decrease from > There are currently almost 237,200 sqm of additional 5.53% in Q2 2018 to 5.04% in Q3 2018. As at Q3 2018, the 5 Market Overview | Q3 2018 | Slovakia lowest vacancy rates were recorded in Bratislava V (2.61%), Development 250 000 evolution vs. Development followed by Bratislava III (3.76%), Bratislava I (4.08%) and Completition (sqm) Bratislava II (6.86%). The highest vacancy rate was recorded in Bratislava IV – 7.63%. 200 000 Rental Rates 150 000 > As at the end of Q3 2018, prime headline rents in Bratislava’s CBD were recorded at around €15.50 sqm/month, while the average CBD rents were at the level of €13.50 sqm/month. The 100 000 corresponding rent figures for the periphery locations were at €11.20 sqm/month for prime headline rents and €10.20 sqm/ month as an average. Bratislava’s prime headline CBD rents 50 000 remain amongst the lowest in the CEE region. Forecasts - 2011 2017 2013 2015 2016 2014 2012 2010 > We expect a strong pace of delivery of the existing pipeline 2009 projects, introduction of which is likely to lead to increases Sub-Lease in vacancy levels for the existing buildings. While most of Q1-Q3 2018 the pipeline projects to be delivered are already pre-let, their Renewal commissioning will lead to a wave of movement from older developments. Owners of the more outdated premises may Pre-Let wish to undertake reconstructions and refurbishments to re- New Occupation gain tenants’ demand. Expansion > New projects are strongly oriented towards superior quality, Development Completitions enhanced employee wellbeing and environmental friendliness, which developers are increasingly looking to demonstrate Take-Up Composition Q3 2018 through the obtainment of corresponding certificates. (no. of transactions/sqm) > Activity from the tenants’ side is likely to slow down due to Area of transactions tightening labour markets and lack of qualified labour to support 8% further growth. < 199 12% 15% 200-499 City Center Inner City Outer City 19% 49% No. of transactions 48% Stock 574,597 m² 750,699 m² 418,482 m² 500-999 Vacancy rate 5.20 % 3.92 % 6.82 % Average headline rent 11.8-16 €/m² 11.4-14.75 €/m² 8.5-10.5 €/m² 21% 28% 1,000-4,999 Vacancy Rate (%) 14% 11% 7,22% 7% 5,04% 3,57% 4% 2011 2017 2013 2015 2016 2014 2012 2010 2009 2008 Grade A Grade B Overal Vacancy Rate Q3 2018 Source: Colliers International/BRF 6 Market Overview | Q3 2018 | Slovakia Industrial Supply Industrial Stock in Slovakia (thousand of sqm) > Development of Slovakia’s industrial and logistics real estate 2400 market remains positive, in line with general trends across major 2000 markets in Europe.