Slovakia MARKET OVERVIEW Q3 2018 Contents

Economic overview 3

Investment 4

Office 5

Industrial 7

Retail 9

2 Market Overview | Q3 2018 | 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 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 , 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. 1600 1200 >> In Q3 2018 total modern industrial supply of class A premises 800 in the country amounted to almost 2.22m sqm. Majority of the 400 premises (59%) are located in Bratislava, followed by Trnava (20%) 0 and Trencin (8%). 8 2008 2009 2011 2015 2010 2012 2013 2014 2016 2017 201

>> Regions with emerging popularity include Central and Eastern parts of the country. Development of the latter is largely related to Jaguar Land Rover’s new plant. Major industrial developers, Q3 2018

>> Slovak industrial market is dominated by five largest players –

ProLogis, CNIC Corporation Limited, Pointpark Properties, CTP and ProLogis Goodman International. Together those companies hold around 60% of the total market share. Even higher industry concentration CNIC Corporation Limited is expected once the dominant players complete projects listed in the pipeline. Pointpark Properties 19% 20% CTP Pipeline 5% Goodman International >> Around 248,000 sqm of additional industrial premises are 5% 11% currently under active construction in the country, most of the project AU Optronics are located in Bratislava, Kosice, Trencin and Trnava regions. Around 5% Karimpol half of the new supply is represented by speculative development. 6% 11% 6% 12% m seven >> ARETE Invest and CTP own 18% share of the pipeline projects under active construction each, followed by Karimpol with 13% and White Star PointPark Properties with 9% Other Demand

>> Automotive industry is an important sector of the Slovak economy, making up around 35% of the total exports and thus forming significant demand for industrial premises. There are Source: Colliers International

7 Market Overview | Q3 2018 | Slovakia currently three major automotive producers in the country – Volkswagen (Bratislava), PSA Peugeot Citroen (Trnava), and Kia Industrial Take-Up in Slovakia Motors (Zilina). The forth entrant, Jaguar Land Rover, is currently (thousand sqm) testing its operations in Nitra, while the full production kick-off is Q1-Q3 2018 expected at the beginning of 2019. 246,9 2017 419,0 2016 450,1 >> Demand effects from the automotive industry are not limited to 2015 277,8 car manufacturers themselves but are extended to the whole supply chain and network. 2014 297,1 2013 257,6 Q3 2018 2012 225,19 >> Total occupational market activity in Q3 2018 amounted to around 2011 207,51 Expansion 71,300 sqm, of which most of the demand (38%) was attributed to 2010 55,58 26% new occupation, followed by expansions (36%) and renewals (26%). 36% New In terms of the sectors, demand was attributed to automotive (71%), 2009 140,3 Occupation Renewal 3PL (15%) and electronics (4%).

38% >> With commissioning of four new projects with the total area of more than 175,000 sqm from the beginning of 2018, vacancy rates increased, reaching the level of 5.97%. High degree of competition Industrial Vacancy Rate in Slovakia (%) between the parks in the same region keeps Slovakia’s industrial 10,00% 8,54% market favourable to tenants 8,30%

7,40% 7,30% 6,50% >> As at Q3 2018, prime warehouse headline rents in Slovakia 5,97% were equal to around €4.0-€4.5 /sqm/month, while the logistics and 5,27% distribution prime headline rents were recorded at the level of €4/ sqm/month. The highest rent rates were recorded in Bratislava 3,15% 3,16% region, where prime warehouse headline rents were recorded at €4.5-€4.9/sqm/month, and prime logistic and distribution headline 2,07% rents - at around €4/sqm/month. 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Q3 2018

Forecasts Industrial under Active Construction >> We expect industrial sector to maintain its positive dynamics in line with an overall momentum across the region further (thousand sqm) strengthened by expectations related to the start of production at Jaguar Land Rover factory this year. ARETE Invest 7% CTP 18% Immorent >> New developments are expected to meet high standards in 37% terms of quality and technological advances. More sophisticated Karimpol customer wants are encouraging rapid innovation in terms of both m seven 8% technological processes and development concepts. Nitra Invest

9% 13% ProLogis 4%4% P3

350 300 250 200 150 100 50 0 2011 2017 2013 2015 2016 2014 2012 2010 2009 Q3 2018 Source: Colliers International

8 Market Overview | Q3 2018 | Slovakia Retail

>> Retail demand is stimulated by robust macro-economic >> Significant rise in retail saturation in the capital city Bratislava momentum in Slovak Republic. Potential risks, on the other hand, is expected as soon as the most significant pipeline projects are include ageing population and slow population growth. commissioned. The largest of those include Stanica Nivy, bringing additional 70,000 sqm of retail spaces in 2019. Moreover, expansions are planned for a number of existing schemes, including Aupark, > > In Q3 2018 total retail stock of traditional and specialized shopping which is currently waiting for the building permission for additional centres in Slovakia was equal to around 1.76m sqm. Traditional 7,300 sqm, and Eurovea with an expansion plan of 25,000 sqm. shopping centres represented 71% of the total stock, while 29% were attributed to specialized shopping centres (retail parks and big Retail Stock in Regional Cities 2018 (m²) box retail). No additional retail schemes were introduced during the 700 000 third quarter. ZA BB 9% 4% TT 600 000 >> More than 130,000 sqm of additional retail spaces are currently 8% under active construction in the country. Despite already high TR 4% saturation, most of the new developments are located in the capital 500 000 PO city Bratislava. Bratislava features one of the highest per capita retail 5% area in the CEE region – 1,477 sqm. The figure is in fact higher than 400 000 NR BA the average of the major Western European Capitals. 8% 50%

300 000 KE >> High street retail in Bratislava is not very developed and is mainly 12% represented by Obchodna Street which has largely lost its popularity 200 000 as a major shopping destination with the arrival of large shopping centres. 100 000

>> Prime headline rents for Bratislava’s retail properties stay at the 0 stable level of: >> High street retail: around €41 sqm/month; >> Traditional shopping centres (in-line tenants): around € 38.5 sqm/month; Retail Space*Specialized in Shopping Regional Center CitiesTraditional Shopping Center (sqm/1,000inhabitants) >> Traditional shopping centres (anchor tenants): around €15 sqm/month; >> Specialized shopping centres (anchor tenants): around €8.25 sqm/month. 1,383 644 Forecast 937 650 619 >> Consumer demand is likely to stay high in line with the expectations of continuing increases in real wages, however may 1,401 be somewhat offset by possible spike of inflation and rise in interest 1,336 rates. 1,477

Source: Colliers International

9 Market Overview | Q3 2018 | Slovakia Tamila Nussupbekova 400 offices in Associate | Slovakia Research 69 countries on [email protected] 6 continents Colliers International | Slovakia United States: 145 Twin City Tower Canada: 28 Mlynské Nivy 10 | 821 09 Bratislava, Slovakia Latin America: 23 +421 2 59 980 980 Asia Pacific:86 EMEA: 131

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