Including Style Guide and Master Layouts

RESEARCH REPORT H1 2018 Ukraine Part of the CBRE affiliate network Kyiv & Regions Retail Market Limited New Deliveries as Increasingly More International Brands Enter the Market

Total Stock Vacancy Prime Rents 1.1 mio 4.0% $65-$95 sqm (ca. +4% YTD) (-0.5 pp YTD) sqm/month (+8%-10% YTD)

Demand Domestic demand kept Ukrainian economic destination choice of leading retailers, with most growth at a reasonably steady pace averaging at of H12018 cross-border entries landing in 3.1% (y-o-y) in Q1 2018. The expansion of Kyiv Gulliver SC. With a view to target the most retail turnover (+4.3% YTD) continued on the affluent consumer audience, 55% of new entries back of rising disposable income, which, in turn, were represented by luxury and business fashion was stemming from a healthy increase in real segment, followed by mid-range fashion wages (+9.3% YTD). CPI accelerated by 4.4% YTD, segment (27%). Whereas a total of 11 new staying in line with the annual inflation target of international brands entered the market in the National Bank of Ukraine (8% +-2pp). In H12018, a brand of ARGO Retail Promod left the H12018 dynamic competition between food market after an almost 18-year presence in retailers resulted in new store formats and Ukraine, a likely result of worldwide refurbishments of existing locations in order to discontinuation of the brand. As an indication of improve competitive advantage of various players. fresh activity in street retail, the Ukrainian For instance, the French retailer Auchan Retail fashion brand Vsi Svoi announced plans to open introduced its first convenience store in Kyiv its second store, this time a 1,500 sqm named My Auchan. The new stores came as Homeware and Décor themed unit on 34 substitute to former Topmart locations that the Khreschatyk St., which was encouraged by the company acquired last year to pursue its success of its existing high-street shop on multiformat expansion strategy. In the fashion 27 Khreschatyk St. and the popularity of its segment, shopping centers remained the prime weekly pop-up fairs on 12 Desiatynna St. Figure 1: Kyiv Wages, Retail Turnover and Consumer Price Figure 2: New Brand Entries Structure by Retail Sector in H12018 Index (% change, y-o-y) ¹

Wages Retail turnover² CPI 9% % 40 9%

30 55% 20 27%

-10 Luxury and Business Mid Range Fashion

-20 2012 2013 2014 2015 2016 2017 H1 2018* Specialist Clothing Homeware and ¹ Excluding the temporarily occupied territories, the Autonomous Republic of Crimea, the Department Stores city of Sevastopol and part of the anti-terrorist operation zone. ² Includes organized retail sales only *Latest available data as of the end of June Source: Kyiv Statistics Office Source: CBRE Ukraine

BRAND RETAIL SECTOR ENRTY LOCATION All Saints Luxury and Business Ocean Plaza Alpina Specialist Clothing Plazma Antony Morato Mid-Range Fashion Cosmopolit DeFacto Value and Denim Globus Emporio Armani Luxury and Business Ocean Plaza HUGO Luxury and Business Sky Mall Jo Malone Luxury and Business Gulliver Kilian Luxury and Business Gulliver Koton Mid-Range Fashion Lavina Mall Santoni Luxury and Business Mandarin Plaza Zara Home Homeware and Department Stores Gulliver

Source: CBRE Ukraine

Supply

After a year of record low new supply, a total of Blockbuster Mall Phase l (120,000 sqm), Aprel ca. 47,000 sqm of newly built retail space was Phase ll (24,000 sqm), Smart Plaza Obolon delivered in H12018. The stock additions were (11,000 sqm), and Good Life (7,500 sqm). represented by Rive Gauche Phase l (20,500 Previously planned for 2018 delivery Retroville sqm), Smart Plaza Polytech (15,000 sqm), and SC was postponed this time until 2019, the first retail park in Ukraine – Retail Park therefore decreasing potential 2018 new supply Petrivka (11,000 sqm). As a result of these new in Kyiv by 80,700 sqm. Although the additions, the total professional stock volume construction of new retail schemes is grew to 1.1mio sqm (ca. +4% YTD). The progressing somewhat sluggishly, significant anticipated new supply of H22018 is forecast stock boost is expected to hit the market over to add up to ca. 162,500 sqm, represented by the 2019-2020 period. Figure 3: Kyiv Shopping Center Stock and New Supply

sqm Stock at the beginning of the year (lhs) New Supply (lhs) % Change y-o-y (rhs) 1,200,000 35%

1,000,000 30% 25% 800,000 20% 600,000 15% 400,000 10%

200,000 5%

0 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E lhs–left hand side; rhs–right hand side; E-Estimate Source: CBRE Ukraine

Smart Plaza Obolon

Retroville

Retail Park Petrivka Sky Mall (Phase III) Blockbuster Mall (Phase l)

Lukianivka Mall Smart Plaza Polytech Rive Gauche (Phase ll)

Aprel (Phase II) Good Life Rive Gauche (Phase l) Ocean Mall River Mall New Supply Delivered in H1 2018 Smart Plaza Holoseevo Kyiv Mall Forecast New Supply in H2 2018 Forecast New Supply in 2019-2020 Source: CBRE Ukraine Table 2:Key shopping centers in the pipeline, as of 2017

ANNOUNCED FOR DELIVERY GLA, sqm DEVELOPER Delivered in H12018 Retail Park Petrivka 11,000 Immochan Ukraine Rive Gauche (Phase I) 20,500 Immochan Ukraine Smart Plaza Polytech 15,000 A Development H22018 Aprel (Phase II) 24,000 Kyivproekt Development Blockbuster Mall (Phase l) 120,000 Mandarin Plaza/Megaline Good Life 8,000 Novopecherskyi Pasazh/Dosvid 2002 Smart Plaza Obolon 11,000 A Development 2019-2020 River Mall 59,000 Vilna Ukraina Retroville 80,700 Stolitsa Group Rive Gauche (Phase ll) 50,000 Immochan Kyiv Mall 58,000 Dilais Lukianivka Mall 47,000 Arricano Real Estate Ocean Mall 70,000 Megaline Sky Mall (Phase III) 39,000 Prizma Beta Smart Plaza Holoseevo 15,000 A Development Halted Respublika 135,000 K.A.N. Development

Source: CBRE Ukraine

Vacancy and Rents Figure 4: Base Rents Range in Kyiv Prime Schemes Despite new additions to the stock in USD/sqm/month H12018, average vacancy continued the 210 downward trend by inching from 4.5% down to 4%, as the new schemes were 180 170 170 delivered with almost full occupancy. 150 Demand for prime retail locations 136 remained strong, with prime vacancy 120 112 standing at 0%-2% range. Prime rent levels 100 100 97 95 90 86 86 86 continued to escalate, posting a healthy 80 80 80 growth of approx. 8%-10% YTD. Even 66 65 60 58 60 60 though the growth of USD-denominated 50 50 54 rents was amplified by UAH appreciation, 30 UAH-denominated rents continued to be 0 used ever more rarely, affected by limited

new quality stock. Prime rentals stood in

Q2 2013 Q2 2013 Q4 2014 Q2 2014 Q4 2015 Q2 2015 Q4 2016 Q2 2016 Q4 2017 Q2 2017 Q4 2018 Q2 the $65-$95/sqm/month range, with

secondary rates ranging between Source: CBRE Ukraine $32-$50/sqm/month and their upper bound growing by ca.10% YTD. Figure 5: Base Rents Range in Kyiv Secondary Schemes Investment USD/sqm/month In H12018 one notable transaction was 100

recorded on the market with Victoria 85 85 Gardens SC (50,000 sqm GLA) in Lviv being 80 acquired by Dragon Capital Investments 68 60 Limited. Moderately growing demand for 56 50 50 50 prime retail properties also assisted in the 46 45 45 compression of prime yields which reached 40 40 40 40 40 33 30 32 32 11.75% (-0.25pp YTD). Accelerating rental 27 25 25 25 20 incomes have the potential to increase investor interest in retail assets, with 0 particular focus on prime and secondary

schemes with lower competition.

Q2 2013 Q2 2013 Q4 2014 Q2 2014 Q4 2015 Q2 2015 Q4 2016 Q2 2016 Q4 2017 Q2 2017 Q4 2018 Q2

Regions Source: CBRE Ukraine

Regional organized retail turnover (35,000 sqm) and Mykolaiv (42,000 sqm), continued to show strength, advancing by expanding the chain to almost 50 stores across the 5.7% y-o-y over the last 6 months on the country. Retailers Eva (Rush LLC) and Watsons back of 10% y-o-y increase in real (DC Ukraine LLC) remain dominant on the disposable income. Grocery retailers were drogerie market, with the former totaling ca.700 the fastest expanding sector and as of the stores countrywide as of the end of H12018 end of last year accounted for ca. 50% (+100 stores YTD). The regional fashion segment (+0.3 pp y-o-y from 2016) of Ukraine’s retail recorded the first Usupso (Japanese Homeware sales. Enjoying local market expertise, ATB and Department) store open its doors in Ukraine Market LLC and Fozzy Group networks in Odesa’s Riviera SC, becoming the only new captured the largest value share in 2017, international brand in 2018 to enter a regional holding 6.6% and 5.6% respectively and city before Kyiv. The regional new supply was continuing to actively grow their regional represented by a small-sized Woodmall SC (10,000 presence. In the DYI sector, two Epicentr K sqm) in Khmelnytskyi. However, regional retail stores launched in the cities of Odesa space developments set for the next few years are (35,000

Figure 6: Company Shares of Retailing by National Brand Owners estimated at ca. 300,000 sqm. Understating (Retail Value RSP* in UAH mio excl. Sales Tax) the growing importance of leisure and entertainment components in enhancing ATB-Market LLC 6.6% customer experience and footfall, Dafi SC Fozzy Group 5.6% and Most-City SC in Dnipro commenced renovation and expansion works in H12018. Epicentr K LLC 2.6% In the meantime, scarce quality retail space Rozetka LLC 1.3% puts pressure on rental rates in the largest Auchan-Ukraine Hypermarket LLC 1.3% cities, as retail density per 1,000 habitants Allo LLC 0.9% stayed broadly the same in locations such as Apteka Magnolia LLC 0.9% 220 sq in Odessa, 200 sqm in Dnipro, 200 sqm in Lviv, and 155 sqm in Kharkiv. Omega LLC 0.9% Comfy Trade LLC 0.7% Figure 7: Density and Purchasing Power in the Largest Regional MTI LLC 0.7% Cities Rush LLC 0.7% Density (lhs) Average Nominal Wage (rhs) Novus Ukraina LLC 0.7% sqm/1,000 ppl USD/month Foxtrot Group 0.6% 450 500 400 450 Diesa LLC 0.6% 400 350 373 Eko LLC 0.6% 300 350 300 Furshet Group 0.6% 250 250 DC Ukraine LLC 200 0.5% 219 200 203 200 Brocard-Ukraine LLC 0.4% 150 150 155 100 Kyivstar PJSC 0.4% 100 50 50 Others 73.6% 0 0 0% 20% 40% 60% 80% 100% Lviv Dnipro Odesa Kharkiv Kyiv * RSP – retail selling price lhs–left hand side; rhs–right hand side Source: Euromonitor International Source: CBRE Ukraine

Table 3: Key Shopping Centers in the Regional Pipeline, as of H1 2018 ANNOUNCED FOR DELIVERY GLA, sqm CITY DEVELOPER Delivered in H12018 Woodmall 10,000 Khmelnytskyi Ukrainian Building Capital H22018 Gagarin Plaza (Phase ll) 20,000 Odesa Atlanta Invest Development Harmata 6,000 Zaporizhzhia Local developer 2019 Nikolskiy 52,000 Kharkiv Budhouse Group Arsen 33,000 Lviv Proekt Center Les Vignes (Phase l) 17,000 Odesa Immochan Ornava (Phase ll) 25,000 Ternopil Rodyna Invest Ternopil Mall 50,000 Ternopil Local developer Yessa 39,000 Odesa Budhouse Group 2019 (Renovation) Dafi 16,000 Dnipro Dafi Most City 25,000 Dnipro Alef Estate 2020 Fabrika 2 68,000 Zaporizhzhia Budhouse Group Project Shopping Scheme 100,000 Zaporizhzhia DELTA Ukraine Source: CBRE Ukraine

Outlook Key Office Market Indicators Summary and Outlook Should the current tempo of domestic Upward economy’s expansion continue, the 1,056 1,094 forthcoming H22018 will be marked with ('000 sqm) ('000 sqm) Trend another uplift in consumer demand and,

as a result, in retail turnover. After years- TOTAL TOTAL STOCK long wait-and-see position , the following H12017 H12018 H22018 brands are expected to finally make their way into the Kyiv market by the end of 2018: Decathlon (French specialist 8.0 47.0 Upward clothing brand), H&M (Swedish mid-range ('000 sqm) ('000 sqm) Trend fashion brand), and IKEA (Swedish homeware and department store). At the same time, 12 retail schemes with almost SUPLLY NEW 600,000 sqm in total are currently under H12017 H12018 H22018 construction and are set for delivery in the next few years (excluding halted Downward construction of Respublika SEC). With 7.0% 4.0% expansion strategies ever increasing Trend among international retailers, average market vacancy will be kept in check or

may shrink further, thereby creating VACANCYAVERAGE H12017 H12018 H22018 further upward pressure on prime rental rates. Capital rates are also expected to further solidify, as more international $60-86 $65-95 Upward players seek to enter the market, with low (sqm/month) (sqm/month) Trend interest rate international lending becoming restrictively available for prime investment transactions in Ukraine. PRIME RENTAL RANGE RENTAL PRIME H12017 H12018 H22018

Downward

12.5% 11.75% Trend PRIME YIELD H12017 H12018 H22018 Source: CBRE Ukraine

CONTACTS For more information regarding this Market Report, please contact:

Sergiy Sergiyenko Radomyr Tsurkan Managing Partner Managing Partner e: [email protected] e: [email protected]

Diana Starunchak Anzhelika Arzumanian Head of Marketing and Research Senior Analyst e: [email protected] e: [email protected]

Definitions (in alphabetical order)

Prime Rent - represents the typical “achievable” open market headline rent which an international retail chain would be expected to pay for a ground floor retail unit of up to 200 sqm commensurate with demand in each location. It is assumed that the occupier will also be agreeing to a package of incentives that is typical of the market at the time.

Prime Yield – represents the yield which an investor would receive when acquiring prime property in a prime location (CBD or major urban intersection, for example), which is fully let at current market value rents. Prime Yield should reflect the level at which relevant transactions are being completed in the market at the time but need not be exactly identical to any of them, particularly if transaction flow is very limited or made up of unusual one-off transactions. If there are no relevant transactions during the survey period a hypothetical yield is quoted and is not a calculation based on particular transactions, but it is an expert opinion formed in light of market conditions, but the same criteria on building location and specifications still apply.

Shopping center - a retail property that is planned, built and managed as a single entity, comprising units and “communal” areas with a minimum gross leasable area (GLA) of 5,000 sqm and offering good quality tenant-mix, at least 50% of which should consist of chain retailers.

Under Construction - represents the total amount of gross leasable area of properties where construction has commenced on a new development or in existing properties where a major refurbishment/renovation is ongoing at the survey date. This is where site works (foundation works) have begun or the ground has been broken (excavation works). It does NOT include demolition, sites being cleared for possible development in the future, or site preparation works where no specific development plans have been approved.

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