Romania Market Overview Real Estate Highlights H1 2018

In ROMANIA MARKET OVERVIEW H1 2018 YoY dynamics of the economy “decelerated from 6.7% in 4Q2017 to 4% YoY in 1Q2018, the slowest pace since 3Q2015.

Total stock in reached 2.6 million sq m at the end of H1 2018 for class “A & B office buildings. 04 06 10 Romanian Economic Office Investment Overview Market Market

12 14 16 Retail Land Industrial Market Market Market

By the end of 2018 approx. 170,000 sq m new retail space are

“forecast to be delivered. 18 20 21 Residential Project Property Market Management Taxation

22 Legal Aspects

The housing prices in Romania increased “in Q1 2018 by 1.4% compared to Q4 2017.

In H1 2018, the modern industrial stock “in Bucharest doubled in comparison with 2015. Contents

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As regards the supply-side there can be noticed the increase of the primary sector by Romanian Economy 6.7% YoY during January−March. The value added in IT&C also climbed by The convergence 5.4% YoY in 1Q2018. At the same time, the domestic industry advanced by 4.4% YoY, an evolution towards potential supported by the exports’ impulse and by the relaunch of the public investments.

Dr. Andrei Radulescu The cyclical component trade/auto- Director Analiza moto repair/transport and warehousing/ Macroeconomica HORECA also rose by 3.7% YoY. On the Banca Transilvania other hand, the construction sector adjusted by 2.1% YoY in 1Q2018.

According to the flash estimates of the National Institute of Statistics the Romanian This evolution confirms the maturity phase At the same time, the private consumption with the exports during 2018−2020: annual economy slightly accelerated in 2Q2018 of the post-crisis cycle, in a context of (the main component of the GDP) climbed average paces of 8.6% vs. 6.9%. (4.1% YoY) and rose by 4% YoY in 1H2018. diminishing convergence among the main by 5.8% YoY in 1Q2018, due to the increase of The global For the labour market we forecast the In Romania economies and accumulation of several the real disposable income of the population In the core macroeconomic scenario Banca economy change of the trend (from improvement to YoY dynamics macro-financial challenges in the emerging (the net average real wage rose by 6.6% YoY) Transilvania forecasts the deceleration of increased in deterioration) in the following quarters. of the economy and developing countries. “2Q2018 by the and the positive climate in the credit and real the YoY growth pace from 6.9% in 2017 to “decelerated from In this scenario the annual average rate of 4.3% in 2018, 3.5% in 2019 and 3% in 2020. As regards the supply-side analysis there slowest pace estate markets. unemployment (the structural component) 6.7% in 4Q2017 to In other words, we expect the convergence can be noticed the deceleration of the since 3Q2017, We underline that fixed investments climbed may decline to 4.5% in 2018, but would 4% YoY in 1Q2018, of the growth pace towards potential, manufacturing, due to the intensifying global according to the increase to 4.8% in 2019 and 5.4% in 2020. the slowest pace by a higher pace compared with the private with prospects for negative output gap in trade tensions. However, the services sector PMI Composite since 3Q2015. consumption in 1Q2018, for the first time 2019 and 2020, as can be noticed from the In our view the main risk factors to the accelerated last quarter (the best dynamics indicator since 2015, as can be noticed in the figure figure below. dynamics of the domestic economy in since 3Q2014), given the incorporation of the computed below. The inventories also contributed by the short and mid-run are: the global and Digital Revolution. by JPMorgan This scenario is supported by several factors: 1.7pp to the GDP growth pace in 1Q2018. European macro-financial developments, and Markit the maturity of the global and European The US GDP increased by 2.8% YoY in including the evolution of the risk perception Economics. On the other hand, the government post-crisis cycle, the rebalancing of the 2Q2018, the highest pace since 2015, being on the emerging markets and the global consumption adjusted by 3.4% YoY during domestic policy-mix and the deterioration noticed the advance of the fixed investments trade tensions; the economic policy-mix, January−March this year. of the leading indicators (the economic by 5.5% YoY, an evolution supported by the the public tensions, the deterioration of the confidence indicator diminished to the affordable level of the real financing costs and Last, but not least, the imports continued to macroeconomic equilibria and the delay lowest level since September 2014). by the implementation of the fiscal reform. increase by a higher pace compared with the of the structural reforms in Romania; the exports in 1Q2018 (11.4% YoY vs. 8.1% YoY). However, we point out that we may upwardly regional climate. On the other hand, the Euroland economy revise the scenario if structural reforms continued the deceleration process (2.2% YoY accelerate. in 2Q2018, the slowest pace since 1Q2017), GDP, private consumption and fixed investments GDP vs. potential GDP in Romania given the global challenges and the fading YoY (%) According to BT macroeconomic scenario YoY (%) 1998 out of the impact of the unprecedented -20 -15 -10 -5 0 5 10 15 20 the investment cycle would continue, given 2020 1999 10 expansionary monetary policy. 1Q10 the exports’ impulse, the low level of the 2Q10 2019 2000 8

3Q10 GDP real financing costs, the relaunch of the In China the GDP decelerated to 6.7% YoY 4Q10 6 1Q11 public investments, the competitive level 2018 in 2Q2018, the weakest growth pace since 2001 2Q11 of the costs and the geo-strategic position 4 3Q2016. 3Q11 4Q11 of Romania. In this scenario the fixed 2017 2 1Q12 2002 In Romania the YoY dynamics of the 2Q12 investments may increase YoY by 4.9% in 0 3Q12 Private consumption economy decelerated from 6.7% in 4Q2017 2018, 3.4% in 2019 and 3.5% in 2020. 4Q12 -2 to 4% YoY in 1Q2018, the slowest pace 1Q13 2016 2003 2Q13 As regards the private consumption we -4 since 3Q2015. The domestic demand had a 3Q13 4Q13 forecast YoY growth paces of 6% in 2018, -6 contribution of 5.8pp to the growth pace, an 1Q14 5.8% in 2019 and 5.2% in 2020, an evolution 2015 evolution supported by the expansionary 2Q14 2004 3Q14 supported by the positive labour market policy-mix. 4Q14 1Q15 climate and by the low level of the real 2Q15 2014 There can be noticed the continuity of the 3Q15 interest rate. 2005 4Q15 investment cycle, with the gross fixed capital 1Q16 2Q16 investments Fixed On the other hand, the manoeuvre room of formation climbing by 6.3% YoY in 1Q2018, 2013 2006 3Q16 the government consumption is limited unless given the influence of several factors: the 4Q16 1Q17 the Administration implements consolidation exports’ impulse, the relaunch of the public 2Q17 2012 2007 3Q17 measures, given the high level of the public investments and the affordable level of 4Q17 deficit (risk of getting over 3% of GDP). 2011 2008 GDP the real financing costs (the increase of the 1Q18 2Q18 2010 2009 nominal interest rates was counterbalanced At the same time, we expect the imports Potential GDP by the acceleration of inflation). Source: Eurostat, AMECO, INS to present a better performance compared Source: BT estimates and forecasts based on Eurostat database

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RENTS and Expo Business Park (36,500 sq m) in the new emerging business hub, Presei Libere Rents stayed similar to previous years. Prime Square; following the same number of sq m, headline rents remained unchanged and were Prime rental Office Market Vastint is finalisaing the third building of reported at around €18–18.50/sq m/month. levels remain stable at Timpuri Noi Offices (20,000 sq m) and VACANCY “18.5 €/sq m/ Business Garden (41,300 sq m). Other large The vacancy rate for Class A and B office month. projects such as Anchor Plaza Metropol Total stock in Bucharest buildings is on a downwardtrend: the market (36,000 sq m), the third phase of Globalworth reached 2.6 million sq m at is experiencing a vacancy of 9%. Campus (30,000 sq m), Globalworth Square the end of H1 2018 for class (29,700 sq m), The Bridge B (25,000 sq m), “A & B office buildings. The latest vacancy indicators are deciding The Light Project (23,000 sq m), Equilibrium the most sought after submarkets, as it I (20,300 sq m), Daniel Danielopolu follows: Calea /Barbu Vacarescu (7,000 sq m) and 109 with a continuous decrease in vacancy rate, (6,000 sq m) are contributing to the reaching today 2%, and CBD with one of its substantial growth of the expected supply. lowest vacancies in years – 3%. Rounding up the projects on the second half FORECAST of 2018 and 2019 we get a roughly 473,000 By the end of the year we are expecting to of class A office space focused mainly in see another 149,500 sq m of class A offices Center West area (46%) where the current delivered ver eight projects: Orhideea vacancy rate is at 8% and Calea Floreasca/ Towers (36,900 sq m), Sema Parc Berlin Barbu Vacarescu area (21 %)with a vacancy (15,700 sq m), Unirii View (18,700 sq m), of 2%. The remaining 33% of the projects are The Mark (20,500 sq m), AFI Tech Park I split between the Centre area (11%), Presei (20,000 sq m), Campus 6.1 (20,000 sq m), Libere Square (9%) , CBD (7%) and Dimitrie Day Tower (12,000 sq m), D’OR Project Pompeiu (6%). OVERVIEW DEMAND (5,700 sq m). Adding the 33,000 sq m already Prime headline rents Bucharest’s office market experienced (€/sq m/month) Total take-up in Bucharest reached delivered in the first half of 2018, the market SUPPLY IN H2 2018 healthy growth, reflected by a total take-up 131,000 sq m for class A & B office space. will reach to a total of approx. 183,000 sq m At the other end of the spectrum, demand of 131,000 sq m, representing 40% of last 16–18.5 This volume represents 42% of the total of office space delivered. The higher rate of registered a 14% decrease in the first half of take-up achieved in 2017. The number year level. CBD deliveries is focused on the second half of 2018 compared to the same period of 2017. of transactions concluded in the first 2018, hence the rather slow start to the year. The most sought after submarkets in the In mid 2018, Following last year’s trend, the main focus six months almost doubled in number first half of 2018 were Centre-West and 14–16 For 2019, the targeted supply will peak, there were cca. will be on relocations and new demand. compared to the same period of last year, Centre with a combined leased area of Presei Libere Square reaching, in total, office deliveries of cca. Headline rents are expected to remain stable but the average transaction decreased 78,000 sq m, representing almost 60% of the 323,000 sq m. over the next year. from 2,200 sq m in 2017 to 1,200 sq m in 1 million total transactions. If we compare these with 14–17 sq m H1 2018. Portland only will map 61,000 sq m, speculatively Service charge levels followed the the same period of last year, we notice a shift Calea Floreasca comprised of two projects in separate to be delivered by same stable trend, ranging between between the submarkets that were in high /Barbu Vacarescu In terms of size, transactions of less than submarkets: Oregon Park C (24,600 sq m the end of 2022 €3.50–4.50/sq m/month. demand: over 36,500 sq m in Calea Floreasca/ 1,000 sq m were dominant, their total Barbu Vacarescu area and over 27,000 sq m in 13–15 area accounting for a 60% share of the the Central Business District (CBD). Center-West total take-up, a notable increase from the previous year (45% in 2016). As expected, the IT&C sector remains the most in demand, accounting for 35% 12–14 In terms of locations, the Centre-West Baneasa of the entire take up (approximately submarket registered a significant demand 43,000 sq m), compared to the 46% for the of 47,000 sq m (37% out of total take up). % 11–13 The Centre area came in as runner-up with same period in 2017. 15.6Total speculative East 24% of the total take-up, followed by Calea supply to be Floreasca/Barbu Vacarescu 13%. SUPPLY 11–13 delivered in H2 2018 In the first half of 2018 we saw a modest Relocation and new demand were of Dimitrie Pompeiu increase in class A office stock with just notable significance, reaching more than 33,000 sq m delivered in Presei Libere 60,000 sq m. Pre-leases also had a strong 11–12 Square and Dimitrie Pompeiu areas. The drive with approx. 40,000 sq m, which, % West office space is divided between two projects, however, represents a mere 25% of the 84.4Total speculative the largest being Globalworth’s Campus II previous year’s volume. supply to be with 29,400 sq m and BASP Victoria with 10–11 Similar to previous years, the main delivered until 2022 3,500 sq m. South demand driver was the IT&C industry From the stock point of view, the submarket accounting for 35% of the total take-up, with the highest modern office stock is Calea 8–10 with the energy/manufacturing and 84+16+K Pipera Floreasca/Barbu Vacarescu (430,000 sq m) industrial sector coming in second with followed by Dimitre Pompeiu (408,000 sq m) 24% of the total demand, the largest which took the lead over last year’s second transaction in the first half, was concluded ranked, CBD (390,000 sq m). Source: Knight Frank in this sector.

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Demand by tenant activity sector Vacancy rates Demand by submarket H1 2018 H1 2018 MAIN

33% OFFICE HUBS Pipera IN BUCHAREST 16% A+B It & Centre % Center West 35% Communication 36 H1 2018 14% South Baneasa 11% Baneasa

Manufacturing 8% % Industrial % Center 24 & Energy Centre West 24 Pipera 8% Dimitrie Pompeiu Dimitrie Presei Calea Floreasca Pompeiu % /Barbu Vacarescu Libere 16% Other 6% 13 Square Presei Libere Square CF/BV

Consumer % Services & Leisure 3% % CBD 6 CBD 12 Finance/Banking/ % Insurance CBD 6 Presei 2% % Libere Square Professional 6 % Services Calea Floreasca Dimitrie 5 /Barbu Vacarescu % Pompeiu Medical 5 % & Pharma % Baneasa 5 0% 1 Media & Marketing West % East 4% 1 East Center West Center Source: Knight Frank Source: Knight Frank Source: Knight Frank West

Demand by type of transaction Demand by leased area H1 2018 H1 2018

South

Pre-Lease 30% 44% 1,000–3,000 sq m

Baneasa Pipera Presei Libere Square Stock 230,000 sq m Stock 187,000 sq m Stock 136,000 sq m Vacancy 11% Vacancy 33% Vacancy 6% Relocation % & New Demand Headline rent 12−14 Headline rent 8−10 Headline rent 14−16 46 27% >5,000 sq m €/sq m/month €/sq m/month €/sq m/month

Dimitrie Pompeiu CF/BV Center West Stock 408,000 sq m Stock 430,000 sq m Stock 315,000 sq m The first half Vacancy 8% Vacancy 2% Vacancy 8% of 2018 recorded % <1,000 sq m Renegotiation/ 14 Headline rent 11−13 Headline rent 14−17 Headline rent 13−15 17% Renewel a total take-up €/sq m/month €/sq m/month €/sq m/month “for class A & B offices of over CBD West Center 131,000 sq m, % Expansion % 3,000–5,000 sq m Stock 390,000 sq m Stock 76,000 sq m Stock 295,000 sq m 7 a 16% decrease 15 Vacancy 3% Vacancy 0% Vacancy 16% compared to Headline rent 16−18 Headline rent 11−12 Headline rent 13−17 the same period €/sq m/month €/sq m/month €/sq m/month Source: Knight Frank last year. Source: Knight Frank

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and are not interested in selling. This fact is expected to report significant transactions also reflected by the increasing interest in as most of the existing owners are more

forward purchases as a way to secure good interested in further expanding their Foreign funds Capital Markets quality properties which are delivered by portfolio and consequently it will likely be a accounted for developers who are normally not holding scarcity of available products. more than 99% their properties. “of the total Analysing the above, increased demand OVERVIEW Romania investment transaction volumes activity but local Retail assets are still of high interest to stemmed from several new investors looking Annual evolution (€mn) In the first half of 2018 the commercial capital is also existing and new investors who are looking for high quality income producing assets. Demand was property volumes reached €360 million. actively looking for new opportunities in the following However investors that have been both 2000 mainly generated Despite the relatively low activity in the for investment period. Nevertheless, in 2018 established active and inactive in the market in recent by new investors first quarter, in the second quarter with we opportunities developers and investors were also active and years have also reported significant activity. “looking for high saw 3 large transactions which accounted and might the additional liquidity is likely to further As in recent years, foreign investment was quality income for more than 80% of the total volume become more encourage other investors to enter the market the main driver of activity, accounting for generating reported in this period. active on the or consolidate their existing portfolios. more than 99% of the total investment assets but Overall, H1 2018 relied mainly on the office short term. volume although local capital is becoming established Also the industrial and logistics segment and retail segments while the industrial more active and several high net worth investors have maintains a strong growth potential sector has not reported significant activity. individuals are actively seeking investments also accounted and there are a significant number of A significant part of the total transactions opportunities on the local market (eg. for a significant developments which will be delivered in volume was generated from new players Paval family was last year in an advanced weight of the the upcoming years. It is therefore likely negotiation process to acquire the first three investment that have entered the market, however that in the following years we will witness buildings from AFI Park developed by AFI volume. established players familiar with the market a significant number of transactions in this Europe but the transaction was not finalized). 1500 expanded their portfolios by acquiring segment as well. income-producing assets. New players are Considering the ongoing transactions which showing interest in the Romanian market DEMAND are likely to close by the end of the year it is as demand continues to be boosted by the The total investment volume reported in H1 expected that the total investment volumes favourable economic environment and very in 2018 will be above €1 billion which will 2018 was almost of €360 million which is competitive risk adjusted returns. mean that we will see the largest volume of The total significantly higher than the volume reported transactions in the past 10 years. investment in the same period of last year. SUPPLY volume reached The office segment was the main driver in “almost €360 The level of supply was not significant YIELDS in terms of products sold or availability, terms of volume with transactions exceeding Despite the improved levels of activity million in the €230 million (slightly more than 65% of the first two quarters however the size of available products registered in 2018 compared with 2017, yields increased significantly (the average deal size total market volume). Two major transactions have not registered a decline in the office of 2018, with were concluded in the first half of the year potential to increased to €45 million from €17 million in and retail sectors. Nevertheless the overall 1000 both involving projects still partly in a reach more than the same period of last year). compression trend seems to be maintained construction phase. The most significant and we might witness a compression in yields €1 billion by end The office segment is experiencing a shortage transaction was the sale of Oregon Park in the following years. of the year. of product available for sale as a significant (almost 70,000 sqm GLA) by Portland Trust part of the existing landlords are trying to to the new entrant Lion’s Head followed by the The gap between the local market and the consolidate their position on the local market sale of the first building from the Campus 6 leading markets in the region (Prague and project (almost 22,000 sqm GLA) developed Warsow) is still above 150–200 bps indicating by Skanska which was sold to CA IMMO. that a moderate yield compression might be Transaction distribution by property type 2018 expected towards the end of the year or early The retail sector also reported a significant in 2019, especially in the office sector. volume accounting for slightly more than 30% of the total investment volume. FORECAST The main transaction reported was the 2018 will likely be a record year in terms of sale of Shopping Center which 500 investment volumes. In the first two quarters was acquired by MAS Real Estate from investment activity increased significantly Atrium Real Estate Europe Limited. Other in the Romanian real estate investment transactions involved the sale of Magnolia market indicating the growing confidence in Shopping Center and one Praktiker shop Prime yields % Romania’s macroeconomic environment and 2018 (%) sold by Miller Development and Ballymore 66Office real estate market. Group respectively to two private individuals 7.5 Moderate yield and Mitiska REIM respectively. Also investor demand remained focused on compression is top quality assets and some new investors Office The industrial and logistics sector reported expected in the have entered the market while other already very low volumes with only one transaction “short to medium established investors continued acquisitions announced in this period (established player 7.25 term, however thus sending positive signals to other Retail WDP bought an industrial park in Ghimbav the risk adjusted potential investors who are still reluctant to % from Flenco East Europe in a sale and lease- returns are enter the market. 0 30Retail 8.5 % still attractive back transaction). Although this segment Hotel4 only accounted for approximately 3% of Therefore, the sentiment remains positive, 2011

2017 Industrial 2012 2013 2015 2014 2016 2010 compared with 2007 2005 2009 2006 2008 2004 the total investment volume, the interest in and an improved market activity is expected

H1 2018 other regional over the coming years. Source: Knight Frank Source: Knight Frank Source: Knight Frank markets. this segment remains high although it is not

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MOST ACTIVE SUPPLY Also, the acquisition of the Militari Shopping DEVELOPERS The first half of the year saw the delivery of Center by MAS Real Estate for €95m is due to complete buy the end of 2018. NEPI Rockcastle approx. 25,000 sq m of modern retail space across three projects. Almost half of the Mitiska Reim new supply is covered by the extension of DEMAND Sun Plaza in Bucharest owned by S Immo. The development of the retail segment from Prime Capital The new space of 11,000 sq m GLA was the past years encouraged the growth of inaugurated at the beginning of this year. the demand. Retailers interest remained Another two projects were delivered in high and vacancy rates low. In Bucharest, the first half of the year, but this time out of shopping centre players are lined up to enter Bucharest: Bistrita Retail Park developed by the market, given the low vacancy in the Element Development, with 7,850 sq m GLA, prime commercial units. and Focsani Value Center with 6,400 sq m It is also important to note the shopping GLA, developed by Prime Kapital/MAS REI. centre as an “experience”, the most significant Another notable retail movement in the magnets being the entertainment tools. People first half of the year was the closure of are enjoying the shopping, but mostly the Carrefour hypermarket and gallery from experience given by the cinema, coffee shops, Vitan Shopping Centre in Bucharest. The food courts, social areas, etc. Thus, even with shopping centre remained with 16,000 sq m the growth of ecommerce the shopping centre By the end of 2018 GLA after Carrefour exit, almost half of the still plays an important role and will continue approx. 170,000 sq m previous area. to grow in the following years. new retail space are “forecast to be delivered.

RENTS The most active developers in the retail In the first six months of 2018, prime market remain NEPI Rockcastle, Mitiska rents for the leading schemes remained Reim and Prime Kapital. relatively stable. Rents were approx. Given the volume of new deliveries due in €65–75/sq m/month for 100 sq m units for the next two years, we expect to see many shopping centres in Bucharest and between new market entrants. €30–40/sq m/in the secondary cities.

FORECAST Bucharest will see the delivery of Auchan extention, while the rest of the new space will be delivered in the country.

Among the new shopping centre supply, the second half of the year will see the delivery of IKEA Pallady with a total area of 37,000 sq m.

PROJECTS SET TO BE DELIVERED IN 2018

Project City Developer GLA (sq m) Sun Plaza Bucuresti Bucharest S Immo 11,000 Bistrita Retail Parkt Bistrita Element Development 7,850 Focsani Value Center Focsani Prime Kapital/MAS REI 6,400

Source: Knight Frank

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SUPPLY Hagag Development bought two land plots Both Bucharest and the secondary cities major and two buildings in Bucharest this year. One land supply is coming from the former factories land plot on Eliade Street and one in Pipera, both for residential developments. Land Market platforms, located in semi-central areas.

In Bucharest, the few remaining prime Another notable transaction was the land plots, located in central/high end acquisition of the development land Festival residential areas, are also sought-after by Mall in Sibiu, by NEPI. the residential constructors/developers. Given the large quantity of big residential PRICES projects announced or under construction, Prices remained at a constant level the small developers focus on central land throughout H1 2018. plots with small boutique projects, with good transportation network. FORECAST We have seen an increase in demand for land One essential aspect in selling a land plot plots suitable for residential and office use is the Building Permit or PUZ. Investors and we expect the trend to continue in the are more interested into land plots with following months. Mitiska Reim is preparing development documents issued, than to lose to acquire a 9 ha land plot in Bucharest from 2 years for approvals and miss the trend. PwC Business Recovery Services (BRS) which is expected to complete by the end of the year. DEMAND Demand trends have remained positive in H1 In the last two years several new office hubs 2018, with high volumes of activity witnessed have been shaped in Bucharest such as across all market segments. Demand has Grozavesti and Timpuri Noi areas. This new been on heights for office land plots. trend comes with the developers’ desire to decongest the existing office hubs. We expect AFI Europe bought a 43,000 sq m land plot other areas to grow in the following period, situated in the proximity of AFI Park and AFI thus new land transactions are anticipated. , for 23 mil €. The land plot is part of the former industrial platform, UMEB. AFI Europe is planning to develop the commercial mix in the following years.

Globalworth acquired two adjoint land plots More investors LAND PLOT PRICES BY USE in order to develop two office buildings, (€/SQ M) are interested in Gara Herastrau/Barbu Vacarescu area, into the near Green Court office development. Office Barbu Vacarescu/ 1,500 “Romanian Calea Floreasca The transaction was estimated at 16 mil. €. market and are Also, Globalworth bought a land plot of Center-West 700–900 decided to buy 30 ha for 7.4 mil. € in Timisoara, near TAP Residential Prime areas 1,200–1,500 and develop development. Periphery 250–300 mixed use Retail Bucharest 350–500 projects (office, Forte Partners bought two land plots in Countryside 100–250 commercial, Bucharest: 5,400 sq m land plot from residential). Hercesa and 8,700 sq m from UniCredit. Source: Knight Frank

RELEVANT LAND TRANSACTIONS 2018 Location Byer Size (sq m) Value (€ Mil.) Bucharest AFI Europe 43,000 23,000,000 Sibiu NEPI 34,000 21,000,000 Bucharest One United 25,000 20,000,000 Bucharest Globalworth 16,000 16,000,000 Bucharest Speedwell 20,000 9,000,000 Timisoara Globalworth 30 ha 7,400,000 Bucharest Forte Partners 8,700 7,395,000 Bucharest Hagag Development 2,000 6,100,000 Bucharest Akcent Construction Projects 14,548 4,700,000 Bucharest Forte Partners 5,400 4,590,000 Bucharest Metropolitan Residence 7,500 1,875,000

Source: Knight Frank

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RELEVANT TRANSACTIONS H1 2018 Industrial Market In H1 2018, Tenant Area (sq m) Property Transaction type the modern Van Moer 15,000 CTPark Bucharest West Expansion industrial stock NOD 14,000 CTPark Bucharest New demand “in Bucharest doubled in Sarantis 9,800 WDP Pre-lease comparison Frankische 7,000 CTPark Turda Expansion with 2015 Mediapost 7,000 LogIQ Mogosoaia Expansion 360 Co-Packing 6,700 WDP Expansion Evobit Information Technology 6,000 Transilvania Constructii Expansion

Source: Knight Frank

DEMAND RENTS Total take-up in H1 2018 was around Rental levels for prime industrial and 100,000 sq m, reaching approx. logistics space remained stable in the 40,000 sq m in the country, respectively first half of 2018, both in Bucharest in the secondary cities. and in the other regions across the country. In Bucharest, prime rents Although Bucharest accounted for 60% of for modern warehouses are approx. total take-up, Cluj was the most sought-after regional location accounting for a further €4.0–4.2/ sq m/month. 23% of the total volume. FORECAST In general, the main sources of demand were New deliveries are expected to come onto the expansions and new demand, accounting for market in the second half of 2018. The most 85% of the total take-up. dynamic developers expected to contribute At the end of the first half of the year, more to the industrial stock are CTP and the vacancy rate remained low nationwide, WDP. On the other hand, vacancy rates with figures falling as low as 2% in are anticipated to grow given the expected Bucharest. deliveries and planned projects. SUPPLY MAIN CONTRIBUTORS Bucharest modern industrial stock (sq m) IN H1 2018 Since 2015, developers’ amplified interest for the Romanian industrial market CTP 2,000,000 translated into an increased yoy growth of the modern new supply. In H1 2018, WDP the modern industrial stock in Bucharest doubled in comparison with 2015. In the VGP previous years of stagnation, 2008–2015, the stock was around 1 million sq m, Transilvania while in H1 2018 the stock touched the 1,500,000 Costructii 2 million sq m threshold. Bucharest saw a flourishing development period in the first half of the year, adding approx. 330,000 sq m of logistics space to the modern stock. Among the main contributors 1,000,000 to the industrial space in the first half of 2018 were CTP, WDP, VGP and Transilvania Constructii.

The biggest influencer of the industrial new supply is the infrastructure. According to 130km.ro analysis, in H1 2018 no deliveries 500,000 were made to the national highway network. The projects for the new segments of the highway have a slow progress and the delivery terms are postponed.

A notable investment was the sale and 0 leaseback purchase of a 20,000 sq m 2011 2017 2012 2013 2015 2014 2016 2010 2007 2003 2005 2009 2006 2008 warehouse in Ghimbav, Brasov County, by 2004

WDP from Flenco East Europe Fluid System H1 2018 with a 10 year contract. Source: Knight Frank

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Over the last four years, there has been a the western half of the country have recovered the most from the tendency to increase the sale period of the price drops caused by the economic crisis. Compared to the first residential real estate. For apartments, the quarter of 2008, Cluj-Napoca is the only city in Romania that not Residential Market growth is slower from 2 months in 2014 to only recovered the price drop, but even reached an average price per 3 months in 2018, and the period of sale for square meter 15.2% higher than 10 years ago. The capital is among the houses will double from 4 months in 2014 to 8 cities with the largest decline, having to recover 41.8% of the level of building, a food hall concept, restaurants, months in 2018. Both sellers and buyers have a gym with pool, all bordering Floreasca Park. the average price of 2008. prudent attitude and are more informed. One Floreasca City, a mixed-use project, will be built on a 2.8 ha plot of land, 30% Although the increase rate of the prices CORPORATE RESIDENTIAL LETTINGS of which will be green spaces. slowed in the first quarter of this year, Although foreign investors continue to see potential in Romania and we are facing a continuous appreciation the appetite for high end residential properties is growing among The Israeli developer Hagag Development behaviour of the apartments based on the expats, Romanian buyers are showing equal interest in investing in Europe will deliver two residential projects increase of the demand and lack of the offer. high end properties. designed for high-end customers. The total A sustainable growth in the value of the real investment from the group in Romania estate should be supported by investments Residential complexes that provide high levels of privacy and reached €150 million, including H Pipera in infrastructure, utilities and quality social security continue to be the top pick for diplomats and foreign Lake, a project with 1,350 apartments in services accessible to communities in the executives from multinational companies. Kiseleff, Aviatorilor, Pipera area and Calea Victoriei 109 office new residential complexes. Dorobanti, Primaverii and Floreasca areas are highly valued for their project with 7,036 sq m GLA. Calea Victoriei proximity to parks and green areas. 139 brings a rare product to the high-end Regarding the type of housing sought by the residential market by transforming an potential buyers, new builds (apartments and Among the criteria underlying tenants’ preferences when choosing old block of flats into a modern boutique houses completed after year 2000) are still their new home, we identified the following: stylish atmosphere, residential building. The delivery date is favoured. The preference for the new housing secure community, green open areas, good transport access, H1 2019 and the project is summing 40 units can be found in Cluj-Napoca, Iasi and unobstructed views. apartments, totalling 6,000 square meters. Bucharest. In Timisoara, Constanta and The Baneasa-Pipera area is popular among families that appreciate The luxury residential market meets new Brasov older apartments are still more popular. its proximity to international schools and kindergartens, maintaining standards as H Eliade 9 is announced high standards of living outside the urban bustle. Herastrau and for 2020. The project will include 35 PRICES Aviatiei are favoured by young couples and young professionals who apartments summing up a total area of The housing prices in Romania increased prefer being close to the office hubs and with easy access downtown. approximately 6,000 sq m. Located in the in Q1 2018 by 1.4% compared to Q4 2017; best rated residential area of the Romanian a relatively small figure considering the capital, H Eliade 9 has all the odds of a increases recorded in the recent years. The FORECAST successful project. level of the seller’s claims is 6.4% higher in Although the increase rate of the prices slowed in the first quarter Q1 2018 compared to Q4 2017, however the of this year, we are facing a continuous appreciation behaviour of the In Floreasca, one of the most important same indicator was 12.9%, one year ago. apartments based on the increase in demand and the lack of offer. projects under construction is Rahmaninov 38. The local developer of the project has The evolution of the average prices per After a very good 2017 which saw significant increases in an impressive track record on the high-end square metres of the apartments over the investments and prices, the residential market looks set to maintain residential market and will deliver 32 luxury past 10 years shows that the localities in similar trends in 2018. apartments with 1, 2 and 3 bedrooms, topped by a unique penthouse with uninterrupted views. TOP FIVE HIGHLY DEMAND VALUED AREAS SUPPLY Since H2 2017, the residential market has Kiseleff entered a new phase of gradual slowdown Cap Nord is one of the most awaited Aviatorilor in price rises. Thus, the annual evolution boutique residential projects located in The housing registered in the second quarter of 2017 Dorobanti the northern area of Bucharest.​​ In H1 prices in declined in the first quarter of this year. 2019, the private developer will deliver 28 Romania Primaverii Moreover, the market data indicates a price apartments in the Jandarmeriei area. With “increased increase in Q1 2018 compared to Q4 2017, Floreasca approximate 5,000 sq m, the new project will in Q1 2018 of 1.4% − an advance below the quarterly be remarkable for the unique finishes and by 1.4% growth average recorded in 2017 of 2.2%. outstanding technical specifications. The view compared to the forest and green surroundings, with to Q4 2017 Demand for apartments and houses for sale easy access to the city centre and office hubs, is still strong; last year we talked about the make this project an attractive investment. insufficiency of the offer on the residential market in relation to the new delivered Developer One United Properties has properties. launched a new project that will include a residential component, One Mircea Eliade Also, demand for inexpensive housing has alongside One Tower Office Building a high volatility dictated by the First House with 24,000 sq m GLA. The €100 milion (Prima Casa) program, the volume o offer investment includes 236 exclusive design in this segment is continuously decreasing, apartments in 3 towers (GF+15F, GF+15F, and the new constructions fail to cover the GF+20F), together with One Tower office differences in the market.

18 | KNIGHTFRANK.COM.RO KNIGHTFRANK.COM.RO | 19 ROMANIA MARKET OVERVIEW H1 2018 The 2018 tax revolutions Project Management Diana Rosu Senior Tax Manager turn 1 year old PwC Romania

Spaces designed to promote shared activities increase the likelihood of interactions and 2018 can be referred to as the “fiscal financing solutions for either qualify as a step forward in attracting the data repeatedly demonstrate that more revolution” year and any investor investment purposes, working and keeping investment vehicles in interactions create positive outcomes: on the Romanian market should be capital needs or finance hedge will Romania, altogether with a low 5% or aware of at least five changes of the tax deduct only €200,000 plus 10% zero (in some cases) dividend tax. At system. Nevertheless, the “revolution” of a tax-adjusted EBITDA. The the same time, this new rule enables continues and is heading towards non-deductible excess borrowing more efficient short-term liquidity The content of 2019, with the objective of improving cost is carried forward and may access to immediate shareholders, interactions doesn’t the monitoring activity of taxpayers’ be deducted in subsequent years but with certain compliance costs matter; when conduct and easing their tax burden. (subject to applying the same cap and time-consuming procedures, interactions occur, annually). The excess borrowing since quarterly financial statements Some key aspects have been selected regardless of their costs include net interest expenses must be audited. and presented below, to enable an content, improvement and net foreign exchange losses. informed planning and management The new rules are, indeed, a step typically follows; of the real estate investment decisions. Equally important is that the above forward, but are still work in cap affects also all historical interest progress, as potential developments Assignment of non-performing and net foreign exchange losses, are needed and further impact Campus assets which have accrued and were not in 2019 should be expected – Greater than workplace! A limited deduction rule was deducted during development accounting, legal and tax wise. Sometimes introduced at the end of 2017 for stages. Deduction of these costs All real estate investors should circulating, assignment of receivables and was may be postponed indefinitely Office is not self-contained but very analyse their solvency and capital exploring, engaging, effective as of 1 January 2018, with or taken in immaterial amounts much connects with and spills over structures, to identify opportunities and increasing The essence of another turnaround in March 2018. annually, depending on the company into a mix of other uses, turning a work for liquidity placement and releasing the number of workplace as Namely, only 30% of losses that profitability. location into a place of choice. It has short tax-free reserves. people’s collisions an experience are incurred upon assignment of borrowed themes from other sectors: Consequently, all real estate vehicles is more important “is where all the receivables may be deducted for that become operational further to Automatic exchange of profit tax purposes. This rule has than individual elements of work the investment stage or that undergo information — cross-border impacted mainly banks and leasing productivity or 01 – the physical, group buy-outs should update arrangements Office as a tallent hub companies, but also utilities and creativity; A place that attracts young talent, where the the virtual and their medium to long-term budget telecommunications companies in An European Directive (typically simulations and consider their sense of belonging and camaraderie is like the behavioural an equal manner. referred to as DAC 6) was approved that experienced in the education sector by – are carefully financing mechanisms or capital in March 2018 with a potential structures, to make sure that their For example, a worker today’s generation of students – tomorrow’s orchestrated Nevertheless, real estate investors material tax impact on reportable should also look out for the effects deferred tax asset may be realized. finds a better way to workers – on a university campus. to inspire cross-border arrangements. of this rule. Most real estate Such tax costs may translate into do their job but never employees. Romania has not implemented the collateralized loans, which used higher cost of debt related to either Directive yet, but this is mandatory to tells anyone else doing 02 inter-company, external bank to be sold as distressed assets happen by 31 December 2019. the same job what they Office as a destination lending or private equity funds. Not just in the sense of its location with significant haircuts during have discovered. They restructuring transactions or Based on DAC6, intermediaries (e.g. in an urban setting but offering staff, There have been constant debates on have improved their bankruptcy procedures, may accountants, advisors, even company partners and visitors alike a welcoming increasing the deduction thresholds become scarce or may not be directors) must disclose in certain performance but no one to level partially or fully the space for co-creation and partnership. performed at all due to the significant conditions information on certain else’s. If the worker takes European thresholds, which are set at Such is the Crick Institute.A place for tax impact, which may exceed cross-border arrangements that time out of their day to €3 million and 30% of EBITDA. This encounter that borrows its aesthetics and in some circumstances even the occurred starting 25 June 2018, such tell others about what is something to watch closely in 2019, functionality from the hospitality sector. transaction price. Such tax costs may as selling loss-making companies has been learned, their as well. translate into higher financing costs to reduce tax liability, conversion own productivity drops, prospectively or bigger appeal for of income into lower-taxed revenue but group productivity 03 Interim dividend distributions Office as a brand share deals. Distressed real estate rich — short-term financing solution streams, circular transactions, etc. has increased; Borrowing from the retail sector, where it companies with sufficient fiscal losses, A short-term solution to the The key message is that all real is all about communicating and enhancing that would otherwise be lost, could aforementioned predicament of estate structures should perform potentially absorb the potential tax the brand. As employees are measured long-term financing costs may be an internal health check of their impact and keep the assignment of In some cases by their sense of initiative and the quality found in a recent amendment of the intercompany transactions and bad debts alive for some time. even a 5% drop of the output they produce, it becomes Company law and Accounting law. holding substance requirements to in personal increasingly important to display this. Limitation of financing options Starting July 2018, optional quarterly identify in due time any potential productivity can profit distributions were introduced, reporting obligation. There is no distinction anymore have a positive with an annual setoff between 04 between the tax regime of intra- In conclusion, albeit the continued Office as an event quarterly and annual profit levels. outcome on group Engaging people group or bank financing, irrespective significant tax impact of the above tax This is about the experience of work and The intermediary profits may be paid performance. with their work, of the company capitalization or its rules, the real estatAe sector should maximising its potential as it spills into life out to shareholders up to realised connecting debt to equity ratio, since the tax continue to check their realistically quarterly profits, retained profits and as part of a 14 hour day cycle. It borrows “them to the deduction rule has been normalized available options by prioritizing the reserves (conditions). its themes from the media sector and business vision for all investors and all financing tax function and simulating their brings together local businesses, large or and creating a sources. Briefly, an “excess borrowing Interim dividend distributions are capital and solvency structures small, and communities around shared great workplace cost” rule applies currently, which typical to most holding jurisdictions against their medium to long-term experiences, that become the talk of town. experience. means that a company that seeks and the local amendment may budget plans.

20 | KNIGHTFRANK.COM.RO KNIGHTFRANK.COM.RO | 21 ROMANIA MARKET OVERVIEW H1 2018

Roxana Fratila Real Estate Pre-SPAs Head of Real Estate CMS_LawTax_CMYK_19-27.eps Alex Dumitrescu Associate Tips for the seller CMS Cameron McKenna

We will refer here to a typical, simple, straightforward real estate Pre-SPA and ask the notary to certify that transaction, between two non-professionals, with no complications the buyer did not fulfil its end of the bargain or negotiations for warranties or indemnities and (as it often happens and, therefore, the Pre-SPA is terminated. In in practice) without any legal assistance involved on seller’s side. this case, the notary would issue a certification resolution (in Romanian incheiere de certificare In practice, once a seller of real estate has finally found its buyer, the usual avenue is two-folded: fapte), based on which the seller (or the (i) the conclusion of a pre-sale agreement (in Romanian notary) can deregister the Pre-SPA from the antecontract de vânzare) (the “Pre-SPA”) in front of a public land book, immediately after expiry of the notary, when the buyer also pays an non-refundable advance Pre-SPA, without any loose ends. payment (e.g. 10% of the purchase price) and Otherwise, the Pre-SPA can only be (ii) a final sale agreement (in Romanian contract de vânzare), to be deregistered based on (a) the notarized concluded within a term specified in the Pre-SPA, in notarized waiver of the buyer or (b) a court resolution. form, the latest on the expiry date of the Pre-SPA. The typical Because a court resolution could take years condition for the conclusion of the final sale agreement is the to obtain, this practical glitch gives an unfair buyer finding sufficient funding for the deal. If the buyer does advantage to a bad faith buyer who can e.g. ask not succeed in finding the money, the deal is off and the seller the advance payment back or create any other keeps the advance payment. nuisance to the seller, on a case-by-case basis.

HOW THE PRE-SPA CAN BECOME A TRAP FOR THE SELLER? HOW CAN A NOTARY MISS THIS? Parties usually go to a notary, without seeking legal assistance, It might be surprising how legal assuming that such a simple deal cannot go wrong. In recent practice, professionals, like the notaries, can make unfortunately, a notary will rarely explain to the seller that, once such an easy mistake and not insert the above concluded, the Pre-SPA will be registered in the land book (in wording. And even assuming that the notary Romanian cartea funciară) of the real estate, thus blocking the real is negligent, how can the law not protect estate from a sale to a third party until expiry of the Pre-SPA. One a seller in such a simple, straightforward could argue that this is common sense. Sure, but the notary might case and why is this natural protection so also fail to explain that an expired Pre-SPA is not deregistered dependent on the notary inserting or not a automatically from the land book of the real estate once the Pre-SPA certain a specific wording? The matter seems expired. counterintuitive and, as briefly explained Why is this important? An expired Pre-SPA, even registered with below, it is. the Land Book, would no longer block the owner to sell the asset to In fairness, the underlying problem is an any third party. Agreed, but, in practice, any non-experienced buyer inconsistency between the provisions of would be very uncomfortable having a Pre-SPA hanging over the real several laws applicable in the case. Without estate it wants to buy. It would take much time and effort for the seller going into detail, when these laws initially to convince such potential buyer that in fact, there is no substantial hidden legal issue and the matter is only a technicality (as further came into force, they were correlated. So the explained below). matter described above could not have happen and a notary could not have made And, most importantly, after a failed deal, finding a new buyer is such a simple yet, costly mistake for the seller, hard and volatile enough to risk having loose ends; therefore, the even if they did not insert the respective seller wants its land book cleaned, quickly, to start over the search wording. But when the respective laws were for a new customer. further amended, the legislator failed to keep To enable such quick deregistration, the notary must take the them correlated and some of the notaries following steps when notarizing the Pre-SPA: failed to make up for such lack of coherence, (i) insert specific wording inthe Pre-SPA that the Pre-Sale is by adapting their practice in favour of serving automatically terminated if the buyer fails to meet the deadline. their customers in a balanced manner. Despite what one would expect, the legal effects of the above Therefore, to avoid complications, wording are not implicit, therefore they do not exist unless the specifically mention the above two steps to wording is expressly written in the Pre-SPA; and the notary and make sure they implement (ii) register such wording in the land book of the real estate, them. Read the Pre-SPA carefully, before together with the Pre-SPA. signing it, and then make sure that both the Connecting If these two simple steps are observed, assuming that the deal fails Pre-SPA and the mentioned wording are , because the buyer did not to find financing in due time, the seller registered with the Land Book of the real people & property would simply show before the notary, on the expiry date of the estate you are trying to sell. perfectly.

22 | KNIGHTFRANK.COM.RO KNIGHTFRANK.COM.RO | 23 KNIGHTFRANK.COM.RO KNIGHT FRANK BUCHAREST Horatiu Florescu Chairman & CEO T: +40 21 380 85 85 E: [email protected] Roxana Bencze COO T: +40 21 380 85 85 E: [email protected] Natalia Gross Head of Marketing and Communications T: +40 21 380 85 85 E: [email protected]

EUROPEAN RESEARCH Alice Marwick Associate International Research T: +44 2038 667 84 E: [email protected]

RECENT MARKET RESEARCH PUBLICATIONS © Knight Frank LLP 2018 This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Knight Frank LLP or Knight Frank Romania SRL for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank LLP and Knight Frank Romania SRL in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank LLP and Knight Frank Romania SRL to the form and content within which it appears. Knight Frank LLP is a limited liability partnership registered in England with registered number OC305934. Our registered office is 55 Baker Street, London, W1U 8AN, The Wealth Report Romania Market Global Cities where you may look at a list of members’ names. 2018 Overview 2017–2018 2018

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