Construction Activity the Highest Since 2009 with Saturation Not Evident

Baltics Part of the CBRE affiliate Network Riga Offices, H1 2019 Construction activity the highest since 2009 with saturation not evident yet Total Modern Stock Vacancy Rate Take-up Completions Prime yield 663,755 sq m 5.2% 16,200 sq m 12,040 sq m 6.25%

*Arrows indicate change from the corresponding period in the previous year

Picture: Business Garden Rīga, Office complex Source: Vastint Latvia

KEY POINTS:

• Total stock is expected to grow by 76,900 sq m in • Energy efficiency in focus: BREEAM/LEED becomes a 2019. new norm. • On the first half of the year, two new projects were • Prime office yields stay put at 6.25%. Despite historic completed. Class B1 offices Akropole and Telegraph low a further yield compression is expected this year. were commissioned in March and May respectively. • GDP growth moderated 1.6 p.p. to 3.2% (Q1 2019) • The vacancy rate is steadily increasing. Currently, it y/y. stands at 5% or 1 p.p. increase y/y. • Wage growth slowed down and was 7.8 % or EUR 75 • The largest projects, such as Z-Towers, Jauna Teika, y/y (Q1 2019). and Business Garden Rīga are expected to be delivered • Building construction volumes increased by 4.8% (April, in the second half of the year. 2019) y/y. • Rent rates remains stable: 14.0–17.0 EUR/sq m/month • Inflation reached 3% (June , 2019) y/y. for class A, 8.0–14.5 EUR/sq m/month for class B.

Figure 1: Main Indicators, Riga Modern Offices Stock 80 6%

60 5%

40 4% Rate Area, sq ‘000 sq m, Area, 20 3%

0 2% Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3/Q4 2019f Vacant Space Completions Absorption, q/q Take-up Vacancy Rate (rh axis) Source: CBRE Baltics, Q3 2019

SUPPLY Figure 2: Modern Office Stock by Building Class In the H1 2019, the commissioned Akropole (in March) and Telegraph offices (in May) added 12,040 sq m or ca 2% to the 14% total modern stock in Riga. The amount of modern office space delivered was 49% lower compared to the same period Class A 42% a year ago. However, a large quantity of office space is Class B1 expected to be supplied in the second half of the year. The Class B2 total modern stock in Riga amounted to ca. 663,755 sq m at 44% the beginning of Q3 2019. The previously reported dominance of the class B office premises in the entire office supply has remained unchanged, with class A offices constituting only Source: CBRE Baltics, Q3 2019 14% of the office floor. On-going construction of new offices Figure 3: Modern Office Stock and Total Number of Employees continues to attract interest from tenants, investors and 920 800 developers, both local and international, to further contribute to the growth of modern stock. 880 600 PIPELINE PROJECTS

This year is expected to be the most dynamic in office 840 400 Employed people, ‘000 people, Employed construction since 2009. Anticipated volume of new supply to stock,Modern sq‘000 m, still to be completed in 2019 is ca. 76,900 sq m. Next year a 800 200 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 ' 19 slowdown is expected with only 11,500 sq m of office space to years Employees Office stock be completed, just before picking up again in 2021 and 2022. Source: CBRE Baltics, Q3 2019 Active leasing is being undertaken on the new office projects which are nearing completion – the first stage of Business Figure 4: Riga Office Market Quarterly Take-up Garden Rīga of ca.14,200 sq m and Mežaparka Offices of ca. 10 3,300 sq m. In the next few years, Business Garden Rīga will 8 become the largest office magnet near Riga international airport providing GLA up to ca. 70,000 sq m in total. A 6 significant addition to the class A stock is expected in August 4 when the Z-Towers complex is scheduled for commissioning. 2

The total area of the 30-storey office tower is 25,000 sq m. ‘000 m,sq Area, Leased 0 The Business Garden Rīga and Z-Towers addition to Q1 2018 Q3 2018 Q1 2019 Pardaugava region is among the projects facilitating the rapid growth on the left bank of the river Daugava. Source: CBRE Baltics, Q3 2019

H1 2019 CBRE Research © 2019 CBRE Baltics, Affiliate of CBRE | 2 RIGA OFFICES Baltics Part of the CBRE affiliate Network In further support of business growth in the Pardaugava Figure 5: Leased Area by Transaction by Size in H1 2019 region, the beginning of H1 2019 saw the start of the second 4% 0-149 sq m stage of the Academic Centre of University of Latvia (UL) 5% opening of the House of Science. This is the second building 29% 150-299 sq m 16% after the House of Nature in 2015 which was the first one in 300-499 sq m the Academic Centre campus – a EUR 90 mln UL 500-999 sq m consolidation project of which EUR 30 mln comes from EU funding. House of Science alone will accommodate six 9% 1,000-1,499 sq m institutes, laboratories, 2,000 students and 450 scientists. 28% 1,500-2,999 sq m 9% The third building – House of Letters will be completed by 3,000-10,000 sq m 2021. Source: CBRE Baltics, Q3 2019 Other leading universities also continue improving their faculties and campuses in Pardaugava, thus strengthening Figure 6: Number of Lease Transactions by Size in H1 2019 the image as an innovation and knowledge hub in the 0-149 sq m 3% 3% neighbourhood. 4% 150-299 sq m 28% DEMAND & ABSORPTION 300-499 sq m 24% In H1 2019, office take-up rose by over 20% y/y, while 500-999 sq m absorption contracted 22% y/y. The changes were mainly 1,000-1,499 sq m caused by the renewals, expansion, and occupier rotation 14% within multiple sub-districtsand by the lack of new projects. 1,500-2,999 sq m 24% Among the largest lease transactions were a pre-lease in 3,000-10,000 sq m Akropole Offices (over 4,000 sq m), Workland in Telegraph Source: CBRE Baltics, Q3 2019 Offices (ca. 1,400 sq m), and Lidl in Alojas Biroji (ca. 1,400 sq m). In addition, 20% of the premises in Business Garden Rīga Figure 7: VacancyRate in Modern Offices by Class and Quarter, % were pre-lease. IT, finance, logistics, retail, legal and other Rate\ Q2’ Q1’ Q4’ Q3’ Q2’ SME business service segments form a profile of typical Period 19 19 18 18 18 tenants that indicate the occupier rotation. Moreover, an Overall 5.2 5. 1 3.9 3.4 4.5 interest from co-working and serviced office operators continues, as it is shown by expansion of existing operators Class A 2.8 2.8 2.5 1.1 0.5 and potential newcomers, which explore opportunities. In Class B1 6.1 5.3 4.2 3.4 6.9 addition, growing office-based employment in Latvia suggeststhat a demand for space will hold out. Class B2 5.2 5.6 4.4 4.1 3.7 VACANCY Source: CBRE Baltics, Q3 2019 The office market vacancy rate has risen to 5.2 % in H1 2019, which is 1.2 p.p. growth since the beginning of the year. Figure 8: Vacancy Distribution by Location Previously, a vacancy rate of over 5% was reported in 2015. In the foreseeable future the office market in Riga will provide even more opportunities for tenants. A comparably 30% significant pipeline should accelerate rivalry, increasing vacancy and lowering the absorption rate. Following the commissioning of several office projects by the end of 2019, 62% 4% vacancy rates would rise according to the current trend. In 4% total over 10,000 sqm of office space can be witnessed in newly developed classB offices. CBD NEW CBD/ Skanste Currently, in comparison to class B, where the vacancy rate Local BD/ Mukusalas Others stands at 4% to ca. 5% range, the vacancy rate for class A Source: CBRE Baltics, Q3 2019 offices in Riga remains low. During H1 2019 the class A vacancy rate remained unchanged at 2.8%.

H1 2019 CBRE Research © 2019 CBRE Baltics, Affiliate of CBRE | 3 RIGA OFFICES Baltics Part of the CBRE affiliate Network RENT RATES Figure 9: Office Rent Prices, excl. VAT 19 The range of asking rent rates remained unchanged during H1 2019. Minor rent rate corrections are expected in the short 17 term, mainly in the class B2 office segment in the upcoming 15 years after pipeline project deliveries later this year. Currently, 13 the class B2 office properties command the lowest rent range 11 of 8 to 12 EUR/sq m/month in Riga. Class A and class B1 monthly rents are expected to stay at a level of 14 - 17 EUR/sq EUR/sqRents, Monthly m 9 m and 12 – 14.5 EUR/sq m, respectively. 7 class A class B1 class B2

Source: CBRE Baltics, Q3 2019

Figure 10: Largest Office Schemes Currently under Construction to Be Delivered in 2019 & 2020

No Project Street District Class Landlord Expected Phase GLA, sq m SPI RE Holdings 1 Z-Towers Ranka dambis CBD A 2019 Construction 24,000 S.a.r.l.

2 Jauna Teika (Henrihs) G. Zemgala gatve Teika B Hanner 2019 Construction 19,000

Business Garden Rīga, Riga Airport/ 3 Maldugunu B Vastint Latvia 2019 Construction 14,200 Stage I Jurmala highway SWH Grupa/ SG 4 SWH Office centre Skanstes New-CBD B 2019 Construction 12,000 Capital 5 Red Line offices Bukultu Sarkandaugava B Dambis 2019 Construction 4,400 Kokneses 6 Mezaparka Rezidences Mezaparks B Domuss 2019 Construction 3,300 prospekts 7 OrigoOne StacijaslaukumsCBD A Linstow 2020 Construction 11,500 Total under construction 88,400 Source: CBRE Baltics, Q3 2019

Figure 11: Riga Map with the Marked Largest under Construction Office Schemes and Business Districts

6 CBD / Embankment

5 4 New CBD

Local Business District

Source: CBRE Baltics, Q3 2019

Total Modern Stock – represents the total completed class A and B space (occupied or vacant) in the private and public sector at the survey date. Includes owner occupied (OO) space.

Vacancy Rate - represents the percentage ratio of total Vacant Space to Modern Total Stock.

Take-Up – Represents the total net floor space, not including renewals, known to have been let or pre-let, sold or pre-sold to tenants or owner-occupiers during the survey period. A property is deemed to be taken-up only when a binding agreement exists.

Prime Rent – Represents the top open-market tier of rent that could be expected for a unit of standard size (commensurate with demand in each location), of the highest quality and specification and the best location in a market at the survey date. The Prime Rent should reflect the level of which relevant transactions are being completed in the market at the time. If there are no relevant transactions during the survey period, the quoted figure will be more hypothetical, based on an expert opinion of market conditions.

Absorption – represents the change in occupied stock within a market during the survey period.

Net Effective Rent – represents a rent that would be achieved, less the incentives paid by the owner. The average net effective rent for a market is the market net base rent less incentives which are amortised over the term of lease.

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• Part of the CBRE Affiliate Network • Offices in Riga, Vilnius and Tallinn • Providing services in: • Research & Analysis, • Consulting, • Valuation, • Property Sales, • Property & Asset Management, • Tenant Representation, • Agency Services – Retail, Offices, Industrial & Logistics, • Financial Services, Accountancy • Landlord/Investor Representation, • Transaction Management

CONTACTS Reinis Lauskis Tatjana Staube Senior Consultant | Advisory & Transaction Services Senior Consultant | Advisory & Transaction Services M +371 2832 4165 M +371 2651 0750 [email protected] [email protected]

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