Boarding Romania

September 2016

“Today, Romania is an established business destination for global investors enjoying a healthy growing, sound economy” Manuel Costescu

Economic Investment: Office: Retail: Industrial: Overview: Volumes of around Record Total stock will exceed More than 1,5 mil. m² GDP will increase by €600 – 700 mil. for level of 3 mil. m² by the end of of space leased in the over 4.5% in 2016. 2016 supply 1 the year last 5,5 years 2 Table of contents 1. Economic & Tax Overview 2. Investment 3. Office Market 4. Retail Market 5. Industrial Market

3 Bucharest, September, 2016

Message on Romania’s attractiveness for foreign investment

Today, Romania is an established business destination for global investors enjoying a healthy growing, sound economy, with the GDP up by 6% for the second quarter of 2016 and forecasted growth of 4.2%highest in EU, whilst profiling itself as one of the leading inward FDI recipients in the pool, with a 23% FDI growth on the first 6 months of the current year.

The international business community acknowledges Romania as a hub of competitive, talented people who now enable Bosch and Boeing to have a 0% error rate on the components they produce, Porsche to build a research center for autonomous driving and world renowned scientists to build a state of the art laser at Magurele, near Bucharest.

Furthermore, the latest survey conducted by the German Chamber of Commerce (AHK) confirmed that the German and Austrian investors feel significantly more optimistic regarding their local businesses whilst the World Bank’s Doing Business Report 2015-2016, upgraded Romania by 13 positions since 2014, due its friendly tax policy with one of the best tax payment regimens among regional peers.

We are a business-friendly government, a true partner for development and growth and a business enabler. We have revamped the public procurement procedure, offered non-reimbursable grants of EUR 145 million and employment incentives, tax exemption for employees working in R&D, developed the legal framework for dual professional education, restructured the National Road Infrastructure Company and unlocked over 90% of all infrastructure projects. There is still so much to be done and our mission will continue until our very last day in office, but I am confident that our strive has not been in vain and the next Executive will carry on our reforms that will create further wealth.

I would like to end my brief intervention by putting on the spotlight the main reason why I think it was worth the effort, the strive and the sleepless hours and that is putting to good use Romania’s greatest assets of all - our enormous reservoir of educated talent, enjoying an extensively creative potential and a highly skilled workforce, at competitive prices, with reduced culture and language barriers. 97% of the Romanian high school students and 90% of students learn at least two foreign languages whilst Furthermore, there are over 400 000 university students in Romania, with approximately 100 000 graduates every year and over 50% majoring in STEM (Science, Technology, Engineering, Math), especially, in Computer Science, Engineering, Telecommunications, Biology, Mathematics and Chemistry.

Romania and InvestRomania, the team I lead are fully committed to secure value-added investments that are technologically advanced, innovation intensive, with maximum economic impact as the only way we can succeed in making Romania as one of the leading investment destinations of the region.

Mr. Manuel Costescu Secretary of State InvestRomania

4 Economic Overview

5 Economic Overview GDP Growth

GDP grew by 3.7% in 2015. The cut in Key Points VAT from 24% to 9% for food products (2016) since the 1st of June 2015 and to 20% for all products from the 1st of January 2016 encouraged private consumption, which was the main driver of the economy last year. The positive economic trend continued in the first half of 2016, when GDP growth reached 5.0%, the highest in the EU. For the entire 2016, the forecasts estimate GDP will increase by 4.5% GDP Growth with all sectors of the economy having +4.5% a positive contribution.

Retail Sales

After a very strong 8.9% growth in 2015, retail sales surged in the first half of 2016, when they increased by 16.8%. Moreover, retail sales are expected to continue their record growing trend for the rest of 2016 as Unemployment well, fuelled by the increase of wages 6.1% and the strong consumer confidence. The net average wage as of June 2016 was in the region of 2,078 RON (~€460), an increase of 15.1% when paid employment abroad. There compared to the same period last year are several counties, especially in but of only 1.7% average increase over the west of the country, where the the last 7 years Wages are increasing unemployment rate is below 3%, due on the back of increased added value to the significant foreign investment, activities performed by the Romanian especially in the manufacturing labor force. industry.

Retail Sales Unemployment Inflation Rate & Monetary +16.8% Policy Rate The unemployment rate registered in July 2016 was estimated around According to data published by 6.1%. However, the economic growth National Institute of Statistics, during combined with the more flexible July 2015 – July 2016, the consumer labour legislation should encourage price index reached -0.78% mainly managers to hire. Over the longer due to the VAT cuts the government term, it is possible that Romania could introduced as of 1st of January 2016. suffer from skilled-labour shortages. The inflation rate is expected, however, Despite the recent increase in wages, to increase starting with the second professional, skilled, and semi-skilled half of the year. According to Oxford Exports +4.2% workers are still attracted by higher- Economics, the inflation is forecasted Imports + 7.7% 6 FX Rate Speaker of the The FX rate has been very day stable despite the recent turmoil in emerging markets, ranging marginally between 4.38 - 4.54 Ron/Euro in the last 3 years. Romania is aiming to join the Euro zone, but the government’s Prof. Daniel Daianu plan for Member of the Administration accession in Council of National Bank of 2019 has been Romania, former Minister of delayed - no Finance clear date set at “The Romanian economy the moment. continues its comeback, and it is likely that the GDP will increase by Budget & over 4.5% this year. It is a healthy Investment growth, even when compared to Climate the emerging economies of the EU. This year we observe an The budget increase in private investment to increase to 0.5% by the end of 2016, deficit narrowed from 1.72% of GDP in which is very important for the rise to 2.7% in 2017 and to around 2014 to below 1.47% of GDP in 2015 growth sustainability. It is however 2.5% in 2018 – 2019. Monetary policy and is estimated to grow to close to likely that the budget deficit rate remains at a historic low of 1.75% 3% in 2016. The government debt will deepen (3% of GDP, when since may 2015. decreased in 2015 to 38.4% of GDP compared to 0.7% in 2015), due to according to Eurostat, one of lowest the fiscal easement measures and values in the EU. Moody’s, Fitch and Imports Exports – Major increase of public wages. Even Standard & Poor’s are unanimously Trading Partners though the GDP growth is high, the assessing Romania as recommended current account deficit will remain Both imports and exports grew in the for investment with a stable to positive reasonable, at around 2% in first half of 2016 by 7.7% and 4.2% perspective. Prospects for the local 2016. The economy is undergoing respectively. economy are influenced by EU’s structural transformations, which Romania became in the last years a performace, which takes over 70% of is reflected in higher exports of IT major machinery and automotive parts the Romanian exports. Provided that products, auto, or equipment. In exporter, besides the agricultural, Eurozone will not suffer any major the years to come it is paramount tobacco and oil related and chemical shocks, the macro-economic forecast that the EU funds absorption products. Major trading partners for Romania looks positive even after increases in order to support include mainly countries in EU, the the results of the Brexit vote. This should infrastructure development. largest being Germany, Italy, France make the country one of Europe’s top However, Romania is still very and Hungary. performers in 2016 and 2017. dependent on the fate of the EU and Eurozone, regardless of the good local efforts.” 7 Tax Overview As of 2016, a new Tax Code and Tax Overview of the income Procedural Code have been adopted derived from a real estate by the Romanian legislature, which transaction Key Points brought changes both in the principles Investing in Romanian real estate (2016) of taxation as well as particular changes business can trigger different tax on specific tax regulations. implication both in terms of taxable Please find below a series of legislative income and the obligation as a non- changes in the taxation system, with an resident to register as a tax payer in emphasis on the real estate industry. Romania. In the last year, Romania The intention of the Romanian Tax has become more attractive from a VAT officials was to draft a more simplified perspective, providing more reliefs also Tax Code, with clearer tax provisions, for the mere sale of immovable assets and transpose into National legislation and for the transfer of assets which the provisions drafted by the OECD are invested to a certain business line. Corporate Income (BEPS), such as the anti-abuse rules These reliefs came to support both have been supplemented with the the Romanian Real Estate market, Tax 16% definition of cross-border artificial as well as the companies operating in transactions. Such transactions are other economic sectors. Please find excluded from the application of Double below a summary of the tax implication Tax Treaties. Moreover, the previous resulting from real estate investments. stated provisions may be coupled with anti-abuse rules for preventing unlawful Share deal: tax practices, aimed at obtaining tax Capital gains from the sale/transfer benefits contrary to the principles of of shares, as well as income arising the EU Parent-Subsidiary Directive. On from the evaluation or revaluation of this note, the Romanian dividend tax shares held in a Romanian or foreign General VAT exemption under this Directive does not legal entity can be tax exempt under 20% apply to hybrid instruments (i.e. amounts the participation exception and the qualifying as interest in the paying conclusion of a Double Tax Treaty. No entity’s jurisdiction have a dividend VAT is due on the sale of shares, as nature in the recipient’s jurisdiction). it represents a VAT exempt transaction Romania applies a 16% tax rate for without deduction right. corporate income tax and withholding tax (WHT can be further reduced based Asset deal on DTT or/and EU Directives), and a Revenues derived upon asset disposal general VAT of 20% (reduced for certain are taxable, whereas expenses products/services). further to de-recognizing the asset Under the new Tax Code, further are deductible for corporate income Withholding Tax for taxes were reduced or eliminated. For tax purposes. Moreover, the income Dividends 5% example, withholding tax rate decreased derived by a non-resident legal entity from 16% to 5% for dividends paid by from the sale/transfer of immovable a Romanian legal entity to another property is taxable and the non- legal entity/ individual. This can be resident has the obligation to register further reduced to nil if the participation for corporate income tax purposes conditions are met (10% for a period of in Romania and submit tax returns more than 1 year). regarding the income obtained. Another favourable amendment brought Based on the Romanian VAT rules, by the new Tax Code refers to exemption a VAT exemption without credit is in taxing the dividends received from applicable for the sale of non-building Building Tax a Romanian legal entity even if the plots of land and buildings which are participation conditions are not met. deemed as old from a VAT perspective 0.08 – 1.3% 8 (i.e. a building qualifies as old after 2 years from its of social housing with a maximum useful surface of 120 finalisation – e.g. a building finalised in December 2015 square meters and a value of less than RON 450,000 is deemed as old starting with 1 January 2017). (exclusive of VAT) performed to an individual / a family, Conversely, as a general rule, the standard VAT rate to the extent that certain conditions are met by the of 20% is applicable for the sale of buildable plots of buyers. land and new buildings. Nevertheless, starting with 1 January 2016, simplification measures are applicable Building tax for the sale of buildings / plots of land performed within As of 2016 building tax will follow property status the taxation regime, provided that both the seller and (residential vs. non-residential properties, or mix the buyer are registered for VAT purposes in Romania. purpose building). Based on this criteria, different Under this scenario, no VAT should be pre-financed by percent applies such as: for residential building a the seller. percent between 0.08-0.2, and for non-residential a percent between 0.2-1.3%. For non-residential Exception: Transfer of immovable buildings used in agriculture and owned by companies assets qualifying as tax neutral a specific 0.4% percent will apply. For non-residential The partial or total transfer of assets performed further building, the taxpayer may re-evaluate the property to a merger or a spin-off is not subject to corporate every three years. Such re-evaluation should not be income tax if certain conditions are met and VAT reflected accounting wise and is performed on the exempt if the beneficiary is a company established in basis of specific valuation standards approved only for Romania. tax purposes, which may trigger different tax values Under certain conditions, also the partial or total by reference to the accounting values. Not exercising transfer of assets performed to a Romanian established the right to re-evaluate will result in higher taxation company through to a sale or contribution in kind percentage. qualifies as a transfer of going concern which is not subject to VAT. Special Construction Tax Starting with 2016 the special construction tax applied Authentication and land registry taxes to immovable assets other than buildings was reduced The ownership transfer over a real estate property to 1%, and as of 2017 the tax will be eliminated. is subject to authentication of the transfer deed and registration with the land book. The fees for registration Highlights on the latest legislative of the transfer with the land is 0.5% in case the buyer amendments is a legal person and 0.15% in case the buyer is an Several changes in the legislation related to construction individual. The authentication fees vary depending on and real estate have been put into effect this year: the value of the land. In case of a merger or spin-off, in case real estate are We note changes Law 10/1995 on quality of transferred, the document(s) to be authenticated and constructions, as well as to the Law 50/1991 based on which the transfer is registered in the land on construction works. A minimum contractual book is/are the resolution(s) of the general meeting(s) guarantee period was included, while the of shareholders. penalties for non-observance of the legal provisions were significantly increased. Rental of real estate property Under the general VAT rules, the rental of real estate New provisions have been enforced with respect property is VAT exempt without credit. Nevertheless, to the fire safety authorization and endorsement the taxpayer performing rental activities may opt to of constructions , following the amendment of the apply the taxation regime for such transactions, which Law 307/2006 on fire safety in November 2015 . will enable it to deduct the VAT on the costs incurred with the real estate property. Non-resident entities On the land book and cadastral regime, steps have the obligation to register and paid CIT on the rent forwards have been taken in respect to performing income. cadaster measurements and registration at a Sale of social housing national level. The VAT reduced rate of 5% is applicable for the sale

9 10 Investment Market

11 Real Estate Investment Market

Key Points In 2007/2008 Romania had a very and forecasted GDP, we expect that liquid real estate investment market Romania should be second only to (2016) with total volumes of over € 2 billion Poland in CEE in terms of investment and € 1 billion respectively, despite volumes at some point over the the limited availability of modern coming years. product at the time. Romania was then the third largest investment market The property investment volume in the in terms of deal flow in CEE (after first half of 2016 is estimated at €340 Poland and the Czech Republic). million, a value 80% higher than that Between 2009 and 2013, volumes registered in the same period of 2015 have decreased significantly, as the (€187 million). Estimated Total number of active players plunged Investment Volume sharply. Transactional activity picked Traditionally, Bucharest is the main up in 2014, when ca. €1.17 billion destination of the real estate investors €600 – 700 mil. was transacted (including a number in Romania, mainly due to the size of unique, very large deals) and 2015, of the market and the availability of when the property investment volume institutional quality product, especially was of approximately €670 million. in the office sector. In the first half of Given its size in terms of population 2016, the Capital City accounted for

Prime Office Yields 7.5% 2,000

1,500 € on Prime Retail Yields Milli 1,000 7.25%

500

Prime Industrial Yields 0 9.0% 2006 2007 2008 2009 2010

12 Office Retail Industrial close to 48% of the total investment conditions and increasing appetite from Speaker of the volume. Market volumes were banks for good product and serious balanced between retail transactions sponsors are also encouraging new day (45%) and office (38%) while industrial investment. accounted for close to 17%. Liquidity is limited by the supply and by The largest transaction registered in the difference in pricing expectations H1 2016 was the acquisition of Sibiu between sellers and buyers. Prime Shopping City by NEPI from ARGO products offered in structured sale for a total of €100 million, which processes are rare, while vendors represents the largest single asset expectation that yields in Romania will deal outside of Bucharest since the soon compress closer to those from the economic crisis. core CEE markets can lead to a pricing gap. Investor interest has increased due Prime yields are expected to remain to the solid market fundamentals as stable by the end of the year, with well as to the still significant yield 7.25% for retail, 7.50% for office while spread of around 2.25% - 2.50% for industrial at 9.00%. Yields have between Romania and Poland or the compressed between 25 and 50 bps Czech Republic. Improving financing over the year. Mr. Dennis Selinas CEO Argo Capital Property

“Argo has always viewed Romania as an investment destination where outsized risk-return opportunities are possible. Prime trades at a significant premium to central Europe whereas the risk is comparable. We feel particularly comfortable with and know we can always rely on strong legal system which continues to be improved and catered to foreign investors. The result has been a series of NPL portfolio purchases by foreign financial institutions and by extension added liquidity in the property market. We will for the medium term continue to look for investments in Romania. “

2011 2012 2013 2014 2015 2016 H1

Mixed Residential Hotels 13 Financing

Key Points Starting with end of H1 2015, borrower’s perspective, doesn’t make the Romanian market witnessed such type of financing attractive. (2016) significant improvement of the We expect that, in the next 6 to 12 financing conditions both in terms of months, financing conditions will pricing and structures. International continue to improve (especially financial institutions having local for prime properties) which will be retail presence are the most active translated, for borrowers, into lower in originating new loans both in Bucharest and in the top 3 largest regional cities with tickets ranging between € 5m to €50m. Loan to Value In addition to these deep-rooted institutions, up to 65% new loans were also provided by players either international banks without a local presence, or small regional providers historically not lending to real estate; this enhance the diversity of debt providers and gave Margin options to borrowers. 2.25% – 3,5% In addition to the above, alternative lenders such CPPIB and Cairn Capital entered the Romanian lending market through the acquisition of €180 mil. bonds issued by Globalworth, the largest office owner in Romania. Maturity Lenders remain very cautious and put great 5 – 10 years emphasis on both the location and the quality of the asset (leasing status, occupancy rate and WAULT), as well as on the sponsor’s standing. margins and more flexible structure, Financial institutions are still focusing thus allowing more cash upstream on income producing properties with toward investors. Such situation is strong resilience in terms of cash the result of an increasing competition flow generations. For development between the different type of lenders Amortization financing, banks still require a high as well as of the limited number of level of pre-leases and restrictive financing opportunities matching 5 – 6.5% p.a. reporting conditions which, from the lenders’ expectations

14 Office Market

15 Bucharest Office Market

Deliveries & Stock

Key Points The Romanian economy is slowly 2014) in which the total yearly supply (2016) shifting into a service oriented one, was close to 120,000 m², only 62,500 with IT services registering the highest m² were delivered in 2015, mainly due growth from all components of the to the fact that a number of projects GDP in 2015 and the first half of 2016. delayed their delivery date. This is also This raised the need for quality office one of the reasons why a large office accommodation that can support space is expected to be delivered in a newer generation of white-collar 2016 – over 370,000 m². workers. Starting to develop in the late 1990’s and becoming more significant Major Owners Announced Deliveries by mid 2000’s, the Bucharest office Historically, the market has been 370,000 m² market will have by the end of 2016, driven mainly by local or regional

Stock 2,670,000 m²

Total Take-up 320,000 m² close to 2.67 million m², divided in developers, with some smaller 12 major office sub-markets. The international institutional players construction, with one exception, occasionally acting. followed the metro network of the city. The largest office owners in Romania The largest office districts remain the are local or are backed by Austrian, areas in the north of Bucharest which Greek or South African money. enjoy good accessibility from both Major investors include Globalworth, public (especially metro) and private Immofinanz, CA Immo, NEPI or Vacancy Rate means of transportation: Floreasca Genesis Development, with their 15% Barbu Vacarescu (14.1% of the total main activity in Bucharest and Iulius stock), North (13.4%) and Dimitrie Grup and again NEPI, focused on the Pompeiu (12%). However, with the secondary cities. recent infrastructure improvements, new areas such as Center West Office Demand are now attracting the attention of Romania (Bucharest and Cluj developers. especially) has a large educated After 2 consecutive years (2013 and labour force with a good technical Prime Rents

18.5 €/m²/month 16 background, which combined with the large offer, to approximately 15% Speaker of the excellent internet infrastructure made as of the end of 2016. However the it a wise destination for IT companies. vacancy rates continue to be uneven day Names such as Microsoft, IBM, between the sub-markets, which is also Oracle, Amazon, EA Games or Ubisoft reflected in the evolution of the rental chose the country for their offices. levels. While in South, Baneasa and IT occupiers were the main demand Pipera North vacancy is above 30%, generators in the last 5 years followed mainly due to their poor accessibility, by BPO/SSCs, professional services the vacancy rate in Dimitrie Pompeiu,, companies, banking and financial West, Center-North Floreasca Barbu institutions and retailers. Vacarescu is below 10%. After 2 record years in which the Prime headline rent in Bucharest is € total take-up was close to 300,000 18.5/m²/month, average headline rent

Mrs. Aurelia Luca Country Manager Skanska

“Romania is an important market for Skanska, taking into consideration its economic growth and business potential. These facts bring a positive outlook in real estate and lead to a high demand for office spaces. In conclusion, the local m², approximately 250,000 m² were for non-CBD locations is in the region business climate is changing leased in 2015 in Bucharest. For 2016, of € 14-15/m²/month, while similar dynamically into an attractive we expect that the demand will reach Class A accommodation in peripheral investment market, and this a historic high, of over 320,000 m². locations command headline rents of generates a need for office The most searched areas were the € 10-12/m²/month. However, most of spaces tailored to the tenants’ north of the city (Floreaca Barbu the large contracts in the market are needs. Skanska, through the Vacarescu and Dimitrie Pompeiu) signed around the 14 – 15 €/m²/month projects developed in Romania, which attracted more than half of the mark. Even though the real estate meets the needs of its total demand, followed by the west, offer in Bucharest is indisputably more customers, building sustainably, which encouraged the developers to diverse than in the secondary cities, the with a focus on innovation and announced a large number of projects cost gap is not that wide considering quality. Improving business in those sub-markets. that occupiers usually compare prime efficiency and employees’ projects in regional cities with quality productivity are some of Vacancy and Rental assets located outside the CBD in Levels the local real estate market Bucharest. requirements, and this offers us The vacancy rate is expected to the perfect place to develop our remain relatively stable despite the projects and vision.“

17 Outside the Bucharest Box

Key Points Cluj-Napoca The 4 Outside Construction activity picked up in Cluj-Napoca Bucharest in recent years, on the back of a growing (2016) demand, especially from IT companies. As of 2016, Cluj-Napoca offers the largest modern office stocks among Romania’s regional cities. Current stock is of over 210,000 m², with largest projects being The Office, Liberty Technology Park, Cluj Business Center and United Business Center. The demand generated by the international Deliveries tenants searching for flexible spaces and extension options influenced the offer which 95,000 m² changed from small or medium size projects in the past to larger multi-phased developments in the recent years and the pipeline. The list of major international occupiers that already have operations in Cluj-Napoca include Endava, Office Depot, SAP, IBM, Siemens, Intel, Bombardier, Pentalog, Genpact, EXL, Stock IQuest and SoftVision. 650,000 m² Iasi

The fourth largest city in Romania has as of 2016, the second largest office stock outside the capital city, as the offer continuously increased during the last years fuelled by the increasing demand. Current stock is of approximately 180,000 m² with largest projects Total Take-up being UBC, Ideo and Moldova Center. 75,000 m² The large number of students present in the city and the strong technical and foreign languages universities that Iasi has, attracted the interest of IT&C companies and BPO which were the most active in terms of leasing activity. Amazon just recently enter the market, singing the largest contract in the last years Vacancy Rate (13,000 m²). Other names such as Unicredit, Xerox, PwC, Capgemini, Yonder or NESS are 6 – 7% present in the city.

Prime Rents

11 – 14 €/m²/month 18 Timisoara Speaker of the Starting with 2005-2007 the first Class A office developments appeared (Romcapital building day and City Business Centre – CBC), leading Timişoara’s office market into its modern stage. Currently, the office stock in Timişoara is estimated around 120,000 m², out of which close to half is comprised by the five existing phases of CBC. However, Timisoara has the strongest pipeline of the secondary cities, with close to 50,000 expected to be finalized by the end of 2017. Advanced technologies and IT&C are the main sectors which are quickly expanding in Timişoara, as a result of both “near shoring” and the growth of domestic companies. Alcatel-Lucent and Continetal are the two largest occupiers in the city, but it is also worth mentioning WIPRO, a recent entrant to the market. Other representative multinational occupiers that have a presence in modern office buildings include: Bosch, Athos, Hewlett Packard, PwC, Deloitte, Mr. Sorin Crisan IBM, Microsoft as well as other local financial Site Manager institutions or insurance companies. Arvato Brasov “The Romanian market offers Office market in Brasov started to develop a large and skilled labour in recent years, on the back of the demand force. This, together with the generated mainly by IT and BPO companies healthy economic prospects which saw the city as a cost efficient alternative and the strong potential, make to the already crowded Bucharest a local market very attractive for Current modern stock is the 5th largest in Arvato. Our business is focused Romania, just below 100,000 m² mark, with the mainly on the regional cities of largest projects being Coresi Business Park and Romania, where we can find Brasov Business Park available workforce and good There are a number of owner occupied buildings office premises which suit the in Brasov which are owned mainly by banks and our needs. With three locations financial institutions. in the country, the most recent The city has a large multilingual labour pool due opened this year in Cluj- to its large German minority and is an important Napoca, we, at Arvato, believe academic center, with over 20,000 students that Romania has the potential enlisted in both public and private universities to become a key market for us.“

Demand is traditionally generated by BPO and IT companies. The largest tenants in the market include CGS, Siemens and Tata Technologies.

19 Retail Market

20 Romania Retail Market Deliveries & Stock Similarly to other post-communist latest additions to the market targeted Key Points countries, modern retail developments the areas which were relatively (2016) started to emerge in Romania and undersupplied, such as Brasov, in Bucharest in the 1990’s. By 2007- where Immochan developed Coresi 2008, the retail market had become Shopping Resort, the eastern part of one of the most dynamic in CEE and Bucharest and Timisoara where NEPI Europe overall. Total modern retail developed Mega Mall and Timisoara supply in Romania is expected to Shopping City.

Deliveries 269,000 m²

Stock 3,070,000 m²

exceed the 3 million m² mark at the Formats and Major end of 2016 and a total density of 152 Developers m² per 1,000 inhabitants. Bucharest’s modern retail supply Historically, the market has been driven currently stands at just over 1 million mainly by local or regional developers, m². The largest projects delivered but in the recent past there has been Retail Density in to date in Bucharest are Băneasa increasing interest from international Romania Shopping City developed by Băneasa institutional players such as Sonae Developments (2008), AFI Palace Sierra, Immochan or NEPI. In terms of 152 m² per 1,000 Cotroceni developed by AFI Europe retail formats, large shopping centres inhabitants (2009), Sun Plaza developed by S continue to dominate in major cities Immo and EMCT (2010) and more while retail parks and convenience- recently Mega Mall (2015), developed type schemes are predominant in by NEPI, each one with leasable areas smaller cities. of around 80,000 m². The top 5 retail owners in Romania Outside Bucharest the most dominant have together close to 45% of the total shopping centres are Iulius Mall Cluj shopping centres stock in the country. (2007), Iulius Timisoara (2005) and The largest is NEPI, a South-African Palas Iasi (2012) all owned by the investment fund which was very active Prime Shopping Iulius Group, Polus Center Cluj (2007) in the recent years, both in terms of Center Rents and Maritimo Constanta (2011) owned acquisitions and development. Other by Immofinanz and Sibiu Shopping major owners in the country are Iulius 65 – 75 €/m²/month City owned by NEPI (2006). The Group, Immofinanz and AFI Europe. 21 Retail Demand It should also be noted that both brands with a direct presence in Romania and Encouraged by the recent record brands operating via franchise have growth in retail sales, retailers are been expanding recently. developing dynamically but tenants Speaker of the are still selective when it comes to the Rental Levels & Vacancy fundamentals of new retail projects. day Bucharest is clearly the most attractive Starting with 2014 prime rents in retail destination in Romania due to its Bucharest showed the first signs of large population and the significantly growth in more than 5 years. Rents higher spending power than in were quoted between €65–75 per m² the rest of the country. Demand in as of H1 2016, with a slightly upward Bucharest remains focused on the trend. The current levels of the prime best performing projects. rent in shopping centres are at the Over 50 new international brands same level with those quoted back opened units in Romania since in 2002, when modern retail was in 2014. Important names include the early stages of its development. COS in a street unit, Forever 21, The gap between truly prime projects Lanidor, Brooks Brothers, Tally Weijl, and less performing shopping centres Liu Jo, Marc Cain, Michael Kors, continues to be wide. Debenhams, Armani Jeans, Boggi, Incentives such as fit-out contributions, Chopard, Hilfiger Denim, Lynne, pure turn-over rents or rent-free Decimas, Pepco, Sport Vision, periods have become frequent ZOOT, Tous, Bobbi Brown, New Era especially in the case of fashion or or Tezenis. entertainment anchor tenants. We Mr. Costin Blideanu The low to mid-market retailers try estimate Bucharest vacancy rate to Head of Leasing to cover most of the market from a a level of around 9 – 9.5%. A much AFI Palace Cotroceni geographical point of view, while higher percentage is registered in the mid to up-market brands are very shopping centres located in southern “2016 was the best year selective and only looking at the submarket of the city, while in well- after the crisis with retail prime centres in Bucharest and the established and performing shopping consumption increasing. We main secondary cities and therefore centres or shopping galleries vacant trust the Romanian market opening few new units. units represent below 3 %. a lot and we will start the construction of AFI Palace Brasov in the coming months, a 40.000 m² GLA shopping center in a regional city. Even with 2 large shopping centers opening on the Bucharest market, AFI Palace Cotroceni continues to grow with a steady rate compared to last years, which makes us confident to further invest both in our retail and office developments.”

22 Market Trends High Street Retail Romanian cities usually lack a high introduced by the government with Speaker of the street retail market with only a few regards to old buildings which are exceptions. Most high street units presenting earthquake risks, hindered day are occupied by supermarkets, the further development of the area. bank branches or pharmacies. The Sibiu is another exception, having important fashion retailers prefer attractive pedestrian retail streets due shopping centers mainly because of to intensive refurbishment works of the the local consumer habits, fragmented city center prior to 2007 when it was ownership of the street units and designated as a European Capital of significant investments required for Culture. refurbishment. There is however Looking Forward

The landscape for retail will change faster than it did in the past. The balance of power in the retail industry is shifting as consumers have more and more access to real time information via the mobile internet, which is driving new demands for lower prices, better facilities, vastly improved customer Mr. Valentin Dobrescu services, convenient technologies Property Director and crowd-pleasing experiences. Yet PEPCO CEE it is also key to ensure that shopping centres are meeting consumers’ most fundamental needs adequately – “Romania enjoys all the good needs for safety, for mobility and for fundamentals for a retailer to renewed interest from both retailers convenience. expand – increasing retail sales, and developers for historical city Probably the biggest impact of the strong consumer appetite and centers. internet on retailing is that in the future, a well-developed real estate The prime retail pitches in Bucharest competition will shift from being mainly market, with shopping centers are along Magheru/Bălcescu about location and price to consumer in all major cities that offer Boulevard and Calea Victoriei. A relevancy and experience, from store expansion opportunities. number of international retailers as the epicentre to the brand as the We, at Pepco, entered the have opened flagship stores along epicentre. Physical retail will have to Romanian market less than 2 these streets. Calea Victoriei mainly reply to this challenge, partly by going years ago, and we now have 85 attracts up-market brands. Magheru beyond retail and delivering art-of- operational stores. Moreover, Boulevard has lost a lot of its appeal living offers to consumers. we will reach 100 units by the during the last few years, but We expect that close to 100,000 m² end of the year. This healthy remains attractive for low-to- of retail space will be delivered in growth shows the confidence mid market brands and service Romania by the end of 2017. None that Pepco has in the local providers. The historic centre and will be in Bucharest as developers are market and its future as a retail especially the Lipscani area are also targeting mainly undersupplied, even destination“ important to mention. After major tertiary cities. Demand will continue to redevelopment works it has become increase which will most likely push the the main destination in Bucharest for rents to €70 – 80/m²/month. Vancancy bars, coffee shops and restaurants. is expected to remain stable. However, the new legal measures

23 Industrial Market

24 Industrial Market Deliveries & Stock Romania is strategically located around the capital city of Bucharest. Key Points in Europe, being crossed by 3 Approximately 75% of the Bucharest major Pan-European corridors and stock is clustered along the A1 (2016) benefits from one of the largest highway corridor in the west making commercial deep-sea ports in CEE this the largest hub of industrial stock (Constanta). Romania is also a large in Romania. Other industrial hubs consumer market, with over 20 million have been established in Ploiesti, inhabitants with a growing spending Pitesti, Craiova, Oradea, Cluj, Sibiu power. Industrial developments are and Brasov. spread throughout the country, but the large clusters are formed obviously in Deliveries Bucharest, the largest city and nearby, 340,000 m² but also in the western part of Romania (Ploiesti, Timisoara, Arad), due to its proximity to the rest of the CEE and the Western Europe and to the good, existing and planned, infrastructure. The industrial landscape has changed significantly between 2001 – 2008. The growth of the retail sector, Major Developers Stock EU accession and programmes to upgrade cities infrastructure were Concentration of the industrial real 2,500,000 m² all creating favourable conditions estate market in Romania is still very for market development, initially in low from a CEE perspective, with Bucharest, followed after 2005 by the largest player having under 20% other major cities (Ploieşti, Pitesti, market share (CTP and Alinso. This Cluj-Napoca, Timişoara). can be explained as Romania joined In 2006-2008, large international the EU only in 2007 (later than the players were already present on the other CEE countries which joined in market: Cefin Real Estate, Eyemaxx, 2004). As this admission into the EU Total Take-up Helios, Portland Trust, Rynart, etc., was a requisite for many institutional 350,000 m² whilst others were preparing to enter funds, and as the onset of the financial the market by acquiring large plots crisis occurred less than 2 years of land and announcing numerous afterwards, there was little time for projects: CTP, VGP, WDP, ProLogis, institutional players to gain dominance Immofinanz, Heitman,etc. However, in the market. in the second half of 2008 the effects Elsewhere in CEE a clear trend of the global financial crisis showed towards consolidation can be their impact over the Romanian observed. Romania, which is the Vacancy Rate warehousing market. Due to the second largest country in CEE after <5% market opportunity we have seen this Poland, having several sizeable year 2 names entering the market: regional cities (7 except Bucharest Logicor/Blackstone and Panattoni. above 250,000 inhabitants) and The current modern industrial stock an expanding manufacturing basis, in Romania is estimated at almost offers an interesting opportunity for 2.3 million m², as of H1 2016 (density those players that would like to build a of 115 m² per 1,000 capita) of which nationwide platform. over 1 million m² is located in and Prime Rents 3.5 – 4.1 €/m²/month 25 Demand weaker technical specifications were particularly affected, while the prime Demand in Romania is mainly parks with solid asset management generated by logistic companies in were able to retain and attract clients. Bucharest and in the vicinity of large Bucharest was more affected than Speaker of the cities and by production companies, other cities because the occupiers especially from the automotive industry are mainly logistic companies and day in the west and central of the country, retailers that suffered from the where the infrastructure allows for a austerity measures taken in 2010. faster movement of goods. Manufacturing companies, however, In the last 5 years, approximately continued to develop, but went mainly 1,200,000 m² of industrial space was in the western part of the country due leased in Romania, out of which more to the boarder proximity to the west than 78% was net. After a record 2014 and in smaller cities with good labour and 2015, with more than 300,000 m² availability force. The high vacancy rented each year, in the first half of rates in Bucharest limited the delivery 2016, gross take- up in Romania reached 230,500 m², a value double than the one registered in same period in 2015. The demand Mr. Cristian Negrutiu for warehouse Logistics Director spaces increased DSV Solutions Romania following the surge in retail „Romania is a very well sales that started positioned country within in 2015 and peaked in the first months of new projects, developers building Eastern Europe and offers great of 2016 (with double digit figures) only built-to-suit. advantages to transport and encouraged also by the recent cuts in Starting with 2013, the local economy logistics players. In the last three VAT. picked-up, which encouraged years we have grown year-on- Bucharest attracted 46% of the total companies to expand, resulting in year by at least ten per cent and demand in the last 5 years. Other record demand for industrial and this year is no exception. We major cities which saw significant logistic space in a market with almost will reach our target by the end surfaces of industrial or logistic space no deliveries. Vacancy rate decreased of 2016 as the year progressed leased were Timisoara, Ploiesti and dramatically in 2015 and 2016 to positively and we are proud Cluj. below 5%. with the implementation of new customers and projects. Vacancy and Rental Outlook Another comment I feel Levels compelled to add is that Demand is expected to reach Romania’s main challenge Vacancy rate in Romania decreased higher values in 2016 as it did in the remains the infrastructure, in the last 5 years. Vacancy reached previous two years, as the economy and if we want a further and a record high of close to 15.5% continues to perform strongly. The fastest increase of businesses in 2011, after the economic crisis, increase in demand will most likely our country has to finish the when the entire real estate market be coming from the e-commerce, infrastructure, at least the was hit strongly and the industrial retail and logistics companies but also projects that are already on market especially. The parks that production. Most of the new demand going and financed by the EU.” were in secondary locations or had will target Bucharest, with a handful

26 of large retailers or light-industrial pressure from the general public and producers aiming for the west and from the legislator. Usually a developer centre of Romania. can build on 50-60 percent of the land. Existing developers, but also the new Obtaining the PUZ and the building entrants will be looking to secure pre- permit can take up to 6-9 months. It leases. The production occupiers is common for the land acquisition to Speaker of the will continue their high interest in only be completed after obtaining the Romania, so the demand for build to PUZ. day suit facilities will maintain its trend. Financing: Debt availability for Development Practices development financing is rapidly improving in Romania and industrial In this section, the key steps that a has been a favourite of the banks in developer, which wishes to develop a recent years. However, the cost of major industrial scheme in Bucharest, funding in Romania, even though needs to take are being summarized. coming down slowly, remains among The entire process from the moment the highest in the EU due to the high of applying for authorizations to the margins. A developer will need to building being ready to host the demonstrate the commercial viability tenants should take approximately up of the project with extensive market to 12 months as most of the processes research and costs assessments and WDP Romania presented below can be run at the the quality of the sponsor will have an same time. important impact on pricing. „In Romania the demand for Securing land: Securing land for Construction: Construction costs new industrial space is growing logistics and industrial projects should are slightly lower than in other CEE both from manufacturing sector generally not be very challenging countries, as both materials and labour but also warehousing, which in Romania. However, that might have become cheaper in recent years. together with the economic be different in the proximity of the There is a wide variety of local and growth contribute to the positive largest cities and especially in the international construction companies perception of Romania, as a west of Bucharest, at the km 13 of that are available in the country. country with good opportunities the A1 highway, where the largest for investing. This is confirmed and most dense logistic hub in the Commercial feasibility: by the number of our projects country is located. Ownership is in Speculative development has been we have concluded in the last the vast majority of cases is not an rare since the on-set of the financial 2 years but also the ongoing issue from a legal stand point (any crisis, even though the few speculative requests which are customized restitution claims have generally been projects launched have proven to be to the client needs, this strategy resolved). Moreover, title insurance is very successful. With demand at high being the core business of available. Most non-owner occupied levels and vacancy rates decreasing, WDP.” developments are freeholds, while we see developers to add some it is common for owner occupied speculative development on top of production facilities to be leaseholds. space secured through large pre- Greenfield sites suitable for industrial/ leases. The market for pre-leases is logistic development at the edge of significant, yet competition can be cities usually lack utilities and proper quite intense from the existing parks infrastructure. that have extension options or from new international developers that Permitting: Permitting have recently entered the market. requirements in Romania have become stricter in recent years and are more thoroughly observed, as local authorities are under increasing

27 Andrei Drosu Andrew Peirson Research & Consultancy Managing Director Mob: +40 745 930 934 Mob: +40 744 333 018 [email protected] [email protected] www.jll.ro www.jll.ro

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