MARKET OVERVIEW REPORT

2018 OVERVIEW & 2019 FORECAST

MARKET OVERVIEW REPORT BOSNIA AND HERZEGOVINA

2018 AND Q1 2019

Summary

Recent Trends Market Prognosis

The highest development activity in 2018 was recorded in the hotel We see and HTL as the most active sectors and retail sector. No new significant developments were delivered to in terms of development volumes in the coming the office market in the past year, but the investment volume was the year. Road and air infrastructure expansion in highest in this segment. pipeline will attract new investments, especially in HTL and industrial/logistics market, while private Banks have continued freeing up capital and cleaning their balance consumption increase should encourage retail sheets by disposing of NPL portfolios secured by mortgages on development in smaller BiH cities. properties of low quality, but a large amount of industrial/logistics and office buildings are still locked as distressed assets.

Economic Overview

Summary & Prognosis

The economy of Bosnia and Herzegovina (BiH) recorded a 3.2% yoy Economic Growth (GDP, %) GDP growth in Q3 2018 compared to the same quarter of the previous year. The slightly faster GDP growth is based on revival of exports in 3,2 steel, energy and other heavy industries, as well as in growing sectors such as and trade. On the other hand, the economy in BiH is 3,0 3,0 3,0 3,0 heavily dependent on external funding for the chronic budget and 2,9 2,9 account deficits. The inflation rate in Bosnia and Herzegovina was recorded at 0.1% in November 2018. However, it is projected to grow at a stable 2.0% rate by 2021. The number of employed persons in October 2018 amounted to 815k, which represents a 2.2% yoy growth, while number of unemployed persons was recorded at 437k in the same month (8.5% yoy drop). Nevertheless, according to Labour Force Survey, the number of unemployed persons is much lower, estimated at 211k in 2017 in Unemployment rate (% of active comparison with 475k of registered unemployed persons. The reason population) for such discrepancy is grey economy and low transparency on labour market. 43% 41% 38% Moody’s credit rating for BiH stands at B3 with stable outlook for three 36% 35% 35% 35% consecutive Reports since July 2012. Standard & Poor’s credit rating changed in March 2019 from B with stable outlook to B with positive outlook. The mentioned credit ratings are 5 grades below investment level. Fitch credit rating agency doesn’t cover BiH. In general, a credit rating is used by sovereign wealth funds, pension funds and other investors to gauge the credit worthiness of Bosnia and Herzegovina thus having a big impact on the country's borrowing costs. BiH GDP growth forecast is set at 3.0% trend by 2019 due to rising exports, low inflationary pressure and increase in private consumption. Inflation (CPI, %) 2018 has shown to be a good year for Bosnia and Herzegovina, as 2,0 1,7 FDI amounted to 2.5% of GDP, the highest percentage since 2015. 1,4 Expectations about two upcoming years are high and are mostly 1,2 1,1 based on the successfulness of 2018, so in 2019 and 2020, FDI are expected to reach 2.9% and 3.1% respectively. -1,0 -1,1 Further opportunities for improvement which should be solved in order to stabilize GDP growth in the long run are: political fragility based on ethnic tensions, structural weaknesses and bureaucratic barriers. Average gross earnings (€/month) Private consumption (% yoy)

3,2 3,1 3,3

704 1,8 2,2 674 1,2 658 659 658 658 664

2012 2013 2014 2015 2016 2017 2018 Source: Colliers International on Oxford Economics Source: Agency for statistics of Bosnia and Herzegovina

2 Market overview | 2018 | Bosnia and Herzegovina | Colliers International

Office Market

Supply & Demand Pipeline

Office stock in BiH is mostly located in , the capital of BiH, Three office buildings are currently in pipeline, all where majority of international companies have their headquarters. of them brownfield projects which were not in use Significant stock is also located in Banja Luka, the capital of Republika since construction: Srpska entity and in Zenica, , Bijeljina and , cities with more than 100,000 residents.  Government of Federation of Bosnia acquired an 8,829 m² unfinished office building “Glass Current office class "A" and class "B" stock in Sarajevo amounts to bank” in Mostar in 2017 and is planning to around 100,000 m² GLA (gross leasable area). Of this, class "A" office relocate in it after the reconstruction. space accounts for 70% and class "B" and "B+" account for the remaining 33%.  Croatian IT company Infobip plans to expand their office premises in Sarajevo to 5,000 m² The market has dozens of smaller office buildings that were built by or (HC 500). The company opened a new office in for businesses who prefer to own property. Some of these include Tuzla in Q1 2019. insurance companies, banks, telecommunications and construction companies, IT industry businesses, etc. The demand for office buildings comes primarily from numerous government institutions due to complex BiH government system, Sarajevo office market key figures 2018 banks, insurance companies and other global corporations present in BiH. IT and domestic start-up companies continue to record growth in Total stock in m² 120.000 m² demand structure. The most demanded are "A" class office premises. "A" class buildings stock 80.000 m² There is a lack of premises with floor area above 1,000 m². Therefore, the companies such as banks and government offices, which have a "B" class buildings stock 40.000 m² need for large office space, decide to buy or build their own buildings. Vacancy <15% On the other hand, there are numerous vacant office premises on secondary locations. Average Monthly Rent A class €12-€18/m² One of the last completed projects is a residential and commercial Average Monthly Rent B class €9-€13/m² "high class" building – Bau-Herc. It is located on the crossroad of Source: Colliers International Hiseta and Kotromanovićeva ulica, close to the Sarajevo City Centre. The object has a surface of 6,300 m². The construction works started in 2014 and finished at the end of 2017.

Rents & Vacancy rate Employed persons per category

The monthly rents range between 12 and 18 EUR/m²/month for class 22.000 "A" office space and between 9 and 13 EUR/m²/month for class "B" 20.000 office premises. The monthly rent in Sarajevo suburban areas ranges between 5 and 9 EUR/m²/month. The rents in office sector remain 18.000 stable in 2018. 16.000 Total average vacancy of Class "A" buildings ranges between 10% 14.000 and 20%. Estimated average vacancy in "B" class buildings stands 12.000 between 5% and 15%.

Prognosis Information and communication Financial and insurance activities Both rental levels and vacancy rate are expected to remain stable

during the next year. We expect that and Turkish Source: Colliers International on Agency for statistics investors, as well as government institutions and local investors will of Bosnia and Herzegovina continue with investment and development activities.

3 Market overview | 2018 | Bosnia and Herzegovina | Colliers International

Retail Market

Supply & Demand Shopping centre stock 150.000 1.000 Improved macroeconomic indicators such as GDP and wage growth have positively affected the retail sector of BiH and Sarajevo. 120.000 800 BiH retail market consists of contemporary shopping centres with 90.000 600 international brands, located in bigger cities and local owner-occupied 60.000 400 department stores that are a combination of F&B, fashion, furniture and DIY stores, located in both bigger and smaller cities. 30.000 200

Serbian company, Delta Holding, opened the largest shopping centre 0 0 in Banja Luka, Delta Planet in March 2019. The investment in 62,500 m² shopping centre was estimated at €70m. Swedish H&M and Polish LPP clothing brands entered the BiH retail market by opening their first stores in Delta Planet. GBA (m²) Shopping Centre stock m²/capita (right side) Desigual clothing brand entered the BiH retail market in August 2018 with its first store on the Sarajevo high street, while UK clothing brand Source: Colliers International Superdry opened its first store in BiH in Sarajevo City Center in September 2018 and afterwards in Delta Planet in March 2019. Rents & Vacancy rate The outcome of insolvency procedure has changed the order of top retailers on BiH market. After surpassing in 2016, The monthly weighted average rent ranges from domestic retailer Bingo continued to strengthen its leading position on €10 to €25 per m² depending on each modern BiH market. Konzum on the other hand experienced stagnation in centre. In addition to base rent some tenants revenue and income decline. (usually the anchor tenants) pay the turnover rent. Year 2018 was very active with openings of two shopping centres and Average vacancy rate in the modern shopping several new big-box developments in secondary and tertiary cities. centres is below 10%. Vacancy rate in other Bingo is the most active retailer and is expected to open its 200th store centres is much higher. in BiH in 2019. Prime shopping centres in BiH Retail developments in 2018 Monthly rent/m² per category (range)

Name Investor, Country City Type GBA (m²) Sports Delta Planet Delta Holding, Serbia Banja Luka shopping mall 62,500 Restaurants and caffe Bingo Bingo, BiH Živinice big-box 15,000 Paper and Book Bingo Bingo, BiH Šamac big-box 14,000 Leather and Shoes Bingo Bingo, BiH Jajce big-box 13,000 Household and Electro Food and Tobacco Furtuna City Leburić komerc, BiH Prnjavor shopping mall 12,400 Source:source: ColliersColliers InternationalInternational Fashion Beauty and Health 0 10 20 30 Pipeline Source: Colliers International Similar to new developments, pipeline is also dominated by Bingo which is building a large big-box in Maglaj and will extend its newly opened big-box in Živinice and turn it into a shopping centre. After the Prognosis opening of Delta Planet in Banja Luka, Delta holding owner announced the construction of a new shopping centre in Sarajevo. We expect new retail developments in secondary and tertiary BiH cities due to continued private Pipeline retail developments, +5,000 m² consumption growth. Name Investor, Country City Type GBA (m²) BiH food retail market is still very domestic as 8 of Cazin City Cazin City AD, BiH Cazin shopping mall 25,000 10 largest retailers are local companies. Konzum Centar and are the only foreign owned food Bingo Bingo, BiH Maglaj big-box 20,000 retailers in top 10. Bingo Bingo, BiH Živinice shopping mall 15,000 After Mercator sold a part of its core portfolio (extension) which consists of 10 shopping malls in Slovenia, it BBI Real Estate, BBI Galerija Bihać shopping mall 6,700 is expected that the company might sell the remaining four centres in Croatia and five centres Serbia Delta Planet Delta Holding, Sarajevo shopping mall n/a in BiH, which is expected to be the largest retail Source:source: ColliersColliers InternationalInternational transaction in BiH in 2019.

4 Market overview | 2018 | Bosnia and Herzegovina | Colliers International

HTL Market

Supply & Demand Tourist arrivals in BiH 1.200.000 BiH has become an emerging tourist destination in recent years with 1.000.000 an average 10% yoy growth in arrivals and overnights since 2010. 800.000 2018 recorded an increase of 13.6% in tourist arrivals and 13.9% in overnights. Sarajevo accounts for most of the country’s growth as has 600.000 almost 40% share in total arrivals. 400.000 Thr largest number of tourist arrivals in BiH comes from domestic 200.000 tourists, with 29% of total arrivals. In recent five years, BiH has 0 become an attractive market for Middle and Far East countries which 2008 2010 2012 2014 2016 2018 achieved more than 30% yoy tourist arrivals growth. Republika Srpska Federation BIH Kanton Sarajevo Such demand increase has initiated strong international hotel brands investment activity during 2018 and beginning of 2019, driven by Orbis Group/AccorHotels and Marriot. Passengers in Sarajevo and Tuzla  Al Shiddi Group opened its hotel component in Sarajevo City Center International Airports in September 2018. The 5* Sarajevo Swissotel offers 218 luxury 1.200.000 rooms and is regarded as the prime hotel in Sarajevo.  Tareq Hospitality, 3* Hotel Sarajevo owner expanded the hotel after 800.000 signing a franchise agreement with Orbis Hotel Group. The expanded hotel has 181 rooms and is branded as 3* Ibis Styles, 400.000 budget hotel. 0  Rotana Hotels, a hotel management company from UAE announced the opening of Bosmal Arjaan by Rotana in Sarajevo in Q2 2019. The hotel will have 132 serviced apartments and will be Sarajevo Tuzla located in one of the Bosmal Towers which was acquired in 2017 by company Al Thani for €17m.  Courtyard by Marriott, 118 room 4* hotel is scheduled to open in Banja Luka in June 2019. Hotel openings in Sarajevo (4 and 5 star category)  Mostar Marriot, 182 room 5* hotel on the location of former Hotel 600 8 Ruža is nearly completed and was supposed to open in 2018, but is 500 on hold with unknown future. 6 400 Luxury resorts 300 4 200 2 Middle East investors own land sites around Sarajevo for construction 100 of luxury resorts, which in majority function as gated communities for 0 0 Arab population. It is estimated that around 100,000 beds in villas and apartments are in New supply (keys) New hotels pipeline on 1,700,000 m² in BiH at the moment. Majority of the projects are marketed only in the Middle East with prices around €100k to Source: Colliers International on Agency for statistics €400k per villa. On the other hand, some of the announced projects of Bosnia and Herzegovina, Statistics Department of are still on hold. Republika Srpska, Informatics and Statistics Department of Kanton Sarajevo The table below gives insight in major resort investments, their size and current status. Prognosis Luxury Resorts around Sarajevo Units Name Investor, Country Status Current trend shows high growth rates in tourism Villas App. sector in BiH and the investors recognized the Aljazeera Residential Al Jazeera, 34 completed potential in this sector. We expect further Sarajevo Resort Gulf Real Estate, Saudi Arabia 160 1st phase compl. expansion in 4* and 5* hotel supply, especially Poljine Hills Al Shiddi, Saudi Arabia 211 260 1st phase compl. those intended for the growing number of Asian Country Side Resort Raw asi Real Estate, Kuwait 128 114 1st phase compl. tourists, particularly from the Middle East. Tarčin Forest Resort TIDC, - 135 176 1st phase compl. Golden Hills Dido Group, 29 U/C There are several brownfield opportunities to be Buroj Ozone Buroj International Group, UAE 1,000+ on hold found in the country which will be initiated in the Source:Source: Colliers Colliers International International coming years.

5 Market overview | 2018 | Bosnia and Herzegovina | Colliers International

Industrial / Logistics Market

Supply & Demand Prognosis

The industrial and logistics sector has gained momentum in recent two One of the key factors for new industrial and years mostly due to strong international investments in manufacturing, logistic developments is good infrastructure energy and steel industry. connection which puts completion of Pan European Corridor 5c on the country’s top priority Demand is propelled by both domestic and international production list as it will attract new retail players and companies which invest heavily in construction of new build to suit investments in logistic facilities. manufacturing facilities in car, furniture, construction products and textile industry. The market is characterized by very large supply of distressed companies/assets which are slowly sold on auctions to both Seasonally adjusted industrial production index (φ 2010 = 100) local and international companies who are restarting the production in 130 the facilities: 120  Almy Zenica acquired a steel production company Metalno Zenica 110 in a bankruptcy procedure for €2.2m and is planning to restart the production. 100  Intral BH acquired a shoe production company Aida Tuzla in a 90 bankruptcy procedure for €1.7m. The company is already present in 80 the factory and will invest in renovation of the production facility.  Perutnina Ptuj opened a logistic center in Breza in March 2018,

near its production facility. The investment is worth €5m. Source: Colliers International on BiH Agency for  German cable production company HIK GmbH opened a new 3,000 statistics m² production facility in Sanski Most in March 2019.

Investment Transactions Overview

Summary Office market  Federation BiH government acquired a 24,600 Investment market volume was low in 2018, with several recorded m² office building in Sarajevo from transactions in office segment by local investors and the government. Energoinvesta for €27.5m or 1,100/m² in The market lacks transparency and it is hard to obtain yield evidence. August 2018. The government acquired the building for its own use. Capital Markets  Local investment company, ABC Finance, acquired a 2,350 m² office building in Banja Hotel market Luka from Srpska Banka at a public auction for €2.5m or €1,060/m² in May 2018. The building  Swiss company Batagon International AG, acquired 144 room Hotel has two tenants: MF Banka and Mikrofin Bistrica on Jahorina mountain near Sarajevo from Olimpijski centar Osiguranje, Jahorina in November 2018. The transaction was worth €3.1m or €21,200/room. Batagon owner is very active in the region as he  Mtel Telecommunications Company acquired a previously acquired FAS, a battery production company from Serbia 15,600 m² office building in Banja Luka in May and is planning to acquire Pavlović International Bank. 2018. Owner of Grand Trade sold the building Industrial/logistics market for €32.6m or €2,100/m². The building was previously leased by Mtel €13/m² which would  Largest retail company Bingo is diversifying its business by imply a 7.5% yield. acquiring several production companies. In the period of several months it acquired a beverage producer Kiseljak from Sarajevo in Prognosis February 2018, followed by acquisition of Pivara Tuzla brewery in April 2018 and 67.45% shares in Ingram , a construction We expect that highest activity in 2019 will be in company for €6.2m in May 2018. brownfield transactions of office, retail and industrial/logistic buildings as there are numerous distressed opportunities all around the country.

6 Market Overview | 2018 | Bosnia and Herzegovina | Colliers International

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