20 1 THE7 COLLIERS REPORT

Accelerating success.1 Top 10 Predictions 2017 4

Economic Overview 6

Industrial Market 10

Retail Market 14

Office Market 18

The Human Touch 22 C ontents

Green Buildings 26

Investment Market 28

Land Market 30

Hotel Market 32

Taxation of Capital Gains 34

Fire Permit Compliance 36

2 Research & Forecast Report | 2017 | Romania | Colliers International DEAR CLIENTS, FRIENDS, There are interesting trends to watch coming forward in development: i) a new location opening for HQs in the north In 2016 our company has celebrated 20 years of activity of Bucharest, ii) warehousing for e-commerce and in the in Romania and we are thankful to a long list of clients for further north of Bucharest, iii) production facilities checking trusting us with their real estate businesses. We have today into more south central cities, to avoid work force battle in a large team of highly skilled and enthusiastic experts, the center-west of the country. in 7 main business lines, offering more than 25 service specializations. Looking more into the future, the big surprise will come Ilinca Paun So one could argue that we are ready for a new cycle of in the following years from retailers, who will adapt their growth and a fast pace new development market. But can Managing Partner shops and overall business model to technology and how it we have a development market without an investment Colliers International changed the way people live. Robots and AI are no longer liquid context? Not really, but the first triggers the other, it [email protected] fantasies and the years to come will be a tipping point for is a matter of time. So our efforts are to create liquidity by changing the way we educate and allocate human resources. creating commercially appealing products and lobbying for Offices will no longer be offices, but living-working areas, Romania as a whole. where creativity will flourish, where millennials feel engaged The main drivers of the new developments in 2016 were in their meaningful work, where they can work out, read the service industry fueling good terms financing for office a book and have a coffee with a friend. Projects will have projects in Bucharest and other major cities, the appetite for mixed functions, office, retail and residential, creating an buying off plan residential units caused by accessible loans urban experience for the young families, with all services at and salary increases, which has also driven construction convenience and accessible by apps. COLLIERS of new retail schemes and warehousing needs for a large I hope you enjoy reading our market report, covering all INTERNATIONAL number of food operators or e-commerce players. sectors, including land market and hotels, and write to us Brexit and Trump filled the digital and print media of the your opinions and questions. Please send them through is a leader in global real estate services, second year half, and they were the main detractors for real to our colleague, Mihai Patrulescu, Head of Research and defined by our spirit of enterprise. Through a estate funds specifically. But the outsourcing and automotive Strategic Analysis, who coordinated this edition of our annual culture of service excellence and collaboration, companies cannot be stopped in expanding in Romania, not report. we integrate the resources of real estate even by the limitations of the work force becoming scarce, We also welcome your inquiries about our service lines or specialists worldwide to accelerate the or to be more accurate, becoming expensive, or the state client portfolio and expertise, and look forward to working success of our partners. We represent inability to plan, finance and build highways. Romania has together in the near future. property investors, developers and occupiers in what it takes to be attractive. Languages, flexibility, tech local and global markets. Our expertise spans skills, several good looking state aids, and the traditional well Ilinca Paun – Managing Partner all property sectors–office, industrial, retail, known hospitality. So development market has boomed in residential, rural & agribusiness, healthcare & office and industrial compared with previous years and stock retirement living, hotels & leisure. will increase significantly in the next 2 to 3 years.

3 3 TOP 10 3. IT and BPO/SSC sectors will PREDICTIONS be the main drivers of office space demand, particularly outside of Bucharest IT and Outsourcing services have seen a massive development over the past 5 years and will maintain the positive momentum in 2017. We expect these sectors to be 2017 the second most important contributor to GDP growth, and to be the key driver of demand for office spaces both in Bucharest as well as the other major cities.

1. Huge uncertainty externally, 2. Investment transactions will 4. Competition on the office but CEE will fare better than reach a post-crisis maximum market will increase other EMs in 2017 As deliveries continue to outpace the newly created demand on the Bucharest office market, the vacancy Financial markets in the CEE region weathered the storms The pipeline for investment transactions in 2017 is already rate is poised to increase over the upcoming period. New of 2016 remarkably well. In fact, most structural metrics covering >65% of the total volume of transactions from buildings which offer good connections to the public indicate that CEE countries are closer to developed 2016. Liquidity has improved as new investors entered transport scheme, Green certifications and an interesting economies rather than other Emerging Markets. Romania the market in 2016 and as new investors are currently mix of amenities will remain the market favorite and will followed this CEE trend and is poised to show resilience prospecting Romania. be able to keep rents around the current levels. Conversely, against external shocks in 2017. We consequently expect Bank lenders will maintain a positive appetite towards real older buildings with poor metro connections will either continued investments in the local market, propping up estate projects. In addition, alternative sources of financing have to make additional investments, or risk competing demand for office and industrial spaces. such as bonds or mezzanine debt have become more solely on costs. convenient and attainable.

4 Research & Forecast Report | 2017 | Romania | Colliers International

5. New industrial developments 7. Bucharest retail market will 9. Residential areas will will hit an all-time high focus on increasing client move closer to the recently The total stock of industrial spaces is set to increase flow; other cities will focus on developed business centers by 500,000 sqm in 2017, marking the highest rate of Substantial investments made in land during 2016 are deliveries/stock in the post-crisis period. Demand will developments of retail parks aimed towards the development of new residential areas stem primarily from the FMCG sector (40% of new Following the deliveries of the Parklake and Veranda in Bucharest, closer to the new office developments in deliveries), E-commerce (20% of new deliveries) and IT shopping centers in 2016, we expect no more retail the Northern part of the city. We expect demand for these & Electronics warehousing (10% of new deliveries). New developments in Bucharest during 2017-2018. However, new residential developments to be supported by the deliveries will remain focused on the Bucharest area (80% the existing shopping centers will focus on consolidating demographics of employees, which are young enough to be of new deliveries), but there is also an increasing interest their market positon and maximize the client catchment. looking towards either their first or second home purchase. for other cities. New deliveries will be concentrated in secondary and tertiary cities, with a strong focus towards retail parks.

6. 2017 will be a point of 8. New brands will enter the 10. Land market will be geared inflection for infrastructure retail market towards the retail and 2017 will result in the delivery of 180 new kilometers We believe there is a strong potential for new retail brands residential sectors of highway, which will provide a fast-track connection to join the Romanian market. Increases in consumer We expect the land market to be geared towards the between the major cities in Transylvania. This should spending coupled with the delivery of new retail spaces evolving needs of consumers. Residential developments in encourage investors to thread further East and will help provide a strong momentum for the market. Brands new areas will remain attractive, as will the expansion of alleviate some of the workforce shortfalls in the western from Poland and Turkey may perform particularly well networks for supermarkets, hypermarkets and DIY stores. part of the country. Both factors should result in increased since: i) these brands match the needs of the prospective Buyers will also focus on minimizing time-to-market for demand for industrial spaces, especially in cities such as consumers very well, ii) Romania is the largest market developments and will consequently prefer plots with a Cluj Napoca, Timisoara, Sibiu or Deva. after Poland in the CEE region, and iii) established solid administrative situation (e.g. PUZ, CUT, PUD). Polish and Turkish brands have had a very encouraging experience in the recent past.

5 ECONOMIC OVERVIEW

1. EXTERNAL CONTEXT for global trade (particularly as Brexit negotiations will Even with growth at 3.3%, the CEE region has outpaced come into play) as well as timid consumer confidence. all other EMs with the exception of Emerging Asia. Huge uncertainty abroad due to Trump, Brexit, With US growth on the rise and flat-line growth in the Furthermore, the region has weathered remarkably well elections in Europe Eurozone, we expect a divergence in the monetary policies the market storm that followed Mr. Trump’s victory in 2017 is gearing up to be a year of unprecedented for the two regions. The US Federal Reserve Bank is set November, the aftermath of the Brexit vote or Italy’s uncertainty: on the one hand, the global economy is set to tighten interest rates at least twice during 2017, while referendum. In fact, the structure of the economies in the to regain its composure, while on the other hand, recent stable inflation will permit the European Central Bank to CEE region is closer to the advanced countries than to the political shifts cast a very large shadow of risks. A new US continue stimulating the Eurozone economy throughout rest of the Emerging Markets. President, Brexit negotiations, and elections in Europe all the year. The bank could withdraw some stimulus towards These structural improvements can be traced back to have the potential to create considerable turbulences both the end of 2017, thus paving the way for winding down its the post-crisis period, when the region has implemented for the CEE region as well as Romania in particular. We Quantitative Easing programme in 2018. reforms and has focused on an economic model based on remain cautiously optimistic in our outlook, as we believe CEE Countries: Less emerging, more developed manufacturing rather than commodities. good economic sense will ultimately prevail. Unemployment Rates in the EU This global context should prove to be broadly supportive Macro storyline should continue to improve for the CEE region. Growth in the area has slowed down Czech If these shocks will not materialize, global growth is set to 3.3% in 2016, down from 3.6% in 2015. However, the Republic to accelerate to 3.3% in 2017 (up from 3.1% previously), main factor driving this slowdown has been a structural Germany helped by emerging markets and, to a lesser extent, the US change in the absorption of EU funds, as the EU shifted Hungary economy. The latter stands to benefit from a particularly from the 2007-2013 budgeting programme to the one Romania Poland poor base in 2016, a build-up of inventories as well as for 2014-2020. The countries which traditionally had the Bulgaria the fiscal stimulus that President Trump plans to unroll. largest rates of absorption, such as Hungary and Poland, Slovakia Eurozone growth is set to remain stable at 1.5%, with have seen the sharpest slowdowns in growth. As these Eurozone Germany acting as the main driver (1.8%), followed by countries gradually ramp up the absorption of funds, we France France (1.2%) and Italy (0.8%). Growth in the Eurozone expect growth in the region to accelerate. Italy continues to suffer from uncertainty regarding the outlook 0% 2% 4% 6% 8% 10% 12%

Data Source: EUROSTAT

6 Research & Forecast Report | 2017 | Romania | Colliers International Consumer spending BPO/SSC and IT One of the key factors for this performance is Consumer spending advanced rapidly in 2016 (+10.7% yoy) Behind the rapid expansion of consumer spending, there the region’s divergence from the global trend following a perfect storm of four catalysts: i) the general is a crucial structural shift in the economy: the emergence of stagnating trade. While the share of trade VAT rate was lowered from 24% to 20%, while the rate for of the BPO/SSC and IT sector as powerhouse for growth in GDP has fallen across most of the world, food products was slashed to 9%. Overall, this means that and employment. Output in the sector has increased by it has risen further in the CEE-EU region. the average VAT rate for Romania has come down to 14%, 12% yoy during 2016, making it the second contributor the lowest in the CEE region. ii) wages accelerated by 12% to GDP expansion after consumer spending and in front In turn, this is down to a closer integration yoy, particularly due to the public sector (+20% yoy); of industrial production. Furthermore, the sector has with the Eurozone supply chain (partly iii) low import prices helped keep inflation at historically consistently recorded growth rates above 7% p.a. during helped by corporate restructurings in the low levels, thus increasing the disposable income of the past five years. We remain very constructive in the post-crisis period). Separately, rising labour consumers; iv) local interest rates declined to historically outlook of the sector for two reasons: i) demand for BPO/ costs in global manufacturing hot spots have low levels, in turn helping increase disposable income for SSC services is expanding at a global level and ii) Romania consumers. Considering this accumulation of factors, it has a significant potential for development in this area. redefined the map of global manufacturing. is clear that the growth rate of consumer spending will Wages in traditional manufacturing hubs At a global level, multinational companies have seen invariably slowdown in 2017. Some support will come from an increased benefit from constructing Shared Service such as China have risen above those in fiscal easing (continued increases of wages in the public Centers as a mean to reduce costs and are set to continue Romania and Bulgaria, which together sector as well as a reduction of the general VAT rate to implementing these solutions as key components of a new with a favorable location, better investment 19%) and a shift in the structure of employment, as more business model. The CEE region has been at the forefront people move to the services with higher wages. climate, and the benefits of EU membership, has attracted investors and importers back Indicator 2011 2012 2013 2014 2015 2016 2017F to the CEE region. GDP growth 1.10% 0.60% 3.40% 3.00% 3.60% 4.60% 3.60% GDP per capita 6,601 6,663 7,207 7,532 7,997 9,130 9,720 2. ROMANIA - Industrial production growth 0.10% -7.00% 3.80% 3.60% 2.00% 2.40% 2.50% A STORY OF NUANCE Household consumption 0.80% 1.20% 1.20% 4.50% 5.70% 8.10% 7.50% Growth is above the cyclical peak, but the economy is set Current Account (% of GDP) -4.90% -4.80% -1.10% -0.50% -0.60% -2.20% -2.00% for a soft landing. 2016 was an exceptional year for the NET FDI (% of GDP) 1.30% 1.90% 2.00% 1.80% 2.00% 2.40% 2.60% Romanian economy, as headline growth accelerated to 4.6%. However, the acceleration was imbalanced across Budget deficit (% of GDP) -5.30% -2.90% -2.20% -1.50% -1.47% -2.70% -3.20% sectors and relied heavily on a fiscal stimulus rolled out Inflation rate 3.10% 5.00% 1.60% 0.80% -0.90% -0.50% 1.80% between 2015-2016. As we approach 2017, fiscal space is much more limited, but some sectors such as BPO/SSC, Average exchange rate 4.24 4.46 4.42 4.44 4.44 4.49 4.45 IT and manufacturing will remain strong performers. We Unemployment rate 7.30% 6.80% 7.00% 6.60% 6.70% 5.70% 5.30% expect the economy to expand by 3.6% in the current year.

Data Source: National Institute of Statistics, National Bank of Romania, Ministry of Finance, Colliers Research

7 of this boon, particularly in Poland where approximately However, there is also a more concerning view. A lack Fiscal challenges 300,000 people are employed in this sector. Romania of physical infrastructure has meant that post-2013 The biggest challenge for Romania in 2017 will be closing is closely following up in the footsteps of Poland, as it investments in manufacturing have been compressed the budget deficit. The combination between election currently employs approximately 100,000 people in the in only a few areas of the country, creating significant promises, changes to the fiscal code, and an impending SSC/BPO sector. Furthermore, the prominence of the workforce pressures. During 2016, Romania ranked third slowdown of the economy are bound to push the deficit already existing companies should help boost demand in the global Manpower talent shortage survey, mainly above the target of 3% of GDP. To solve this problem, during 2017. We expect demand in this sector to come due to a lack of workers in the construction sector and the default solution of past governments has been to from the IT sector, banking and auto manufacturers. laborers. Under this scenario, we believe the country trim investment spending. However, Romania’s future has the potential to absorb more investments, but is held Romania remains very well positioned to attract new government should review this policy for two reasons: back by workforce shortages and poor infrastructure. In investments. The country currently has 5 polytechnic i) the magnitude of the deficit may be too large to adjust order to mitigate this situation, the government needs to universities, 59 domain specific universities and 174 solely via investments and ii) the policy of cutting taxes has follow through on key infrastructure projects such as the private colleges and is capable of training more than been ineffective in promoting investments in the private Pan-European Corridor IV, the Transylvania Highway and 30,000 employees for the BPO/SSC and IT sectors sector. In this instance, we would suggest a two-pronged its connection with the East. 2017 is set to be the first every year. Second, Romania also ranks quite well in the approach: focus on increasing fiscal revenues while point of inflection. The government plans to deliver 180 circulation of foreign languages. According to Eurostat, improving transparency for spending in the public sector. 74% of Romanians speak a second language, compared The absorption of EU funds will be another crucial with the EU28 average of 66%, ranking Romania higher GDP Breakdown by contribution to growth element for the outlook of the economy. There is hope the than the other CEE countries (68% in the Czech Republic, absorption of EU funds may improve starting from this 62% in Poland, 39% in Bulgaria and 37% in Hungary). year as the previous government has released guidelines Third, the lack of physical infrastructure has isolated some 0.2% 0.6% for the absorption of as much as ¤ 5.6bn in Transport regions of Romania from the post-2013 manufacturing 0.4% Agriculture funds during the next couple of years. Furthermore, the boom (particularly the East and the South), creating a Constructions 0.2% government has continued to attract EU funds from the strong potential for the BPO/SSC sector. Overall, it appears IT & BPO SSC Manufacturing 2007-2013 budget, as the absorption rate for transport that Romania’s biggest challenge will be to supply the Retail Sales increased from 61% to 82% during 2016. necessary workforce to keep up with mounting external Other Services demand. Interest rates Manufacturing Even though Romania operated with a positive output gap in 2016, the spillovers into the rate of inflation have Manufacturing activity has remained in positive territory 1.9% been very limited. This apparent contradiction can be during 2016, but at a very restrained pace (1.8% yoy). 1.4% explained by the rapid increase of imports during 2016 Partly, this is because Romanian manufacturing has (8.7% yoy), which means that prices in Romania have already achieved a close integration with the Eurozone become much more correlated with the ones in the supply chain, while growth in the Eurozone remains Data Source: INSSE Eurozone. Considering the steady dynamic of prices in lackluster. This integration was particularly strong in the the Eurozone, external inflation pressures will remain auto sector. Romania’s automotive industry currently ranks new kilometers of highway and thus establish a highway limited. Furthermore, consumer prices will benefit from a 11th in the European Union) behind those of the Czech connection between the major cities in Transylvania Having reduction of the general VAT rate from 20% to 19%. The Republic, Hungary, Slovakia, and Poland. Over the past five this connection will effectively enable manufacturers to main risks for inflation are twofold: i) commodity prices years, the country’s production share has stabilized at 2% tread towards the center of the country and alleviate some will remain highly volatile due to plethora of political risks of total EU car production and 10% of CEE production. of the current workforce shortfalls.

8 Research & Forecast Report | 2017 | Romania | Colliers International in 2017, and ii) uncertainty regarding the implementation of a law mandating that more than 50% of supermarket Monetary Policy Rate vs 3M Robor products should be from national sources. 4.5 The benign dynamic for inflation coupled with the 4 deceleration of consumer spending should enable the 3.5 3 NBR to maintain the policy rate unchanged throughout 2.5 2 2017. More importantly, we expect the interbank market 1.5 to remain flush with liquidity, thus keeping market rates 1 0.5 significantly below the NBR’s policy rate. During the 0 - 1 4 - 1 5 - 1 6 past 4 years, the Romanian banking system has seen - 1 4 - 1 5 - 1 6 - 1 4 - 1 5 - 1 6 - 1 4 - 1 5 - 1 6 - 1 4 - 1 5 - 1 6 l l l v v v p p p a r a r a r a y - 1 4 a y - 1 5 a y - 1 6 u u u o o o e e e a n a n a n J J J J J J S S S

a massive rebalancing, with the Loan to Deposit ratio N N N M M M M M M declining from 118% to 83%. In turn, this surplus of funds has pushed market rates below the NBR rate. We believe Robor 3M that absorbing this excess liquidity will be a prolonged Monetary Policy Rate process for two reasons: i) administrative measures such Data Source: NBR as sterilized interventions or increasing minimum reserve requirements could prove to be expensive and ii) the pace of expansion of banks’ balance sheets is constrained by cautious risk appetite policies, as well as a structural lack of capital for Small and Medium Enterprises. We believe the NBR will follow the lead of the European Central Bank and other CEE banks, and will gear up to tighten market rates in 2018. Exchange Rate Considering the complicated context of 2016 (high risks on the international financial markets, Parliament elections locally, widening of the Current Account Deficit), the RON is well positioned for a slight appreciation during 2017. The Current Account Deficit is set to remain broadly unchanged this year (at 2.2% of GDP) as consumer spending starts to decelerate and as SSC/BPO sector will stimulate the export of services. Also during 2017, the financing side of the equation will improve: Romania looks to step up the absorption of EU funds, while FDI inflows are set to accelerate further. Overall, these factors should translate into a stable evolution of the RON, with some appreciation tendencies.

9 Industrial MARKET

2017, especially considering the large potential of the local 1. SUPPLY industrial sector. 3. RENTS The market for industrial spaces has seen an abrupt Market rates for logistics remained broadly unchanged At an international level, P3 Logistic Parks was acquired by change in the pace of developments starting from 2015. during 2016, ranging between 3.8 ¤/sqm and 4.25 ¤/ the sovereign wealth fund GIC in a deal worth ¤ 2.4bn. P3 During 2015 the structure of developers in the market sqm. We expect rents to edge upwards during 2017, as owns and manages over 150 warehouses in Europe, and saw substantial changes, as players such as P3, CTP or the construction market may struggle to accommodate in Romania its investment represents the largest industrial WDP geared their strategies towards a rapid expansion the deliveries planned for this year. Building costs are park in Bucharest, with a built area of over 305,000 sqm. on the Romanian market. New deliveries of industrial consequently set to remain on an upward trend, which may spaces during 2015 stood at 150,000 sqm, and the market push the starting point for headline rent close to 4 ¤/sqm. remained very bullish in 2016 as well. During 2016, new 2. DEMAND deliveries stood at 350,000 sqm, of which 60% were We estimate total take-up of industrial spaces during 2016 in Bucharest. By early 2017, the total stock of industrial stood at 350,000 sqm, of which approximately 60,000 Vacancy rate and stock on spaces stood at 3,000,000 sqm. sqm were geared towards speculative developments. The Bucharest market The largest players in the market seek to actively expand largest generator of demand is the FMCG sector (in the their portfolios, in an attempt to capitalize on the structural past 2 years, their demand reached approx. 200,000 sqm 1,551,000 changes of the Romanian economy: i) increased spending in the main cities of Romania), followed by e-commerce, 1,151,000 15.4% power and development of shopping areas in secondary electro-IT companies, and logistics companies. 941,000 941,000 941,000 941,000 15.3% 14.5% and tertiary cities, ii) increased focus on e-commerce 13.7% The vacancy rate in Bucharest has decreased to 2% by the 922,000 and the optimization of logistics for traditional retail end of 2016 (down from 5% in the previous year), while 10.2% corporations, iii) development of infrastructure in the the vacancy rate for the rest of the country stood at 5%. 908,000 western part of the country. This decline in the vacancy rate is remarkable when taking 5.0% 2.0% 2.0% Furthermore, the number of players in the market is into account the large volume of new deliveries. Both 2010 2011 2012 2013 2014 2015 2016 2017F expanding. During 2016, Panattoni, chose to follow in the factors indicate that the industrial market is one of the footsteps of its successes in Poland, the Czech Republic or most active in the real estate sector and is set to retain this Stock Evolu on (m2) Vacancy Rate (%) Germany and decided to enter the Romanian market. We dynamism in 2017 as well. expect continued interest from international players during Data Source: Colliers research

10 Research & Forecast Report | 2017 | Romania | Colliers International 4. FORECAST The increase in demand for industrial spaces over the past The advent of e-commerce their customers consolidated during 2016, including three years has been remarkable by all accounts. Even players such as Emag, Fashion Days, QuickMobile, Mobile internet is increasing dramatically Romania’s as the stock of industrial spaces has increased by 13% F64, Evomag or Elefant.ro. Furthermore, this online access, particularly by adding connections during 2016, the vacancy rate has been compressed to its creation of value was also transferred down the to rural areas, which are leapfrogging straight into lowest level since 2008. Against this backdrop, we expect supply chain. The business of couriers is booming, the mobile first experience and in some cases a high number of speculative developments and prelease as Romania’s largest player on the market, Fan completely by-passing the PC-first user experience. transactions in 2017. We estimate that the total stock of Courier, reported an increase of its turnover by By 2016, the rate of penetration of mobile industrial spaces will increase by 500,000 sqm, marking 30% yoy during 2016. broadband connections was 73.8%, up from 60.4% the highest rate of deliveries/stock in the post-crisis period. in the previous year and a mere 48% in 2014. The starting point for online sales in Romania Demand will stem primarily from the FMCG sector (40% of has been very low, with Eurostat reporting that This rapid increase in the number of mobile users new deliveries), E-commerce (20% of new deliveries), IT just 10% of Romanians shopped online in 2012. has also been reflected in online traffic. Olx.ro, an & Electronics warehousing (10% of new deliveries), while However, the rapid increase in the access to mobile online trading platform, has emerged as the most the rest of the deliveries will most likely be of speculative connections as well as the development of new popular website in Romania, with close to 9 million nature. We believe these speculative developments will online platforms are bound to push towards an unique users every month. Turnover in the entire be easily absorbed by the market, especially in light of the acceleration of this trend. rapid acceleration of consumer spending. New deliveries market for online sales increased by 30% yoy in will remain focused on the Bucharest area (80% of new 2016, with a notable exception during the month Overall, the existing level of warehousing facilities deliveries), but there is also an increasing interest for other of November when Black Friday sales jumped by is insufficient for coping with the ramp-up in cities. over 50% yoy. The increase in turnover was broad demand. We expect e-commerce to be one of the based, as the entire industry of retailers using main sources of demand for the industrial sector, During 2016, we have observed a substantial number of online as the main channel for connecting with and help drive a doubling of the stock of industrial manufacturing firms prospecting the region (including spaces over the next five years. Turkish companies looking to tap new markets) as well as Acces to Mobile Broadband a substantial number of international e-commerce retailers Connections (% per 100 people) (as was the case with Alibaba in Bulgaria).

73.8%

Available at New projects 60.4% sustainable started 48.0% rent levels 500,000 sqm 35.4% 3.8-4.25 TO BE DELIVERED /sqm BY THE END OF 2017

2013 2014 2015 2016 Data Source: ANCOM

11 ROMANIA 3,000,000 sqm UKRAINE Bucharest 1,151,000 sqm Timisoara 370,000 sqm Satu Mare Botosani Cluj 213,000 sqm Baia Mare Suceava Ploiesti 280,000 sqm Bors HUNGARY Iasi Brasov 130,000 sqm Salaj Bistrita MOLDOVA Oradea Piatra Neamt Arad 50,000 sqm 2017 Cluj-Napoca Targu Mures M43 Vaslui A11 Miercurea Bacau The point of inflection for manufacturing 2017, 2018 A10 2017 Ciuc Arad activity Nadlac Alba Iulia A3 Manufacturing activity in Romania has hit workforce 2017 Sfantu Gheorghe UKRAINE constrains during 2016, but we believe 2017 will Deva Timisoara Sibiu be an inflection point. During 2017, the government Brasov Focsani Galati is scheduled to release 180 km of new highways A6 A1 in Transylvania; this will effectively establish a fast Resita Buzau Targu Jiu Braila Tulcea transit route between the major cities in the region Ramnicu Ploiesti and the border with Hungary. In turn, this will enable Drobeta Valcea Turnu Severin Targoviste manufacturers to develop production facilities in Pitesti Slobozia 2017 other cities in Transylvania and alleviate some of the A2 A4 workforce shortfalls. Calarasi BLACK SEA Slatina BUCURESTI SERBIA Craiova Separately, rising labour costs in global Constanta Alexandria Giurgiu Port manufacturing hot spots are redefining the map of global manufacturing, driving growth into the next group of low cost countries. This is forcing higher- BULGARIA cost countries such as China up the value chain. In Legend CEE, hierarchies are slowly shifting as tier 1 markets Low stock such as Poland and the Czech Republic become Medium stock more expensive and increasingly saturated. This High stock is likely to pave the way for new investments into countries such as Romania and the Balkans, of which Existing highway we have seen some early examples such as Alibaba Under construction highway Planned highway in Bulgaria or the Italian group Custom in Romania. A6, A11 - routes to be determined

12 Research & Forecast Report | 2017 | Romania | Colliers International 13 Retail MARKET

1. SUPPLY (+20,000 sqm in extension of City Park Constanta), 2. DEMAND Brasov (+13,500 sqm in extension of Coresi Brasov). 2016 saw the delivery of a series of new retail projects, We also saw a complete refurbishment of the Mercur Growth catalysts such as higher wages, fiscal easing and with Bucharest acting as the main point of attention Shopping Center (15,000 sqm of GLA) in Craiova and a lower interest rates have helped prop up consumer spending for developers. Total deliveries of new stock stood at new project delivered by NEPI in Piatra Neamt (27,900 in 2016. According to the National Institute of Statistics, total 240,000 sqm of GLA, out of which Bucharest accounted sqm of GLA). turnover in the retail sector has increased by 13.5% in 2016, for more than 40%. The highlight projects of the year and we also observed a return of consumer confidence We expect developers to focus in the future mainly on were ParkLake Plaza and Veranda Mall, amounting to to levels last recorded in October 2008. However, with projects outside of Bucharest, and particularly on retail approximately 100,000 sqm of GLA. regards to the structure of spending consumers report parks due to their flexible cost structure. Following these two deliveries, there are no new a greater propensity in making small purchases (e.g. projects announced for delivery in Bucharest during food, entertainment, fashion) rather than large ones (e.g. Traditional vs. purchasing a home or a car). 2017 – 2018. Within this period, we expect the existing Specialised Shopping Centers shopping centers to focus on consolidating their market Fashion brands continued to register a very good position in order to maximize the centers’ attraction. performance in 2016, with most of them recording sales Several shopping centers already announced extensions increase between 20-30% compared to 2015. The rapid aimed at creating additional space for anchor tenants 27% increase in turnover encouraged existing players to extend and/or entertainment areas (i.e. AFI Cotroceni, Sun their store networks and spurred new brands to enter the Plaza, Promenada Mall, Colosseum Retail Park). These market. Players on the mass market fashion segment were extensions plan to add over 50,000 sqm by the end of particularly active in extending their networks towards 2018. Traditional secondary and tertiary cities. Brands like H&M, LC Waikiki, Retail Park Overall, Bucharest’s ratio of retail stock increased from C&A, Deichmann, CCC, Koton, Pepco, or TXM were among the 573 sqm per 1000 capita in 2015 and currently stands at most active in 2016. 626 sqm per 1,000 capita, however still behind the CEE 73% The American brand Forever 21 was the most notable new markets. entry on the mass market segment, while the upper middle Cities outside of Bucharest also saw a considerable segment saw new entries from brands such as COS, Boggi or rate of new deliveries during 2016, particularly due to Data Source: Colliers research Lanidor. extensions of the existing projects: Timisoara (+40,000 sqm- phase II of Timisoara Shopping City), Constanta

14 Research & Forecast Report | 2017 | Romania | Colliers International DIY retailers also increased their number of stores, with on new business models in order to attract customers. The Leroy Merlin and Dedeman as the most active players on the focus will shift towards creating experiences for customers market. Leroy Merlin has acquired the Baumax portfolio of and we believe there are three ways of achieving this goal: i) stores in 2015-2016, thus opening 8 new locations, while the innovative and exciting entertainment options for customers, latter opened 4 new stores during 2016 and was prospecting ii) complete experiences focused on offering a very large new locations in early 2017. The DIY remains supported by number of options, and iii) targeted marketing campaigns. two factors: i) as consumers remained reluctant towards Innovative malls are incorporating value-added elements that purchasing new homes, they spent increasingly more on attempt to recast the mall as the new downtown, including refurbishments, and ii) demographic trends for Romania are concerts, arts centers, spas, fitness clubs, and farmer’s nearing the sweet-spot for the consumers focused on DIY markets. These services provide a level of leisure and projects (the bulk of Generation X members are nearing entertainment that can never be satisfied online. the moment when their propensity to shop in DIY stores increases). 3. RENTS Consumer spending also filtered into entertainment areas, with restaurants seeing a substantial increase in business Rent levels remained broadly unchanged in 2016, as the volumes (turnover increased by 16% yoy by Q3, 2016). The market was able to absorb organically the newly released traditional fast food operators (McDonald’s, KFC, Pizza Hut supply in retail centers. Although the performance of the etc) also continued expansion but are mainly focusing their retailers continued to increase in 2016, they were rather strategy on drive-thru concepts. conservative during the negotiation process and signed contracts for constant base rent levels, compensating with With the rapid development of e-commerce (see special box turnover rents in the case of very successful locations. on page 11), shopping malls will increasingly have to focus

Retail sales of food and non-food products Romania Shopping Centers Average Rents

25% 20% City Asking Rent (€ / sqm /month) 15% Bucharest 55-65 10% Cities with more than 30-40 5% 250,000 inhabitants 0% Cities with less than -5% 15-20 250,000 inhabitants -10% Jan-12 Oct-12 Jul-13 Apr-14 Jan-15 Oct-15 Jul-16 *Average rents obtainable for prime spaces in good performing Retail sales of food products centers for 100 sqm occupied by good brands; Retail sales of non-food products **This represents the market average; there are big differences between the cities depending on the level of competition; Data Source: INSSE

15 Projects to be delivered in 2017

4. FORECAST Project Prima Shopping Center Project Platinia Shopping Center Project Bistrita Mall 2017 will be another active year for the retail market Developer Oasis Retail Development Developer Platinia Developer Element Development in Romania, as the estimated deliveries will amount to GLA sqm 10,000 GLA sqm 13,000 GLA sqm 15,000 approximately 180,000 sqm of GLA. Even though the aggregate number of deliveries remains broadly unchanged from 2016 (12 projects in the pipeline), the structure of the market is changing. Developers of shopping centers will focus on smaller cities like Ramnicu Valcea or Sibiu, while we expect to see also a rapid development of retail park projects in cities such as Bistrita or Oradea. Oradea Bistrita We expect fashion brands to remain very active in 2017 and we believe there is a strong potential for new players Project Shopping City Galati Cluj-Napoca (extension) to join our market. We expect Polish and Turkish brands to Developer NEPI be at the forefront of this trend, encouraged by the good GLA sqm 21,000 performance of the already established brands from these markets. The main Polish fashion brands have already Sibiu reached the point where they have a full coverage of their home market and Romania is a natural development step being the 2nd largest market in the CEE Region. Turkish Galati Project Shopping City Sibiu brands have a twofold motivation for looking towards the (extension) Ramnicu Romanian market: the positive perspective for retail trade Developer NEPI Valcea as well as their need to diversify income sources as a GLA sqm 16,900 buffer for the volatility of the Turkish Lira.

Project Ramnicu Valcea Mall Developer NEPI GLA sqm 27,900

Data Source: Colliers research

16 Research & Forecast Report | 2017 | Romania | Colliers International 17 buildings which do not fit into this paradigm will need to differentiate themselves in the market or risk competing solely on costs. We believe this increased competition will manifest itself Office on a like-for-like basis: buildings from older established business districts (e.g. Dimitrie Pompeiu) will have to face MARKET a direct competition from districts such as Central West. With regards to the latter, we believe there is still a strong short-term potential for development, particularly as it is one of the most spread-out business areas in the capital, 1. BUCHAREST Demand spawning over three metro stops. These characteristics allow for the development of very large buildings, which Total take-up in the market for 2016 reached 369,000 sqm, OFFICE MARKET along with the development of new amenities may well up by 52% from the previous year. IT and BPO/SSC were result in the buildup of Bucharest first mega-district for Supply the main drivers behind this expansion and accounted for business. a total of 50% of the transactions. In fact, we estimate The stock of modern office spaces in Bucharest reached that more than 20,000 people were hired in these sectors Conversely, buildings in the central area with good 2.1mn sqm, after registering new deliveries of 230,000 during 2016, which would mean that IT and BPO/SSC transport connections will have to compete with the sqm during 2016. In fact, the volume of new deliveries are on their way to becoming the largest employers in newer ones in the same area, as well as buildings in the marks the fastest pace of expansion since 2009 and is Bucharest, outpacing employment in retail trade. Floreasca Barbu Vacarescu business area. Overall, existing 112% more than the yearly average of deliveries in the landlords will need to move along two directions: 1) offer post-crisis period. By all means, the Bucharest office Demand for office buildings has been strongest in the more flexibility for tenants, and 2) reshape their amenities market is shifting gears. One of the explanations for already established areas such as: Floreasca Barbu in order to become more relevant for a workforce of which this increased volume of deliveries is the focus on large Vacarescu (13% of total demand), Dimitrie Pompeiu (17%), 40% are millennials. projects (with GLAs larger than 25,000 sqm), which and the Central West part of the city (24%). In the case of accounted for 60% of the total volume of deliveries from the area between Calea Floreasca and Barbu Vacarescu, Demand by sector of activity 2016. At the same time, we have seen an increase in the demand is starting to outpace the volume of office space number of pre-lease transactions in the market. During on offer, as the vacancy rate continues to decrease rapidly. 2016, pre-leased transactions accounted for 82,100 sqm Consumer goods Looking at the broader market, it is clear that tenants (up by 200% from the post-crisis average) continue to have the upper-hand. Net take-up during 2016 20% 19% Energy/Industrial In terms of geographical distribution, the highest reached 166,600 sqm, which covers 73% of the area Finance/Banking/ contributors to the stock are Floreasca-Barbu Vacarescu delivered to the market in the same period. We expect Insurance 10% 9% (42% of total deliveries), Dimitrie Pompeiu (26% of supply to continue outpacing demand during 2017 as well, IT & total deliveries) and the Central West Area (24% of total which will invariably increase competition in the market. 2.2% Communications deliveries). In total, these zones accounted for 92% of the 17% New buildings which offer good connections to the public 23% Pharma total deliveries in the market. These areas have developed transport scheme, Green certifications and an interesting considerably in the post-crisis years as accessibility, Professional Services mix of amenities will remain the market favorite and will transportation and proximity to amenities started to rank be able to keep rents around the current levels. Conversely, Other higher in tenants’ requirements. Data Source: Colliers research

18 Research & Forecast Report | 2017 | Romania | Colliers International Sources of demand (2016) Bucharest Rents & Vacancy Rates

24.1%

18.7% 17.3% 15.8% Baneasa 13.2% 11-13 8-10 6% 7.2% 28% 3.7% Pipera 15-16 6% D. Pompeiu 11-13 Floreasca Dimitrie Central Pipera West CBD Other P. Presei 7% Barbu Pompeiu West 16-18 Vacarescu 12% 14-16 Floreasca Aviatorilor 7% Barbu Vacarescu Data Source: Colliers research 16-18 9% Victoriei P.Poenaru Rents 14-15 Romana 13-14 10 9%M 9% Over the last two years and a half rents in Bucharest saw Grozavesti Pacii 0% Eroilor little to no movement, while projects with higher vacancy Universitate Piata Muncii rates, showed more flexibility in approaching tenants. We Politehnica Izvor Unirii 12-14 14-15 expect rents for prime buildings to remain unchanged 26% 18% Vitan during 2017. Timpuri Noi

Eroii Revolutiei Forecast 10 39% More than 265,000 sqm of office area is scheduled for Piata Sudului delivery in 2017, broadly in line with the level received in 2016. Approximately 50% of these deliveries are already under advanced negotiations and almost all have managed to secure anchor tenants during development. We estimate a net take-up of approximately 175,000 sqm during 2017, most of which will be generated by new tenants in the market. During 2016, new entry tenants generated transactions of over 107,000 sqm, up by 118% n Average headline rent (€/sqm) from the post-crisis average. We expect this optimism to n Vacancy rate be carried forward into 2017 as well.

19 In order to capitalize on this dynamism, landlords will need • Iasi is rapidly becoming a magnet for the BPO/SSC iii) technical skills of the workforce, especially from a to provide tenants with increased levels of flexibility: either industry as it has a large pool of highly competitive regional stand point (secondary, tertiary cities). workforce and has sparked the interest of companies for already existing tenants which will need to upsize (for If the respective shortfalls were to be resolved, we believe such as: Amazon, Xerox, UniCredit and Accenture. additional hires) or downsize (in cases where tenants Bucharest could employ an additional 20,000 people every open new offices in other parts of the country), or for new In Iasi, an insufficient number of office buildings is becoming the biggest drag on growth. year, which would be result in an additional demand of entry clients which plan to grow their business over the 160,000 sqm of new office space every year. Similarly, upcoming years. • Cluj Napoca has become a direct competitor for Bucharest on the IT market. Over the past three years, cities such as Cluj and Iasi could each absorb as much as We believe demand will remain strongest in the already the city has rapidly moved towards the higher end of 50,000 sqm every year. established areas such as Central West, West or Floreasca the market. This tendency is evident in the employment Looking forward, we can classify Romania’s top cities into Barbu Vacarescu. Over the longer term, the agglomeration structure of Cluj Napoca, which is more focused three main categories: of some office areas will encourage developers to explore towards the IT sector rather than BPO/SSC when new locations which offer the complete package: short compared to other cities in Romania. The existence of 1. The heavy hitters: Bucharest and Cluj Napoca have commute time, availability of public transport, and retail a large critical mass of IT companies may also create a critical mass of workforce with strog IT skills, but are areas. We have seen a first example of this trend with during the upcoming period the appropriate conditions already pushing the edge of workforce availability, and thus for foster innovation and the incubation of new ideas the construction of the Timpuri Noi Square by Vastint. driving up salaries. The solution in this case would be to and businesses. During 2016, some of the biggest Similarly, we believe there is a latent potential in the area invest more in technical skills and move up the value chain, transaction in the market included Arvato, Impact Hub which would make the rise in salaries sustainable. on Bulevardul Expozitiei, especially when considering and Sig Comiblock and Magneti Marelli. As in the case three factors: i) the city of Bucharest plans to construct of Iasi, available office spaces appear to be insufficient 2. The up-and-coming cities: Iasi enjoys an ample a new metro line connecting this area with the Henri to keep up with market demand. workforce at low costs, which has helped fuel a very Coanda Airport by 2020, ii) the area benefits from a • Timisoara is another city with an interesting rapid development in the BPO/SSC. We believe Craiova close proximity to residential areas in the northern part proposition for companies. The mixture between a very is another city with latent potential, and could see an of Bucharest as well as easy access to the Western area strong industrial sector and IT skills has created the accelerated pace of development over the upcoming years. via light rail transport and iii) the abundance of land plots basis for an engineering-focused demand for office However, in order to encourage growth, this type of cities available in the area. spaces. Timisioara has seen interest during the past need to improve their supply of modern office spaces. year from players such as HP, Continental, or Huawei. Moving forward, the biggest challenge that the city 3. The niche players: Timisoara and Brasov are emerging 2. PLOTTING THE faces is gathering the necessary workforce to keep up as strong engineering polls at a competitive cost. However, DEVELOPMENT PATH FOR with demand. the rapid development of the former is already starting to • Brasov is showing potential as a prospective center strain its workforce availability. ROMANIA’S MAJOR CITIES focused on engineering and an alternative for Timisoara, with players such as Siemens (2015), Tata Over the past five years, the business landscape in Romania (2015), or Continental (2016) setting up office spaces Triple threat cities has been reshaped with an increased focus on the services in the areas. sector. At a macro level, IT and BPO/SSC have become With global demand on an upward trend due to corporate the second largest contributor to GDP growth, outpacing restructurings, we believe Romania is in the position industrial production. This switch towards the services where it could absorb more new investments than it does industry was most evident on the office market. Bucharest currently. In order to achieve this, it needs to address three remains the most prominent Romanian city, but other cities Technical Workforce Office bottlenecks: i) availability of a large enough workforce at are seeing a very rapid pace of development: Skills Availability Spaces competitive costs, ii) availability of office spaces,

20 Research & Forecast Report | 2017 | Romania | Colliers International Romania - Next Outsourcing Destination

Iasi

Cluj

100,000 Employees Timisoara Sibiu Brasov

Craiova Bucharest Constanta

Data Source: Telus, ABSL, Colliers research

21 different structure with respect to its Eurozone or USA counterparts, where Baby Boomers and Silent/Veterans THE account for over 30% of the workforce. Generation X is by far the largest in the labor market, accounting for close to 50% of the workforce in the Bucharest class A office market. Millennials account for close to 40% of TOUCH the workforce. However, we currently find ourselves at Human a crossroad, as Centennials (Generation Z) are preparing to enter the labor market. Having these four generations working at the same time in the same office could prove to be a real challenge as each generation has specific needs and different ways of working.

1. THE CHALLENGE Cost structure for a knowledge Technological flexibility intensive company Over the past five years we have observed local companies Over the past seven years, technology has changed pivoting towards the higher end of the market, where 90% 9%1% significantly the way we work, particularly due to the they can provide more innovative services and a higher mobile revolution. Upon the advent of mobile phones, added value. Furthermore, market leaders have shown employees were able to remain permanently in touch with that focusing on the quality of their workforce is the Employee related costs developments at work, even if they weren’t physically cornerstone for achieving these goals. In fact, the cost present. Furthermore, services such as Skype, Slack, Asana Rental costs structure of local IT and BPO/ SSC companies has started are revolutionizing the way we communicate, track projects to resemble the one of their western counterparts with Other costs and share information in the office. The exponential curve human capital costs accounting for the bulk of their cost Data Source: World Green Building Council for mobile technology was also evident in Romania, where structure. the rate of penetration for mobile broadband internet has jumped from 48% in 2014 to 74% in 2016. The issue regarding the quality of human capital 2. THE OPPORTUNITIES is particularly binding in Romania due to the rapid A generational shift 3 Generations in the workplace development of the market. We estimate the Bucharest One of the main factors that is affecting the Romanian office market has generated more than 80,000 new jobs work environment is the generational shift in the Baby Boomers for knowledge workers over the past five years, which workforce. There are three generations currently working 10% represents a real challenge for local companies that Generation X together in Romania’s offices: Baby Boomers, Generation want to: attract the brightest employees, engage their X-ers and Millenials (Generation Y). We estimate that Millenials (Gen Y) creative and analytical thinking and retain their skills for Baby Boomers are the most under-represented generation 40% a prolonged period of time. Against this backdrop, the in the workplace, accounting for less than 10% of the workplace should be able to change and easily adapt in a workforce. This under-representation is directly correlated way that facilitates and supports the achievement of these 50% with the enormous shift of the Romanian economy in business goals. the post-communist era. Furthermore, this means that the Romanian work environment has a fundamentally Data Source: Colliers research

22 Research & Forecast Report | 2017 | Romania | Colliers International Furthermore, the digitalization of business processes is an enabler for a more flexible work environment. The new technologies available on the market allow for higher flexibility with regards to when, where and how the business is conducted. The rise of the business hubs Productivity and A third major development in the Romanian work New ways of business environment is the construction of business districts. This working results tendency is most evident in Bucharest, where we have seen the emergence of several business districts over the Space past five year (e.g. Floreasca/ Barbu Vacarescu, Central Optimisation West Area, Dimitrie Pompeiu). The development of these hubs means there is a sufficiently large number of people in order to bring a shift in the way the workplace and personal life are integrated together. This,in turn, leads to a of grouping employees just into departments as a single and increase employee satisfaction and wellbeing. critical demand for day-to-day services such as: food, dry area of activity, the work environment should focus on Companies can bundle an activity based workplace with cleaning, childcare, errands management. accommodating the different activities conducted by the optimization of the office space layout. This means employees. Concentration areas could be provided for the tracking the way in which the office is used, maximizing 3. INNOVATING times when employees need to work on intricate reports its utility and optimizing costs. Some examples include the or detail-oriented work that requires a high degree of arrangement of amenities in the smartest way possible. THE WORKPLACE concentration. Similarly, a modern work environment could First, we recommend the development of common areas Traditional offices with a plain open-space design include also some small rooms where salespeople can talk which both save space and encourage the interactions feels outdated and is not a catalyst towards employee freely without disturbing colleagues, can organize video/ between employees. Second, we recommend placing these engagement and creativity. According to the World Green teleconferences or where small one-to-one meetings can common amenities in a way that they leave the prime Building Council, 90% of costs for knowledge intensive be held. For innovation-focused companies brainstorming office space for employees (e.g. access to sunlight and companies are directly related to employees. Increasing areas where employees can bounce ideas and work on green) as well as encouraging them to be more active and employee engagement and satisfaction leads to increased new projects can also be provided. interact with each other. revenues. The biggest issue is that the traditional The concept can be further extended in order to include layout of the office is based on the premise of mutually a hot desking environment, where there are no assigned interconnected islands. Each workspace is its own island, places and employees can freely choose a place that suits connected to other islands based on their functional role their activity. Relaxation rooms and informal meeting in the various divisions of the company. This setup is areas could also be provided in order to facilitate work life not ideal to stimulate idea generation, cross department integration. communication or a lean management structure. The real estate costs represent a much smaller portion We believe the solution to this problem is a very simple of the total cost of the company. An activity based shift in the organization of the work environment. Instead work environment can help optimize the office space FROM CONVENTIONAL TO FUN

23 24 Research & Forecast Report | 2017 | Romania | Colliers International 25 THE DEVELOPMENT OF Green Buildings

1. INTRODUCTION 2. STRUCTURE OF LEED/ BREEAM breakdown The development of the office market during the past CERTIFICATES five years has not only seen a quantitative shift, but Office buildings are the most prominent on the Green a qualitative one as well. Developers and landlords certifications market, as they account for close to 80% have been approaching buildings through a long term of the existing certifications. The certification of Office perspective, focusing increasingly more on efficiency buildings has reached a historical milestone during 2016, and sustainability. Over the past years we have been when it surpassed the 1 million sqm threshold. By early collaborating with both developers and landlords in order 2017, we estimate over 1.22 million sqm of office spaces to obtain Green certifications for their buildings and we had Green certifications and provided working conditions have observed firsthand the rapid development of this for more than 160,000 employees. The Romanian market market. BREEAM (Building Research Establishment’s remains predominantly driven by the certification of Environmental Assessment Method) and LEED BREEAM already existing buildings, which account for 53% of the (Leadership in Energy and Environmental Design) have 44% 56% total number of certificates. become the most widespread standards for evaluating the environmental performance from an end-to-end BREEAM and LEED certifications perspective over a building’s life cycle. This study is based LEED on official data derived from the certification bodies for by type of building 48% 52% both LEED and BREEAM standards.

NEW CONSTRUCTIONS EXISTING BUILDINGS 2% 18% Industrial O ce

Retail

80%

26 Research & Forecast Report | 2017 | Romania | Colliers International 3. BREEAM VS. LEED 4. REGIONAL DISTRIBUTION In the case of LEED, GOLD certification is the most prevalent in the market, accounting for 62% of the total CERTIFICATIONS OF CERTIFICATIONS number of certifications. Only one project was awarded the highest level of LEED certification – PLATINUM, The number of certified Green buildings has been Bucharest remains the city with the largest area of the office of DB Global Technology in Bucharest, which increasing constantly over the past five years and has green buildings, with a total of 1.1million sqm of certified received the certification for Commercial Interiors. Another reached a peak during 2016, when 29 buildings were buildings. However, other cities are quickly catching up: 7 buildings received the SILVER and CERTIFIED levels of certified. BREEAM has proved to be the most popular Cluj Napoca has more than 430,000 sqm in green spaces certification. certification standard on the local market with 72 buildings, and is followed by Timisoara with 307,000 sqm. Looking followed by LEED with 21 certified buildings. However, at the pipeline for LEED projects, Iasi is also focusing BREEAM/ LEED - the balance between BREEAM and LEED certifications increasingly more on Green buildings as it records 177,000 Quality of certifications may be reversed in the upcoming period considering the sqm under certification (compared with the existing stock remarkable pipeline for the latter: 40 projects are currently of 66,000 sqm). under LEED certification. BREEAM Certi cation LEED Certi cation

BREEAM/ LEED - BREEAM/ LEED - Outstanding Platinum Annual number of buildings Regional distribution of certifications 1 1 Excellent 18 Gold Very Good Silver 13

300,000 Good 41 Certi ed 25 Pass 5 11 1 2 760,000 140,000 9 8 6 6 6 129,000 5 4 2 295,000 1 1 46,000 178,000 111,000 20,000 103,000 6. TAX INCENTIVES 2011 2012 2013 2014 2015 2016 Brasov Bucuresti Cluj-Napoca Iasi Targu Mures Timisoara Tax incentives also help to improve the outlook for the BREEAM LEED BREEAM LEED Green certificates market. Bucharest does not have a LEED: scheme currently in place, but other cities have made Certified vs. Under Certification 5. QUALITY OF significant efforts in this area. Cluj Napoca was the first city in Romania to have taken the initiative to introduce CERTIFICATIONS tax relief for the design of green buildings (e.g: for a 50% The most popular level of certification for BREEAM is reduction they must achieve a minimum level of GOLD in 40 VERY GOOD, which represents 56% of all certificates the case of LEED or Excellent for BREEAM). Cluj Napoca Already Certi ed awarded. Only one building has achieved the highest level was followed by Timisoara in case of tax incentives for Under Certi cation of certification for BREEAM in Use – OUTSTANDING green buildings. In addition, there are local initiatives (both 21 (the Maestro Business Center building in Cluj Napoca). public and private) in other cities such as Iasi. The BREEAM EXCELLENT certification was awarded to 18 buildings, while the BREEAM GOOD certification was awarded to 11 buildings. 27 Investment were driven primarily by large, sporadic investments, this trend started to reverse in 2016. Furthermore, new MARKET investors joined the Romanian market, as was the case with PPF, GIC, Logicor, while others have resumed their acquisitions in Romania: Catinvest, GTC, First Property, Smartown Investments. We expect this qualitative shift to continue in 2017 as well, particularly as some transactions were postponed for this year due to some administrative delays. Transactions and Investors Prime yields The interest for CEE properties remained heightened in 2016 and is likely to continue in 2017. Poland is slowly In terms of investment volumes, the industrial sector making the shift towards being an alternative for western dominated the market registering a total of ¤ 255mn or markets, while Budapest and Bucharest are considered Bucharest Warsaw Budapest Prague 28% of the total market with only two deals. This high more often as alternatives to secondary Polish cities. percentage is largely attributed to the sale of Europolis Office 7.50% 5.30% 6.75% 5.05% Park in a large multi-jurisdictional transaction - the 2. ROMANIA acquisition of P3 by the Singapore’s sovereign wealth Retail 7.00% 6.25% 6.50% 4.75% fund GIC. The other industrial transaction was also part INVESTMENT MARKET of a large cross border transaction: Blackstone acquired Industrial 8.75% 6.50% 8.75% 6.75% Immofinanz’ industrial assets through Logicor, its Overview European logistics platform. Source: Colliers Research The real estate investment market in Romania is on an The retail sector came in second with 25% of the market, ascending trend as both the volume of transactions as well or ¤ 229mn. NEPI continued to consolidate their position 1. CEE INVESTMENT MARKET as the interest from foreign investors registered sizable on the retail segment and acquired Sibiu Shopping City increases. The main factors underlying this dynamic are: i) In the Investment arena specifically, 2016 turned out to be from Argo Group for ¤ 100mn and the 30% share of a positive macro environment spurring investor confidence, a bumper year for the CEE-6 countries, with ¤ 11.8bn of Real4You in Mega Mall. Catinvest was a new name on the ii) increasing market liquidity, iii) an improved financing volumes (Colliers International estimates). market in 2016 with the purchase of Electroputere Mall environment, and iv) a rapid development of the Romanian Craiova from BelRom. As opposed to 2015, when it led the Compared to 2015, when the most sought after properties real estate market. were the office buildings, followed by the mixed use investment activity, office accounted for only 20% of the segment, 2016 brought high interest for the retail sector 2016 maintained a comfortable market liquidity, marking a market in 2016 (¤ 183mn). After years of absence, GTC followed closely by offices. Industrial and development site total investment volume of ¤ 910 mn, up from ¤ 820 mn in returned on the market and secured 100% of City Gate by spaces had also an important weight in the overall volume. 2015. The market not only saw a boost in the total volume acquiring Bluehouse’ share of 41%. The Israeli fund also of transactions, but it also registered a qualitative shift acquired two office properties in Bucharest’ CBD, Premium during 2016. While 2014 and 2015 investment volumes Point and Premium Plaza.

28 Research & Forecast Report | 2017 | Romania | Colliers International The Iceberg Effect entries already having occurred. Margins have come around 350 bps and even lower for core properties, after a The number of investors in the Romanian market has increased substantially in 2016 and long period where they used to be between 400 and 500 there are further prospects for new players bps, and risk appetite for the real estate sector continues to improve. In addition, alternative sources of financing TH

UCHAN such as bonds or mezzanine debt have become more A O R convenient and attainable. AL W B O G L

300 mn TH IMMOCHAN /

O R Forecast 250 mn S AL W

B Based on the current volume of closed transactions, deals GIC O S TMEN T 200 mn TE S A

G L that are currently under negotiation and the current level TI E T G NEPI T S A L NEPI S CTP 150 mn E R of interest in the market, the investment volume in 2017 P G L P3 C ST ONE could surpass ¤ 1 bn, marking the best year for real estate TRA B T WN INV E REFOUR TINV E S G C K O

100 mn NEPI T A investment in the post-crisis period. Furthermore, we C A AS Y MERLIN PF REAL E T CA R B L O P

50 mn CURE PR O expect the qualitative shift in the market to continue, as SMA R S E LE R REV E new players are currently prospecting Romania. 0 We expect to see a slight decrease in yields across all 2014 2015 2016 sectors by the end of the year, as investor interest grows and bidding situations arise while the financing costs decreases. Prime office yields could reach 7%-7.25%, prime retail 6.75% and prime industrial 8.5%-8.75%. Data Source: Colliers research Historical Yields PPF Real Estate entered the Romanian market with the Pricing 11% acquisition of Metropolis Center, an office complex in the Although the growing investment activity has already put city center of Bucharest, from Soravia. The insolvent office 10% pressure on pricing, the risk-return yield that Romania project Swan Office & Technology Park was sold by Casa 9% offers remains very attractive both by Eurozone and CEE de Insolventa Transilvania, the insolvency administrator, to standards. The current yield levels are 7.5% for office, 7% 8% a group of local investors, Smartown Investments. Phoenix for retail and slightly below 9% for industrial. Tower and Construdava were another two office buildings 7% changing hands in 2016 from Aberdeen Asset Management Viewed from a different lens, yields in Bucharest are 6% to Hoshen Holdings (administered by the co-founder of at a higher spread from 2007 market peak than in all 5% AdamAmerica). peer countries, showing again an advantage for potential 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 investors in terms of the market cycle stage Romania is in. O ce Industrial Bank financing is becoming more attractive as more Retail players are interested to enter the market, some notable Data Source: Colliers research

29 Land MARKET

1. DEMAND Looking at the structure of developers, we have observed 2. SUPPLY an increase in the proportion of locals which share a very 2016 remained a lively year for the land market. The overall broad experience on the Romanian market. Furthermore, On the supply side, the land market saw an increased focus number of transactions suffered due to administrative we have seen an increase in the number of partnerships towards old factory plots, or undeveloped plots acquired hurdles, but market interest was very elevated and is between local players in order to acquire particularly in the pre-crisis period. This dynamic highlights the fact bound to continue during 2017. Plots aimed towards attractive plots. that the market has reached a point of stability regarding residential developments sparked the most interest in the both the structure of investors as well as price and The retail segment was the second driver of demand on market, as a series of factors have converged towards liquidity conditions. This stability is further emphasized by the land market during 2016. Three consecutive years making residential developments very attractive the volume of transactions with assets from banks’ NPL of strong consumer spending have helped increase the (e.g. increases of employment over the past three years, portfolios, as in the case of the Prefa-plot in Brasov. turnover of companies in the retail sector and increase higher wages, low interest rates and the development their confidence in the Romanian market. Consequently, of new office zones). Developers focused on defining hypermarkets, discounters, DIY stores as well as furniture 3. PRICES new residential areas in close proximity to the recently companies all continued to extend their coverage network developed office buildings, particularly in the Northern part Land prices remained stable, with isolated slight increases throughout the country. This appetite for extension was of Bucharest. Against this backdrop, areas such as Aviatiei, for prime locations where more developers are negotiating particularly prevalent in secondary and tertiary cities, Baneasa, Sisesti, Straulesti, Pipera or Militari-Lujerului for the same plot. Looking at the broader situation of the where the competitive environment is more favorable. were particularly interesting for the market. The highlights market, the average price has also increased slightly in of the year were the acquisition of the Automatica land plot Over the short term, the office Bucharest market will taper, 2016, but we attribute this rise to the fact that more plots of (approx. 32,000 sqm in Floreasca) for ¤ 25 mn by One as it will need some time to absorb the deliveries made higher value were traded rather than to a generalized hike United Properties and Auchan, as well as the acquisition of in the 2016-2017 period. Developers will consequently in prices. a 48 ha plot in Sisesti by Vastint, one of the largest areas redirect their focus towards: i) plots with exceptional sold on the Bucharest market in the post-crisis period. In locations or smaller sites with building authorizations addition, investors have started focusing on mixed projects, which allow for a very short time to market, or ii) plots particularly residential and office. with a focus on developments over a medium term.

30 Research & Forecast Report | 2017 | Romania | Colliers International 2016 Bucharest Land prices in major transactions 4. FORECAST We expect a positive outlook from the land market, especially as some of the transactions postponed from Sisesti 2016 will reach the market during early 2017. Investors ¤70-250 /m2 will continue to focus on the evolving needs of consumers. Pipera 2 Residential developments close to office areas will remain ¤ 50-250 /m attractive, as will the development of mixed projects (e.g. residential and office). Bucharest is leading the way Floreasca - Aviatorilor- Barbu Vacarescu on investors’ radars, followed by cities such as Mircea Eliade ¤500-1,000 /m2 Cluj-Napoca, Timisoara or Brasov. ¤2,000-2,500 /m2 Dorobanti In addition, we expect companies in the retail sector ¤1,300-1,700 /m2 to consolidate their position on the market, either by extending their coverage network or acquiring smaller Eminescu ¤1,000-1,300 /m2 players in the market. Center West The extension of the metro coverage network will bring Lujerului ¤450-600 /m2 2 new opportunities for developers. Locations in the area ¤250-350 /m around Piata Presei/ Expozitiei Boulevard are very well Timpuri Noi ¤500-600 /m2 suited for the office market. In turn, these developments could unlock the potential for the broader area in the eodor Pallady Northern part of Bucharest for residential, retail and hotel ¤80-200 /m2 developments. Another trend will be the level of selectivity of land depending on the status of zoning documentation (PUZ, PUD, Building Permit). Considering the effervescence of the residential market, investors seek the flexibility to deliver projects on the market as quickly as possible and are, therefore, willing to pay more for plots with permits in place.

The information is based on the deals concluded in 2016 and not average asking prices for the specified areas. They highlight the most targeted type of land plots. As usual, the prices were influenced by size, destination, building parameters, status of the permitting process.

31 Hotel MARKET

1. OUTLOOK dynamic: i) the modernization of airports in cities outside Flights Growth Rate between 2009 and 2015 of Bucharest (i.e. Iasi and Cluj, and Craiova), and ii) an The hotel market in Bucharest continued to improve during increased number of flight companies (from 31 to 37), 2016, seeing growth in all major sectors: business, leisure which brought a commensurate diversity of destinations. and MICE (meetings, incentives, conferences and events). The market for flight companies has become more focused Czech 1% The outlook for the hotel market remains very positive in on low cost companies, as we estimate that WizzAir, Republic the former two sectors, with the latter being constrained by RyanAir and Blue Air will become the top 3 ranking flight Germany 26% a lack of supply for large venue spaces. companies in 2017. Furthermore, we have observed during The number of tourists who spent their holidays in 2016 a displacement of traditional players by low cost Hungary 27% Romania has grown by 63% over the last five years, ones, as Alitalia and Airberlin are leaving the Romanian Poland 109% bringing the annual number of visitors to 2.45 million market. people. In spite of the rapid rise of foreign tourism, Even though the leisure segment has been growing Romania 175% Romania remains a long way from its CEE peers: Hungary constantly over the past two years, it only accounts for Data Source: EUROSTAT records over 5.1 million foreign tourists every year, Poland approximately 35% of hotel revenues. Consequently, the has more than 6.2 million, while the Czech Republic has Bucharest market remains heavily geared towards the Bucharest market is estimated to have a total of 12,000 over 9.1 million. Overall, Romania is a country geared corporate segment. rooms, of which approximately 40% are associated with an towards the business market, with very limited spikes international brand. during the summer months. 2. SUPPLY During 2017 Hilton worldwide plans to open a four- Romania had a total of 1,530 hotels by the end of 2016 star hotel in the historical area of Bucharest, which will (broadly unchanged from the previous year), and had an During 2016, the existing players in the hotel market were offer 201 rooms. Mariott also plans to open a four-star average vacancy rate of 37% during 2016, compared with focused on consolidating their position. The competition hotel with 250 rooms under the Courtyard brand in the 34% in the previous year. The number of air flights has was particularly strong in the capital, where the biggest Floreasca Barbu Vacarescu business district. Over the increased by 8.6% yoy during the first six months of 2016, players are: Radisson Blu Hotel (763 rooms under 3 longer term, the Orbis Hotel Group has announced plans and we believe it maintained the upward trend throughout brands), JW Marriott Bucharest Grand Hotel (402 rooms), to increase its network of hotels and aims to become the the rest of the year. Two factors lie behind this positive Athenee Palace Hilton (272 rooms), Sheraton (270 rooms) largest player on the Romanian market by 2019. The brand and InterContinental Bucharest (257 rooms). Overall, the is currently exploring 3 locations options in Bucharest.

32 Research & Forecast Report | 2017 | Romania | Colliers International Additionally, we expect players in the local hospitality estimate that the volume of FDIs in the capital has in this direction with the Mariott Courtyard in the Floreasca market to focus increasingly more on weaving technology increased by 35% yoy. Looking at the structure of Barbu Vacarescu area, but there is also a latent potential into their offering. This focus on technology relies on corporate demand, we believe there is potential for in the Central West Area of Bucharest. Investors are two drivers: offering novelties to increase customer additional high-end hotel developments in the Northern more enthusiastic about prospecting the market for new engagement as well as collecting more information about part of Bucharest, in close proximity to the newly hospitality projects, including reputable brands such as the customers in order to setup a more personalized developed office areas. Hilton, Kempinski and Hyatt. relationship. We also remain optimistic about the continuous development of the leisure sector. Bucharest is enjoying 3. DEMAND improved visibility on the international tourism markets and is currently offering a broad range of entertainment options Demand on the hotel market is starting to be differentiated 4. FORECAST at a competitive price. Furthermore, the market for leisure along two lines: the four- and five-star segment is Over the past two years, we have observed a constant tourism is starting from a point far from its potential. sustained by corporate demand, while the three- and four- trend of higher inflows of tourist as well as increased star segment benefits from more activity on the leisure This appetite for leisure tourism is also boosted by the new rates of occupancy in the main hotels of Romania. We sector. wave of cultural venues, with events such as the Enescu believe this trend is set to encourage new investments in Festival in Bucharest, the Untold Festival (300.000) and Bucharest is increasingly seen as a city-break destination, the hotel sector, with a particular focus on the high-end Electric Castle (120.000). However, the lack of large benefitting from low air ticket fares and good connections of the market. The rapid development of office areas in enough exposition spaces is becoming the main drawback with continental Europe. Also, the current ADR of five-star Bucharest as well as the other major cities has increased for organizing more events in Romania, particularly on the hotels in Bucharest is around 94 ¤, while in Budapest the potential for business travel. We have seen a first step Bucharest market. (Hungary) the ADR reached 110 ¤ and in Prague (Czech Republic) - 130-140 ¤. Bucharest Hotel Occupancy Q4 2016 The level of occupancy for the above mentioned segments (four- and five-star branded hotels on the Bucharest market) has risen steadily over the past two years, reaching an average of 70% for Four-Star hotels in Q4.2016, and of 79% for Five-Star hotels in Q4.2016. The rise in occupancy has also coincided with a rise in the average ADR (+8.9% yoy for Four-Star hotels in Q4.2016 and +9% yoy for Five-Star hotels). This dynamic highlights Occ. 70% Occ. 79% the improvement of demand in the local market. Growth Rate 3.10% Growth Rate 3.30% Corporate demand has received a welcome boost from the rapid development of the IT and BPO/SSC sectors, particularly on the Bucharest market. The number of expats has increased over 110.000 in 2016, while we Data Source: Colliers research

33 RECENT CHANGES IN THE TAXATION OF Capital Gains

Taxation of Capital Gains in Romania • Tax consolidation at the level of the holding; Throughout the last couple of years, in the light of the Recent Changes to • An efficient tax administration (giving the possibility to the Romanian government initiated quickly obtain advance tax rulings or advance pricing agreements); various tax measures meant to attract the Fiscal Code • Legislative stability and predictability. foreign investors and to develop their We need to first look at the corporate income tax rate Ruxandra Jianu | Partner long term operations in Romania. of 16%, one of the most competitive taxes in all the EU In fact, all these initiatives, together “Biris Goran SPARL” member states. Only Bulgaria (with 10%), Cyprus (with with the 16% flat tax, aimed to Romania may be viewed as being en route to becoming a 12.2%), Ireland (12.5%) and Latvia and Lithuania (with put Romania on part with other regional business hub, with several legislative measures 15%) have a lower rate. This 16% rate has been applicable European countries with favourable already implemented: since 2005 – almost 12 years – and there is no indication that the Romanian government intends to change it holding legislation, such as the • Tax exemptions for capital gains and dividends (under certain conditions); anytime soon. This actually contributed a great deal to the Netherlands, Cyprus or Luxemburg. stability of the Romanian corporate taxation environment • A lower rate of corporate and personal income tax (16% represents one of the lowest tax rates in the and, consequently, is one of the factors that will certainly European Union); attract long-term investments in our country. • A large number of Double Taxation Treaties (“DTTs”) Regarding the taxation of capital gains in Romania, related concluded with various countries. to both asset deals and share deals, we will present Of course, other steps have to be taken in order to aim for below the main tax issues which need to be taken into the title of a regional business hub: consideration. As you will see, all these actually contribute to the overall appeal which Romania has had lately as an • A modern company’s Law; important regional business hub in Eastern Europe.

34 Research & Forecast Report | 2017 | Romania | Colliers International We will commence our analysis by stating the tax • In case of asset deals, both Romanian and foreign treatment applicable starting 2017 to the capital gains individuals are due to pay an income tax of 3% on the To conclude, even if the taxation of obtained from Romania by companies: value of the transactions which exceeds a threshold of ¤ 100,000. (i.e. practically, the income tax is due capital gains obtained from either • In case of asset deals, both Romanian and foreign to be paid on the difference between the transaction asset deals or share deals does not companies are due to pay profit tax for the gains value and the non-taxable income of ¤ 100,000). Also, compensate entirely the other lacks obtained from the respective transaction (i.e. the gain no social contributions are due in Romania for capital is computed as the sale price less asset’s cost less gains resulted from asset deals. of the Romanian tax environment, the registered depreciation of the asset less costs Similarly as above, sellers which are resident in you might want to keep all eyes on related to the sale). The tax rate applicable to the gains countries with which Romania has a DTT concluded Romania, as it shows high potential obtained from asset deals is 16%. are allowed to deduct the tax paid in Romania in their Companies which are not resident in Romania, but country of residency, under the specific provisions of to become an important regional which are resident in countries with which Romania the Treaty. hub for the foreign investments, has DTT are allowed to deduct the tax paid in Romania in their country of residency, under the specific • In case of share deals, the capital gains obtained considering also the future legislative provisions of the Treaty. following the sale of shares held in a company resident modifications which will hopefully in Romania are taxed with 16%. Also, a 5.5% social • In case of share deals, the capital gains obtained health security contribution is due to be paid on the improve the other conditions Romania following the sale of shares held in a company resident capital gain, should the seller not pay this contribution has to meet in order to be fully in Romania or in a country with which our country in Romania for other types of income. has a DTT concluded are tax-exempt if the beneficiary compliant with the expectations of any of these gains hold minimum 10% of that company’s However, individuals which are resident in countries investor might have from a tax haven. share capital for a period of more than 1 year. with which Romania has concluded a DTT shall be taxed according to the capital gain provisions provided in the If these conditions are not met, then a profit tax of 16% respective Treaty. is due for the capital gains obtained from the respective transaction. Nevertheless, sellers which are resident in Also, individuals who are residents in a member state countries with which Romania has concluded a DTT shall and provide an A1 form issued by that member state be taxed according to the capital gain provisions provided shall be exempted from paying the social health security in the respective Treaty. contribution. Tax treatment applicable to capital gains obtained from In addition to the above, we would need to highlight the Romania by individuals is different, as it involves the fact that Romania is one of the EU member states having application of the income tax provisions, as opposed to the the largest number of DTTs concluded: a total of 85, profit tax provisions applied to the capital gains obtained by including all EU countries, almost all European countries, companies and described above. As such, the provisions USA and Canada, Australia, South Africa, Israel, the largest applicable for 2017 state the following: 4 Middle East countries, 20 Asian countries, 12 African countries and 2 Latin-American countries.

35 NAVIGATING Fire Permit COMPLIANCE IN ROMANIA

Victor Constantinescu | Partner and Head of Real Estate compliance, but other risks for failing to comply: ranging 2. HOW LONG IS from fines to questionable availability of insurance Sorin Aungurenci | Partner coverage to even criminal implications. The purpose of A FIRE PERMIT VALID? “Biris Goran SPARL” this article is to outline some key points about fire permits, The fire permit is valid as long as the property is compliant with the aim that owners/buyers not familiar with the issue with the fire safety conditions existing at the time of can at least begin to ask the right questions. At first glance, readers may ask why would lawyers issuance of the fire permit. Thus, in case the fire safety include in a real estate market overview the topic of fire conditions are not met or once a change is made to the permit compliance? Surely, there must be more pressing 1. WHAT IS A FIRE PERMIT? property (such as addition of a new floor, re-shaping of the or interesting issues to consider. interior layout of the premises, etc.) then the fire permit Protection Against Fire Law 307/2006 defines the fire loses its validity, and a new one should be obtained. That may have been the case in the past, but certainly permit as the authorization issued by the Bucharest or not now. With the “Colectiv” nightclub tragedy in 2015 in county emergency situations inspectorate (Romanian: which dozens of poor souls lost their lives in a nightclub Inspectoratul pentru situaţii de urgenţă judeţean sau al 3. WHAT IS THE PROBLEM fire in Bucharest (which ostensibly could have been municipiului Bucureşti) attesting the compliance of the avoided if proper protections were in place), fire permit property with essential fire prevention measures. In other WITH COMMERCIAL compliance is now the proverbial “elephant in the room”: words, in order to get this fire permit, any property needs PROPERTIES IN ROMANIA? unfortunately, a large stock of commercial properties to be compliant first with a series of measures that makes in Romania may not be fire compliant. As a result, this it safer in terms of fire protection. This usually means DO THEY NOT HAVE A FIRE has become a leading (if not THE leading) issue in due equipping the property with sprinklers, fire extinguishers, PERMIT? diligence investigations of sales and purchases of property a sufficient number of escape routes exits, fire-proof walls in Romania, often introducing considerable delays in and/or doors, etc. Commercial properties in Romania do have fire permits, transactions. Owners and potential buyers have to deal but unfortunately, they have not been updated to take into No commercial property can lawfully operate in Romania not only with the expense of remedial works to achieve account changes to the properties over time. Certain plans without a fire permit (with certain exceptions of a were submitted to the fire authorities for approval upon temporary nature).

36 Research & Forecast Report | 2017 | Romania | Colliers International issuance of the building permit or in the building’s early The combined threat of these issues, coupled with the show remedial actions. The latter normally involves days, but then structural changes were made, layouts/ often-considerable cost and timing associated with certain works to be performed, e.g., new or additional partitions changed, the owner may have “cut corners,” etc. remedial works, have made fire permit compliance, a top fire exits, different internal layouts, fire protection Many owners did not update their fire permit compliance issue in due diligence investigations in sales of commercial doors and walls, etc. Most of these works likely documentation as required and, thus, are technically in property. will need a building permit that would approve the technical specifications of the authorized works. Once breach of applicable law. this permit is obtained, a contractor usually executes 5. SO WHAT SHOULD these works based on these specifications. Once this 4. SO WHAT? WHAT IF is done a taking-over of the works is done and finally THE OWNER DO? the property is ready for final inspection by the fire authorities. If the property successfully passes the THE PROPERTY IS NOT The obvious answer is to become compliant. But this takes inspection, then the fire permit is issued. If not, likely time, and in our experience advising a number of files COMPLIANT? additional remedial works are required. The fire expert involving fire permit compliance, the following should be Legislators have acknowledged the practical reality that is critical in this entire process. kept in mind: many buildings in Romania are not compliant. Thus, at • Monitor your Contractor. The owner should keep a this time, the Protection Against Fire Law 307/2006 • Don’t underestimate the amount of time it takes. close eye on the contractor to ensure that there are establishes a grace period until 30 June 2017 for owners Fire permit compliance is a long and tedious no deviations between the works and the technical process – lasting many months. The authorities to take steps necessary to get their permits. This deadline specifications approved under the building permit. are overwhelmed with requests for updates, as are has already been extended from 31 December 2016, so it • Directors Should Have Serious Discussions with technical experts who handle the files. Get started their Shareholders. Given the possibility of personal may be that further extensions could be contemplated. But sooner rather than later. at some point these extensions will end. financial and criminal liability of directors in the event • Take Remedial Measures in the Interim. While the of a fire, directors of property-owning companies After they end (or even before), owners should be aware of actual permit may take time, take steps to avoid fires in in Romania should not delay in having a serious the following sanctions that the authorities can apply: the interim. There are firms on the market specializing discussion with their shareholders to determine in this service, and make recommendations as to • Fines against the owner of the property, ranging an action plan to achieve all of the above. While strategic placement of fire extinguishers, escape exits, between RON 20,000 (approx. ¤ 4,400 and RON appropriate D&O insurance may resolve part of the fire prevention/escape protocols, and the like. While 100,000 (approx. ¤ 22,200) problem, it cannot cover jail time. this is not a guarantee, it is important for owners to • Closure of the premises/suspension of activity until the demonstrate that they took steps to address the issue. property becomes fire compliant • Speak to Your Insurance Provider. The issue • Potential criminal liability against both the owner (and of insurance coverage is a delicate one. In our in the case of a company, the company’s directors). experience, even in due diligence exercises, we are In the event of a fire causing bodily injury or death, seeing insurance companies requesting their own “due prosecutors will call the company’s directors to diligence” to determine fire permit compliance and account, to determine if they were negligent in any availability of coverage. way. In the event of a criminal trial, this could result in • Hire a Proper Expert. Choose a fire technical expert monetary sanctions or even jail time. with experience, and not one that promises to “fix” Aside from the issue of dealing with authorities, there is things based on old habits. The result of the technical the practical issue of insurance coverage: policies may audit will determine the degree of compliance of the exclude coverage in the event that the insured does not premises with the fire safety norms and would also hold a valid fire permit.

37 Contact OUR EXPERTS

Ilinca Paun Mihai Patrulescu Robert Miklo Managing Partner Head of Strategic Analysis | Research Associate Director | Investment Services +40722 589 323 +40747 287 277 +40728 988 830 [email protected] [email protected] [email protected]

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Raluca Buciuc Associate Director | Valuation Services and Hospitality Advisory Services +40724 290 922 [email protected] 39 About Colliers International Group Inc. Colliers International Group Inc. (NASDAQ: CIGI; TSX: CIGI) is a global leader in 554 offices in commercial real estate services with more than 16,000 professionals operating from 554 offices in 66 countries. With an enterprising culture and significant insider ownership, Colliers professionals provide a full range of services to real estate countries on occupiers, owners and investors worldwide. Services include brokerage, global 66 corporate solutions, investment sales and capital markets, project management and workplace solutions, property and asset management, consulting, valuation and appraisal services, and customized research and thought leadership. Colliers 6 continents International has been ranked among the top 100 outsourcing firms by the International Association of Outsourcing Professionals’ Global Outsourcing for 11 consecutive years, United States: 153 more than any other real estate services firm. Canada: 34 For the latest news from Colliers International, visit Colliers.com or follow us on Latin America: 24 Twitter (@ColliersIntl) and LinkedIn. Asia Pacific:231 EMEA: 112

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Copyright © 2017 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. 40 Research & Forecast Report | 2017 | Romania | Colliers International