MARKET OVERVIEW REPORT

H2 2018 OVERVIEW & 2019 FORECAST

Summary

Recent Trends Market Prognosis

Boosted by positive investor sentiment and attractive returns, in Despite shortage in quality product, 2019 is 2018 the total transaction volume of commercial real estate expected to reach 2018 investment volume. We exceeded EUR 800 million, which is more than double the expect continuation of high investment volumes in investment volume in 2017. Income-producing retail and hotel hotel sector. Office sector is expected to take properties were in focus of investors while the yield compressed higher market share than last years. Warehousing for prime office and industrial properties. Development activity & logistics sector, the least developed CRE sector, across majority of sectors is still much below pre-crisis levels, has the most upside potential in terms of which has most effects on the prices in residential sector. development and investment activity in the Croatian CRE industry.

Contents

Economic Overview 3 Office Market 4 Retail Market 5 Industrial / Logistics Market 6 HTL Market 7 Investment Market 8 Residential Market 9

Economic Overview

Summary & Prognosis Economic Growth (GDP, annual var. in %) Croatian GDP grew by 2.3% in Q4 2018 according to Croatian Bureau of Statistics, which is a 18th consecutive quarter of economic growth. GDP 3.5 growth in 2018 was 2.6%. 2.4 2.5 2.3 Focus Economics panellists see GDP growth in 2019 at 2.7%. 2.9 Unemployment should further decrease, which should, together with strong 2.7 2.7 tourism, support private consumption. Moreover, growth in fixed investment will likely accelerate thanks to stronger EU funds inflows. The inflation should reach 1.7% and 1.9% in 2019 and 2020 respectively.

The share of non-performing loans (NPLs) in Croatia’s banking system was estimated at 10.1% in 2018 with expectation of further decreasing to 9.1% in 2019 and 8.9% in 2020. We expect a continuation of strong investor interest for NPLs portfolios secured by real estate. Inflation (CPI, annual variation in %, With Agrokor’s settlement plan between the company creditors reached, aop) one problem of the Croatian economy has been solved, but another one emerged. Another strategic Croatian company Uljanik has been having 1.9 1.9 problems with insolvency. The government, in attempt to save this private- 1.6 1.7 owned shipbuilding company and its 4,000 employees, started extensive 1.1 search for a new strategic partner that could lift the company back to its feet. In addition, the government offered state guarantees to Uljanik’s clients and took upon itself to cover up to 50% of Uljanik’s restructuring costs. Active guarantees in H2 2018 amounted to approx. EUR 800 million. New strategic -0.5 partner was found in Split based Brodosplit, another Croatian shipbuilding company. -1.1

Major credit ratings for Croatia in February 2019 stand at: Fitch BB+ (positive outlook), Standard & Poor’s BB+ (positive outlook) and Moody’s Private Consumption (annual var. in Ba2 (stable outlook). Standard & Poor’s was the last of the three major credit %) rating agencies to upgrade Croatia’s outlook from stable to positive on the 3.6 grounds of a budget surplus and steady economic growth. 3.4 3.5 3.0 2.6 Although the investor interest is strong, administrative and bureaucratic 2.5 barriers as well as lack of real structural reforms continue to prevent the full investment potential in Croatian commercial real estate sector. 1.0

Building permits issued & planned value of works (€) 4,500 10 4,000

8 3,500 3,000 Unemployment (% of active 6 2,500 population, eop) 2,000 4 17.6 1,500 14.7 1,000 2 12.2 9.4 500 8.4

Issued b.p. in thousands in b.p. Issued 7.9 7.9 0 0

Value of planned works in millionsin works of planned Value 2013 2014 2015 2016 2017 2018 Planned value of works (€) Issued building permits

Source: Croatian Bureau of Statistics Source: Colliers International / Focus Economics

3 Market Overview | H2 2018 | Croatia | Colliers International

Office Market

Supply

Total office stock in totalled approx. 1.34 million m² in H2 2018 out Zagreb Office Market Stock and 1,400 16% of which approx. 45% was in Class A. Clustering of office buildings has Vacancy 14% continued in Business District East (around Radnička street). 1,300 12% There are several office buildings under construction. The D3 building of 1,200 Centar 2000 complex was finished in H2 2018. The building comprises of 10% 4* business hotel and 8,800 m² GLA of office space and is located in 1,100 8% Business District East (near Radnička). 6% Thousands 1,000 New projects are strongly oriented towards superior quality, enhanced 4% employee well-being and environmental friendliness, which developers are 900 increasingly looking to demonstrate through the obtainment of 2% corresponding certificates such as LEED, BREAM or WELL. 800 0% 2014 2015 2016 2017 2018

Demand Total Stock e.o.y Yearly addition

Demand for office spaces remained the strongest for A class buildings in Vacancy

CBD and Business District East. Majority of leases recorded in H2 2018 Source: Colliers International were for office premises larger than 500 m². The market still lacks premises larger than 1,500 m². Strong demand for larger office premises comes Croatian office sector: Building predominantly from ICT sector. permits issued & planned floor area

Workplace is becoming a crucial factor to attract quality workforce therefore 180 65 companies (occupiers) are putting more effort to create appealing working 160 environment in order to prevent employees outflow. 55 140 45 Vacancy Rate and Rents 120

100 35 ) in thousands in ) Average vacancy rate remained at 4.5% in H2 2018. Following the delivery 2 80 25 of existing pipeline project, we expect the vacancy levels will increase, 60 especially in buildings in secondary locations. Average rents are still stable. 15 40 Floor area (m area Floor 5 20 Projects under construction thousands in issued permits Building 0 -5 The following large projects are under construction in Zagreb: > Developer VMD GRUPA is constructing a new office building in Otok Floor area Issued building permits business district. The scheme is scheduled to be completed in H1 2019 and is already fully pre-let. Source: Croatian Bureau of Statistics > First office building in GTC’s Matrix Office Park should be finished in Q1 2019. The project will comprise two office buildings each totalling approx. 10,000 m² of leasable area. Matrix will be designed Zagreb Office Market - Key figures H2 2018 and constructed according to the highest green building standards Total Stock in m2 1,340,000 featuring a LEED Gold certification. Matrix office park is located in edge of Business District East. Vacancy Rate 4.5% > HOK (Croatian insurance company) is investing in R21 project, mixed- Prime Headline Rent €14-15/m2 use development in Radnička Street. The project will consist of 17,000 Average Monthly Rent Class A €12/m2 m² GLA office space and a 150-key hotel (signed franchise agreement 2 with Hilton Garden Inn). Approx. 90% of the total leasable office area has Average Monthly Rent Class B €8-€10/m been let to a single tenant. Completion of the project is planned for H1 2019. Source: Colliers International

4 Market Overview | H2 2018 | Croatia | Colliers International

Retail Market

Summary

Retail demand is stimulated by positive macroeconomic momentum and Retail Sales & GDP growth (%) growing consumer spending. Potential risks in the medium term, on the other hand, include negative demographic trends and impact from e- 4.7 4.0 commerce. 3.7 3.4 In H2 2018 majority of expansion was related to food retailers. Occupiers 3.0 2.9 2.4 demand remains firm and comes from all types of occupiers; local and 3.5 international brands already present on the Croatian market as well as from 2.9 2.7 2.7 2.5 market newcomers. 2.4 2.3 High street locations and prime shopping centres continue to be the most sought-after premises. Big-box retailers have expansion plans across the country. For them the key is to find available land with adequate surface, accessibility and visibility, suitable for their typical stand-alone objects. Retail Sales (annual variation in %) Shopping centres are expanding (e.g. Arena Centar) or reviving their offer Economic Growth (rhs, GDP, annual var. in %) (e.g. King Cross). The largest new shopping centre in the country delivered to the market in H2 2018 is Max City in . Max City is also the largest Source: Colliers International / Focus Economics shopping centre in Istria region. It has 29,000 m² of NLA. The tenant mix consists of more than 100 international and local brands. The project’s investor is Istracement Nekretnine d.o.o. and the investment totalled EUR Zagreb Shopping Centre – Factsheet H2 2018 53 million. Total shopping centre stock* in m² 490,000 Prime shopping centre / weighted Vacancy & rents €19/m² average rent (excl. turnover rent)

Vacancy rate in prime shopping centres is below 4% while weighted Prime shopping centre vacancy rate <4% average rent currently stands around EUR 19/m²/month. The base rents in prime shopping centres can reach up to € EUR 50/m²/month for smaller Source: Colliers International *SC stock excludes Outlet centres, Big-boxes and premises (up to 150 m², rents depend on the sector). department stores

High street rent levels range from EUR 30/m² to EUR 120/m² greatly depending on micro location, size, visibility and window display width. Croatian retail sector: Building permits issued & planned floor area

Projects under construction 300 140

> Prime shopping centre Arena Centar, Zagreb, expanded its NLA for 250 120 5,000 m² in H2 2018 by rearranging the premises on the first and second floor. The owner of Arena Centar NEPI Rockcastle is investing in a new 100 8,000 m² NLA retail park next to their current scheme. The opening of a 200

new retail park outside the western section of the centre is scheduled for 80 ) in thousands in ) 2019. This should further enhance the entire shopping destination. 2 150 60 > Project “Z” in the west part of Zagreb (Špansko), is currently under 100 construction. It will consists of shopping mall, retail park, standalone 40 issued permits Building

supermarket, drive in restaurant in total gross area of more than 75,000 Floor area (m area Floor m². Shopping center, as central part of the project, is based on fashion & 50 20 entertainment mix with cinema, supermarket, modern food court and caffe bars that together with retail park amounts to more than 31,000, m² 0 0 GLA. The project is being undertaken by a group of local investors. > AM PS Delta Real Estate Ltd. is developing a new retail park in Poreč. The same developer has already built Pula City Mall and is a member of Floor area Issued building permits the Croatian subsidiary of MID Bau, one of the leading developers on the regional market. The retail park should have around 8,400 m² NLA and

completion is planned for June 2019. Source: Croatian Bureau of Statistics

5 Market Overview | H2 2018 | Croatia | Colliers International

Industrial / Logistics Market

Supply

Warehousing & logistics sector, the least developed CRE sector, has the Zagreb Logistics and Warehouse – Factsheet H2 2018 most upside potential in terms of development and investment activity in the Croatian CRE industry. Total stock in m² 935,000

Vacancy <2.5% We are currently seeing a return of developers as a result of strong demand, lack of modern supply and growth of e-commerce. This is in line with global Prime headline rent €5.5/m² trends advances in technology. To further boost the development in this sector the government should change the calculation of communal contribution fees which are currently charged per cubic meter / volume. Prime Warehouse Headline Rent (€/m2/month) H2 2018 Major obstacles for new developments are high land prices, communal 5.5 contribution, rising construction costs and lack of scalable land plots on 5 4.7 4.75 4.7 good locations. 4.15 4 February 2019 saw completion of Atlantic Group’s new logistics distribution centre (LDC) located in Meridian 16 Business Park in Velika Gorica (largest satellite town of the Zagreb urban region). The developer Kamgrad (one of the leading Croatian construction companies) has built this modern facility for the long-term tenant Atlantic Group. The new LDC will have 30,000 pallets and the investment totalled €18.5 million. Demand Source: Colliers International In H2 2018 the demand remained strong for logistics stock, especially in Industrial Production (annual var. in Zagreb area. The demand was driven mainly by logistics providers, %) pharmaceutical and food & beverage distributors, appliance distributors and 5.0 other consumer goods retailers. 2.5 Due to lack of quality supply, some of the largest companies in Croatia are 1.9 1.8 1.9 2.0 deciding to build properties for own use or collaborate with a developer on -0.2 construction and long-term lease agreements. The demand remained strongest for warehouses between 2,000 m² and 5,000 m², but there is also a significant interest for modern warehouse premises above 5,000 m².

Vacancy & rents Source: Colliers International / Focus Economics

As a result of increased demand and limited supply, vacancy rate remained below 2.5%. Prime monthly headline rents for logistics premises in Zagreb Croatian industrial sector: Building is in region of EUR 5.5/m². Average rents for older and refurbished industrial permits issued & planned floor area premises range from EUR 2/m² to EUR 4/m². 450 300 400 Projects under construction 250 350 300 200

> Croatian Post’s new logistic centre in Velika Gorica near the Zagreb ) in thousands in )

2 250 International Airport is currently under construction. The total estimated 150 value of this investment is approx. EUR 46 million. The facility is 200 scheduled to be built in two phases. On completion of all phases, the total 150 100 surface area of the complex will be 38,200 m² on the surface of 70,000 100 50 issued permits Building m². (m area Floor 50 0 0 > Gebrüder Weiss is investing EUR 17 million in a new logistics centre in Sveta Nedelja near Zagreb. The new logistics centre will have 18,000 m² and will replace their old centre in Jankomir which is three times smaller Floor area Issued building permits than the new facility.

Source: Croatian Bureau of Statistics

6 Market Overview | H2 2018 | Croatia | Colliers International

HTL Market

Supply & Demand Croatia - Tourist arrivals and overnights (in million) According to Croatian Bureau of Statistics, Croatia recorded 18.6 million 100 20 tourist arrivals and 89.8 million overnights in 2018, which is an increase of 80 6.5% and 4.2% yoy respectively. Croatian tourism is characterised by high 15 60 seasonality with 59% of all overnights in 2018 made in two summer months 10

July and August. Tourist turnover experienced a slowdown in these key two 40 Arrivals months; arrivals grew 1.7% and overnights 1.6% yoy. Overnights 5 20

Foreign overnights accounted for 93% of all overnights, the same share as 0 0 in 2017. Average length of stay slightly decreased from 4.9 days in 2017 to 4.8 days in 2018, continuing a trend from past ten years.

During 2018, leading HTL players continued making large investments to Overnights Arrivals improve quality and competitiveness. Valamar Riviera Group, one of the largest investors in Croatian tourism, completed its large investment cycle Passengers in , Split and worth over EUR 95 million. The investments included several projects: the Zagreb Airports repositioning of Rabac as high-end holiday destination was completed with 4,000,000 the opening of the Valamar Collection Girandella Maro Suites 5*, and the Valamar Argosy Hotel 4* in Dubrovnik was repositioned as “adults only” 3,000,000 hotel. Valamar’s large investment cycle in the forthcoming 2019 is planned around EUR 101 million. 2,000,000 In 2018 Plava Laguna had the largest capital budget in its history - around 1,000,000 EUR 68 million. Plava Laguna invested approx. EUR 33 million in the Park 0 Resort in Poreč, which comprises 309 accommodation units, including 154 rooms and suites, 91 garden suites, 43 apartments and 21 villas. In , the company invested approx. EUR 84 million in the complete Dubrovnik Airport Split Airport reconstruction of the Stella Maris campsite and approx. EUR 11 million in Garden Suites & Rooms Sol Umag. Plava Laguna is planning to invest around EUR 40 million in 2019. Source: Zagreb Airport, Split Airport, It is expected that the occupancy rate for hotels in Croatia has increased in Dubrovnik Airport 2018 slightly from 2017 when it was around 48% (175 days). Leading hotel players’ reported growth in ADR and RevPAR in their financial reports for the first 9 months of 2018. Croatian hotel sector: Building There is a substantial interest from investors and developers for HTL permits issued & planned floor area projects across the whole coast and in two largest cities, Zagreb and Split. 300 200 However, numerous factors harm the competitiveness of Croatian tourism 180 and hinder further investment potential: VAT (one of the highest rates in the 250 Mediterranean), high rate of total contributions to salaries, skilled labor 160 140 shortages, red tape and tourist tax increase. 200 120

) in thousands in ) 150 100 Large projects under construction 2 80 100 > Maistra (Adris Group) has invested more than EUR 81 million in Grand 60

40 issued permits Building Hotel Park in . The new 5* hotel is being built on site old Hotel 50 Park. The new Hotel Park will comprise 209 rooms. Total investment (m area Floor 20 amounts to approx. EUR 390,000 per room, a market record. Although it 0 0 was supposed to be open at the end of 2018, the hotel’s opening has been postponed to April 2019. Hotel Park is considered one of the most Floor area Issued building permits luxurious hotels in Croatia.

Source: Croatian Bureau of Statistics

7 Market Overview | H2 2018 | Croatia | Colliers International

Investment Market

Supply & Demand

In 2018 the total transaction volume of commercial real estate reached Average prime yields in H2 2018 - Croatia approx. EUR 810 million, which shows strong increase in investment activity A class Office Yield 7.50% compared to 2017 (approx. EUR 320 million). Prime Retail Yield 7.00% Supported by the positive macroeconomic indicators and strong property fundamentals, Croatian CRE market is seeing high demand for yielding Prime Industrial/Logistics Yield 7.50% properties coupled with a scarcity of quality products across all sectors. In Prime Hotel Yield 6.50% addition to income-producing properties, the demand is also strong for distressed assets or value-add opportunities. Source: Colliers International

Retail and hotel sectors recorded highest investment volumes in the Yield is calculated as NOI/Price Croatian commercial property market in 2018, as a result of portfolio deals. excluding taxes and transaction costs Domestic investors were the most active purchasers representing 50% of all deals by volume. The most active foreign investors are REITs (real estate investment trusts) from South Africa, with 40% market share. The drivers CRE - Capital Markets Transaction for newcomer investors are attractive yields, often with little or no elevated Volumes (€) by region in 2018 risk compared to other CEE countries. 6% Due to the strong investor interest, the market is characterized by strong 7% seller position, especially on prime investment products. 8% Prime yields are under pressure in all asset classes. We saw yield 15% compression of 175 bps in industrial/logistics sector, while prime retail and 64% hotel opportunities are being priced at a similar level as they were at the end of 2017. Despite shortage in product, 2019 is expected to reach 2018 investment Zagreb Dubrovnik volume. We expect continuation of high investment volumes in hotel sector. Dalmatia Istria/Kvarner Office sector is expected to take higher market share than last years. Slavonia

Top transactions in H2 2018 Source: Colliers International

> The last major state owned hotel chain Hoteli Maestral has finally found CRE - Capital Markets Transaction a buyer. After eight unsuccessful tenders, PND Strategy, highest bidder Volumes (€) by property sectors in in the ninth tender, purchased the hotel chain in Dubrovnik. Hoteli 2018 Maestral consists of five hotels in the Bay of Lapad with 473 rooms. All 1% hotels are in need of investment. The purchase price for 68.94% stake totalled approx. EUR 20.7 million (100% valuation equates to approx. EUR 63,800 per room). 4% 6% > Immofinanz continued driving the expansion of its Stop Shop retail park brand by purchasing 8 retail parks in Croatia, Slovenia and Serbia. 47% Croatian properties are located in and . Total NLA of two retail parks is 13,500 m². The seller of the locations in Croatia was MID 42% Group. The price for Croatian properties totalled approx. EUR 22.1 million or EUR 1,640 per m² of NLA. > Tower Property Fund acquired a prime industrial property situated in Žitnjak, Zagreb from VMD Grupa. The ground floor of the two objects is used for manufacturing and the first floor for offices. The property has Retail Hotel Dev site Office Other 6,775 m² GLA out of which 5,775 m² is let to a leading manufacturer of

wiring harnesses in the automotive industry. The price totalled approx. Source: Colliers International EUR 8.6 million or EUR 1,270 per m² of GLA. Yield amounted to 7.50%.

8 Market Overview | H2 2018 | Croatia | Colliers International

Residential Market

Supply

Croatian and Zagreb residential real estate sector was severely hit by the New apartments built in Zagreb 10,000 economic recession, which lasted from 2009 to 2014. During that period the demand was low and a lot of apartments, especially new build, could not 9,000 find a buyer. This led to default of many developers. Therefore, despite the 8,000 economic recovery which followed and strong demand for residential stock 7,000 the supply of new build apartments is still much lower than it was in pre- 6,000 crisis years. In addition to lack of developers, other key reasons for low 5,000 supply are construction labour shortage, rising wages and inflated land 4,000 prices in some locations. 3,000 Most activity comes from domestic developers. Currently most active large 2,000 developers in Zagreb are VMD Grupa, Alfastan, Kaić - Domograd, Pionir, 1,000 Zagrebgradnja, Mešić COM, Nivogradnja, Kamen Ukras, Sigma, FEAL 0 Grupa and Saras Promet.

Demand New apartments Exponential trend The demand and volumes are strongest in Zagreb and in coastal cities where the demand exceeds the supply. The demand is mostly propelled by Source: Croatian Bureau of Statistics need for permanent residence. Another important driver, especially on the coast, is tourism / short-term apartment rental business. The buyers are Zagreb apartment transactional predominantly local population with mild share of foreigners or diaspora volume 9,000 buying on the coast and in high-end projects in Zagreb. 8,000 There is a lack of new(er) housing affordable to those with a median 7,000 household income. Key threats to sustainability of volumes and prices in the 6,000 medium-term are demographic trends and change of economic cycle and 5,000 interest rates. 4,000 3,000 Prices and expectations 2,000 1,000 The prices have been growing pushed by strong demand, more favourable 0 interest rates and lack of supply. Asking prices for apartments rose in 85% 2012 2013 2014 2015 2016 2017 2018 of Croatian counties in H2 2018 yoy. The average asking price for apartments in December 2018 amounted to EUR 1,960/m² and EUR Source: eNekretnine 2,430/m² in Zagreb and Split respectively, according to Njuskalo.hr. The discrepancy between the asking prices and transaction prices is No. of completed apartments in Split noticeable. The average transaction price in H1 2018 in Zagreb was EUR and surroundings 700 1,670/m², according to Croatian Bureau of Statistics, approx. 10% lower than average asking price in the same period. 600 500 Average transaction prices in new high-end apartment projects in Zagreb in H2 2018 ranged from EUR 2,400/m² to EUR 2,700/m² (including 25% VAT). 400 300 We expect the prices will continue (slightly) increasing in the short to 200 medium term in Zagreb and on the coast, providing the interest rates and economic cycle remain stable. The correction of prices in favourable 100 macroeconomic conditions will happen if the supply significantly increases 0 and for that to happen, one of the large projects in pipeline needs to come 2011 2012 2013 2014 2015 2016 2017 to the market. Split Kaštela Podstrana

Source: Croatian Bureau of Statistics

9 Market Overview | H2 2018 | Croatia | Colliers International

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10 Market Overview | H2 2018 | Croatia | Colliers International

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