Arco Real Estate Annual Report 2006 24 28 32 36 44 40 2 ARCO REAL ESTATE ANNUAL REPORT 2006 Contents Mission, vision and main values of Arco Real Estate 4 e structure of Arco Real Estate group 5 Address by the chairman of the supervisory board 6 Address by the chairman of the management board 8 Service Division 12 Development Division 14 Construction Division 18 Macroeconomic background 22 Estonia 24 Latvia 28 Lithuania 32 Ukraine 36 Bulgaria 40 Romania 44 Arco Real Estate group 15 52 Sponsorship projects 54 Comments to Consolidated Annual Report 56 Consolidated Annual Report 60 e mission of Arco Real Estate is to be Our main values: a comprehensive and appreciated provider of real estate solutions. Partnership our clients are our partners e vision of Arco Real Estate is to become the symbol of real estate. Reliability we are reliable, open and honest Professionalism we guarantee quality service Respect we respect our client’s personality Responsibility we keep our promises Chronology – 1992 1993 key events > Arti Arakas founds AS Arco Vara. > Arco Vara’s Saare office is founded, which represents an expansion of activity beyond Tallinn. > Arco Vara is responsible for conducting what to its knowledge was the first real estate transaction in independent Estonia. 4 ARCO REAL ESTATE ANNUAL REPORT 2006 Arco Real Estate group Service Division Development Division Construction Division Brokerage Development Construction companies companies Valuation Property advising Property management Asset management 1994 1995 1996 > e Estonian Association of Real > A real estate development subsidiary, > One of the largest real estate Estate Companies is founded, with Arco Investeeringute AS, was founded. development projects in the Baltics – Arco Vara as a founding member. > In cooperation with partners, Veskimöldre – is launched. > e Arco Vara Pärnu Office is founded. 2.1 hectares of commercial land is pur- > Arco Vara begins offering land > e first contract for the right of chased in Tallinn passenger port, where surveying services. superficies in Tallinn is concluded involv- today a large-scale project is proceeding. ing a piece of real estate owned by the > Activity is expanded to southern Republic of Estonia. Estonia. 5 Arco Real Estate group is in its athletic prime Arti Arakas Chairman of Supervisory Board 1997 1999 > Arco Vara begins expansion to other large real estate development project in > Arco Vara Tartu Office acquires the Baltic States. e first step is the es- Pirita. Ristiku shopping centre in Tartu, then in tablishment of Arco Real Estate in Riga. poor financial state. It is the first sanitiza- Today, Arco Real Estate is one of Latvia’s tion of a real estate firm in Arco Vara most successful real estate firms. history. e centre is sold successfully in > Arco Vara Halduse OÜ is established 1998 2002. as a provider of real estate management > Arco Vara Pärnu Office acquires and > Establishment of a second large-scale services. renovates a historical building in Pärnu on residential community (40 hectares), > Cooperation with the developer and Aia 8. In addition to a number of tenants, Merivälja2, is launched. builder AS TTP begins for the sales of a Arco Vara Pärnu Office is based here. 6 ARCO REAL ESTATE ANNUAL REPORT 2006 I would like to begin by talking about an ostensibly I consider the other major underpinning of our success to different field – the athletic field. I have always admired be risk diversification and the readiness for broad-based the fortitude and willpower of professional athletes. As and sustainable growth. e founding of Arco Real Estate a skiing enthusiast, I have kept an eye out for things that subsidiaries in Bulgaria and Romania last year plays a could be learned, for example, from the results posted by major role in this regard. Constant flow of information Estonia’s successful Nordic ski teams. Let us be honest and a good overview of developments in this very high- – the results have been good ones. I am sure that their prospect market allow us to make the necessary action success is based on a number of principles which can at the right moment. also be applied to the business world: precise planning, fortitude and perseverance, teamwork and attention to e company has completed structuring the Group on details. three pillars - Service, Development and Construction - which ensures clarity and efficiency. Important To continue our parallel to the world innovations have also been introduced in company of sport, I can say that for Arco Real financial management, the budget process and organization of accounting and reporting. Estate, 2006 was a year of hard training, resulting in a good level of preparation As a result of all of these training sessions, Arco Real for the effective, broad-based and Estate is in top physical condition. e entire team, balanced future growth of the entire partners and clients all deserve recognition for this Group and in the longer term as well. accomplishment. And we would like to thank our fans! Above all, this has to do with our people – I would assert At the same time, there are inevitably some spectators that, figuratively speaking, Arco Real Estate has the best who hint that much of the Estonian and Latvian ski waxers, coaches, physicians and caretakers in the real estate boom is history. Stabilization will affect business. anks to their aptitude and dedication, there is speculative investors the most, but the cyclical nature reason for self-confidence. We have a very strong group of the market means that a correction and cooling was of leaders. Yet "Team Arco" is actually made up of almost overdue. e situation was not a normal one and actually 500 people in six countries. Amid a shortage of good the proliferation of what can be termed „one-man specialists, especially in Estonia and Latvia, people have development booths” reduced the competitiveness of the expressed a desire to join us, and this is very noteworthy. serious players. Now that we are seeing consolidation in the market, Arco Real Estate can really reveal its polished e hard-working people of the Arco Real Estate form with pride. Service Division’s team provide our eyes and ears in the market, ensuring the best sales solutions for our We recently marked Arco Real Estate’s 15th birthday. development projects. Arco’s Construction Division We should be in our athletic prime for several more includes construction teams in Estonia as well as Latvia. decades. e company has already set Baltic records, is makes it possible for us to complete our projects by becoming the leading real estate company, but our ourselves, from start to finish, producing the best aims are even more distant – and so we have focused on possible quality. Our competitors have nothing on such endurance events and longer distances. Keep on rooting an all-inclusive, integral development scale. for us! 2000 2001 2002 > Arco Maadehalduse OÜ, a forestland > One of Estonia’s largest construction > Arco Vara buys the Tallinn Olympic and land management and brokerage supervision companies, Tallinna Sailing Centre from the Ministry of company, is founded. Linnaehituse AS, is acquired in a public Culture. > An Arco Real Estate office is founded tender. > Arco Real Estate Latvia launches the in Vilnius, Lithuania. > Arco Kapitalijuhtimise AS is founded first large-scale residential development with the aim of managing real estate in Baltezers near Riga – the Marsili investment programmes to be launched residential community. and of offering various investment op- portunities. 7 A year of revolutionary changes Viljar Arakas Chairman of the Management board Last year Arco Real Estate group´s turnover stood at In 2006, many different signals were received regarding 483 million kroons and net profit reached 217 million the situation of the Baltic real estate market. As always, kroons. ese figures, coupled with the knowledge that some were pessimistic and others were optimistic. the net profit grew 87% in a year, surely gives us reason e pessimists predicted a market crash, while the opti- to be satisfied. In this background of good macroeco- mists talked about prices continuing to rise unabated. nomic figures there is however no time to rest on our I believe that the truth lies somewhere in between; we laurels but rather time for scrutinizing our strengths and will probably see prices stabilize, as well as corrections weaknesses bearing in mind the longer term. Indeed, this in a few overvalued sectors. is what we did last year at Arco Real Estate, focusing on the challenges for the future and areas where we saw the need for development. 2003 2004 > A forest auction system, www.metsaoksjon.ee, is created and > e final implementation of Arco Real Estate Arco Vara Puukooli OÜ is founded as a nursery, seedling sale centre group managerial unit is completed. and forestry renewal company. > Successful development activity is launched > Cooperation begins with a leading German real estate group, DEC. in Latvia through Arco Development SIA. > A majority stake is acquired in the construction firm > Developments in group´s construction activities. Deena Ehituse OÜ. > First Arco Real Estate managed funds are launched on the market. > Arco Vara becomes the personal main sponsor of a top Estonian skier, Jaak Mae. 8 ARCO REAL ESTATE ANNUAL REPORT 2006 I believe that releasing some pressure will undoubtedly considering that we have no competitors with such bring us back to reality amid the hitherto overoptimistic a chain. expectations. e rapid price rise we have seen in the last three years will certainly not last for ever. Sooner or later We see the same thing when we look at the quality of it must end. Certainly a market slowdown will mean less our land and the nature of the development projects in speculative interest and mark an orderly settling process progress.