Belgrade | Q4 2016 Residential Market Outlook Residential Market Outlook | Q4 2016 | LeRoy Realty Consultants | 1 Economy Overview Improvement of key macroeconomic indicators ___ GDP & Construction Industry Growth ___ has brought a surge in optimism among 25.0% 4.0% investors and GDP growth in 2016 was 20.0% 19.0% 3.0% predominantly led by investments, net exports 17.4% 15.0% 2.0% and final consumption. 15.0% GDP 1.0% 8.5% growth 10.0% 8.2% 6.1% 0.0% Constr uction industry growth records positive rates in six 5.0% -1.0% consecutive quarters together with housing loans increase -2.3% 0.0% -2.0% over the first eleven months of 2016. According to Construction industry growth industry Construction Q1 Q2 Q3 Q4 Q1 Q2 Q3 preliminary data, GDP grew by 2.7% while construction -5.0% -3.0% industry grew by 6% in 2016. 2015 2016 Construction industry growth GDP The National Bank of Serbia maintains its policy rate at a historic low of 4% (since July 2016). Political stability, Source: Statistical Office of the Republic of Serbia structural reforms, halting further debt accumulation and progressing towards EU membership are assessed as main ___ Employment & Unemployment ___ drivers of recovery and sustainable growth. 50% 25% 21.3% 40% 20.7% 20% Accelerating private consumption and 19.0% 19.0% 17.9% rate Unemployment 17.0% 17.3% 16.6%17.7% 15.2% 30% 13.8% 15% declining unemployment 20% 10% Despite the private consumption consolidation and the 10% 5% slight improvement in disposable income, the wave of rate Employment 0% 0% optimism has yet to reach companies, which are not Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 increasing their exposure to bank loans, in spite of the record low level of financing costs. There is still lot to be 2014 2015 2016 done to remove existing bottlenecks to economic growth Employment rate Unemployment rate that will foster private sector job creation and raise living Source: Statistical Office of the Republic of Serbia standards. Better prospects in the mid-run ___ Mortgage Approvals in Serbia ___ 10,000 40.0% In the coming period GDP growth is expected to gradually 30.0% 7,500 step up, reaching 3.0% this year and 3.5% in 2018, while 20.0% change Annual keeping favourable growth structure driven by net exports 10.0% 5,000 and investments. 0.0% -10.0% 2,500 FDI inflow remains the same as in 2015, amounting to EUR loans of Number -20.0% 1.8 billion, while FDI/CAD coverage for the first eleven months of 2016 stood at 145.6%. 0 -30.0% 2011 2012 2013 2014 2015 I-XI 2016 In the short term, the outlook remains positive thanks to Housing loans Y-o-Y Growth (%) continuing low interest rates, mortgage affordability, rising Source: National Mortgage Insurance Corporation employment, household income and consumer spending and below target inflation. Residential Market Outlook | Q4 2016 | LeRoy Realty Consultants | 2 Residential Market Outlook Record low interest rates and economic growth ___ Number of newly finished, unfinished & sold apartments over the last 7 quarters have underpinned the in Belgrade metropolitan area ___ market demand and brought the resurgence of 2,677 Sold apartments 9,110* (secured loan real estate investment activity in the Belgrade 2016 transactions) residential market. Sold apartments 2,153 10,189 2015 Reduced level of new supply in 2015 has accelerated off- 2,735 3,596 Unfinished plan sales within the most successful residential projects in apartments 2016, which uplifted investors’ confidence and reinforced 2,353 9,585 development pipeline starting from the second half of 2015. 2014 Newly finished 3,571 apartments 4,311 Ever-lower interest rates enticed new 0 3,000 6,000 9,000 12,000 * preliminary data buyers Sources: Statistical Office of the Republic of Serbia & Republic Geodetic Authority After the contraction, whose effects were seen in 2014-2015 period, residential market seems to be getting back on ___ Housing development intensity in Belgrade municipalities healthy level of activity supported by growth in buying in 2015 ___ demand and attractively-priced offer. Tempting interest 1,200 5.0 Finished rates introduced throughout 2016 have also spurred latent 999 1,000 4.0 demand, which resulted in growth of approved housing 800 loans by 34.6% in the first 11 months of 2016 compared to 728 692 3.0 per apartments 573 the same period previous year, in the entire country. 600 546 396 418 2.0 However, these modest improvements with confidence 400 377 362 305 341 321 269 213 gradually recovering and favourable forecasts should be 200 164 152 151 1.0 69 97 1 45 49 , taken cautiously as many systemic risks are still prevailing, 28 000 0 0.0 such as fragile economic recovery in Europe, high level of inhabitants debt and unsustainability of low interest rates in the long Other Vracar of finished & unfinished apartments unfinished& finishedof Zemun Palilula Cukarica Rakovica Zvezdara Vozdovac term. grad Stari Savski venac Savski New Belgrade New Nuber Newly finished apartments New supply diminished for the second Unfinished apartments year in a row Number of finished apartments per 1,000 inhabitants Source: Statistical Office of the Republic of Serbia On the supply side, 2015 has recorded delivery of only 3,596 new apartments within metropolitan area, which is annual ___ Number of residential sq m based on building permits ___ decrease of 16.6% and the lowest market performance since 379,949 2004. The highest development intensity was seen in New 400,000 200 Belgrade and Vracar municipalities with 4.7 completed 190 permits of issued Number apartments per 1,000 inhabitants, which is twice higher than 300,000 152 150 259,710 the city average of 2.4 new units per 1,000 inhabitants. m sq permits, 131 199,530 200,000 100 Accelerating pace of new development has continued through 2016 in virtually all areas of the city and the current volume of housing construction will give effect during 2017, 100,000 50 when we expect increased number of new apartments coming onto the market. New Belgrade will accommodate 0 0 2014 2015 I-IX 2016 large part of new supply, followed by Zvezdara and to according of buildings Size Vozdovac. Building pipeline, sq m Number of permits Source: Statistical Office of the Republic of Serbia Residential Market Outlook | Q4 2016 | LeRoy Realty Consultants | 3 Dominant share of new supply consists of mid and upper- mid quality schemes located in the wider city centre while ___ Residential development pipeline in Belgrade remaining part is located on the city outskirts. Data on municipalities ___ issued building permits in the first 2 quarters of 2016 100,000 20 indicates similar level of development activity (pipeline) as 18 2015. 80,000 16 permits issued of Number 14 60,000 12 Soaring demand for new apartments 10 keeps resale market stable 40,000 8 6 20,000 4 The total volume of property transactions including resale 2 market, increased by 6.3% during 2015 and preliminary data 0 0 for 2016 indicate similar level of market activity. Low Other Vracar Zemun interest rates have pushed up number of secured loan Palilula Cukarica Rakovica Zvezdara Vozdovac Size of buildings according to permits, sq m sq permits, to according buildingsof Size Stari grad Stari transactions in 2016 by 24.3%, which is still 20% lower than venac Savski BelgradeNew average for the period 2011-2013. Number of residential sq m 2015 I-VI 2016 Number of permits, I-VI 2016 based on building permits Upper -mid quality projects are generating stable absorption, Source: Statistical Office of the Republic of Serbia which is partly attributable to the overall supply shortfall in the capital that will continue to play in favour of investors through strong off-plan sales and slightly higher prices. New ___ Number of sold apartments in Belgrade municipalities___ Belgrade leads the market demand, providing the most distinctive offer of new apartments, together with Zvezdara 12,000 and Vozdovac. Developers responded to increased demand 687 10,000 with an accelerating pace of new developments, which will 547 827 592 result in larger number of new units, thus enabling supply to 606 595 318 259 catch up with increased demand. 8,000 447 660 1,272 1,265 Both prices & rents stayed flat over the 6,000 1,593 1,932 last 12 months 1,012 of sold apartments soldof 4,000 1,143 1,136 Prices have broadly stabilized in all Belgrade municipalities Nuber 2,115 2,000 615 and we expect to remain relatively steady in the nearest 722 1,687 future. The market activity is also dependent on the interest 978 rates which may change with potential unexpected 0 developments in global financial markets. Therefore, despite 2014 2015 modest demand increase and strengthening economic Vozdovac Vracar Zvezdara Zemun growth in 2017, more realistic attitudes amongst buyers will New Belgrade Palilula Rakovica Savski venac Stari grad Cukarica Other curtail house price growth. Source: Republic Geodetic Authority Average apartment prices in Belgrade metropolitan area are EUR 1,225 per sq m. Asking prices for new units within upper -mid quality complexes depend heavily on micro ___ Distribution of sales transactions per municipalities in location and are within the range of EUR 1,700-2,000 per sq 2016___ m, while prices of older apartments range EUR 1,000 – 1,250 per sq m. Higher quality apartments prices are between EUR 2,100 -2,400 per sq m on average, while the offer of luxury 6% Vozdovac Vracar 9% 16% new units is very limited and the price ranges between EUR 2,800-3,000 per sq m.