czech republic - colliers international/media/files/emea/czech... · 2012-10-10 · across the...

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2012 Eastern Europe Real Estate ReviewCZECH REPUBLIC

Fluent in Real Estate

Almaty

Baku

Barcelona

Beijing

Berlin

Bratislava

Brussels

Bucharest

Budapest

Frankfurt

Hong Kong

Istanbul

Kyiv

London

Madrid

Moscow

New York

Paris

Prague

Shanghai

St Petersburg

Warsaw

Representative Transactions in 2011

Panattoni Germany Management GmbH

Value Confidential Development and lease of a 16,000 sq.m. logistics centre located in Schwäbisch Gmünd, Germany

Germany

Accession Fund Sicav

EuR 308,000,000Refinancing of Accession Fund sub-portfolio of 9 office buildings and 1 logistics park located in Central and Eastern Europe

Poland, Czech Republic, Hungary, Romania

Heitman European Property Partners IV

Value Confidential Acquisition of an office building in Capital Partner’s Metropolis mixed-use project located in Moscow

Russia

Li & Fung Limited

Value Confidential Approximately 500,000 square foot office lease for LF USA’s new US headquarters in the Empire State Building

USA

Unibail-Rodamco

EuR 475,000,000Acquisition of GTC’s 50% stake in the Galeria Mokotow shopping centre located in Warsaw

Poland

UFG Real Estate

Value Confidential Acquisition of two office buildings and one shopping centre located in Moscow

Russia

Sahaviriya Steel Group Plc

uSD 680,000,000 Acquisition of Tata Steel’s steelmaking plant located in Redcar, Teesside

United Kingdom

w w w . s a l a n s . c o m

Northwood Investors

EuR 300,000,000Acquisition and financing of a 30,000 sq.m. office building located in La Défense

France

AIRE GmbH & Co. KGaA

Value ConfidentialSale of the 118,000 sq.m. APP logistics park located in Bratislava

Slovakia

Tristan Capital Partners AEW Europe

EuR 300,000,000 Acquisition from VGP N.V. of an 80% stake in 6 industrial parks located in the Prague region

Czech Republic

3 | COLLIERS INTERNATIONAL

EXECUTIVE SUMMARY 4

ECONOMIC OVERVIEW 5

INVESTMENT MARKET 6

INDUSTRIAL MARKET 7

OFFICE MARKET 9

RETAIL MARKET 11

CZECH REPUBLIC LEGAL OVERVIEW 14

CZECH REPUBLIC – TAX SUMMARY 15

CZECH REPUBLIC


RECENT TRENDS

Economy: The unemployment rate continued to decrease from 7.4% in 2010 to 7.1% in 2011. Exports accounted for 62% of the country’s GDP. Germany made up 32% of Czech exports.

Offices: 2011 was a record year for gross office take-up with 325,500 m2 being leased. The bulk of leasing activity occurred in Prague 4,5 and 8. There were 12 new office completions totaling almost 100,000 m2 in 2011, which was double the level of new supply recorded in 2010. Vacancy fell however prime office rents remained flat.

Industrial: Industrial stock expanded and now totals 3.94 million m2. Prime industrial rents remained more or less stable. The manufacturing and logistics sector continued expanding, however, the bulk of industrial transactions across the Czech Republic were lease renewals and renegotiations.

Retail: There has been limited new retail development and many retailers have been cautious about expanding their store portfolios. In light of restrained consumer spending, the performance of Czech retail sector has suffered as of late. However, there were some encouraging signs in that new retailers entered the market and investors were keen on acquiring good retail assets that they believe can deliver strong returns.

Investment: A very active 2011, with investment transactions totaling more than €2.2 billion closing, which was around four times higher than the €570 million of deals completed in 2010. Retail malls accounted for more than half of all investment activity, while offices made up a smaller portion largely due to the lack of true institutional office buildings being readily available for purchase. Prime yields hardened by around 25 bps.

MARKET PROGNOSIS

Economy: Czech exports are positioned to benefit from an improving German economy in late 2012 or early 2013. The unemployment rate is expected to remain stable in 2012 and decrease to 6.9% in 2013 but not without a medium term increase as public job cuts are likely to outweigh private sector job creation.

Office: Gross office take-up is set to slow down from its record year in 2011. Speculative and new office development starts are expected to drop in 2012 due to banking restrictions on development financing and lower occupier demand. New office construction will only commence once pre-leases represent 40% to 50% of the total proposed project or where developers are able to fund a large portion of the project costs from private equity sources.

Industrial: Gross take-up is likely to fall below 2011 levels due to concerns over business orders and economic growth. Occupiers with larger requirements (10,000 m2 +), are facing a narrower choice of immediately available space and will therefore have to commit to pre-leases. Vacancy rates across the Czech Republic should fall further, although prime rents are unlikely to experience strong upward pressure.

Retail: Competition for strong retailing locations is set to remain healthy. A number of new retailers are seeking a foothold in the Czech Republic while some existing brands will be looking to open further stores. The health of the economy and job security will nonetheless affect consumer spending and retailers will continue having to work harder in order maintain or increase their turnover levels.

Investment: The Czech Republic will continue to be a destination where a number of investors are keen to acquire investment property. However, the challenges of real estate deleveraging, the increased costs associated with new senior debt plus the ongoing Euro Zone uncertainty will undoubtedly have a dampening affect on investment activity levels. Further, marginal yield compression may be achieved but only for the very best investment assets at selective locations.

EXECUTIVE SUMMARY

RESEARCH & FORECAST REPORT | 2012 | CZECH REPUBLIC | EXECUTIVE SUMMARY

TRENDS 2012

IncreasingStableDecreasing

GDP GROWTH

PRIME OFFICE RENTS

PRIME SC RETAIL RENTS

TRANSACTION VOLUMES

PRIME YIELDS

PRIME INDUSTRIAL RENTS


SUMMARY

In 2011, the unemployment rate in the Czech Republic was 7.1%.

According to consensus forecasts GDP growth for 2011 was 1.8%. The unemployment rate fell from 7.4-7.1%.

The capital’s proximity to Germany has enabled it to integrate itself into their supply chain. As Germany grows, so does the Czech Republic. This trend has given the country one of the highest GDP per capita ratios in the region totalling US$25,000 per head at purchase price parity. However integration has also made the country more dependant on the vicissitudes of the German economy.

In 2011, exports accounted for 62% of the country’s GDP. Germany made up 32% of the Czech export figure meaning that exports to Germany accounted for just over 21% of the Czech Republic’s GDP.

While industrial production is recovering to its pre-crisis level, the same cannot be said for retail sales. Pre-crisis GDP was driven by private consumption and retail growth surged up until 2008.

In 2011 M1 money supply growth was around 4.5% and private consumption was negative.

PROGNOSIS

The Czech Republic is a relatively stable economy with a well capitalised and regulated banking system. As foreign banks with a local presence pull back on lending this year, local banks are in a good position to step up lending.

Czech exports are positioned to benefit from an improving German economy in late 2012 or early 2013. However, Germany is expecting a GDP contraction in 2012 to 0.7%, which will impact the Czech Republic’s GDP this year. By 2015 exports are expected to be 72% of the Czech Republic’s GDP.

The unemployment rate is expected to remain stable in 2012 and decrease to 6.9% in 2013 but not without a medium term increase as public job cuts are likely to outweigh private sector job creation.

Industrial production is driven by its German centric export market. After the re-stocking of inventory between 2009 and 2010 and the austerity dip in 2012, the Czech Republic’s industrial production rate will hold steady at 5%.

Retail sales are expected to dip again in 2012 due to the slowdown in the German market.

The continuance of low private consumption, now compounded by a reduced level of fixed investment is making the government maintain its levels of public spending. Despite the forecast of its current account recovery in 2013, public debt will not decrease due to the lack of structure to reign in public spending.

Constrained consumer demand coupled with government cut-backs will keep economic growth sluggish in 2012 at 0.5% in comparison to 2011’s GDP growth of 1.8%.

ECONOMIC OVERVIEW

RESEARCH & FORECAST REPORT | 2012 | CZECH REPUBLIC | ECONOMIC OVERVIEW

KEY ECONOMICS INDICATORS

KEY INDUSTRIAL RATIOS

10%

5%

0%

-5%

20%

10%

0%

-10%

-20%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Gross domestic product, constant pricesInflation, average consumer pricesUnemployment rate

Gross domestic product, constant pricesVolume of imports of goods and servicesVolume of exports of goods and servicesIndustrial Production

Source: IMF, Focus economics

Source: CNB, Focus Economics (from 2014)

Key Economic Figures2010 2011 2012

GDP % 1.93% -0.26% 0.70%CPI % 1.50% 1.71% 3.06%Unemployment % 9.6% 8.6% 8.7%

Economic Make-upSector GDP LabourAgriculture 2.4% 3.1%Industry 37.6% 38.6%Services 60.0% 58.3%

Population 10 562 214Top 3 Cities 2 071 954 19.62%Prague 1 300 108 12.31%Brno 450 820 4.27%Ostrava 321 026 3.04%

Source: IMF/CIA World Fact Book/FocusEconomics




RESEARCH & FORECAST REPORT | 2012 | CZECH REPUBLIC | INVESTMENT MARKET

SUMMARY

In 2011, investment transactions totaling more than €2.2 billion closed in the Czech Republic, which was around four times higher than the €570 million completed in 2010. There was a flurry of activity in H2 2011, with €1.4 billion worth of deals closed in this period.

Strong fundamentals of the Czech real estate market and a large number of institutional quality investment assets being marketed for sale helped to propel investment activity in 2011

The return of foreign investors to the market bolstered the already active Czech based investor group that has emerged in recent years. The share of total transactions by Czech investors decreased to 28% in 2011 however the absolute volume of their investments increased to €570 million from €390 million in 2010.

Retail malls made up 55% of investment deals last year. The Olympia shopping mall in Brno was jointly acquired by ECE and Rockspring. Multi Development also sold two of their malls, i.e. Forum Nova Karolina Ostrava and Forum Usti nad Labem, which were purchased jointly by Meyer Bergman and the Healthcare of Ontario Pension Plan (HOOPP) for €300 million.

Office investment deals, which typically account for the majority of real estate investment transactions represented only 22% of total investments in 2011. This was due to the fact that only a handful of institutional office investments were available for purchase. Of the office investments that were sold, the largest was Futurama Business Park Buildings A1 & A2 which were purchased for €50 million by Invesco Real Estate.

The sale of two separate industrial portfolios marked a landmark event as they were the first large scale industrial portfolios to sell in the Czech Republic. Logistics Park VGP CZ I was acquired by the EPISO fund while the VGP CZ II portfolio was acquired by Curzon Capital Partners Fund III. In total the lot size of both was €435 million and accounted for 20% of the investment volume in 2011.

Prime yields continued to compress in 2011, following the initial positive signs seen in 2010. Transactions in the retail sector demonstrated prime yields of slightly

sub 6.50%, while prime office yields hardened from 6.75% to 6.50% by the close of 2011. This moderate yield compression was a reflection of pent-up investor demand and the appetite of buyers seeking core product.

they were the first large scale industrial portfolios to sell in the Czech Republic.

Prime yields continued to compress in 2011, following initial positive signs in 2010. Transactions in the retail sector demonstrated yields of slightly below 6.50%, while prime office yields hardened from 6.75% at the start of the year to 6.50% at the close of 2011. This moderate yield compression reflected pent-up buyer demand and the desire of investors to seek prime assets to add to their real estate portfolios.

PROGNOSIS

Investment trading volumes in the coming year are unlikely to reach the figures posted in 2011, even though a range of investment funds remain active and a number of investment deals (largely offices in Prague) are expected to close in H1 2012.

The challenges of debt deleveraging will persist throughout 2012 as banks attempt to clean up non-performing loans in their portfolios. The lack of available senior debt and the additional liquidity costs, coupled with the ongoing Eurozone uncertainty will undoubtedly have a negative affect on investment activity levels.

As a result of the stricter regulations being imposed on banking groups, we expect to see more distressed assets come on to the market in the coming 24 months. Many of these opportunities will be discreetly and selectively marketed by Czech lenders and we do not yet expect to see large wholesale loan books being auctioned off.

There is currently sentiment to suggest that yields on a few selective “best in class” assets in Prague will set a new prime benchmark yield in the period since the start of the global financial crisis. Yields on most other assets will broadly remain flat for 2012 due to investor cautiousness over the European economic outlook, sovereign debt challenges and banking liquidity issues.

INVESTMENT MARKET

Source: Colliers International



PRIME YIELDS

INVESTMENT VOLUME (€ MILLION)

12%

10%

8%

6%

4%

2%

0%

1500

1200

900

600

300

0

H1 2

000

H1 2

001

H1 2

002

H1 2

003

H1 2

004

H1 2

005

H1 2

006

H1 2

007

H1 2

008

H1 2

009

H1 2

010

H1 2

011

H1 2

000

H1 2

001

H1 2

002

H1 2

003

H1 2

004

H1 2

005

H1 2

006

H1 2

007

H1 2

008

H1 2

009

H1 2

010

H1 2

011

OfficeRetail SCIndustrial

KEY MARKET DATA - Czech RepublicInvestment Turnover €2.2 billionPrime Office Yield 6.50%Prime Retail Yield 6.35%Prime Industrial Yield 8.00%


SUPPLY

Industrial stock expanded by 240,000 m2 (to 3.94 million m2) in 2011, a 6% increase (from 3.72 million m2) in stock compared to 2010. In H2 2011, industrial space increased by 166,000 m2.

CTP and VGP were the most active developers in terms of new building completions.

CTP developed four buildings, totaling 112,600 m2 in Brno with the largest measuring 36,500 m2.

VGP started construction on a 17,000 m2 build-to-suit (BTS) production facility in Hrádek nad Nisou on the Czech Republic´s northern border with Germany and a 13,000 m2 building at Nýřany close to the city of Pilsen.

The three major geographic clusters of Czech industrial stock saw a change in their ranking based on proportion of total stock. Southern Moravia accounted for 706,600 m2 and overtook Western Bohemia where 575,100 m2 is located. Prague, holds 1.6 million m2 of the Czech industrial stock and is the region with the largest share of industrial buildings.

Speculative development of industrial space was rare in 2011 and when it did occur it often comprised an adjunct to the construction of pre-leased space, e.g. Panattoni Park Prague Airport and VGP Park Hradec Králové. While examples of pure speculative development were seen at VGP Park in Tuchoměřice, Nýřany and Horní Počernice.

The odd BTS project also got underway in Central and Eastern Bohemia for companies in the manufacturing sector, as there were no suitable properties that could meet such demand.

DEMAND

Total gross take-up in 2011 reached 816,800 m2 which was 17% less than the 979,000 m2* recorded in 2010.

The logistics sector accounted for the highest percentage of gross take-up with a 55% share, while 28% of total leasing activity came from the manufacturing sector.

Net take-up in 2011 amounted to 420,600 m2 which was around half of the gross take-up. In comparison to 2010 figures, net and gross take-up decreased by 42% and 17% respectively.

Looking at demand in terms of net take-up, the logistics sector represented 44% and the manufacturing sector accounted for 36%.

Some notable lease renewals and renegotiations closed during 2011 including a number of DHL´s leases in Prague. These renewals accounted for the three largest industrial transactions in 2011.

In terms of developers’ share of deals last year, two companies were involved in over half of deals completed i.e. CTP (31%) and Prologis (27%).

*Previously gross take-up for 2010 was reported by Colliers as 1 million m2. This figure has been revised since adopting the Czech Republic Industrial Research Forums’ take-up methodology.

RESEARCH & FORECAST REPORT | 2012 | CZECH REPUBLIC | INDUSTRIAL MARKET

INDUSTRIAL MARKET

CHANGE IN STOCK OVER TIME (THOUSAND)4 000

3 900

3 800

3 700

3 600

3 500

3 400

Q3 2

010

Q4 2

010

Q1 2

011

Q2 2

011

Q3 2

011

Q4 2

011


Existing Stock (m2)

New Supply (m2)

TAKE-UP VS. VACANCY315 000270 000225 000180 000135 00090 00045 000

0

14%12%10%8%6%4% 2% 0%

Q3 2

010

Q4 2

010

Q1 2

011

Q2 2

011

Q3 2

011

Q4 2

011

Source: Colliers International / PRF

Net take-up (m2)

Renewals (m2)

Vacancy (%)


Key Industrial Figures - Czech RepublicTotal Stock 3,946,500 m2

Take-up 816,800 m2

Vacancy 7.7 %Prime Headline Rent €4.40 m2/pcm


VACANCY/AVAILABILITY

Due to healthy gross take-up in the past two years across most Czech regions, the average country vacancy rate dropped to 7.7%. This is a decrease of 2.7% from the end of 2010.

Vacancy levels in Prague were 9.5% at year end, which was a slight improvement on the H1 2011 figure of 9.9% and 1.6% less than the 2010 vacancy rate.

In 2011, the largest vacancy rate decline was seen in Northern Moravia which dropped from 12.8% to 2.6%, and was helped by Prologis leasing space at Prologis Park Ostrava.

Eastern Bohemia also registered a large drop in its vacancy from 7.9% down to almost 0%.

Southern Moravia was the only region to experience a vacancy rate increase, from 3.2% (2010) to 4.5% (2011). This increase was triggered by the completion of the new industrial space at CTPark Brno II. Overall vacancy in this region nevertheless still remained below the country average.

The largest cluster of vacant modern Grade A space was located north of Prague in Úžice where over 50,000 m2 was available for lease.

Other industrial parks that can accommodate occupiers seeking space in excess of 10,000 m2, included Business Park Rudná (Prague), Airport Logistics Park (Prague) and CTPark Divišov (at Junction 41 of the D1 Highway).

RENTS

Headline rents remained by and large stable throughout 2011 despite a fall in vacancy rates.

The Brno industrial market commanded the highest rents in the Czech Republic ranging between €4.30-4.60m2/pcm. While in the submarket of Prague-North, modern storage facilities could be leased for as low €2.75-3.00 m2/pcm.

Average net effective rents after taking into account leasing incentives were around 8-12% lower than the quoted headline rent (depending on the size of the space leased and the lease term).

Headline rents for BTS properties were generally being agreed in the range of €4.00-4.50 m2/pcm. In many instances some of the additional fit-outs required by the occupier were being rentalised if paid for by the developer.

PROGNOSIS

In 2012, gross take-up for industrial space is likely to be below the 2011 level due to concerns over business orders and economic growth.

Tenants with larger requirements (10,000 m2+) will face a narrower choice of immediately available space due to falling vacancy rates and low volumes of new speculative development.

At the end of 2011, around 125,000 m2 of space was under construction around the country, the largest being a 30,000 m2 BTS at Jirny (Prague-East) for the German retailer Globus.

Barring an economic meltdown, vacancy rates are set to fall further as current vacant space leases up and the supply of new developments fall back.

We expect around 160-180,000 m2 of new industrial space to come through the Czech development pipeline in 2012.

RESEARCH & FORECAST REPORT | 2012 | CZECH REPUBLIC | INDUSTRIAL MARKET

HEADLINE RENT INDICATIONS

LARGEST INDUSTRIAL TRANSACTIONS

REGION RENT LEVELPRAGUE €2.75-4.40 m2/pcmPILSEN €3.90-4.20 m2/pcmBRNO €4.30-4.60 m2/pcmOSTRAVA €3.60-4.30 m2/pcm

TENANT PARK DEVELOPER SIZE DEALDHL Prologis Park Prague-Jirny ProLogis 39,366 renewalDHL Prologis Park Prague-Jirny ProLogis 30,619 renewalDHL Prologis Park Prague-Jirny ProLogis 29,058 renewalKompan CTPark Brno II. CTP I 24,478 consolidationHoneywell Industrial Park Brno Heitman 24,230 renewalVF Corporation PointPark Prague D8 Pointpark Properties 21,443 renewalLoxxess CTPark Bor CTP 16,688 expansionPST CLC CTPark Pohorelice CTP 16,308 pre-letLoxxess CTPark Bor CTP 15,645 renewalSchenker PointPark Prague D1 Pointpark Properties 15,276 renewal

TAKE-UP STRUCTURE

51%49%

New demand

Renewals & renegotiations




STOCK VS. VACANCY 315 000270 000225 000180 000135 00090 00045 000

0

14%12%10%8%6%4% 2% 0%

Q3 2

010

Q4 2

010

Q1 2

011

Q2 2

011

Q3 2

011

Q4 2

011


Net take-up (m2)

Renewals (m2)

Vacancy (%)


SUPPLY

In 2011, the office stock in Prague increased by 100,000 m2 to reach 2.8 million m2. Grade A space accounted for 69% of the office stock and Grade B represented 31%.

12 new office buildings were completed during 2011 and together totaled almost 100,000 m2. This was double the new supply recorded in 2010.

46% of any newly developed office space was either pre-leased or pre-sold before completion.

The largest office projects in 2011 included: Main Point Karlín in Prague 8 (25,700 m2), Harfa Office Park in Prague 9 (19,600 m2), Phase II of Futurama Business Park in Prague 8 (16,042 m2) and Qubix in Prague 4 (11,700 m2).

13 projects totaling 127,400 m2 of new office development were under construction in 2011, most of which should be completed by the end of 2012.

Speculative development of office projects in Prague diminished substantially due to the challenges of obtaining development financing.

In 2011, Futurama Phase II received a BREEAM certification and Main Point Karlín and Qubix are seeking to attain LEED Platinum certification.

DEMAND

2011 was a record year for gross office-take-up, reaching 325,500 m2. This increase represented a 51% growth compared to 2010’s total of 215,000 m2.

Looking closer at office demand, net take-up accounted for 39% with the remainder of office leasing activity comprising renegotiations and relocations.

Active business sectors in office take-up included Professional Services (23%), Banking, Insurance and Investment (18%), IT & Telecoms (12%) and Manufacturing (9%).

70% of office leasing transactions took place in Prague 4, 5 and 8.

The largest office transactions of 2011 included UniCredit Bank (26,680 m2) at Filadelfia - BB Centrum in Prague 4, Komerční Banka (15,236 m2) at City West - Building A2 in Prague 5 and PwC (11,924 m2) at City Green Court in Prague 4.

VACANCY / AVAILABILITY

After two years of sluggish take-up, Prague’s office vacancy rate decreased from 13.2% to 12% by the end 2011. However, this figure was slightly misleading when viewed in isolation as there were large variances between the individual Prague office sub-markets.

Prague 5’s vacancy rate was 6.8% and remained low due to limited new office supply and healthy take-up. Vacancy levels in Prague 4 fell to 7.7% from 11.9% and Prague 6´s vacancy rate decreased to 20.8% from 25.2%.

Prague 7 (25.1%) and Prague 9 (30.2%) had relatively high vacancy rates compared with the office stock in those individual districts. Prague 9´s vacancy rate increased significantly, however this was due to the completion of Harfa Office Park (19,600 m2), which has been slow to lease up.

Prague 2 also experienced an increase in its vacancy rate from 8% to 13.2% which was due to the relocation of tenants from Prague 2 to other districts in the city.

OFFICE MARKET

RESEARCH & FORECAST REPORT | 2012 | CZECH REPUBLIC | OFFICE MARKET

CHANGE IN STOCK OVER TIME (THOUSAND)2850

2800

2750

2700

2650

2600

Q3 2

010

Q4 2

010

Q1 2

011

Q2 2

011

Q3 2

011

Q4 2

011




Total Stock (m2)

New Supply (m2)

KEY OFFICE TRANSACTIONSTENANT BUILDING m2 TRANS-

ACTION TYPE

UniCredit Bank

BB Centrum Filadelfia

26,680 Reloca-tion

Komercni banka

City West A2 15,236 Reloca-

tion

PwC City Green Court 11,924 Reloca-

tion

Metrostav Palmovka Park II 10,817 Reloca-

tionSupreme Audit Office

Tokovo 10,200 Renego-tiation

Deloitte Nile House 9,000 Renego-tiation

T-Sys-tems

Business Centurm Vysehrad

6,447 Renego-tiation

Accenture The Park 6,393 Renego-tiation

SAP Business Services

Avenir Business Park

6,139 Renego-tiation

Seznam.cz

Palac Krizik II 6,000

Reloca-tion / Expan-sion

Key Office Figures - PragueTotal Stock 2,800,466 m²

Take-up 325,564 m2

Vacancy 12.01 %Prime Headline Rent € 20-21 m2 /pcm


RENTS

Prime rents remained unchanged in 2011. Prague 1 (city centre) rents ranged from €20-21 m2/pcm. Rents in the inner city ranged from €15-17.5 m2/pcm and outer city rents ranged from €13-14.5 m2/pcm. Landlord incentives continued to be a staple in leasing deals for new and also existing tenants. Incentives varied depending on the size and terms of the deal and net effective average rents were typically around 10% to 15% lower than quoted headline rents.

PROGNOSIS

2012 take-up levels are unlikely to reach the demand levels of 2011 mainly due to low economic growth, external market risks associated with the Eurozone and remnants of the global financial crisis. As a result, we expect the share of renegotiated leases will likely increase as tenants reconsider expansion or relocation.

Levels of speculative development are expected to drop in 2012 due to banking restrictions on development financing. New office construction will only commence once a project has achieved pre-leases between 40% to 50% of the total project size or alternatively where developers are able to draw upon private equity sources.

Relocations by large tenants such as Komerční Banka and PWC may cause a short term rise in the vacancy rate towards the end of 2012 in Prague 1 and 2 as the space vacated by both tenants has yet to be backfilled.

11 buildings, representing 113,000 m2 of office space, are expected to come on to the market in 2012, 65% of which will be located in Prague 4 (Pankrác) and Prague 8 (Karlín).

Office rental rates are anticipated to remain flat throughout 2012, however net effective rents could rise from their current levels of 10-15% below quoted headline rents as vacant space around Prague dries up.

The propensity to develop and lease sustainable properties will continue to increase as more and more projects coming to market are being built to meet green certification criteria.

In Prague, there are currently four BREEAM certified office buildings, one LEED certified building and one other has an OGNI certification. Similarly, four new office buildings currently under construction are seeking a BREEAM or LEED certification.

RESEARCH & FORECAST REPORT | 2012 | CZECH REPUBLIC | OFFICE MARKET


TAKE-UP STRUCTURE

6%

29%

1%

31%

33%

New Leases

Expansions

Renegotiations

Relocations within stock

Sale & leaseback

TAKE-UP VS. VACANCY

PRAGUE DISTRICT VACANCY

120 000

100000

80 000

60 000

40 000

20 000

0

800 000700 000600 000500 000400 000300 000200 000100 000

0

13.5%

13.0%

12.5%

12.0%

11.5%

11.0%

35%30%25%20%15%10%5%0%

Q3 2

010

Q4 2

010

Q1 2

011

Q2 2

011

Q3 2

011

Q4 2

011

Prah

a 1

Prah

a 2

Prah

a 3

Prah

a 4

Prah

a 5

Prah

a 6

Prah

a 7

Prah

a 8

Prah

a 9

Prah

a 10



Net take-up (m2)

Gross take-up (m2)

Vacancy (%)

Total stock (m2)

Vacancy (m2)


SUPPLY

There is approximately 2.2 million m2 of retail space in the Czech Republic, 70% of which is located within shopping malls. Shopping centre stock in Prague totalled around 750,000 m2.

A limited number of new shopping centres came to market in 2011, however, some existing retail properties were refurbished in smaller towns such as Lihovar in Říčany and Elan in Havířov.

Notable shopping centres currently under construction included Multi’s Forum Nova Karolina (58,000 m2) in Ostrava and the Develon/Avestus Breda Shopping Mall (25,000 m2) in Opava.

Retail park development has been on the rise with the completion of Ostrava Retail Point (7,600 m2), Centro Zlín Retail Park Phase II (4,000 m2) both built by Discovery Group and Avion Shopping Park’s extension (9,300 m2) built by Inter-Ikea in Ostrava, alongside the construction of a new Kika furniture store (16,000 m2) at the same location.

Demand for the best retailing locations remained highly competitive due to the limited new supply of new shopping centres coming on line across the country.

The trend of refurbishment and expansion of existing shopping centres can be seen at Nový Smíchov in Prague 5 (interior recently remodelled) and Černý Most in Prague 9 (scheduled completion in 2013).

Individual retailers such as Ikea in Černý Most, also chose to renovate and upgrade store formats to refresh their look and improve their in-store customer experience.

The ratio of online sales to total retail sales continued to increase as e-retailers tested out new forms of electronic commerce to boost sales and attract consumers. For example, Tesco recently launched an online grocery service in Prague. P&G and Mall.cz created a partnership which brought virtual grocery stores to Prague’s four busiest metro stations where customers scan QR codes with a smart phone and are connected to an online store. The goods purchased are then delivered the following day.

DEMAND

Retail sales in the Czech Republic showed a slight sign of improvement in Q4 2011 as December 2011 posted a 1.6% improvement year-on-year. This growth was largely attributed to an increase in car sales and non-food items.

Several retailers continued to seek space in the best performing shopping centres around the country. The lack of available space proved to be a barrier to new entrants.

Existing retailers already operating in the Czech Republic were planning store expansions, including Interspar, H&M, Orsay, New Yorker and Paul (bakery). New entrants to the market in 2011 included Foot Locker (sports), Decathlon (sports) Desigual (fashion), Karen Millen (designer fashion) and Crabtree & Evelyn (cosmetics).

Grocery chains continued to experiment with smaller convenience store formats. Tesco expanded its Tesco Extra stores while Austria’s Spar, launched its first Spar-to-Go in Říčany, a 120 m2 sales floor with take-away food, ready meals, sandwiches and soups.

A handful of American retailers are in the exploration stage of entering the Czech market via a franchise arrangement such as Churches Chicken, Dairy Queen, Marble Slab Creamery, Great American Cookies and Radio Shack.

Luxury American jewellery store, Tiffany & Co. planned to open its first store in CEE in 2012 in Prague. The shop will be 260 m2, at 10 Pařížská Street and located opposite the Gucci store. Pařížská is Prague’s and CEE’s premier high-end fashion and luxury goods retailing destination.

RETAIL MARKET

RESEARCH & FORECAST REPORT | 2012 | CZECH REPUBLIC | RETAIL MARKET

RETAIL SPACE PER 1,000 INHABITANTS

ONLINE PURCHASED GOODS (2011)*

1 800

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% of individual on-line shoppers over last 12 months

Source: Czech Statistical Office (ČSÚ)


Key Retail Figures - PragueTotal Shopping Centre Stock 870,000 m2

Prime Headline SC Rent €170 m2/pcmPrime Headline High Street Rent €90 m2/pcm


RENTS

Prague’s prime high street city centre retail rents were between €160 m2/pcm and €170 m2/pcm while Brno prime rents were between €60 m2/pcm and €70 m2/pcm in 2011.

Prime shopping centre rents in Prague were €90 m2/pcm and Brno shopping rents ranged between €50-60 m2/pcm.

While many shopping malls across the Czech Republic suffered a rental decline of 10-30% over the past three years in relation to specific retail units or retailers, the stronger performing malls such as Chodov, Palác Flora and Nový Smíchov (all located in Prague) achieved rental growth of 5% to 10% on lease renewals or new lettings.

PROGNOSIS

Popular, well designed shopping malls with a good tenant mix will benefit from rental growth and attract retailers seeking to lease shop units. While shopping malls that have struggled as of late will do well to maintain their current levels of tenant occupancy.

Many retailers experienced a drop in retail sales and this has impacted their ability to meet rental obligations. In 2012, we expect average rental rates to stabilise and many

RESEARCH & FORECAST REPORT | 2012 | CZECH REPUBLIC | RETAIL MARKET

NAME CITY m2 DEVELOPER OPENINGForum Nova Karolina Ostrava 58,000 Multi Development 2012Breda & Weinstein Opava 25,000 Develon / Avestus 2012

Futurum - expansion Hradec Kralove 9,950 TK Development

/ Heitman / GE Capital 2012

Avion Shopping Park - Sever Ostrava 4,000 Inter-Ikea 2012Centrum Cerny Most - expansion Prague 26,000 Unibail - Rodamco 2013

NAME CITY m2 DEVELOPER OPENINGGallery Santovka Olomouc 46,000 Dandreet 2013Aupark Hradec Kralove 24,420 HB Reavis 2013Aventin Jihlava 23,000 Aventin 2013Gallery Teplice Teplice 22,000 Dandreet 2013Fontana Teplice 22,000 JTH Group 2013Gecko Ostrava 15,630 Reflecta 2013

RETAIL PROJECTS UNDER CONSTRUCTION

SAMPLE OF PLANNED RETAIL PROJECTS



landlords will be hoping to maintain, or grow their rental income and if possible move out weaker tenants for stronger retailing brands.

Although a number of existing retailers are seeking to increase the number of their stores, the rate of expansion is expected to be measured and cautious given the lack of available space and tepid consumer demand.

The health of the economy and job security is affecting consumer spending levels and many retailers are having to work harder and smarter to maintain or increase their sales turnover.

The opening of Nová Karolina in Ostrava is about to change the retailing landscape in this city. This new shopping mall will not only provide fierce competition to existing retail malls but will also draw customers from a wider catchment beyond Ostrava’s city boundaries.

Some new shopping malls will be added to the retailing stock, however retail development is many ways is more challenging than development in the other main property sectors, due to the fact shopping centres tend to be larger in size, expensive to construct and need to appeal to a large variety of different retail tenants.

Older or poorly located shopping malls will continue to struggle, as some retailers in such schemes will still find it difficult to meet rental costs. Therefore, owners will need to be creative in order to improve the attractiveness of their retail centres to shoppers or to find alternative uses for the growing vacant space.


RESEARCH & FORECAST REPORT | 2012 | CZECH REPUBLIC

512 offices in 61 countries on 6 continentsUnited States: 125Canada: 38Latin America: 18Asia Pacific: 214EMEA: 117

• $1.5 billion in annual revenue

• 978.6 million square feet under management

• Over 12,500 professionals

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.

CZECH REPUBLIC:

Lenka Oleksiakova

Sona Volfova

Colliers International s.r.o.Myšák GalleryVodičkova 710/31110 00 Prague 1Czech Republic

TEL +420 226 537 618FAX +420 226 013 579EMAIL [email protected]

COLLIERS RESEARCH

Colliers Research Services Group is recognised as a knowledge leader in the commercial real estate industry, providing clients with valuable market intelligence to support business decisions. Colliers research analysts provide multi-level support across all property types, ranging from data collection to comprehensive market analysis.

Across the CEE-SEE-Russia region of EMEA, Colliers researchers regularly collect and update data on key real estate metrics, set to consistent definitions. This information is constantly managed using databases, enabling staff to readily produce analysis on key regional markets including supply, demand, absorption, pricing and transaction data on capital markets and the office, industrial and retail sector. In most CEE-SEE-Russian markets, the office definitions used are consistent with those set out by the CEE Research Forum – an umbrella group, of which Colliers is a founding member - established to ensure consistent research methodologies are used, bringing greater transparency and reliability to the analysis of real estate markets in the region. Definitions of the key metrics used in our regular reports are highlighted below.

KEY METRIC DEFINITIONS

Prime Headline Capital Value (derived): This is a calculation of market value derived from the annual prime headline rent divided by the prime (net initial) yield.

Prime Net Initial Yield: The yield an investor is prepared to pay to buy a Grade A building, fully-let to high quality tenants at an open market rental value in a prime location. Lease terms should be commensurate with the market. As a calculation Net Initial Yield = first years’ net income/purchase price (prior to deducting fees and taxes).

Prime Headline Rent: Represents the top open-market tier of rent that could be expected for a unit of standard size commensurate with demand, of the highest quality and specification in the best location in the market at the survey date. This should reflect the level at which relevant transactions are being completed at the time but need not be exactly identical to any of them, particularly if deal flow is very limited or made up of unusual one-off deals. If there are no relevant transactions during the survey period, the quoted figure will be more hypothetical, based on expert opinion of market conditions, but the same criteria on building size and specification will apply.

Prime Net Effective Rent: Prime Net Effective Rent is the lowest rent payable, based on a calculation of the Prime Headline Rent, less the monetary equivalent of the highest of either the rent-free period or fit-out contribution available at the time of the survey date.

Average Headline Rent: Average Headline Rent represents the average open-market tier of rent that could be expected for a unit of standard size commensurate with demand, based on a blend of Grade A and B space across a range of locations in the market at the survey date.

Total Competitive Stock: Includes the gross leasable floor space in all A and B class buildings.

Space Under Active Construction: Represents the total amount of gross leasable floor space of properties where construction has commenced on a new development or in existing properties where a major refurbishment/renovation is ongoing at the survey date.

Space Under Construction – Inactive: Represents the total amount of gross leasable floor space of properties where construction had started/where a major refurbishment/renovation was ongoing, but activity has since stopped for a period of three months or longer.

Vacant Space: The total gross leasable floor space in existing properties that meet the Competitive Stock definition, which is physically vacant and being actively marketed at the survey date. Space should be available for immediate occupation.

Take-up: In our calculation of take-up, gross take-up accounts for all occupational market activity including renegotiations , renewals and sale-and-leasebacks. Net take-up includes new leases and pre-leases only, although it will often include relocations.


CZECH REPUBLIC LEGAL OVERVIEW BASIC FORMS OF TITLE

In the Czech Republic, the most common title to real estate is full ownership (“vlastnické právo”), which is similar to a “freehold” title and entitles the owner to a full range of perpetual rights to use and enjoy real property. It is also possible to use real estate based on (i) an easement (“věcné břemeno”) or (ii) a lease (“nájemní právo”), which can be either a long-term lease or a lease for an indefinite period of time.

ACQUISITION OF REAL ESTATE BY FOREIGNERS

Foreigners who are EU nationals may acquire commercial real estate directly. The acquisition of residential and commercial property by non-EU foreigners is only possibly in the case of holders of a permanent residency permit or, indirectly, through the establishment of a Czech legal entity such as a limited liability company (“společnost s ručením omezeným”). A foreigner can own 100% of such legal entity.

REGISTRATION SYSTEM

In the Czech Republic, there is a so-called Cadastral Register (“Katastr nemovitostí”). This register shows the owner of the property in question and also indicates the extent to which the land is encumbered by mortgages and other servitudes. Any rights in rem become effective through registration in the Cadastral Register as of the day on which the application to register a right in rem is filed. As a general rule, “good faith” purchasers of land are entitled to rely upon information contained in the Cadastral Register, provided that the registration was made after January 1, 1993. The Cadastral Register system is accessible online.

TRANSFER TAXES

Presently, there is a 3% transfer tax for which the seller is generally liable and for which the purchaser is the guarantor by law. Value Added Tax may also be payable in certain cases upon the transfer of real property.

LEASES

Leases in the Czech Republic are freely negotiable but are subject to certain mandatory provisions of the Civil Code and the Act on the Lease and Sublease of Non-Residential Premises. These mandatory provisions may not be varied by

contract. The most important restrictions concern the commencement of the lease.

PRIVATISATION CLAIMS

There is a comprehensive re-privatisation law in the Czech Republic and all deadlines for claiming possession have expired. However, certain proceedings may still be pending. These should be registered in the Cadastral Register.

NOTARIES AND NOTARIAL FEES

Legal agreements for the sale of real estate and the transfer of perpetual usufruct rights to real estate do not need to be in notarial form in order to be enforceable in the Czech Republic. It is, however, common practice for a notary, attorney or local municipalities to verify the signatures on such agreement/letter.

LANGUAGE

In order to be enforceable in the Czech Republic, most legal agreements to be filed with the Cadastral Register, Commercial Register or other authority must be translated into Czech. However, it is common for English or other languages to be used as a second language for checking purposes.

www.salans.com

Information contained in this general outline does not constitute a legal opinion and is not meant to be comprehensive. As a result of pending and new legislation, laws and regulations change frequently in the Czech Republic and are often subject to varying interpretations. Professional advice should be sought regarding all aspects of real estate in the Czech Republic.

Olga Humlová PartnerHead of Real Estate – Czech Republic T +420 236 082 111 E: HYPERLINK “mailto:[email protected]” [email protected]

RESEARCH & FORECAST REPORT | 2012 | CZECH REPUBLIC | LEGAL OVERVIEW

Fluent in Real Estate


CZECH REPUBLIC – TAX SUMMARYCORPORATE INCOME TAX AND CAPITAL GAINS

Corporate income tax is levied on profit from all activities (including rental incomes) and from the management of all types of property, although there are some exceptions to this rule defined in the tax law. The corporate income tax rate is 19% in 2012 (with the exception of pension and investment funds where it is 5%).

Capital gains are generally included in income and taxed at the same rate, including income from the transfer of shares in Czech companies or cooperatives. However, if at least 10% of the shares of a company is held by a parent company for 12 months, income from sale of the shares is tax exempt if the parent company is a Czech tax resident, an EU resident company or a resident of Norway or Iceland and the subsidiary is tax resident in an EU Member State or a non EU Member State with which the Czech Republic has concluded a Double Tax Treaty (subject to certain conditions).

As of 1 January 2012, the Czech Republic has 77 bilateral double tax treaties. As a rule, the right to tax capital gains is conferred on the state of residence of the seller. However, a number of double tax treaties provide a special regime for the capital gains if the shares being sold derive more than 50% of their value directly or indirectly from real estate (e.g. those with Australia, Cyprus, Egypt, Finland, France, Ireland, Canada, Sweden, USA). In such cases, the taxing right belongs to the state where the real estate is located. In other cases the taxing right belongs to the state of residence of the company whose shares are being sold (e.g. those with Germany and Israel).

There are no corporate tax grouping provisions in the Czech Republic.

Tax Depreciation

For tax purposes, either straight-line or reducing balance depreciation can be used. The tax depreciation period for buildings is generally 30 years except for administrative buildings, shopping centres and hotels where the depreciation period is 50 years. Special rates apply in the year of acquisition. Land is not depreciated for tax purposes. Certain assets attached to a building can be treated as separate movable

assets for tax purposes and therefore can be depreciated over a shorter period.

Special provisions apply for the assets of solar power plants. These fixed assets must be depreciated over 240 months and the depreciation must be claimed (unlike depreciation on most other assets). Special adjustments are made for similar assets acquired under finance leases.

Tax Losses

Tax losses can be carried forward for five years.

Losses may not be carried forward on a substantial change in the ownership of a company unless it can be shown that at least 80% of the company’s revenues are derived from the same activities as those carried on in the period when the loss arose. A change of at least 25% in the ownership of the registered capital or the voting rights, or a change resulting in a person obtaining a controlling influence in the company, is always a substantial change.

Tax losses are available after a merger or de-merger, although they only can be offset against profit on the same activity as was carried on in the year when the tax loss arose.

Thin Capitalisation

The thin capitalisation provisions act to restrict the deductibility of interest where the borrower has insufficient equity.

The following financial costs are nondeductible:

> Financial expenses on loans and credits received from related parties which are more than four times the equity (or more than six times the equity in the case of banks and insurance companies);

> Financial expenses incurred on credits and loans with interest rates or other returns dependent on the debtor’s profit.

Interest on loans and credits received from unrelated parties, or those secured by a related party, are fully deductible on general principles, except for interest on “back-to-back” loans (i.e. where a related party provides a loan, credit or deposit to an unrelated party, which then provides

the funds to the borrower); this is treated as interest on related party debt.

Any interest or other expenses relating to a non EU or EEA resident lender disallowed under the capitalization rules may be treated as a dividend, i.e. is subject to dividend withholding tax, as reduced by the provisions of any applicable double taxation agreement.

WITHHOLDING TAX

The standard Czech withholding tax rate is 15%. However, the rate can be reduced by double tax treaties.

Dividends

Withholding tax applies on all dividends paid by Czech companies.

Under the EU Parent/Subsidiary Directive, a dividend paid by a Czech subsidiary to a parent company that is tax resident in an EU member state may be exempt from withholding tax. These provisions also apply to dividends paid between Czech companies and paid to Switzerland, Norway and Iceland. A parent and subsidiary qualify for this exemption if a minimum shareholding of 10% is maintained for an uninterrupted period of 12 months.

Interest and Royalties

Withholding tax applies on interest, royalties and lease payments paid abroad, although the rate is reduced to 5% for finance lease payments.

Under the EU Interest and Royalties Directive, qualifying interest and royalty payments between associated enterprises which are tax resident in the EU member states may be exempt from withholding tax. This also applies to recipients in Switzerland, Norway and Iceland.

Residents of other EU and EEA countries have the option to file a tax return in respect of income subject to withholding tax (e.g. interest payments, royalties, income from freelance work), and to claim a deduction of the related expenses. This may result in a reduction in the tax burden as withholding tax is calculated on a gross basis.

REAL ESTATE TAX

Real estate tax comprises land tax and

RESEARCH & FORECAST REPORT | 2012 | CZECH REPUBLIC | TAX SUMMARY


building tax. The property must be located in the Czech Republic and recorded in the Land Register. The real estate tax is calculated on the area multiplied by the tax rate.

The rate varies according to the type and location of the property. The basic rates of tax applicable to buildings may be increased depending on the number of floors and the location. Municipalities can also issue a decree increasing the basic tax rate or coefficient.

From 2012, improved land surfaces are regarded as a separate class of real estate on which a special rate of tax applies.

REAL ESTATE TRANSFER TAX

A 3% real estate transfer tax is payable on the transfer of ownership to real estate for consideration. Generally the tax is paid by the transferor (seller), with the buyer guaranteeing the tax.

The tax base is the higher of the market value (according to the Valuation Act) or the sales price.

The contribution of real estate to share capital is exempt from the tax unless the contributor sells all shares received within five years.

VALUE ADDED TAX (VAT)

The reduced VAT rate is 14% and the standard rate is 20%.

The sale of residential property that qualifies as social housing is subject to the reduced VAT rate. To qualify as social housing, an apartment should have a floor area of 120 square metres or less and the floor area of houses should not exceed 350 square metres.

The VAT rate on the sale of buildings is generally 20%. The transfer of buildings is exempt from VAT once three years has passed from the first approval for use of the premises or after the first use of the building.

If the acquisition of a building is subject to VAT, this can be recovered if the building is used to generate VAT-able sales. The recovery is limited if it is used to wholly or partly make VAT exempt sales. A change in the level of exempt sales within ten years of acquisition of the building may lead to a claw back of previously recovered input VAT. A claw back period of 5 years is applicable

to buildings acquired before 1 March 2011.

The transfer of land is VAT exempt except for the transfer of building land, which is subject to 20% VAT. The lease of buildings and land is generally VAT exempt but the lessor can opt to charge 20% VAT on a lease with a tenant which is registered for VAT.

Groups of related companies can form a VAT group.

From 1 January 2012, construction work and building assembly services between two Czech VAT payers are subject to the ‘reverse charge’ regime. As a result, the duty to report and pay the VAT rests with the service recipient.

ADMINISTRATION OF TAXES

Tax administration is governed mainly by the Tax Code with specific procedures provided by other acts.

FOR MORE INFORMATION ON REAL ES-TATE SERVICES IN THE CZECH REPUBLIC, PLEASE CONTACT:

Eva DoylePartner

KPMG in the Czech RepublicPobrezni 1a, 186 00Praha 8Czech Republic

T: +420 222 123 564M: +420 602 738 591E: [email protected]

RESEARCH & FORECAST REPORT | 2012 | CZECH REPUBLIC | TAX SUMMARY

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