H2 | 2019

MARKET OVERVIEWLAND AND INDUSTRIAL SPACE

TRANSFORMING REAL ESTATE INTO REAL ADVANTAGE

LAND AND INDUSTRIAL SPACEH2 | 2019

INVENTORY AND PIPELINE

Throughout 2019 we observed a sustained growth in the construction of industrial space due to the increasing demand for warehouse and logistics facilities. In the second half of 2019, 104,000 sq. m. of new industrial space was delivered. The total stock of industrial space in Sofia rose to 3.104 million sq. m., including space used for manufacturing, warehousing and logistics purposes. The new deliveries in H2 2019 were 29,000 sq. m. for tenant-occupied space and 75,000 sq. m. for owner-occupied space, while 265,000 sq. m. was the space under construction. In H2 2019, only 28% of the newly delivered projects were aimed at tenant occupiers. For 2020 we expect the number of speculative developments receiving use permit to rise as 31% of the total industrial space under construction is aimed at tenant occupiers. The increasing

interest among investors in warehouse projects for rent is due to the growing demand for modern facilities. Among the largest completed projects in H2 2019 was the new manufacturing unit of Integra Plastics AD located in Elin Pelin. The other two significant projects were the completion of BMS Productions’s new facility in Bozhurishte and Primex’s new tire center on South Ring. In the second half of 2019, most new developments were delivered around Elin Pelin, Krivina and Novi Han – 44,000 sq. m. of modern industrial space. The east industrial zone remains attractive and continues to grow with new developments that amount to 71% of projects under construction. Currently, in the areas of Krivina and Sofia Airport there are projects under construction with a TBA of 54,000 sq. m. In addition, there are several big projects under construction like

Orbico Bulgaria on Chepinsko Shose, Dhollandia’s factory in Grigorevo and Melexis’s production plant in Gorublyane. The investors’ interest in the Eastern part of the city is due to the better transport links. Several big projects were delivered outside Sofia in H2 2019:• The automotive signal light

company Odelo built a new modern manufacturing facility in Plovdiv with a built up area of 23,000 sq. m.;

• ABB opened their fifth production facility in Bulgaria in Petrich with a TBA of 5,000 sq. m.;

• Voss Automotive rented 15,000 sq. m. of industrial space in Lovech which was formerly occupied by Great Wall;

• Teklas Bulgaria began the construction of a manufacturing unit in Vratsa which is expected to open in 2020.

MARKET HIGHLIGHTS

Under construction

265 000 m2

PRIME RENTS IN SOFIA

Newdeliveries

29,000 m2

tenant occupied

owner occupied

75,000 m2

TOTAL industriaLspace in sofia

3.104 mln. m2

Vacancyrate

2.7 %

Tenant occupied industrial space

1,004,000 m2

CITY € 3.50-5.50 M2/month outskirts € 3.00-4.50 M2/month

LAND AND INDUSTRIAL SPACEH2 | 2019

ASKING RENTAL RATES (BULK WAREHOUSE SPACE)

€ pe

r sq.

m.

30

100

25

60

20

50

30

140

40

150

100

300

30

100

0

50

100

200

150

300

250

Varna Plovdiv Vrazhdebna Voennarampa/ Iliantzi

Kazichene/Krivina

SofiaAirport area

ElinPelin

€ pe

r sq.

m. p

er m

onth

2.00

4.00

2.00

4.25

3.50

5.50

Plovdiv Varna/Burgas Sofia0

1.00

2.00

3.00

4.00

5.00

6.00

ASKING PRICE RANGE FOR INDUSTRIAL ZONE LAND (SELECTED LOCATIONS)

DEMAND

The demand for industrial space in H2 2019 was growing, mainly due to industrial outsourcing. The vacancy rate of space offered for rent remained low, standing at 2.7% as of H2 2019. In the second half of 2019 companies

operating in the FMCG sector, logistics, the automotive industry and pharmaceuticals continued to be most active in looking for new properties to rent. The demand in Sofia was focused on warehouses with sizes from

1,000 sq. m. to 5,000 sq. m. The majority of companies that plan to open logistic centers in Sofia are global players, looking for modern warehouses. Due to the lack of existing options, they will continue to prefer built-to-suit projects.

LAND MARKET

RENTAL LEVELS

Prime rental levels in Sofia were stable in H2 2019 and ranged from €5 to €5.5 per sq. m. The most popular area among occupiers still was Sofia Airport where the vacancy rate was very low and asking rents were higher than those in other areas. In the outskirts of the capital, newly-built, modern warehouses were offered at lower rents, usually between €3 and €4.50 per sq. m. The rents for old units were around €3 per sq. m. In the large regional cities, Plovdiv, Varna and Burgas, rents for modern space varied between €2 and €4.25 per sq. m.

The asking price range for land plots designated for industrial development in Sofia varies significantly in terms of location and size. The main areas for industrial development and

warehousing in Sofia are: Sofia Airport, Iliantzi, Voenna Rampa, Vrazhdebna, Kazichene, Krivina and Elin Pelin. The highest asking prices in the capital were observed in the area of Sofia Airport where

the range for regulated land plots for industrial development was from €100 to €300 per sq. m. The area with the second highest asking prices is Kazichene/ Krivina where asking prices were between €40 and €150 per sq. m, although transactions were closed around €80 per sq. m. Another area that attracted interest is Iliantzi/ Voenna Rampa where we observed a wide asking price range from €30 to €100 per sq. m. depending on infrastructure and building parameters. The region around Vrazhdebna was also preferred by investors, especially the areas around Botevgradsko Shosse, Jumbo and North Ring Road where regulated land plots for industrial development were marketed from €30 to €140 per sq. m. Overall, the eastern part of the city, inside and outside of the Ring Road, remained more attractive to developers due to its better transport links.

LAND AND INDUSTRIAL SPACEH2 | 2019

CONTACT INFORMATION:

MBL1 Kuzman Shapkarev Str.Sofia 1000, BulgariaT: +359 2 9888 650T: +359 2 9888 651E: office@mbl.bgwww.mbl.bg

Georgi DjibovHead Land and Industrial SpaceT: +359 2 9888 650T: +359 2 9888 651M: +359 888 664 395E: gdjibov@mbl.bg

Rosen Grigorov, CFAHead of Valuations & ConsultingT: +359 2 9888 650T: +359 2 9888 651M: +359 888 222419E: rgrigorov@mbl.bg

We expect the tendency for new projects to be owner-occupied or built-to-suit to continue. The interest in the sector among local and international developers remains high, but large-scale transactions will be rare due to a serious discrepancy between buyers’ and sellers’ expectations regarding asset valuation and profitability. Profitability and rental rates are expected to

remain with minimal changes due to the less dynamic demand and supply market in the capital and the country. We anticipate the demand for modern industrial space to come from companies in the automotive, pharmaceuticals, FMCG and logistics sectors. However, it is worth to note the risk that the coronavirus outbreak brings. It is possible that some companies’ supply chains will

experience disruptions due to the temporary closures of factories in China and other countries affected by the virus. That may lead to parts and inventory shortage for some companies in Bulgaria that will negatively affect their operations. Consequently, demand for new industrial space may stall until supply chains resume their normal operations.

Total volume for commercial real estate transactions in 2019 slightly exceeded €220M and is the lowest in the past 3 years. The office segment maintains a reasonable risk-return profile accounting for almost half

of all deals, while the hotel segment turns out to be a good alternative to experienced domestic buyers. International investors still claim they have a preference for other markets due to limited liquidity

and unfavorable loan amortization in Bulgaria, while local buyers are also restrained by the 50 to 100 bps bid-ask gap for investment grade products.

MARKET OUTLOOK

INVESTMENT ACTIVITY

This research report has been prepared for general information only. The data herein was obtained from various sources; we do not guarantee its accuracy or completeness.

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