new europe 2011 real estate review

COLLIERS INTERNATIONAL2011 NEW EUROPE REAL ESTATE REVIEWAlbania Bulgaria Croatia Czech Republic Greece Hungary Poland Romania Russia Serbia Slovakia Ukraine

Accelerating success.

P. 4 | CollieRS inteRnAtionAl

New Europeregional real estate review

What a difference a year makes. All national economies in the region continue to stabilize and improve, with positive GDP growth of 3.6% on average forecast for the new europe region as we head into 2011. this expansion comprises a combination of high industrial/manufacturing production growth and falling unemployment, but rather muted growth in the demand for goods and services in most markets, bar Poland and Russia.

on the downside, austerity packages, concerns over government bond defaults, the rising cost of international debt and increasing inflation, which reached ca 6.1% on average in 2010 – a similar figure is forecast for 2011 - could curtail the forecast for the year, although by varying degrees per country. in particular rising prices of energy, food and basic commodities could constrain any significant economic expansion.

office Market – vacancy appears to have peaked on average and is set for a period of slight stagnation or moderate decline over 2011. Average rents are likely to remain stable over the year, but we could start to see prime rental growth in some markets – Kiev has already jumped back from 50% falls at end 2010, Warsaw is likely to see prime rents climb in the first half of 2011. it will take until at least year-end 2011 for other markets to see a comeback in prime rents as a result of excess availability v. limited net take-up.

industrial Market – industrial production grew significantly in 2010 driving demand for modern warehouse/logistics space. this activity was predominantly focused on Poland, the Czech Republic and the Moscow region, driving a fall in vacancy in these markets. outside of these regions, demand remained weak as a result of the lack of proximity to market – the export trade partners in Western europe, notably Germany.

By end 2010 interest was picking up in Slovakia from developers seeking land opportunities, but such interest is yet to migrate further south or east. it will eventually, but many markets are likely to be driven by retail demand in the short-term.

Retail Market – from an occupational and development perspective, retail continued to be the poor man in new europe. Continued job uncertainty and austerity packages continue to drive low domestic consumption levels bar the usual anomalies of Russia, Poland and to a degree the Czech Republic. Retail sales took such a significant hit during the crisis period, it will take at least another year before retailers get close to par which will subdue any further expansion or growth in rents. that said, the long-term prospects for growth are much more positive – double the growth forecasts of western europe to 2020. Given the large number of international retailers yet to penetrate new europe, occupational growth prospects are positive but will place greater demands on shopping centre quality. Coupled with growth in internet-based retail shopping, there are interesting times ahead in the retail market.

investment transaction volumes over the year show a significant recovery compared to 2009, coming in at €6.36 Bln - an increase of 47%. that said volumes are still someway short of a longer-term turnover rate of €10 Bln, market cycles accepted. they only represent ca. 7.3% of total european transaction volumes. While the transaction cycle is on the way back up, the future for 2011 is a little opaque. investor interest continues to move further south and east in search of acquisition opportunities which should increase turnover volumes for the region. With a €100 Mln prime office deal happening in Bucharest at the very end of 2010 – the first deal this market has witnessed since 2006 – money is finally moving beyond the core markets of Poland and Prague.

this is the third annual review i have written for Colliers in new europe and the best yet. it continues to be the most comprehensive report of its kind in terms of the geographic and sectoral coverage.

i trust you find it an informative and interesting read.

Kind regards, Damian Harrington

Damian Harrington regional director, research and consulting colliers international new europe

Address Galerie Mysak Vodickova 710/31 Prague 1, 11000 Czech Republic

Phone +420 226 537 624

Email [email protected]


CollieRS inteRnAtionAl | P. 5

2011 COlliERs REal EstatE REviEW » NEW EUROPE

ECONOMIC OVERVIEW

� As we head into 2011, we can finally see that the economic recovery has filtered through into positive territory for almost all markets across the region. While Bulgarian growth remained largely neutral for 2010, Romania was the only market to suffer from another year of recession.

� The better news is that all national economies are set to expand in 2011, in terms of ‘year-on- year’ GDP growth, as all countries finally emerge from the financial and economic crisis which started two years ago, in earnest. A good response time, all things considered, but a growth response not without downside risks.

� Poland of course continues to grow steadily having never succumbed to a recession, with the likes of Russia and Ukraine showing a strong rebound from the dark days of 2009. If realized this will also translate into stable/falling unemployment levels in 2011, according to consenus forecasts from Focus Economics.

DEMAND FOR GOODS AND SERVICES POSITIVE ALBEIT VARIED…

� Whilst GDP growth in CEE markets generally portrays a solid growth pattern, the actual demand for goods and services is less robust. Demand in Bulgaria, the Czech Republic, Slovakia, Hungary and Romania is forecast to be rather muted going into 2011, as is the case for the majority of south east Europe. This is likely to keep office and retail occupational demand subdued.

� The demand for goods and services in Poland and Ukraine is far more robust, as it is for the regional behemoths of Russia and Turkey – all of these benefitting from large domestic markets.

� Even more promising is the extent to which industrial production has grown over the last 12 months, with very strong growth forecasts predicted for 2011 in all markets. Slovakia saw a very positive rebound in 2010, driven mostly by the

automotive industry. The Czech Republic, Poland and Hungary also witnessed a significant growth in output, moreso than the likes of Bulgaria and Romania further south and east. We put this down to their greater proximity and accessibility to market, the market being western Europe and notably Germany, where the vast majority of demand for exports produced in the CEE region emanates.

� That said, production growth is forecast to rise stronger in the more peripheral markets in 2011, largely matching the growth prospects of other countries across the region.

GROWTH IS NOT WITHOUT RISKS � Despite the positive news, growth

forecasts for the region are not without downside risks. Inflation is expected to rise or remain stable in most countries, which could dampen a recovery if interest rates follow. Perhaps more worryingly, the potential rising cost of debt & poor government bond ratings is also likely to dampen growth prospects, leading to more conservative growth estimates in 2011. The austerity packages many economies need to adhere to will also dampen consumption prospects, although providing more stable economic fundamentals in the long-term.

� Equally, positive growth does not necessarily translate directly into increased demand for more space. The abruptness and depth of the recent crisis created a significant pool of ‘unused capacity‘ in all the markets which were recessionary. This only started to get absorbed in 2010. Until economic output is back to par, which remains around 12 months away if not longer for some countries, this will continue to dampen the demand for office and retail space in 2011.

� Industrial demand, however, is already back especially in those markets closest to Germany. This should spread immediately south to Slovakia in 2011, but it may not necessarily spread any further than Hungary.

20.0

15.0

10.0

5.0

0

FIG. 3: INDUSTRIAL PRODUCTION: 2010 V 2011

▄ 2010 ▄ 2011

|

Bulgaria|

CzechRepublic

|

Hungary|

Poland|

Romania|

Russia|

Slovakia|

Turkey|

Ukraine

Source: Focus Economics

10.0

5.0

0

-5.0

FIG. 1: GROWTH: 2010 V 2011

▄ 2010 ▄ 2011

|

Bulgaria|

CzechRepublic

|

Hungary|

Poland|

Romania|

Russia|

Slovakia|

Turkey|

Ukraine

Source: Focus Economics

10.0

5.0

0

-5.0

FIG. 2: GENERAL CONSUMPTION: 2010 V 2011

▄ 2010 ▄ 2011

|

Bulgaria|

CzechRepublic

|

Hungary|

Poland|

Romania|

Russia|

Slovakia|

Turkey|

Ukraine

Source: Focus Economics/Colliers International

Research: [email protected]



OFFICE MARKET

OVERVIEW � Over the course of 2010 we have

wtnessed the office market move toward stablisation as a whole across the CEE region. Vacancy rates, on average, appear to have flattened out at 18%, having risen significantly over 2008 and 2009 from ‘unsustainable’ lows of ca. 5% in 2007.

� We expect vacancy to stabilize further in 2011, but to varying degrees by market. Kiev and Warsaw had already witnessed an overall decline in vacancy rates by end 2010, whilst the likes of Sofia may see vacancy rates climb further in 2011.

� Prime rents had stabilized by year-end in all markets. Indeed, prime rents in Kiev had already started to increase by Q3 2010 (although it is worth bearing mind the market suffered from a 50% peak-to-trough fall in rents following the onset of the crisis) and prime rental growth is imminent in Warsaw as we head into 2011. These appear to be the only markets supporting prime rental growth in 2011, with all other markets remaining stable.

� Average rents mirrored prime rent trends, falling and then stablising in most markets over the year. The outlook for 2011 is somewhat different, however, with no growth anticipated amidst a general flight to quality stock by occupiers. Only stock located within the core, central areas and key business districts appear to have a strong chance of sustaining average rental levels in 2011.

� The significant volumes of availability in the major capital cities, bar Warsaw and Moscow, but especially in the likes of Sofia, Budapest and Bratislava, may lead to a continued fall in average rents in 2011 before stabilizing.

SUPPLY V. DEMAND � In order to gain a more strategic

overview of the overall recovery and growth position of each market, we can

start by looking at the balance between office supply and demand (availability v. take-up).

� Fig. 6 provides an outline of the potential ‘absorption rate’ of office stock per city, assuming an 8% vacancy rate to be ‘zero’. The vacancy rate of 8% is chosen as this is typically the lower point of the natural vacancy rate band, at which point rents are likely to grow. Once vacancy gets below 6%, rents typically grow at a much more aggressive rate.

� The number of years, or the ‘absorption rate spread’, is determined by the best and worst years of take-up relative to the current level of availability within each market (availability = the sum of existing vacant stock + stock actively under construction).

� For example, if take-up in Prague were to match the best years of take-up witnessed (in 2006) it would take less than 1 year to get back to 8% vacancy from ca. 14% today. Equally however, if take-up were to remain at the lows of 2009 it could take-up to four years for the market to recover to a position which would support rental growth across the market. Alternatively, Warsaw represents very limited absorption risk given that vacancy is already sub 8%. Combined with a very limited pipeline and economic growth driving take-up, availability remains tight and rents are expected to grow in 2011.

� The absorption point for all markets, of course, is most likely somewhere in the middle, although younger markets such as Kiev and Bucharest - yet to see their best years of take-up - should recover quicker than the more mature markets.

� Put simply, the wider the spread the better the position is for occupiers versus developers. Most markets continue to be oriented to occupiers in the short term.

30.00

25.00

20.00

15.00

10.00

5.00

0.00

20.0%

18.0%

16.0%

14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%

FIG. 4: AVERAGE VACANCY AND RENTS

▬ Prime Rent ▬ Average Rent ▬ Vacancy

|2000

|2002

|2003

|2005

|2007

|2009

|2001

|2004

|2006

|2008

|2010

Source: Colliers International

60%

50%

40%

30%

20%

10%

0%

FIG. 5: PEAK-TO-TROUGH CHANGE IN RENTS

| | | | | | |

Kiev

Bucha

rest

Budap

est

So�a

Warsaw

Bratisl

ava

Prague

▄ Average Rent ▄ Prime Rent


Chan

ge, %

9

8

7

6

5

4

3

2

1

0

FIG. 6: AVAILABILITY V TAKE-UP

| | | | | | |

Warsaw

Prague Kie

v

Bucha

rest

Budap

est

Bratisl

ava

So�a


Num

ber

of y

ears




STRATEGIC POSITION � Fig. 7 gives an indication of the

longer-term development potential of office markets. This is based on the current supply of office space relative to more mature western European capital cities of a similar size, in terms of Sqm per 1,000 population (where the western European average ranges between 2,500 – 3,000 Sqm).

� From this simple quantititave analysis, locations such as Kiev and Bucharest, the youngest markets, appear to have the greatest capacity to grow from a ‘strategic supply perspective’. At the other end of the scale are Prague and Bratislava, which look very close to capacity. In the ‘middle-section’ lie Warsaw, Sofia and Budapest which offer some further development growth of office stock over the medium-longer term. On the surface, one can develop an inkling as to which markets are good targets for developers.

� From a qualitative perspective, a different picture emerges. So, whilst the overall volume of stock is close to capacity in Prague, the quality of stock may not be as over 60% of stock is over 10 year old, and 35% over 10 years old. While this is not necessarily an accurate indication of quality, it does provide some indication that a high proportion of stock will soon become technically obsolete in Prague. This provides developers with a different ‘refurbishment and redevelopment’ opportunity, but an opportunity nonetheless. The question is, what to build?

� We believe there are two significant factors to consider to ensure the long-term sustainability and success of an office asset in line with changing market trends and demands.

� The first key factor is the extent to which a building is certified as being green/sustainable. To date only around ten office buildings are registered to a high enough standard by either BREEAM or LEED across CEE/SEE. A very small

amount. The trend, however, shows that a further 100 or so are in the pipeline to be certified illustrating that developers and owners are now taking this more seriously as a must have, rather than a nice to have.

� Given that the actual construction of green office space is no longer prohibitive in cost, and the fact that the right construction can save operational costs, the use of energy and boost the CSR profile of occupiers, we see this as a real differentiator for developers in future. This is especially in a world of rising energy costs. By future we do not necessarily mean 5 – 10 years away, but now. Especially when one considers the competition for occupiers between developers which is likely to play out in a number of markets over the next few years.

� The other important factor to consider is the way we work and how this is changing our use and needs for office space. Continual improves in ‘mobile’ technology and the use of handheld/tablet devices alongside alternative working strategies – i.e. remote/flexible working, hot desking and more efficient use of space is already changing how office space needs to be configured to meet modern demands.

� This will ultimately change the use and format of office space, most likely leading to a reduction in the volume of office space which has traditionally been required and thus reducing the quantitative argument for developers.

PROGNOSIS � The overall message is that the need

for space improvements will provide developers and property companies with a new opportunity and/or challenge. Especially in markets which are otherwise saturated – notably Prague and Bratislava. Bucharest and Kiev should continue to provide traditional development opportunities but not to the extent one may think as capacity requirements fall.

OFFICE MARKET

|

Bratislava|

Warsaw|

Bucharest|

Prague|

Budapest|

So�a|

Kiev

3,000

2,500

2,000

1,500

1,000

500

0

FIG. 7: STRATEGIC LONG-TERM SUPPLY (sqm/’000 capita)

▄ Under 5 yrs old & Pipeline ▄ 5-10 yrs old ▄ Over 10 yrs old

West European Average


GREEN CERTIFIED BUILDINGS IN CEE/SEE

Market Stock* BREEM* Details LEED* Details

Sofia 260 0 1 American Embassy

Prague 414 2Zlaty Andel, BB Centrum Beta (INGREIM)

2CSOB Headquarters (Skanska), City Green Court (Skanska)

Budapest 286 1 Quadrum Office Park (AIG Lincoln) 0

Warsaw 376 0 2

Bucharest 134 2Lakeview (AIG Lincoln), Euro Tower (Cascade Group)

0 Atrium City (Skanska), Atrium Center (Skanska)

Bratislava 251 0 0

Kiev 160 0 0

* Buldings. Source: Colliers International/LEED/BREEAM

SHORT-MID TERM OUTLOOK

Market Forecast'Demand' Growth 2011

Availability/Absorption Rate (yrs) Vacancy at 8%

Warsaw 3.5% 0.75 H2 2011

Kiev 4% 1.5 H1 2012

Prague 1.5% 2 H2 2012

Bucharest 1.5% 2.5 H1 2013

Bratislava 1.75% 3 H2 2013

Budapest 1.5% 3 H2 2013

Sofia 1.5% 3 H2 2013


SUMMARY OUTLOOKDevelopers Market: Now for Warsaw, slightly later for Kiev – rents likely to grow in 2011.

Middle Ground: Prague and Bucharest – rents likely to grow in 2012, perhaps sooner for core/prime.

Tenants Market: Bratislava, Budapest and Sofia – rents unlikely to grow overall until 2012/13, although core/prime rents may rebound sooner.




� Historically, take-up growth in the region has been driven primarily by three types of occupier:

� Companies in the production/manufacturing and assembly sector, which account for ca. 35% of occupied space directly.

� Retailers and wholesalers comprise a much smaller proportion of the market directly at ca. 15%.

� Logistics operators/3PLS which comprise the largest market share, at ca. 50%, their business however, driven by the needs of the manufacturing and retail sectors.

� Overall, however, we would suggest the production/manufacturing and assembly sector is responsible for around 70% of overall take-up. Figure 8 highlights the strong correlation between growth in take-up/demand and industrial production pre and post crisis and even during the booms years of 2006 – 2007.

� During these boom years the market witnessed a ‘quantum leap’ in demand growth as take-up more than doubled across the CEE region overall. This major shift appears to have been driven largely by 3PLs expanding, growth in occupiers associated with the automobile industry & from existing tenants/occupiers grading up from older B-class stock to higher-spec, A-class space. It does not represent a 100% growth in ‘net take-up’, allowing for renewals and renegotiations.

� As industrial production recovered in 2010, we have also seen take-up rebound, from the previous lows of 2009, albeit it to varying degrees by location. As Fig. 9 shows, activity is highly concentrated in three markets: Poland, inc. Warsaw, the Czech Republic, inc. Prague and in Moscow.

� So why such a difference with all the other markets south and east where take-up is significantly weaker? Even

allowing for the fact that some of these markets are less transparent and activity is generated by owner occupation as much, or indeed moreso, than by leasing. It still begs the question(s), why such a difference in demand levels, and is this likely to change in future?

� The reasons for the significant differences are largely obvious and do give some indication of how demand levels may change. Moscow is a very large domestic (practically regional) market in its own right with a population of ca. 13 Mln supporting large volumes of retailing and manufacturing production.

� In the Central European belt, Poland has witnessed sizeable take-up of ca. 1.4 Mln Sqm as a result of being a large, expanding domestic market of ca. 35 Mln of which Warsaw is key. Next in line is Prague and the Czech Republic, where take-up is around two thirds of that seen in Warsaw/Poland. In these markets, the role of industrial production comes much more into play. Take-up has been driven by western European manufacturers who have expanded and or relocated into the central European belt to exploit strong labour skills at lower production costs whilst maintaining strong proximity to market.

� As Fig. 10 shows, all of the Visegrad countries have similarly strong trade relationships with western European countries, especially Germany which accounts for around one third of exports. In fact virtually all CEE/SEE nations, bar Ukraine, have a similar export profile yet the further south and east one goes, the weaker the market in terms of take-up.

� The interesting difference is the extent to which take-up in Slovakia and Hungary has been far more muted than in the Czech Republic despite no proportional difference in market (pop’n) size. All markets are relatively close to market, although Hungary is arguably further afield. The answer seems to lie in operational costs and infrastructure.

INDUSTRIAL MARKET

|

2000|

‘01|

‘02|

‘03|

‘05|

‘08|

‘04|

‘07|

‘06|

‘14|

‘13|

‘12|

‘11|

‘10|

‘09

400

350

300

250

200

150

100

FIG. 8: TAKE-UP & IND. PRODUCTION GROWTH

▬ Industrial Production Index ▬ Take-up Growth Index

1,500

1,200

900

600

300

0

FIG. 9: TAKE-UP TRENDS BY MARKET (,000)

| || | | | | | | | |

Poland

Mosco

w

Czech

Rep

St. Pete

’sKie

v

Hunga

ry

Roman

ia

Greece

Slovak

ia

Bulgari

aSerb

ia

▄ Capital City ▄ R/O Country

100%

80%

60%

40%

20%

0%

FIG. 10: CEE EXPORT PARTNERS

| || | | | | | |

Bulgari

a

Czech

Rep

Croatia

Poland

Hunga

ry

Roman

ia

Russia

Slovak

ia

Ukraine

▄ Other ▄ CIS ▄ M.East ▄ Turkey ▄ Balkans ▄ Asia▄ Japan ▄ China ▄ US ▄ Russia ▄ EU27




INDUSTRIAL MARKET

� When one considers that transport costs typically account for 60% of all operational costs – labour costs typically comprise 30% - this proximity to market factor, driven by high quality infrastructure (roads) is keeping the bulk of companies production and distribution facilities within the central belt territory of Poland and the Czech Republic for now. This is likely to continue for the foreseeable future, although signs of demand spreading south and east have started to happen - Slovakia has stared to witness more signifciant developer interest toward the end of 2010, driven by demand.

� Over the mid-long term what can we expect across the region, and which factors will be the primary drivers of this change?

DISTRIBUTION HUBS OF THE FUTURE – KEY DRIVERS

� From a demand-side, an increase in GDP per capita and disposable income will increase demand from retailers and associated logistics/3PLs across the entire region, in particular further south and east where economies are further behind the growth curve.

� From a supply-side perspective, the following drivers are key:

— The cost and efficiency of production, primarily driven by labour costs, will continue to support a shift of production from northern and western Europe to central and eastern Europe – CEE/SEE country labour costs are at typically least one third the labour cost of western Europe. The further south and east you go, the lower the cost, which would appear to support production moving further south and east.

— Increasing fuel costs and the requirement for a decrease in CO2 emissions will, however, curtail any immediate shift in production away from the ‘central belt’. In order for production to move further south and east, a significant shift in transportation infrastructure and

quality, which can reduce the cost of getting both products to market and obtaining raw materials, is essential.

— Shifts in distribution forms, notably from road to rail, and lower production costs allowing for quicker, more cost efficient delivery will be the catalyst for this alongside improved road infrastructure.

� A shift away from road and air freight (most fuel inefficient/carbon emitting) to sea & rail freight is already happening, for example H&M moving to Panatonni Park in Poznan, Poland. The company has made dramatic changes to the way products are shipped internationally and across Europe over the last few years. International air freight has been reduced to 74% from 100% in the space of a year. Across EMEA more goods are now shipped from Turkey via rail rather than by road, to distribution centres in Poland, Germany and Belgium – the shifts are very significant:

� Rail freight from Turkey to Poland was 10% in 2008 - by 2009 it grew to 87%; from Turkey to Germany it was 22% in 2008 - by 2009 it grew to 62%; and from Turkey to Belgium it was 0% in 2008; by 2009 it grew to 52%.

� In future, this modal shift to rail will support locations which can offer genuine ‘multi-modal’ capabilities, including those which can offer sea freight as an option. This should lead to a shift towards spoke & hub distribution points, rather than activity being concentrated around one or two major distribution hubs.

PROGNOSIS � Over the short-term the central belt is

likely to be the main beneficiary of production/assembly activity. Further south and east, retail will continue to drive demand as planned new roads and infrastructure remain 5-20years from completion. Advances in rail freight could alter the situation sooner.


|

30,000|

50,000|

20,000|

10,000|

0|

40,000|

60,000

BulgariaRomania

LatviaLithuaniaSlovakia

PolandEstonia

HungaryCzech Rep

PortugalSlovenia

SpainFinlandAustria

GermanyFrance

NetherlandsBelgium

UKDenmarkSweden

Luxembourg

FIG. 12: ANNUALISED LABOUR COSTS (€)

T3: CURRENT MARKET POSITION

Market Vacancy Rents Yields2011 Developers MarketsSofia (Bulgaria) 3.9% €4.50 12%

Moscow (Russia) 6.0% €6.55 12 – 13%

Slovakia 8.2% €3.20 – 4.00 8 – 12%

Next in Line for DevelopersPrague (Czech Rep.) 14.4% €3.10 – 3.90 8.5 – 9%

Belgrade (Serbia) 15.0% €3.00 – 4.00 11%

Poland 15.6% €2.40 – 4.50 9 – 11%

Czech Republic 16.5% €3.60 – 4.00 9.5 – 11%

Bucharest (Romania) 15% €3.80 – 4.00 10%

Tenants Markets for 2011Kiev (Ukraine) 22.0% €4.15 – 4.25 14 – 16%

Budapest (Hungary) 21.3% €3.00 – 4.50 9 – 10%

Warsaw (Poland) 21.8% €2.20 – 5.20 8 – 9%

St. Petersburg (Russia) 24.0% €5.45 – 6.65 14%

SUMMARY OUTLOOK Developers Market: Sofia, Moscow & Slovakia, Brno in Czech Republic – where vacancy is below 8%, we may see some rental growth in 2011.

Middle Ground: Poland and Czech Republic, especially regional locations. Rental growth possible at year-end.

Tenants Market: The remaining markets, vacancy unliklely to fall to levels supporting rental growth in 2011.



RETAIL SALES � Despite an improving economic

climate there was no obvious growth in retail sales outside of Poland and Russia in 2010. From mid-2008 to 2010, almost all CEE/SEE markets performed worse than the EU average, a decline of -2.2% (-1.1% per annum avg). Other poor performers include Spain, and perhaps surprisingly Denmark. Poland on the other hand has been the number two performer across Europe since the onset of the crisis, second in line only to Luxembourg.

� The positive news is that with such significant falls comes the greater opportunity of a rebound. As early as 2010 a number of markets in the CEE/SEE area had already started to recover – with growth showing through in Croatia, Romania and the Baltics. The Czech Republic and Hungary have moved closer to neutral, whilst sales in Bulgaria and Slovakia continued to decline by ca. 2%. This does at least represent an improvement.

� As we look forward to 2011 a scenario of economic growth combined with falling unemployment should start to drive the demand for goods. Although those countries faced with strong austerity packages – Romania, Greece, Ukraine and to a degree Hungary are unlikely to see particularly strong retail growth in 2011.

� With a view to the longer term i.e. up to 2020, retail demand growth forecasts for all CEE markets are very positive at 40% on average over a 10 year period –double the forecast growth of the Eurozone. Much better news for shopping centre owners and investors, especially those capable of capturing new retailers looking to expand and/or consolidate in the region.

RENTAL CHANGE, HIGH-STREET AND SHOPPING CENTRES

� As a whole the Central and Eastern Europe region posted average rental growth of ca. 2% in 2010. This does,

however, mask some considerable differences in performance. Kiev, for example, experienced a strong recovery in prime rental levels with a recorded rise of 30%. In contrast, Bratislava and Budapest saw rental falls of 11% and 8% respectively whilst no change was recorded in Prague, Warsaw or Bucharest.

� Rental growth in South Eastern Europe was slightly negative at ca. -0.8%, driven by falls of 4% in Sofia whilst all other markets remained neutral. In Russia, rental rates in Moscow have increased by 25% over the year, whilst rents in St Petersburg have fallen by ca. 6% over the year.

� Whilst growth on the high street was marginally positive, rental growth in shopping centres was broadly negative at -2.7%. Only Russia posted positive growth across the whole territory – recording an increase of 12% in Moscow over the year, with minor growth of 0.5% posted in St Petersburg.

� Of the remaining cities, 50% saw no change in rents – Warsaw, Prague, Budapest, Zagreb and Tirana. Whilst Sofia, Kiev, Belgrade, Athens, Bratislava and Bucharest all recorded rental falls ranging from 2.5 – 13.3%.

� So overall, there have been some quite disparate levels of performance as one would suspect but with some suprising results. Notably Bratislava suffering more than any market in both prime shopping centres and across the high street.

� Perhaps more suprising is the fact that there have been very limited declines in prime high street rents, and to a degree prime shopping centre rents, over 2010 despite such a strong fall in retail sales.

� This could partially be explained by the fact these changes only refer to the prime high street and shopping centre locations. Given the general flight to

RETAIL MARKET


|

-20|

-10|

-5|

0|

5|

-25|

-30|

-35|

-15|

10

LatviaLithuania

EstoniaGreece

RomaniaBulgariaSlovakiaCroatia

DenmarkHungary

SpainCzech Rep

EU AverageItaly

GermanyUK

SwedenFrance

SwitzerlandPoland

Luxembourg

FIG. 13: RETAIL SALES GROWTH, MID’08–MID’10

|

30%|

50%|

60%|

20%|

10%|

0%|

40%|

70%

GermanyItaly

GreeceEurozone

NetherlandsSpain

FranceUK

DenmarkIreland

Czech RepHungarySlovakia

PolandBulgaria

RussiaRomania

Turkey

FIG. 14: RETAIL DEMAND FORECAST, 2020

Source: Experian

|

-5%|

5%|

10%|

15%|

20%|

25%|

30%|

-10%|

-15%|

-20%|

0%|

35%

Bucharest

Bratislava

Athens

Belgrade

Kyiv

So�a

Zagreb

Warsaw

Tirana

Prague

Budapest

St Pete’s

Moscow

FIG. 15: RENTAL CHANGE BY MARKET, 2010Source: Colliers International

▄ High Street Rental Change ▄ SC Rental Change



RETAIL MARKET

quality during the crisis, we suspect the impact has been more damaging to many secondary locations.

� For instance, the main high street has the ability to benefit from a diversified demand-base comprising tourism and passing business/discretionary trade, which should continue to underpin demand and performance irrespective of an economic crisis. A similar argument can be put forward for the large prime shopping centres, who continue to attract lots of city-wide trade, retail parks and outlets offering a well-planned budget offer at the opposite end of the scale and community retail centres which continue to offer a solid, local offer.

� Centres operating in the middle ground, however, with no significant USP are the most likely to suffer. Especially those in locations where the volume of retail space is quite saturated.

� Judging by Fig. 16 a number of cities already look fully saturated from a population catchment perspective, relative to western European and Nordic capacity levels. Bratislava appears to be somewhat alarmingly oversupplied, whilst Prague, Warsaw, Zagreb and St Petersburg also look to be fully developed markets. Even the less mature, southern markets such as as Sofia, Kiev and Tirana appear to be quite fully developed.

� All markets across New Europe, especially the most saturated group, do pose some interesting challenges for existing shopping centre owners especially where there is limited diversity of offer. Fig. 17 for example highlights the extent to which there is a limited mix of traditional and specialized shopping centres – specialized being the retail park and factory outlet end of the spectrum. This is especially the case in the Russian cities which appear to provide a real opportunity for this type of development – either as new, or as redevelopment/reconfigurations – given

the complete lack of these types of facilities.

� In the more traditional shopping centre market sector, shopping centre owners will need to take steps to improve not only core retail environments but also accompanying catering and leisure facilities at their centres. This is a vital step if they are to continue to attract shoppers, who are increasingly technologically aware and more inclined to shop from the comfort of their home when not given a compelling reason to leave it. In fact, the expansion of internet shopping could severly dent the relative success of many a shopping centre which does not move with the times.

PROGNOSIS � Colliers expects the retail property

market across much of Central & Eastern Europe to buck the trend seen in Western Europe, with sharply increasing domestic consumption expected to be a key driver of retail sales growth across the region over the mid-long term. International brands began to show renewed interest in select areas of Eastern Europe in 2010, with TK Maxx experiencing its best ever opening in Europe with its first store in Warsaw. Strong retail sales figures in Poland over the next year and beyond will only serve to encourage this further. It may take some of the other eastern European markets another year to show more sustainable growth as unemployment starts to fall.

� We expect locations that did not see excess development during the boom years to see retail rents improve in the short to medium term, particularly where centres are upgraded to meet modern demand standards. We may also see increasing forms of diversity in town centres, notably more ‘department store’ type developments – again changing the overall shopping offer, such as the Mystore andVanGraff stores in Prague. This should encourage increasing investment in the market.


1,200

1,000

800

600

400

200

0

FIG. 16: RETAIL STOCK BY COUNTRY (SQM/1,000 CAPITA)

| || | | || | | | || |

Bratisl

ava

Warsaw

Prague

Zagre

b

St Pete

’s

Athens

Budap

est

Tiran

a

Mosco

w

Bucha

rest

So�a

Kiev

Belgrad

e

▄ Capital City ▄ R/O Country


Nordic Average

West European Average

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

FIG. 17: TRADITIONAL/SPECIALISED STOCK (SQM MLN)

| || | | || | | | || |

Mosco

w

Warsaw

St Pete

’s

Budap

est

Prague

Zagre

b

Athens Kie

v

Bratisl

ava

Bucha

rest

So�a

Tiran

a

Belgrad

e

▄ Traditional ▄ Specialised


|

2006|

2007|

2009|

2008|

2010|

Pipeline

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0

FIG. 18: EVOLUTION OF RETAIL STOCK (SQM MLN)


▄ Traditional ▄ Specialised

P. 12 | CollieRS inteRnAtionAl Research: [email protected]


� With regards to the investment market, a recovery in values and transaction volumes began to show though in 2010 driven primarily by activity in Poland and Russia. Transaction volumes over the year reached an estimated €6.47 Bln, including Russia, CEE & SEE. This represents a 50% increase compared to 2009 when investment volumes recorded were €4.32 Bln.

� Of this, almost three quarters were recorded in Russia (44% at €2.872 Bln) and Poland (29% at €1.9 Bln). Outside of these territories, the other deals were recorded primarily in CEE (20% at €1.25 Bln), the majority of which were in the Czech Republic. Only €0.45 Bln of deals (7%) occurred in SEE nations – Croatia and Greece being the locations of choice.

� That said, contrary to 2009, deals have now been transacted for good quality stock outside of Russia, Poland and the Czech Republic with deals occurring further south and east. In particular a €100 Mln, prime office deal transacted in Bucharest at the very end of 2010 – the first ‘prime/core’ deal since 2006.

� Combined with some deals in Hungary and Slovakia it is a sign that investor interest is eventually thawing and spreading out to ‘non-core’ markets. Based on investor interest at the start of 2011, this is a trend which is likely to continue throughout the year as the investor base grows, including non-core investors seeking higher yields to match their return requirements.

� As Fig 20. Highlights, yields have moved in such a manner to create almost four separate pricing levels: Prime Poland; Prime Core CEE – comprising Prague, Budapest and Bratislava; Fringe CEE – comprising Bucharest, then Sofia and Zagreb; then outer CEE – notably Kiev, which is much in line with Moscow.

� As we all know, yields have comprseed over time moving much more in line with, but at a risk premium to, prime European yields – in this example London. Over the crisis period there was a noticeable lag-time response of around 6 – 9 months of the various CEE submarkets reacting to yield movements in the UK.

� As we have moved out of the crisis, the most interesting trend has been the extent to which Poland has split from the Core CEE pack, with prime office yields now at close to 6%, rather than the other core markets which are closer to 7%. All the other markets are priced accordingly, reflecting the various risk factors which drive higher pricing in these markets.

� So while the market and investment cycle is on the way back up, what can be expected as we head into 2011? A number of factors come into play in the capital markets/investment arena, from a supply, demand and pricing perspective:

PRICING � Pricing (yields) are currently fairly

priced, all things being equal relative to current return targets as per Fig. 21. That said, a picture of rising interest rates and bond rates will place upward pressure on the cost of money, which in turn places upward pressure on yields. If we consider that German government bond rates rose 30 basis points over a 3 month period to the end of 2010, this would already cut into returns and place rental growth pressure on office markets such as Warsaw and Bratislava. A similar picture would be apparent for prime shopping centres.

� As we have previously pointed out, rental growth in Warsaw – for both sectors – seems very probable. Much less so in locations suich as Prague and Bratislava, so there is very limited scope for yield compression in these markets. This could shift investor interest further afield as investors seek yields which match target returns.

INVESTMENT MARKET

|

2005|

2007|

2004|

2003|

2002|

2000|

2001|

2006|

2010|

2009|

2008||

20

18

16

14

12

10

8

6

4

2

0

FIG. 19: NEW EUROPE INVESTMENT VOLUMES (€ BN)

▄ Russia ▄ CEE ▄ SEE


|

2003|

2004|

2005|

2007|

2008|

2006|

2010|

2009

18%

14%

10%

6%

2%

FIG. 20: PRIME YIELD MOVEMENTS OVER TIME

▬ UK Prime ▬ Warsaw ▬ Core CEE ▬ Fringe CEE ▬ Outer CEE


12%

10%

8%

6%

4%

2%

0%

FIG. 21: RETURNS, RISK PREMIUMS & PRIME OFFICE YIELDS

|LondonPrime

|Prague

|Bratislava

|So�a

|Warsaw

|Budapest

|Bucharest

|Kiev

RiskPremium

RiskFree Rate

▄ Current German Government Bond Yield ▄ Cap EX ▄ Defaults▄ Liquidity ▄ Equiv. Prime Office Yield


CollieRS inteRnAtionAl | P. 13Research: [email protected]


INVESTMENT MARKET

� Equally, bank margins (on the cost of debt) are also likely to rise as a result of the shrinking pool of debt, raising the overall cost of capital further. This negates any genuine capacity for further yield compression in the majority of markets. In fact, we may even see rising yields over the next 24 months. The critical component to better understand is debt.

DEBT � The overall volume of debt available

to the property market in Europe continues to reduce, creating a double-negative impact on the property market:

� Firstly, banks continue to deal with write-downs and internal requirements to improve their liquidity levels. This has led to much lower levels of debt being made available to property as a whole. A trend which is likely to continue for the foreseeable future.

� This is reflected in the reduced number of banks active across the market, as per Fig. 23 – relative to the number of banks offering development and investment finance pre-crisis (in many cases it is less than half). At the central banking, senior-debt level, it appears that only Warsaw/Poland, Prague/Czech Republic and Moscow are deemed as viable core investment options worthy of debt. It is also reflected in much lower loan to value ratios of ca. 60% being in operation now, relative to the 85%+ of the boom years. Overall, this equals less debt to go around and to compound this issue is the aspect of re-financing.

RE-FINANCING & VALUES � If one considers that the typical

finance term is for five years, 2011 will see a number of assets purchased and financed in 2006 coming back to market for renewal or roll-over. According to our analysis, based on values rising in 2011 relative to 2006 – as a result of yield compression and higher rents – assets will be in positive valuation territory, but only marginally.

� Concurrently, the debt shortfall created by lower loan-to-value ratios on offer now, relative to 2006 is not so significant and many banks will view the positive value upside as enough to warrant providing the additional debt required. This partially explains why so few ‘distressed’ assets have come to market to date.

� When we look at 2007 values relative to those likely in 2012, however, we have a very different scenario - one of significant value downside combined with a significant debt shortfall. This is highlighted by Fig. 25. If we take these forecasts at face value this would eliminate the equity of the owner and create the need for an additional 50% of debt. This could force a major shake-up in the market, driving a large number of debt or equity share deals in 2011 and 2012. Especially when one considers that more assets were acquired during 2006 and 2007 than at any other point during the last ten years.

� It is no coincidence that a number of banks across Europe are being reported as posting significant writedowns. On the positive side, there are an equal number of reports concerning new debt, mezzanine and equity funds being established to seek out the opportunities created by this short-fall. Combined with the volume of equity waiting in the wings and provided yields do not compress much further, we could see a a further increase in the volume of deals in 2011.

10%

8%

6%

4%

2%

0%

FIG. 22: FINANCIAL GAP & PRIME OFFICE YIELDS

▄ EURIBOR+margin ▄ 3m EURIBOR ▬ CEE Core Prime Office Yield

|

Q42005

|

Q42007

|

Q42006

|

Q22006

|

Q22007

|

Q22008

|

Q42008

|

Q22009

|

Q42009

|

Q22010

|

Q22011

|

Q42010

|

Q42011

|

Q22012

|

Q42012


|

Poland|

Bulgaria|

Czech Rep.|

Slovakia|

Hungary|

Romania|

Ukraine

40

35

30

25

20

15

10

5

0

FIG. 23: NUMBER OF ACTIVE BANKS

▄ Number of Banks Historically Active ▄ Banks Actually Providing Investment Funding


7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

FIG. 24: IMPACT OF LTVs ON DEBT REQUIREMENT

▄ Debt ▬ Equity ▬ Office CV

|

H22004

|

H22008

|

H22006

|

H22005

|

H22007

|

H22009

|

H22010

|

H22011

|

H22012

Pre-crisisLTVs@

80-85%

Post-crisisLTVs@60%


7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

FIG. 25: 2012 VALUE & DEBT GAP CONUNDRUM

▄ Debt ▬ Equity ▬ Office CV

|

H22004

|

H22008

|

H22006

|

H22005

|

H22007

|

H22009

|

H22010

|

H22011

|

H22012

Pre-crisisLTVs@

80-85%

Post-crisisLTVs@60%

2007 Deal

www.colliers.com

new europe 2011 real estate review

Real Estate

average rents

occupational growth

average forecast

growth inregional director

new europe job uncertainty

positive gdp growth

muted growth inretail

market cycles