Another strong year. DTZ Research INVESTMENT MARKET UPDATE. Poland Contents. Author. Contacts

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1 DTZ Research INVESTMENT MARKET UPDATE Another strong year Poland nd of February, 2015 Contents Macroeconomic background 2 Investment volume 3 Source of capital 4 Preferred locations 5 Yields 6 Outlook 6 Definitions was another strong year in the investment market in Poland, with a total of EUR 3.03 billion having been transacted in the commercial real estate sector, which made up almost half of the investment volume dealt in the CEE region. This total is comparable to the result gained in 2013 and exceeded the 2012 figure by 22%. Transactions in the office sector dominated 2014, unlike in previous years, accounting for over 5 of the total value of all transactions. Office buildings located in Warsaw continued to be the most sought-after asset class. Property buyers, however, have been starting to interest in the highest class schemes situated in major regional cities in Poland being favourable destinations for the BPO/SSC occupiers. Since 2012 the industrial sector has been gradually gaining in importance, with a record investment volume over the past twelve months reaching EUR 706 million which translates into the 23% share. Portfolio assets are invariably preferred by most active purchasers. The retail sector, with reported EUR 562 million of the transaction volume, shared 19% of the total volume. The abated position of the retail investment sector resulted mainly from a low availability of premium class assets offered for trading. The situation is expected to improve in the first half of 2015 due to a number of ongoing transactions. Prime office yields dropped slightly below 6.0 at the end of Yields for prime retail assets remained stable at 5.75%, yields in smaller cities compressed slightly. Author Patrycja Dzikowska Associate, Consulting & Research patrycja.dzikowska@dtz.com Contacts Kamila Wykrota, Consulting & Research kamila.wykrota@dtz.com Magali Marton Head of EMEA Research magali.marton@dtz.com Hans Vrensen Global Head of Research +44 (0) hans.vrensen@dtz.com Over the last twelve months, prime yields for industrial properties dropped from 7.75% to 7.5 and below. This is clearly triggered by the increasing attractiveness of the industrial sector for investors seeking for diversifying their property portfolio. Figure 1 Investment volume (EUR million) and number of transactions Investment volume (EUR mil) Number of transactions (rhs) Investment Market Update 1

2 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Jan2005 Jan2006 Jan2007 Jan2008 Jan2009 Jan2010 Jan2011 Jan2012 Jan2013 Jan2014 Jan2015 Poland 2014 Macroeconomic background Economic growth and inflation In 2014, Polish economy has noticeably accelerated after two years of moderate growth. According to the National Bank of Poland (NBP), the GDP growth in 2014 amounted to 3.2% compared to 1.6% registered in In the first half of the year, Poland has remained resilient to the political and economic unrest in Europe. In H2 2014, however, the continued decline in the economic activity in the European Union has slightly curbed national economy through the deterioration in the trade balance and the general sentiment in the enterprise sector. Consumption was the main component that boosted GDP dynamics. Due to improving labour market conditions and gradually increasing households purchasing power, the trend is expected to continue in the coming years. GDP growth forecasts for 2015 and 2016 oscillate around 3%. Over 2014, the consumer price index reach 0. which has resulted from the general economic situation, as well as supply factors, including a decrease in food and oil prices. As a result of the deflation observed since July 2014, the Monetary Policy Council reduced in October the reference rate by 0.5 pp to the level of 2.. Low interest rates buoy demand for credit and hence spur consumption. Currency exchange Although over the first eight months of 2014 the Polish zloty appreciated against euro and dollar, the trend was reversed in the months that followed. The exchange rates, both in terms of euro and dollar, have slightly increased to the level of 4.22 EUR/PLN and 3.43 USD/PLN in December The depreciation of the national currency is correlated with poor economic performance, specifically in the Eurozone, and political tensions in the Polish economic environment. The exchange rate against dollar is additionally influenced by the improving situation in the US economy. Retail sales Over 2014, the retail sales in constant prices increased by 4.1% y-o-y, with the most dynamic growth observed in the first two quarters when the average indicators fluctuated between 5% and 5.5%. The main drivers of this dynamics include the nominal growth of salaries, increasing employment and also deflation, which translates into higher purchasing power. Labour market The situation in the Polish labour market has markedly improved over the year As of the end of December 2014, the unemployment rate amounted to 11.5%, compared to 13.4% observed in December In 2014 the average monthly salary in the enterprise sector increased to the level of PLN 3,980 up by 3.7% compared to Figure 2 GDP growth and inflation rate in Poland 8% 7% 6% 5% 4% 3% 2% 1% Source: National Bank of Poland, (f) - forecasts Figure 3 Reference rate in Poland 7% 6% 5% 4% 3% 2% 1% Source: National Bank of Poland Figure 4 Retail sales in Poland 10, 8, 6, 4, 2, 0, -2, -4, GDP growth Inflation rate Source: Central Statistical Office Investment Market Update 2

3 Investment volume Another strong year 2014 was another strong year in the investment market in Poland, with a total of EUR 3.03 billion having been transacted in the commercial real estate sector, which made up almost half of the investment volume dealt in the CEE region. This total is comparable to the result gained in 2013 and greatly exceeded the 2012 figure by 22%. The continuing high level of investment activity in Poland reflects investors positive perception of the fundamentals of the Polish economy, demonstrated by the past year s sound results. The last quarter of 2014 ended with a total of EUR 1.16 billion, driven mainly by a number of acquisitions valued above EUR 100 million each, closed across all sectors (e.g. purchase of a Metropolitan office building by Deutsche Asset & Wealth Management, a Plac Unii mixed-use asset by Invesco, a Panattoni portfolio of warehouses by PZU AM). The office sector dominated the market Transactions in the office sector dominated during 2014, unlike in previous years, accounting for over half of the total value of all transactions. Five major sales in the office segment (Rondo 1, Metropolitan, Lipowy Office Park, Quattro Business Park and Ghelamco portfolio of three properties) involved EUR 902 million and accounted for as much as 51% of the total transaction volume in this sector in Office buildings located in Warsaw continued to be the most sought-after asset class. This results from the maturing of this market and, consequently, the highest availability of investment products. However, following the trend noticed in 2012 and 2013, the property buyers have been starting to interest in the highest class schemes situated in major regional cities in Poland, especially Kraków and Wrocław. This trend reflects the decreasing risk aversion of investors connected with their overall positive market outlook, as well as the increasing maturity of the office markets outside Warsaw. Since 2012 the industrial sector has been gradually gaining in importance, with a record investment volume over the past twelve months reaching EUR 706 million which translates into 23% share. The retail sector, with reported EUR 562 million of the transaction volume, made up just 19% of the total transaction volume. Retail sector dwindled slowly over 2014 Retail schemes in smaller cities gain in importance The abated position of the retail investment sector over 2014 resulted mainly from a low availability of premium class assets offered for trading. Investors' appetite, although hearty, has been curbed by a deficit of premium quality stock for sale. The situation is expected to improve due to a pool of products disposed for sale in the end of Consequently, a number of ongoing transactions is supposed to be concluded in the first half of In contrast to a busy 2013, when four prime assets with a total value of almost EUR 1 billion were transacted, only two Figure 5 Investment volume by sector Table 1 Major investment transactions in Poland in 2014 Sector Office Retail Industrial Figure 6 Property / Location Rondo 1 / Warsaw Ghelamco Potrfolio / Warsaw, Katowice Metropolitan / Warsaw Poznań City Centre / Poznań Focus Mall / Bydgoszcz Galeria Mazovia / Płock Panattoni Park / Poznań, Stryków, Mysłowice Panattoni Park / Łódź, Poznań, Gdańsk Tristan Park / Pruszków, Łódź, Poznań Investment volume in the office sector by location Office Retail Industrial Mixed Use Warsaw Other cities Investment Market Update 3

4 comparable deals were closed over 2014 (Poznań City Centre and Focus Mall in Bydgoszcz). While prime retail schemes in the largest Polish agglomerations with established positions on the market are still the most sought-after asset class, investors interest has been gradually shifting towards smaller projects located in regional cities. The best secondary class assets with established positions in their respective regional markets and identified upside opportunities have gradually drawn higher interest from potential investors, thus compressing yields slightly. The majority of transactions concluded in 2014 involved retail schemes located in medium-sized cities. 6 of the transaction volume was generated in cities populated below 400,000. Interestingly, we have noticed a growing interest from individual investors building their portfolios and searching for small retail schemes of high quality. Industrial properties continue to attract more interest Following the strong growth reported over , the industrial segment continued to gain market share and posted a 2 growth in With investment transactions worth EUR 706 million, the industrial sector set a new record. Portfolio assets are invariably preferred by most active purchasers. The strong interest from investors in acquiring prime industrial assets has remained stable. Three major portfolio acquisitions of prime properties (Panattoni portfolio by PZU AM, Panattoni industrial parks by Blackstone, and Tristan properties portfolio by SEGRO), each worth above EUR 100 million, made up half of the transacted volume. High investment activity in the industrial sector has resulted from its positive development, due mostly to strong tenant demand, falling vacancy rates and stable rents, combined with a perspective for growth in the most attractive locations. The industrial market is developing in a healthy way, with the majority of new supply being built-to-suit developments or warehouse properties with secured high levels of pre-let. Source of capital Foreign investors still the most active Similarly to 2013, foreign investors were responsible for approximately 92% of all acquisitions in Poland in Polish investors purchased properties with a total value of approximately EUR 258 million, including the large acquisition of Panattoni portfolio of warehouses by PZU Asset Management. In contrast to the previous couple of years, when German capital drove the Polish investment market, over 2014 we have seen the activity of German investors reduced to an approximated 21% share in transaction volume due to termination of German open-ended funds. At the same time, American investors increased their presence in the Polish market and were responsible for as much as one third of the transacted sum. The most active American players include Starwood Capital Group, WP Carey and Prologis. Figure 7 Investment volume in the retail sector by location (EUR million) Figure 8 Annual volume of transactions in the industrial sector (EUR million) Warsaw agglomeration Other agglomerations > 400,000 inh. Other cities < 400,000 inh. Multi-city/portfolio transactions Investment Market Update 4

5 Austrian capital manifested its importance for a second year in a row (e.g. Vienna Insurance Group and Atrium RE) with purchases reaching 8% of the total transaction volume. Capital from pooled global funds maintained its importance with a 24% share in the commercial real estate investment market. Private property vehicles strengthened further their dominant market position Over the last decade private property vehicles have been the most important participants in the Polish investment market and the volume of their acquisitions has accounted for more than 55% of the total transaction value during this period. Over 2014, private property vehicles have further increased their position, with a total volume of transactions of almost EUR 2.24 billion, i.e. 74% market share. Quoted property companies and vehicles have been in the second place, with a market share oscillating between approximately 2 in the preceding years and 15% in Other types of investors were responsible for a relatively small number of investment acquisitions. Preferred locations Increasing interest in regional markets 2014 was the third consecutive year when Warsaw has been steadily losing its position as the preferred location for investors acquiring properties in Poland. The share of transaction volume involving properties situated in Warsaw has steadily decreased from 62% of the transaction volume in 2011 to 42% at the end of Compared to the period between 2011 and 2013, 2014 saw the portion of capital that was invested in smaller Polish cities populated by less than 400,000 residents grow markedly. This trend is most clearly visible in the retail sector, with acquisitions summing up to EUR 310 million, which is more than a half of the transaction volume concluded in the retail segment in Poland over Major transactions include Focus Mall in Bydgoszcz (purchased by Atrium European RE), Galeria Mazovia in Płock (purchased by CBRE GI) and Galeria Piła in Piła (acquired by Immofinanz). Figure 9 Investment volume by nationality of investors Figure 10 Investment activity by type of investor Public Sector International/other UK & Ireland Rest of Europe Poland Nordics Middle East Germany France Austria Americas Private Property Company Other / Unknown Institutions Listed Sector Private Property Vehicle A number of investors, particularly those well established in Poland and familiar with specifics of regional markets, acquired office assets located in major agglomerations other than Warsaw for EUR 319 million (equal to 2 of the transaction volume concluded in the office sector). Mature BPO / SSC destinations with healthy economic indicators (such as Kraków and Wrocław), were the most preferred locations. Figure 11 Total investment volume by location multi-city/portfolio transactions other cities < 400,000 inh. agglomerations > 400,000 inh. Warsaw agglomeration Investment Market Update 5

6 Yields Prime yields compression in the industrial sector, stable in retail and office. Throughout 2014 yields for prime office assets (top quality projects in Warsaw city centre) lowered below 6.0. Yields for secondary assets have waned to a lesser degree. This is due to a strong pipeline supply and downward pressure on rents expected for some non-central business districts in Warsaw. Over 2014 yields for prime retail assets remained stable at 5.75%. Throughout the last months we have noticed a downward pressure on yields in the smaller cities. Prime yields for industrial properties dropped from 7.75% to below 7.5 over the last twelve months. Outlook Significant office supply from the two previous years and a substantial amount of pipeline projects may adversely affect vacancies and rental levels and, consequently, mute investors' demand in this sector over Prime properties are relatively resistant to turbulence within the sector, and as such will remain in high demand. Well established regional markets would attract a growing number of investors. Over 2015, transactions may be concluded in other locations such as Tri- City, Poznań and Łódź. Due to the number of good quality retail product put for sale in the second half of 2014, the volume of transactions in this sector in the coming year is anticipated to markedly exceed the result from Larger number of single asset transactions, each priced over EUR 100 million, is expected to be the subject of transactions. Increased availability of best-in class stock will result in the investment volume grow in the retail sector over Noticeably, appetite for secondary locations and value-added assets has been growing. Following the development activity in smaller geographies, and thus the shift of investors towards smaller geographies, we expect further acquisitions in secondary markets. A number of retail portfolios would be put for sale, including a relatively new format of small convenience type retail schemes, thus meeting demand of new participants from the institutional sector who started to search for opportunities and create portfolios of small assets. Although the pool of investors attracted by industrial assets seems to be stable, the upward trend of the past three year may soften due to a lack of best quality product on the market, however, some portfolio transactions may support the market. Given the situation in the office segment, yields for best in class properties are anticipated to remain at the stable level just below 6.0. Yields in the retail segment will settle at 5.75% for prime assets, while for secondary product will compress from to In the industrial sector, following the hearty investors' demand, further yields' compression (below 7.5) is expected over Figure 12 Office investment volume in the major Polish regional cities, Łódź 15% Figure 13 Prime yields in Poland Table 2 Yields for prime and secondary assets in the office and retail sectors - forecast Sector Kraków 19% 10,0 9,0 8,0 7,0 6,0 5,0 Yields forecast Office Prime 6.0 and below 6.0 and below Office - Secondary 7.25% %* Retail - Prime 5.75% 5.75% Retail - Secondary * for selected assets possible further yield compression Tri-City 4% Poznań 15% Wrocław 3 Katowice 17% Office Retail Industrial Investment Market Update 6

7 Definitions Investment transaction / Subject of the report Inclusion in the statistics Property type Refers to the purchase of commercial real estate for the purpose of receiving an income or rent. Covers purchases of properties with commercial use which value exceeds EUR 1 million. Determined by the date of signature of contract. DTZ tracks commercial property transactions made primarily in the office, retail, industrial and mixed use sectors. Land sales are not recorded. Volume of transactions Aggregate of total purchase prices agreed for the registered purchases. Yield The attainable prime yield for top of the range properties is given. This is based on the annual rental income and the purchase price. Purchaser (vendor) type Classification of purchasers and vendors by type enables us to track trends in transactions and also to assess the type of capital committed to property investments. Purchaser/Vendor Type and subtype definitions are as follows: Institution: financial institutions/banks, pension funds and insurance companies. Private Property Company: companies and developers, whose principal activities involve the development, buying and selling of commercial real estate but which do not have a stock exchange listing. Private Property Vehicle: non-listed investment vehicles whose principal activities involve the development, buying and selling of commercial real estate. Private investor: private individuals. Quoted property company: companies and developers, whose main activities involve the development, buying and selling of commercial real estate that is listed under Real Estate on a stock exchange. Quoted property vehicle: listed real estate vehicles i.e. funds and tax efficient structured vehicles, whose main activities involve the development, buying and selling of commercial real estate Corporate: companies whose main activities do not involve development or investment in real estate. Investment Market Update 7

8 Chief Executive, EMEA John Forrester Executive john.forrester@dtz.com Head of Central & Eastern Europe Alan Colquhoun Senior alan.colquhoun@dtz.com Consulting and Research Kamila Wykrota kamila.wykrota@dtz.com Capital Markets... Craig Maguire Senior craig.maguire@dtz.com Office Agency... Barbara Przesmycka barbara.przesmycka@dtz.com Retail Agency... Renata Kusznierska Senior renata.kusznierska@dtz.com Industrial and Logistics Agency Marc Le Bozec marc.lebozec@dtz.com Valuation Urszula Sobczyk urszula.sobczyk@dtz.com Property Management... Christopher Rasiewicz christopher.rasiewicz@dtz.com Project and Building Consultancy Andrew Frizell andrew.frizell@dtz.com Corporate Real Estate Services (CREM) Ian Scattergood Senior ian.scattergood@dtz.com Disclaimer This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, DTZ can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to DTZ. DTZ January 2015 To see a full list of all our publications please go to Global Headquarters 77 West Wacker Drive 18th Floor Chicago, IL USA phone fax info@dtz.com DTZ Poland ul. Złota 59 8th Floor Warsaw, phone fax info@dtz.pl