Research & Forecast Report Eastern Europe Investment Q Opportunity Knocks for CEE?

Transcription

1 Research & Forecast Report Eastern Europe Investment Q1 215 Opportunity Knocks for CEE?

2 Contents Executive Summary 3 Introduction 4 The Context 4 European Investment Volumes 5 Why the Disconnect? 6 Relativity 6 Prime Yield Pricing 6 Risk-adjusted Pricing 6 Scale of Opportunity 7 The Evolution of Distress 8 CEE Distressed Sales 9 Value in Values 11 Office Capital Values 11 Retail Capital Values 11 Industrial Capital Values 11 The Macro Story 12 Cyclical vs Structural Growth 12 Office Demand: Offshoring & Outsourcing Growth 12 Industrial and Logistics Demand 14 Conclusion 15 2 Research & Forecast Report Q1 215 Investment Colliers International

3 Executive Summary RIGHT PLACE Central and eastern Europe (CEE) has a very strong investment story, from a pricing and occupational demand perspective. Office and industrial/ logistics demand trends alike - via outsourcing, off -shoring, best-shoring, e-commerce and distribution - illustrate that significant growth opportunities have yet to be fully realised. Shorter term, GDP prospects are positive - above EU-average - and retail consumption is making a comeback in a number of markets. RIGHT TIME In many respects there couldn t be a better time, for the CEE market to capture more investment from the increasing global pools of capital. With several years left to run in the global and European investment cycle, and opportunities gradually diminishing elsewhere in Europe (and globally), this is a good time to consider taking a stronger position to invest in CEE. RIGHT PRICE The CEE market provides excellent comparable pricing: From a m2 perspective, the region trades at 5% of the European average. Capital values continue to trade below peak values across all sectors, with offices and industrial/logistics particularly attractive on the value curve. Yields trade at a discount to other comparably sized EU cities, and stack up on a risk-adjusted basis - both now, and when taking a more conservative view of pricing risk in future. Investment financing is also coming back, and margins are diminishing amidst competitive lending scenarios, allowing for a further compression in yields. RIGHT PRODUCT Competing with the scale of opportunity which has been made available in western Europe has been a challenge to date. But these opportunities are diminishing and new opportunities are being brought to market in the CEE region. New development activity is also creating new product for sale, without hampering the underlying supply/ demand balance. Strong growth trends in occupational demand will continue to justify more product. THE MISSING PIECE Outside of Poland and the Czech Republic, the range and depth of investor diversity remains a challenge. Exit strategy is a concern across Europe, but for those willing to take a longerterm view, CEE provides a well priced and significant opportunity. By taking positions in the market now, longer-term institutional investors will help increase the profile and exit liquidity position of the region, bringing more short-term investors into play alongside the growing number of local investors. 3 Research & Forecast Report Q1 215 Investment Colliers International

4 Introduction Market forces in the sphere of global investment point toward an ongoing recovery in investment activity within the European commercial real estate market. In fact, from a yield perspective, it appears that some core, European markets have gone beyond recovery into full-pricing mode as of Q Within the CEE region, the likes of Poland and the Czech Republic continue to be very strong performers in terms of investment turnover, without showing signs of overheating. Outside of these markets there had been a limited recovery until a significant rebound in activity in 214 saw Hungary, Bulgaria, the Baltics and especially Romania improving as expected. Russia, unfortunately, has moved in the opposite direction. It is apparent that the current investment cycle has some way to go on a European (and global) level. This raises a few important questions: Will the investment recovery/growth story continue in CEE, and at what pace? What factors are likely to shape the investment destiny of the CEE markets in the near future? Could market conditions finally translate into a significant step-change in investment activity for the wider CEE region, this time around? With this in mind, this report will review the key investment trends to date, positioning CEE markets against a wider European and global backdrop. Does CEE warrant further investment? We believe the answer is yes. Let s see what you think. The Context As our recent EMEA Paper How Long will the Cycle Last points out, there is an increasing likelihood that the significant waves of global capital pounding the European commercial real estate (CRE) market will continue to flow ashore. Global funds under management amount to $32 trillion. Institutional, private equity and sovereign wealth funds are growing and increasing allocations to property. This weight of capital, alongside increasing debt availability and a new real estate development phase are helping elongate the current investment cycle. Extraordinarily low interest rate regimes also support the very strong likelihood that this global property bull cycle will continue for another few years at least. In Europe, forward yield curves suggest no UK rate hike until 217, with no rise evident in the eurozone before 22. Quantitative easing (QE) and low interest rates are driving an international search for yield, with property offering relatively high returns, but its pricing benchmark (long term government bond yields) is distorted, so risk is more difficult to assess. In turn, this has led to yields in certain global and European markets surpassing their previous 27 peak. In brief, more money is chasing product, which in turn is becoming more expensive. In some cases, certain markets may no longer fit the return requirements of many an investor, where yields provide limited income and the potential for further capital growth appears less sustainable. 4 Research & Forecast Report Q1 215 Investment Colliers International

5 Fig. 1: Investment Volumes Europe vs CEE Billion 3 Europe CEE Investment Volumes GDP Est. Office Space Population 2 CEE 5% 1 CEE 35% CEE 2% % /Europe CEE 7% European Investment Volumes European investment volumes continued to recover in 214 reaching 22 billion, up from 18 billion in 213. The main recipients of these volumes continue to be the UK, Germany, France, Nordic and Benelux markets. Fig. 2: Investment Volumes Growth [Eastern Europe Region; 213 vs 214] Romania Bulgaria 16% 27% More peripheral markets have also made a comeback, with Spain and Ireland clearly back on the investment agenda. The CEE region, on the other hand, has seen investment volumes decline as a proportion of total European investment from around 1% post-crisis, to just 7% in 214, despite maintaining volumes at over 1.5 billion last year. Czech Republic Slovakia Hungary Latvia Lithuania 31% 77% 71% 68% 61% The swift change in circumstances in Russia is the primary reason for this decline, with deal volumes dropping by 5% in 214 to 2 billion. So overall, despite a significant rebound in volume growth in other CEE markets, the region as a whole has failed to keep pace with the wider European market. 2% Estonia % Poland -52% -69% Russia Croatia -1% Ukraine Fig. 3: GDP Eastern Europe Region [214 vs f215; %] f Romania Bulgaria Czech Republic Slovakia Hungary Latvia Lithuania Estonia Poland Russia Croatia Ukraine 5 Research & Forecast Report Q1 215 Investment Colliers International

6 Fig. 4: Office m² Pricing Evolution [27-214; /m²] 5, 4, Fig. 5: Prime Office Yields [214 vs Previous Peak; %] At/below prior peak Within 1bps of prior peak At least 1bps above prior peak 3,.5 2, -.5 1, Europe CEE -1.5 London - West End Manchester Hong Kong New York City Paris Munich Stockholm Warsaw Prague Brussels Frankfurt Milan Madrid Amsterdam Moscow Budapest S o fi a Bucharest Dublin Why the Disconnect? At the outset, we can see that the region produces 2% of Europe s GDP, represents around 35% of modern office stock and 5% of its population. However, even accounting for the 5% difference in m2 values between CEE and western Europe in general (the discount is much higher compared to the UK, Germany and France), the disconnect between the size of the opportunity and current turnover is apparent. Investment turnover has closely correlated with positive GDP growth over 214, and GDP forecasts for 215 are equally positive so it doesn t appear to be a GDP issue short-term (outside of Russia and Ukraine, which will be in reverse in 215). Additionally, the medium-long term growth prospects for the region are robust, arguably more so than in the other more established European markets, which we ll point out later in the report. So where is the disconnect? Relativity The CEE region is sometimes perceived often unfairly as being riskier than other more established European markets. In addition, the scale, quality and pricing of the opportunities available in CEE markets may not have always whetted the appetite of many a global investor, relative to those available in the more established European markets. But markets and riskadjusted opportunities are evolving during this current cycle. Prime Yield Pricing: an advantage for CEE? A brief review of yields, relative to their previous 27 peak, shows that a number of locations have already surpassed their prior best. The core markets of London, Paris, Munich and Stockholm, alongside global cities such as Hong Kong and New York, have reached a premium of up to 1.5% (lower) than their previous peak. A number of other markets aren t too far off, including Frankfurt, Brussels and Milan, in addition to the core CEE markets of Warsaw and Prague. Further afield, we have the more peripheral CEE markets including Bucharest, Sofia and Dublin, which are at least 1 basis points off their previous peak. So in terms of yield at this point in the cycle, investment in CEE markets makes more sense than investing in the core markets. Or does it? For some markets, the previous peak probably didn t make much sense either. Yet for CEE, the peak rates used here reached no lower than 6% outside of Warsaw which fell to 5.9%. So in this respect, current pricing levels are favourable. Let s look at yields from a slightly different perspective i.e. riskadjusted pricing. Prime Yield Risk-adjusted Pricing : An advantage for CEE? Figure 6 looks at current yield pricing from a risk-adjusted perspective by examining the spread of yields over 1-year national government bonds. The current spread on offer (i.e. year-end 214 prime yields vs year-end bond rates, although we appreciate that certain government bond rates have changed recently in response to QE), gives us an idea as to which markets offer a solid riskpremium. As we can see, all CEE markets remain above the healthy 3% margin except for Moscow, which is an exception to the rule under current circumstances. 6 Research & Forecast Report Q1 215 Investment Colliers International

7 But what about exit spreads? Exit liquidity is something of a concern for the majority of investors, particularly those with a shorter investment horizon of up to five years. The right hand part of Fig. 6 illustrates a conservative view of what the yield spread could be in future, based on current yields over a 5-year average bond price. By pricing in an increase in long-term (and therefore short-term) interest rates, it paints a view of how many markets would remain attractive buying propositions if government bond yields bounced off their current floor. Anything around a 2% spread is relatively positive, anything below is not so good. In this respect, CEE looks good with Sofia, Prague, Bucharest and Warsaw featuring in the better positioned markets. While Czech bond rates are very low, the current exit spread over bonds provides capacity for an upward movement in bond pricing, without creating additional pressure on property yields. Conversely, there is the possibility that government bond yields could compress further in Romania, Bulgaria and Poland, giving these markets some extra comfort in terms of their longer-term pricing position. The macro story for the CEE region creates a very positive picture for occupational growth. This is an all-important factor for maintaining sustainable bond prices and for driving and sustaining new product (development) and rental levels. But before we look forwards, let s review the availability of real estate investment opportunities across Europe, which has had a part to play in why CEE investment volumes have yet to reach their strategic position to date. Scale of Opportunity The opportunities which different investors seek are based on a myriad of factors, roughly defi ning investors as core/ core plus, value add or opportunistic. In simplistic terms this boils down to the extent to which each grouping is prepared to move up the risk curve in anticipation of higher returns. While certain markets are deemed core (less risky) and others more opportunistic, this parallel often glosses over the fact that a range of product exists in every market to satisfy these investment risk/return styles. Across the CEE region, Warsaw and Prague are deemed the core markets, increasingly akin to the likes of Madrid, Berlin, Copenhagen, Amsterdam and Manchester in size and scale. Bucharest, Bratislava, Budapest and Sofia are one step removed on the risk scale, as are the likes of Belgrade, Zagreb, Riga and Vilnius, as the view becomes more opportunistic. While Warsaw and Prague have continued to trade solid investment volumes over the last few years, and will continue to do so, the relative position of the other cities has been more challenging, particularly in light of the size and scale of opportunities available elsewhere across Europe. This is highlighted by the significant volume of distressed debt and distressed assets which have been made available to, and snapped up by, a range of investors, primarily comprising US private equity. Fig. 6: Yield Spreads vs Bonds [%]: Current Pricing vs Exit Pricing Fig. 7: 1-Yr Government Bond Yields [%, End 214] -5.1 S o fi a Switzerland Bulgaria USA Italy 4 Hong Kong UK Spain Ireland Austria Netherlands Sweden Denmark France Belgium Germany Czech Republic Romania Hungary Poland 6 Moscow Hong Kong London WE New York C. Paris Manchester Madrid Munich Warsaw Stockholm Vienna Budapest Dublin Milan Bucharest Geneva Frankfurt Copenhagen Brussels Amsterdam Prague Russia 14 7 Research & Forecast Report Q1 215 Investment Colliers International

8 Belgium France Portugal The Evolution of Distress In the immediate aftermath of the post-lehman meltdown, it was anticipated that markets would be flooded with distressed commercial real estate assets. However, the market has pannedout differently from what many expected, as extend and pretend became the modus operandi. Rather than seeing a range of assets flooding the market, distressed sales have been carefully managed back into the system as values have recovered. Another key aspect of European distressed sale management is the form of the opportunity. Although the immediate volume of sales postcrisis appeared as single assets, since 211, sales of debt portfolios by the European banks have been made increasingly available and increasingly dominate the distress scene. This has provided well-capitalised investors with significant, large, lot-size opportunities at discounted prices. An estimated 2 billion of CRE-secured NPLs have been sold to date. Over 5% of of these sales have been at prices at - or less than - 4% of face value. A further 45% of sales have been achieved at discounts of 4-8% of face value. It is also worth noting that the vast majority of NPL sales to date have been within the UK, German, Irish and Spanish markets. There has been very limited activity in CEE, although this is expected to change going into 215. Fig. 8: European Distressed Sales: Assets and Debt [ Billions] Debt Assests f215 Fig. 9: Domicile of Bank NPL Sales [1%] UK Ireland Spain Germany Fig. 1: NPL Discount to Face Value [1%] <4% discount 4-8% discount Other Italy 8-1% discount Fig. 11: CRE Non-Performing Loan Iceberg f215 f216 CRE-Secured NPL Sales CRE-Secured NPLs: To Be Deleveraged f217 f218 f219 f22 8 Research & Forecast Report Q1 215 Investment Colliers International

9 CEE Distressed Sales Fig. 12: Distressed Asset Sales [29-214; Billion] Europe ex. CEE 48,877 CEE 4,79 USA 118,799 By comparison, if we look at the size and scope of CEE asset sales over the same period, we get some idea of the difference in the scale and scope of the distress opportunity. Less than 5 billion of distressed assets are known to have been traded since 29, accounting for less than 7% of all sales over the same period. This compares with almost 5 billion across Europe (5% of all sales) and ca. 12 billion in the US (9% of all sales). In light of this, and the 2 billion of European NPL sales which have been closed, it is unsurprising that investor attention has been elsewhere than CEE, working on the sizeable, low-hanging fruit on offer. Looking forward, however, PwC research points out that upcoming NPL sales in 215 will increasingly feature CEE markets as sales derived from Italian and Austrian banks are targeted. Equally, the US opportunity has been on the decline since 21 first to react, first to change and adapt - a strategy which brought US investors into Europe in search of the opportunities on offer. So as the market opportunity for distressed sales continues to diminish across Europe, this could see investors shift their intention generally to the CEE region in search of opportunities, particularly those in search of yield. Fig. 13: Distressed Sales Over Time [% of Sales] Europe USA CEE In summary, distressed sales in CEE have been conspicuous by their absence. In terms of the number/size of deals which have been closed post-crisis, this has reduced the role of CEE in the overall European sphere. On a more positive note, the lack of distressed activity points to CEE being a very robust market in terms of weathering the post-crisis storm. While transparency is still an issue (as it is across many continental European markets), and certain deals may have not been captured, or have been subsumed by the larger NPL pan-european portfolio sales, the robustness of the market is visible. There is a further positive flipside to the process of deleveraging. While debt finance is widely available in Poland, the Czech Republic and Slovakia, it is only just making a genuine comeback elsewhere. The predicted increase in NPL sales by Austrian and Italian banks will positively impact bank balance sheets, ultimately improving the lending position of banks active in the wider CEE region, albeit not in a uniform manner. Positive change is likely to follow in the order of Romania, Bulgaria, Serbia and Hungary. Obviously, more debt finance at achievable rates, will help realise a wider increase in investor appetite, encouraging investment into the wider CEE region, especially when taking into account the position of markets on the value curve, and the positive macro/ occupational growth story. 9 Research & Forecast Report Quarter 213 Sector Colliers International

10 CEE Distressed Sales - In Detail The 1.5 billion sale of the Europolis portfolio to CA Immo in 211 constitutes the biggest single distress deal to happen in the CEE market. This classified as a multicountry deal given the widespread geography of assets involved in the transaction. The remainder of the multicountry deals comprises the more recent Arcapita sale of shares in the P3 logistics platform, acquired by TPG Capital and Ivanhoe in Q Arcapita, based in Bahrain, had previously filed for Chapter 11 bankruptcy protection in New York in 212. The Czech Republic, Poland and Romania make up the lion s share of the single-country deals, accounting for a further 37% of transactions. There have been very few transactions in all the other markets. In terms of the source of deals, it would appear that complications with the holding company and/or vehicle holding assets has been the major driver of the need to sell, as opposed to asset specific concerns. In particular, the liquidation of German open-ended funds (GOEFs) has been a major source of distressed transactions, accounting for ca. 66 million (15%) of transactions to date, in addition to the Europolis deal. The often conflicting needs of retail and institutional investor groups, combined with declining market conditions in the aftermath of the financial crisis, destabilised the GOEF structure. This resulted in the loss of 15 funds to liquidation in little over two years. The majority of these GOEF sales have been transacted in the Czech Republic and Poland the most active and liquid markets to sell into post-crisis. Based on our analysis of liquidated GOEF funds, a further 1 billion of assets are yet to be sold, although the liquidation dates of these funds stretches out to end-217. Further company-specific asset liquidations, including a number of sales by Orco, Dawnay Day Carpathian and Equest Balkan Capital, have amounted to ca. 4 million (1%). Banks have been responsible for 11 million of sales transactions, with the likes of Barclays, Sberbank, CIB, Bayer Landesbank and Alpha Bank behind the deals. Another bank associated name in the distressed deal schedules is Ektornet, a wholly owned, but independently managed subsidiary of Swedbank. Ektornet established companies in each of the Baltic countries to acquire, manage and sell Swedbank s distressed assets. It is the most transparent and structured work-out system of the banks in the region, and has resulted in the closing of 1 incomeproducing investment deals worth around 1 million. Collectively, however, bank-derived activity accounts for only 5% of the regional distressed asset sales market. A figure far below the one anticipated in 29, but one which is consistent with the limited number of distressed loan sales witnessed in the region to date. Our analysis highlights that company/holding structurespecific issues have resulted in around 75% of the distressed asset sales that have taken place. Property/asset specific issues have only contributed to 25% of such sales to date. Fig. 14: CEE Sales by Country Estonia Lithuania Latvia Bulgaria Croatia Slovakia Hungary Czech Republic Poland Fig. 15: CEE Sales by Source Asset Specific Romania Russia Multi Country Company Specific 1 Research & Forecast Report Q1 215 Investment Colliers International

11 Value in Values A quick review of capital value movement illustrates the extent to which capital values have changed post-crisis by sub-region. These are categorised as follows: Tier 1 indices include Warsaw, Prague and Bratislava; Tier 2 & 3 indices include Budapest, Zagreb, Belgrade, Sofia, Bucharest and Kyiv; Russia indices include Moscow and St Petersburg; Baltic indices include Tallinn, Riga and Vilnius (this is a much shorter time series, from 29). There are some clear differences by sub-region and sector, which we can summarise in the following observations: Office Values None of the sub-regions are back to peak capital values. It is unlikely that Russia notably Moscow will get back to peak anytime soon, in that it peaked very strongly in 27 and the market has now taken a turn in the opposite direction. The Tier 1 and Baltic markets have recovered from their 29 dip, but remain short of their previous peak level. This is a good, not a bad, thing - as it provides capacity for value growth. In the Tier 2 and 3 markets, the scope for value improvement is even stronger. Retail Values As reported in our If I were a Rich Man report from 214, retail values have seen the biggest recovery since 29. Russia (Moscow) values had already surpassed their previous peak in 213 before flattening out in 214. Given the depreciation of the rouble and the sharp increase in interest and internal financing rates, it is impossible to put a figure on where retail values could be, but they are clearly down. The Baltic markets, albeit running off a shorter time series, are above Tier 1 market values, which have grown steadily postcrisis, but not alarmingly. Prices are close to their previous peak, but some capacity for growth remains, particularly in the prime shopping centres with defensive positions. Retail consumption and spending in the region is starting to creep back up, which should help sustain the rental side of the equation. This should also be the case in Tier 2/3 markets, which should have hit their value floor in 214, providing a good opportunity for investors to get involved on the upside. Industrial Values Interestingly, all market regions, bar the Baltics, have been very flat post-crisis. None of these markets are close to their previous peak, despite industrial investor activity really picking up in the last couple of years and large deals being closed in Tier 1 locations especially. Aggressive developer strategies have deflated rents, but vacancy in Warsaw and Prague in particular has fallen to much lower levels, which should maintain sustainable rents and drive demand for new product and development. This could also put downward pressure on yields. In summary, there are no major concerns of the market overheating, with scope for sustainable value growth across the Tier 1, 2 and 3 markets. This growth story is backed by positive macro fundamentals for the region as a whole, with growth opportunities in modern office and industrial/logistics in particular. Figure 16: Weighted Capital-Value Indices Office Retail Industrial Tier 1 Tier 2&3 Russia Baltics Tier 1 Tier 2&3 Russia Baltics Tier 1 Tier 2&3 Russia Baltics 11 Research & Forecast Report Q1 215 Investment Colliers International

12 The Macro Story Poland, the UK, Switzerland and Austria are arguably the strongest growing economies across Europe. Outside of Ukraine and Russia, the remainder of CEE is also firmly back on track, with positive GDP growth forecast for 215, ahead of GDP growth witnessed in 214. Cyclical vs Structural Growth Fig. 17: Economic Growth Position 215 Across Europe, a patchy economic recovery is underway, but it continues to be undermined by being a relatively jobless recovery. The CEE region, however, will continue to benefit from a number of other structural growth drivers, which will continue to increase occupational demand in the office and industrial/logistics sectors in particular. Expansion Recovery Stagnant Recessionary Source: Moody s Analytics / Colliers International Office Demand: Offshoring & Outsourcing (O&O) Growth Our analysis of office demand across major cities in the region highlights that there has been very strong demand for office space from the O&O sector since 21. Following the early phase of growth up to pre-crisis times, the sector has grown by 8% in terms of the volume of office space occupied over a fouryear period. Not only has there been strong demand from new companies wishing to enter the regional O&O market at least 2 new companies have set up operations since 21 - there is also evidence of a maturation of the sector, with a large number of established operators having expanded their footprint across a wider geographical area. This is a reflection of the strong depth of skills and experience available in these markets which is allowing existing companies to evolve their service offering to provide higher value-added functions. In turn, this is attracting more new companies to the region. When compared with the donor markets of western Europe and OECD countries, the CEE region exhibits much lower labour costs McKinsey research highlights that the average hourly wage in core-cee markets is 75% less than in the EU- 15; in Bulgaria and Romania it is 9% lower (and lower than China). While this is a major part of the initial attraction for new companies viewing the region as a base for operations, once a business is established, further expansion is based on the quality and depth of the talent pool: the most active locations are also the most expensive. In total, an estimated 4, jobs have been brought to the region via the O&O sector. This is not a short-term, cost-saving venture and prospects for future growth look very healthy. 12 Research & Forecast Report Q1 215 Investment Colliers International

13 Firstly, our analysis of O&O companies located in CEE shows that only 3% of the top 1 global outsourcing companies are already here. This suggests a strong growth opportunity to capture some of the remaining 7%. Secondly, the CEE region now stands ahead of other globally competitive O&O regions in terms of the World Bank Ease of Doing Business rankings. In addition to providing a strong cultural fit with established OECD countries, there is increasing impetus for O&O companies to build true partnerships with customers that sustain their culture and brand. We are likely to see existing operations evolve to provide much more advanced combinations of software and service, using web/ cloud platform-based solutions for services that depend on judgement and analysis, rather than simply process or transactional-based activities. With an estimated 1.4 million jobs yet to be outsourced from Europe and US headquartered locations, according to research by Hackett Group, the CEE region could continue to absorb a sizeable proportion of these jobs. Based on the volume of jobs outsourced to date, attracting 2% of this figure is not unreasonable, which could translate into 28, new jobs by 225. At 1 m² per person, that s an additional 2,8, m² office requirement. Fig. 18: Doing Business Regimes Simple & Cost Effective vs Complex & Expensive Strength of Legal Institutions Stronger Weaker Eastern Europe & CIS Latin America& Caribbean South Asia Sub-Saharan Africa OECD high income Av. Rank Ease of Doing Business No. of Economies Complex & Simple & Expensive Inexpensive Complexity & Cost of Regulatory Processes Source: World Bank/ Colliers International East Asia& Pacific Middle East& North Africa Public-sector-oriented O&O services is another untapped market. We have also seen signs of O&O growth in the retail and logistics sectors - a direct result of growth in e-retailing and e-commerce. Given the vast scope for the evolution of this business regionally, not to mention globally, this is a definitive growth area for the regional industry to service not just in terms of demand for office space. Fig. 19: Outsourcing & Offshoring Job Growth Technology 4.5 Outsourced Outsourced in CEE 2.5 To be Outsourced f215 f216 f217 Not Outsourceable 13 Research & Forecast Report Q1 215 Investment Colliers International

14 Industrial and Logistics Demand: There are four areas of significant growth for the CEE region, bringing with it an increase in occupier demand for industrial and logistics space. The European industrial and logistics market is diversifying and becoming more complex in response to changing demand, improved transportation networks and dynamic technologies. The movement of freight still centres itself within the hubs of the Golden Triangle in the UK, and the continental blue banana of Benelux, western Germany, France and the northern part of Italy, but the concentration of activity is also increasing across the top of northern and central Europe into Poland, the Czech Republic and Slovakia. We are also seeing distribution volumes grow in Russia, with activity shifting further east from Moscow. While the extent of this growth is underpinned by expanding trade, improved infrastructure, time sensitivity and cost, the increase in the number of logistics operators specialising in intermodal/ multimodal transport in CEE suggests an ongoing structural shift in freight distribution is taking place. Intermodal freight and logistics operators have become a significant driver of demand in CEE, with pan- European operators seeking economies of scale in the main logistics hubs of the Czech Republic and Poland. Western Slovakia will be one market to watch moving forward. Russia, still chiefly an internal market, is quickly developing its own large-scale intermodal/ multimodal network driven by retail and domestic e-commerce fulfilment demand. It is not only in Russia where the rise of online retailing is beginning to filter through to the logistics sector. In the core CEE logistics markets, take-up from e-commerce occupiers has increased fourfold in the last three years, especially in Poland and the Czech Republic. As well as expanding locations, there is increasing evidence of hub and spoke distribution models taking shape. Hubs are getting bigger, with e-commerce occupiers dominating takeup of larger facilities (4, m²), particularly in the Czech and Polish markets. Yet the spoke components are still developing, a likely outcome of which is the growth of last mile facilities - i.e. the demand for smaller, urban e-fulfilment operations. Manufacturing is also undergoing a renaissance across the entire CEE region. This is driving demand not only in the traditional markets of Poland and the Czech Republic, but also for new facilities in Hungary and Serbia. Russia is working on localising its manufacturing and production and creating a base for domestic and foreign companies alike. In summary, the industrial and logistics market is developing rapidly and we are just beginning to see the impact on the demand for hub and spoke facilities, and new forms of freight and transportation modes. The positive effects on the market through further growth in logistics, manufacturing and retailing demand will continue to revolutionise the CEE markets in the short and long-term, providing investment opportunities for an increasingly popular global market sector. Fig. 2: Industrial & Logistics Growth Drivers Pan -European Distribution Retail & E-commerce More Industrial & Logistic Space Required Best-shoring Manufacturing Inter/ Multi-modal Freight Networks 14 Research & Forecast Report Q1 215 Investment Colliers International

15 Conclusion: The Exit Strategy Investor demand has reached unprecedented levels on a global and European scale. As quantitative easing and low interest rates continue to drive this boom, investors are being faced with a dilemma. Distressed opportunities are diminishing across Europe, and prime core product pricing has fallen in a number of markets to below the previous 27 peak. This is making many an investor shift their attentions up the risk curve in terms of both product type and geography. However, uncertainty over economic growth, political discontent, the recent Russia/Ukraine crisis and the threat of terrorism are putting extra emphasis on investors needs for a clear exit strategy. One interesting observation from our analysis of CEE investment activity in recent years is that European (and global) institutions are returning to CEE markets, having got their houses in order as a result of the new EU banking and financial regulations. Austria may no longer be the driving force in EE investment, though it is picking up. Germany and the UK have been consistent players and 214 saw their highest level of investment yet. US players have also seen a recovery, though how much of this is down to fundamentals and how much to currency is not yet clear. In addition to these overseas players, the likes of NEPI and CPI essentially locally based and/or controlled investors - have become far more dominant, just as a more diverse range of local investors have become increasingly involved in the markets of the region. New development, driven by demand for new industrial/ logistics and e-fulfilment space, alongside the demand for offices to satisfy outsourcing growth, will help drive the volume of standing institutional grade assets. Alternatively, the redevelopment and refurbishment of existing, obsolete assets for residential, healthcare and leisure use will also drive new investable product. Further down the line, new infrastructure development such as the development of multi-modal industrial parks and facilities - offers a key way forward. Some cities still lack modern infrastructure, be it effective modern public transport and mass transit systems, or improvements to road networks and motorways. As this infrastructure is planned, there is scope for investors to become involved in the delivery of such important new infrastructure. As it is built and delivered, the overall attractiveness of CEE towns and cities to occupiers and investors will also improve. Exit is relative. For those with a long-term view, buying into well-priced product with a strong macro-story in CEE markets is a strong argument. Whether it is strong enough to tempt investors away from relatively expensive, safe-haven investments remains to be seen, but the CEE option could create a more attractive exit option in time, as more investors continue to engage the market. It is also worth noting that debt is becoming increasingly available, even though its supply is patchy across the region. As bank deleveraging continues in the years ahead, it will bring greater capacity to markets outside of Poland, the Czech Republic and Slovakia. Equally, although alternative lending sources are yet to significantly impact lending across Europe, they are becoming increasingly exposed to Germany. This will have a positive indirect knock-on impact on CEE markets in due course. Fig. 21: CEE Number of Investors: Foreign vs Local 25 Local Foreign Research & Forecast Report Q1 215 Investment Colliers International

16 485 offices in 63 countries on 6 continents United States: 14 Canada: 42 Latin America: 2 Asia Pacific: 195 EMEA: 88 Damian Harrington Regional Director Research EE damian.harrington@colliers.com Neil Crook Research Consultant EE neil.crook@colliers.com Katy Dean Senior Regional Research Analyst EE katy.dean@colliers.com Juliane Priesemeister Regional Research Analyst EE katy.dean@colliers.com Colliers International Eastern Europe About Colliers International Colliers International is a global leader in commercial real estate services, with over 15,8 professionals operating out of more than 485 offices in 63 countries. A subsidiary of FirstService Corporation, Colliers International delivers a full range of services to real estate users, owners and investors worldwide, including global corporate solutions, brokerage, property and asset management, hotel investment sales and consulting, valuation, consulting and appraisal services, mortgage banking and insightful research. The latest annual survey by the Lipsey Company ranked Colliers International as the second-most recognized commercial real estate firm in the world. colliers.com Copyright 215 Colliers International. 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.