European Office Property Markets

Transcription

1 European Office Property Markets 28

2

3 King Sturge: European Office Property Markets 28 Contents Executive summary 2 Riding the roller coaster 3 Europe-wide analysis 6 Economy 6 Demand 8 Supply 9 Rental values 1 Investment market 11 City summaries 17 Austria Vienna 18 Belgium Brussels 18 Croatia Zagreb 19 Cyprus Nicosia 19 Czech Republic Prague 2 Denmark Copenhagen 2 Estonia Tallinn 21 Finland Helsinki 21 France Lyon 22 Marseille 22 Paris 23 Germany Berlin 23 Frankfurt 24 Munich 24 Greece Athens 25 Hungary Budapest 25 Ireland Dublin 26 Italy Milan 26 Rome 27 Latvia Riga 27 Lithuania Vilnius 28 Luxembourg Luxembourg 28 Netherlands Amsterdam 29 Norway Oslo 29 Poland Warsaw 3 Romania Bucharest 3 Russia Moscow 31 Serbia Belgrade 31 Slovakia Bratislava 32 Spain Barcelona 32 Madrid 33 Sweden Stockholm 33 Switzerland Geneva 34 Zurich 34 Turkey Istanbul 35 UK Belfast 35 Birmingham 36 Bristol 36 Cardiff 37 Edinburgh 37 Glasgow 38 Leeds 38 London 39 Manchester 39 Thames Valley 4 What are the main European real estate tax issues? 41 Courtesy of BDO Stoy Hayward Austria 44 Belgium 45 Croatia 46 Cyprus 47 Czech Republic 48 Denmark 49 Estonia 5 Finland 51 France 52 Germany 53 Greece 54 Hungary 55 Ireland 56 Italy 57 Latvia 58 Lithuania 59 Luxembourg 6 Netherlands 61 Norway 62 Poland 63 Romania 64 Russia 65 Serbia 66 Slovakia 67 Spain 68 Sweden 69 Switzerland 7 Turkey 71 UK 72 1

4 King Sturge: European Office Property Markets 28 Executive summary Economy The European Central Bank s decision to raise its main short-term interest rate by 25 basis points in July 28 marked a new phase in the yearlong global financial crisis and worries caused by global commodity price inflation. Output in the EU27 is expected to rise by 1.8% in 28, compared with 2.8% last year. A further slowdown is in prospect for 29, with growth declining to 1.6%. Eastern Europe has not been immune to the global slowdown, even if most of its economies are continuing to enjoy higher growth than in the West. Employment prospects across Europe have also weakened sharply in the economic downswing. Demand Pockets of stronger activity continue across the region, but it is now evident that office occupational markets in Western Europe are in the midst of a slowdown. In Western Europe, total take-up to the end of 28 is now forecast to fall by 12.4%, following growth of 6.9% in 27. In Central Europe, total take-up for the year is forecast to grow by 13.7% following a fall of 5.4% last year. Supply For cities in Western Europe, the average vacancy rate is expected to remain broadly stable at 7.3%, according to estimates given to the end of 28, compared with 7.2% in 27. Frankfurt and Amsterdam continue to register some of the highest vacancy rates in Western Europe, while Geneva and Luxembourg experienced almost full occupancy in 27. Significant development pipelines exist in a number of countries in Central and Eastern Europe (CEE) and the average vacancy rate is expected to rise from 5.2% to a level of 7.1% by the end of 28. This would bring it in line with the Western European average. Riga, Vilnius and Bucharest registered some of the lowest levels of vacancy at the end of last year, but each city predicts a rise in the vacancy rate over 28. Rental values Despite the credit crunch, prime office rental growth continues in Western Europe, but at a much reduced rate of 5.5% in 28 against 1.7% last year. London s West End and City districts have registered a fall in rental levels, whilst prime rents are assumed to have stabilised in Paris, Madrid and Dublin. In Central Europe, after particularly strong rental growth in 27, the expectation is for continued growth at 13.2% this year. Investment market The generally expected slowdown in capital markets has spread out across Europe. A weakening in investment activity is now evident in most European markets, with all but a few cities registering an outward correction in prime and secondary office investment yields. Prime office investment yields in Western Europe now range from 4.5% in Geneva and Zurich, to 6.75% in a number of UK regional office markets. In CEE the range is from 5.75% in Prague and Warsaw to 1.% in Moscow. 2

5 Riding the roller coaster Since mid-27, European office markets have experienced their leanest period for five years. The onset of the global credit crisis last August marked the shift. Twelve months on, the underlying financial strains remain and Europe is bracing itself for the full economic impact. Initially, property investment bore the brunt of the downturn, with debt funding drying up, capital values plummeting and yields correcting rapidly. More recently, there has been evidence of weaker take-up and rising vacancy rates, although rents have continued to move upwards in most centres covered in our survey (Fig 1). annual % change Fig 1: European prime rental growth Mid-year analysis Source: King Sturge Why have offices been so vulnerable? The turnaround in the office sector over the last 12 months has been unexpectedly abrupt. Property markets tend to be highly cyclical because of the long lead times on supply and their greater sensitivity to interest rates. However, for offices this is reinforced by a growing volatility in the economic drivers. The concentration of office demand in finance and business services, along with the increasing globalisation of these industries have forged an ever tighter link to world economic fluctuations. The larger financial centres in particular have become more highly specialised in overseas operations and are increasingly swayed by international influences. Overall, this change has boosted occupier demand across the cycle, but at the cost of greater volatility and steeper downturns. Fig 2 shows Experian s economic data for Western Europe, with employment growth in the financial and business services sector far outstripping total job creation in the upturns (the late 199s and mid-2s) then declining more precipitously in the downswings (22-3 and now). Fig 2: Employment growth in Western Europe annual % change Source: Experian Financial and business services Other industries Forecast Winners and losers in the short-term Most commentators believe economic conditions are unlikely to improve over the next 18 months, perhaps longer. So the outlook for occupier demand is expected to worsen. But the European slowdown is not likely to be uniform and some markets could still emerge relatively unscathed. For instance, the smaller economies on the European fringes are generally less affected by global downturns. These include Norway, Cyprus, and Greece, where growth remains healthy, although these nations tend to have fewer major office centres. Performance across the larger nations is more sluggish overall, but even here there are differences. UK and Spain are still seen as most vulnerable to the credit squeeze, with Italy s economy also performing poorly. By contrast, France, Germany and the Low Countries, while slowing, should fare slightly better. There is also an important industry dimension to the current malaise, with the turbulence in the banking sector set to bring net job cuts across Europe while business services remain less affected. This is likely to drive differences between cities. So, while the larger financial centres, particularly those with international exposure, have been hit hardest and will be slower to recover, the more diverse secondary markets will tend to perform better. 3

6 King Sturge: European Office Property Markets 28 Experian employment forecasts give some indication of different patterns of occupier demand (see Fig 3). Previously buoyant Spanish and UK markets are largely absent amongst the job growth rankings for Where international business centres appear they tend to be relatively light in financial services (such as Munich and Rome). By contrast, locations on the faster-growing fringes of the Continent (Oslo, Stockholm and Athens) and secondary markets (Manchester) are prevalent. Fig 3: Top ten centres for office employment creation in Berlin 2 Amsterdam 3 Stockholm 4 Rome 5 Manchester 6 Munich 7 Athens 8 Dublin 9 Vienna 1 Oslo Property prospects will hinge not only on economic drivers, but also on local market dynamics. The latest property forecasts suggest that the prime rental outlook is least secure in London s West End and City markets, where reductions are already evident. Madrid and Barcelona are also expected to see some compression and Brussels, Milan and Dublin remain vulnerable. For most European centres, a prolonged deceleration in rents, and no worse, is predicted for the next two years or so. Munich, Frankfurt and Dublin and the eastern cities are expected to show the greatest resilience in rental increases. As yet, no-one is projecting a repeat of the occupier slump seen in European investment markets are much harder to predict, given the unusual financial conditions. The worst of the yield adjustment appears to be over, but most expect at least a further 25 basis point shift. Here, economics play a subordinate role to the normalisation of the credit markets and a revival in investor sentiment. Nothing new under the sun How long will the current downturn last? Despite unremitting short term gloom and the claims of some Cassandras, the current downturn is not unprecedented. Economic cycles never disappear, while property market volatility is nothing new; though the causes can change. At present, most expect the worst to be over by 21, though much still depends on progress in the banking sector. Fig 4: Share of European office jobs in total employment % of total employment 2% 15% 1% 5% % Source: Experian Forecast Even if the current dip is worse than expected, conditions will eventually improve. Over the last 3 years, despite periods of severe economic turbulence, there has been a tangible rise in the share of office employment across Western Europe, replacing jobs lost in declining manufacturing and agriculture. Total growth is expected to slow somewhat relative to the last decade according to Experian, but financial and business service prospects remain buoyant. Although the first half of last year may mark a shortterm peak for financial globalisation, the trend is unlikely to reverse, as new markets emerge and new opportunities are created. The demand for financial products, and related business services, is inextricably linked with rising affluence, a trend which is expected to resume once the current upheaval ends. So the inexorable rise in urban office demand is structural and predicted to be sustained (see Fig 4). A normalisation of credit markets is a prerequisite for a revival in investment demand. As a result, capital market activity may take longer to recover, though the fundamentals are solid here as well. 4

7 The healthy outlook for occupier demand in the west, opportunities in the east, interest from the emerging world and a return to economic stability should all help recovery. While returns at the level of 18 months ago are not expected to be repeated, office property is set to remain an attractive asset over the longer term. 5

8 King Sturge: European Office Property Markets 28 Europe-wide analysis European economy Fig 5: Forecast growth in gross domestic product (% change) COUNTRY 27 28F 29F 21F 211F WESTERN EUROPE EU Norway Luxembourg Cyprus Finland Ireland Greece Spain Netherlands Austria Switzerland United Kingdom Belgium Sweden Germany France Denmark Italy CENTRAL EASTERN EUROPE Slovak Republic Latvia Lithuania Russian Federation Serbia Estonia Poland Czech Republic Romania Croatia Turkey Hungary Source: Experian Business Strategies/IMF World Economic Database The European Central Bank s decision to raise its main short-term interest rate by 25 basis points in July 28 marked a new phase in the year-long global financial crisis. Renewed inflationary fears from soaring commodity prices, as crude oil prices reached record highs, brought about a change of heart at the ECB, which just a few months earlier had been considering cuts. While the latest move is seen as a bold pre-emptive strike against spiralling inflation, it also increases the downside risks for the EU economy, with underlying global financial strains, if anything, worsening in recent months. At the start of the year, euro zone GDP was stronger than expected, driven largely by unusual buoyancy in Germany and France. But some of this rise was the result of temporary factors and the evidence since has pointed to a loss in momentum. For the year as a whole, output in the EU27 is expected to rise by 1.8%, compared with 2.8% last year. A further slowdown is in prospect for 6

9 29, with growth declining to 1.6%, though this is predicted to be the trough and a recovery to trend is evident by the end of the decade. In the context of the current global turmoil, the EU slowdown is forecast to be relatively mild, though there will be considerable disparities of fortune between countries. The slowest activity is seen in Italy, decelerating from an already-weak base. More abrupt cooling is seen in former high-flyers Spain and the UK, which are regarded as most exposed to the credit crunch after many years of unsustainable consumer debt expansion. By contrast, in France and Germany, while performance remains unspectacular, only a modest easing in annual growth rates is in prospect. Eastern Europe is not immune to the global slowdown, even if most of its economies continue to enjoy higher growth than the west. Slovakia, Lithuania, Romania and Poland are the top performers amongst the accession countries, with the non-eu contingent led by the Russian Federation. By contrast, Hungary faces another year of fiscal consolidation and the outlook in parts of the Baltic, notably Estonia and Latvia, has deteriorated markedly over recent months. Employment prospects have also worsened sharply in the economic downswing. Last year saw a peak in the office job cycle with many centres booming, but a marked slowdown is now in prospect across Western Europe s major centres. At the national level, Spain s slowdown is particularly abrupt, moving from an employment boom to job contraction in less than two years. Other weak-spots include Italy, in line with its anaemic economic outlook. With the exception of Greece, Fig 6: Office jobs (% annum) COUNTRY 27 28F 29F 21F 211F 212F WESTERN EUROPE Norway Luxembourg Cyprus Finland Ireland Greece Spain Netherlands Austria Switzerland UK Belgium Sweden Germany France Denmark Italy CENTRAL EASTERN EUROPE Slovakia Latvia Lithuania Estonia Poland Czech republic Romania Hungary Source: Experian 7

10 King Sturge: European Office Property Markets 28 no market is expected to buck the slowing trend, although the downturns in the largest economies - UK, France and Germany are still relatively mild by EU standards. Job creation has generally lagged output growth by a wide margin in Eastern Europe, as many of these economies continue to undergo industrial restructuring. Office employment is holding up best in Romania and Poland, while Latvia is experiencing a period of prolonged stagnation. Demand Office occupier activity across Europe has clearly shifted into a lower gear since last year s European Office Property Markets Report. There continue to be pockets of stronger activity across Europe, but at the half way stage of the year the office occupational market is currently in the midst of a slowdown. Fig 7: Western Europe Index growth in total office take-up Index 1995 = Trend line *28 Source: King Sturge *Estimate for full year, provided Q2 28 The provisional estimates obtained in Q2 28 for full year take-up are showing signs of a weakening in occupier activity, with the Western Europe index predicting a fall of 12.4% for 28. This contrasts with a healthy growth rate of 6.9% in 27. At an individual city level, however, it is a mixed bag of fortunes for the office property markets, with the outlook not exclusively bleak. In London s West End, the market fundamentals remain stable and its diverse tenant base should continue to insulate the occupational market against further shocks. In the City of London demand has weakened, owing to capital market uncertainty affecting core tenants in the financial and business services sector. The positive occupier trends observed in the Paris office market last year have continued into 28. There has been a healthy level of take-up over the first half of the year, although slightly less than in the same period last year, as the global credit crunch has increased uncertainty. Madrid celebrated another year of buoyant occupier activity in 27, resulting in a take-up level of just over 88,m². However, demand has begun to register a downturn in 28, with the weakening economic prospects for the country having a direct influence on office location decisions. Dublin s office market also witnessed very good letting activity last year, when take-up reached 26,m². Occupier activity at the beginning of 28 remained fairly buoyant, but as the year progressed it has become clear that small to medium sized occupiers are adopting an increasingly cautious approach in view of the general economic slowdown. By contrast, larger occupiers, with requirements, appear to be taking a medium to long term view and pressing on with their acquisition plans. A number of the Nordic cities also appear to be bearing up reasonably well under these new testing conditions. There continue to be strong occupational demand in Stockholm, with the expectation that 28 will result in a take-up level broadly similar to last year. Following a record year, in which take-up reached approximately 45,m², demand for office accommodation in Copenhagen remained active over the first six months of 28. However, total take-up is expected to fall back this year towards the 26 level, in the region of 32,m². The economic slowdown in Norway has put a dampener on leasing activity in Oslo s office market in 28. Take-up for the year has been estimated at 15,m², which if achieved would represent a sizeable drop compared with the level of 26,m² registered last year. 8

11 Fig 8: Central Europe Index growth in total take-up Index 1995 = Trend line *28 Source: King Sturge *Estimate for full year, provided Q2 28 Following a year of extremely strong growth in 26, the Central Europe Index registered a fall of 5.4% in 27. The estimates provided for take-up to the year-end 28 indicate a return to positive growth, at a level of 13.7%. Good levels of demand for new office space were registered in Prague over the first half of 28, with a large number of developments in the city already pre-leased. Total take-up for the year has been forecast at 24,m², which, if achieved, would be higher than the level reached last year, although down on the record 26 figure. Occupational demand in Warsaw has remained very strong into 28, with the highest level of transactions ever recorded occurring in the first half of the year. With very little availability over the last 18 months, larger occupiers have turned their attention to pre-leases. A number of large lease transactions are in the pipeline and consequently the outlook for 28 is for continuing strong demand and the potential for a higher level of take-up. Looking beyond these cities, there has been sustained growth in the demand for office space in Bucharest in recent years, with a trend towards buildings being pre-leased at an early stage of development. Demand for modern office space in the city remains strong in 28, driven by the expansion of existing companies and newly created enterprises. The city has also benefited from Romania joining the EU in January 27. Slovakia experienced stronger economic growth over 27, which provided the momentum for occupier demand in Bratislava. Despite a softening of economic activity predicted for 28, the expectation is for stronger levels of take-up this year. Take-up once again surpassed the 1 million m² level in Moscow last year, with approximately 1.2 million m² of office space occupied in the city. Strong occupier demand has continued into 28, with the take-up level for this year forecast to reach 2.1 million m². Supply A simple, un-weighted, average of the vacancy rates for the cities in Western Europe covered in the report shows that in 27 vacancy reached 7.2% and is expected to remain at broadly this level (at 7.3%) for 28. The development pipeline for cities in Western Europe remains satisfactory, with the supply of new office product in 28 expected to be above the level delivered last year. Frankfurt and Amsterdam continue to register some of the highest vacancy in Western Europe. After several years above 15.%, the vacancy rate in Frankfurt dropped to 14.5% at the end of 27 and is forecast to reach 13.% this year. In contrast, the vacancy rate for Amsterdam has begun to jump back up, having fallen to a new low of 12.% at the end of 27. The expectation is for the vacancy rate to lie between 14.% and 15.% by the end of this year. At the other end of the scale, Geneva and Luxembourg experienced almost full occupancy in 27. The overall vacancy rate in Geneva remains low at around 2.6%, but has risen slightly over the first half of 28. This pattern is reflected in most districts of the city, although the core city centre has seen little change, so far, in the vacancy rate. The low level of new construction work in Luxembourg, combined with ongoing demand for modern office space is expected to hold the vacancy rate at around 2.%, with the possibility of a small increase (to 3.%) towards the end of the year, dependant on the level of take-up. For cities in CEE, a simple, un-weighted, average 9

12 King Sturge: European Office Property Markets 28 of their vacancy rates, suggests an increase from 5.2% in 27 to 7.1% by the end of 28, bringing them in line with Western Europe. The development pipeline is certainly stronger in the CEE, with almost every city surveyed, expecting new office volumes to surpass those delivered in 27. Fig 9: Office Vacancy 27 (%) 16% 14% 12% 1% 8% 6% 4% 2% % Growth expectation 7-8 Decrease Stabilise Increase Frankfurt Budapest Amsterdam Dublin Bratislava Stockholm Brussels Helsinki Prague Vienna Rome Zagreb Belgrade Paris Oslo Copenhagen Madrid London West End Tallinn Warsaw Luxembourg Geneva Bucharest Riga Vilnius Source: King Sturge Vacancy in Bratislava crept back up towards 1.% at the end of 27 and is forecast to rise to around 12.% by the end of this year, as a consequence of increased new product delivery. Budapest currently registers one of the highest vacancy rates compared with other cities in CEE. There continue to be good ongoing levels of demand for modern office space and the relatively strong take-up appears, so far, to have kept pace with the high volume of supply now coming to the market. This was reflected in the vacancy rate, which remained broadly stable over the first half of 28 at 12.5%. However with a higher level of development in the pipeline for the city this year, there could be an increase in vacancy to 14.%, even if take-up remains strong as over the early part of the year. At the other end of the scale, Riga, Vilnius and Bucharest registered some of the lowest levels of vacancy at the end of last year. But each city is predicting a rise over 28. Office stock in Bucharest is still very low compared to neighbouring countries. The vacancy rate for the city is currently at 2.%, but the development pipeline in the city over the next couple of years is impressive and this is expected to push vacancy towards 5.% by the end of the year. Riga experienced a significant increase in demand for modern office space last year which resulted in an extremely low vacancy rate (of 1.%) at the end of 27. However, the economic downturn has led tenants to review their expansion plans, and take-up is currently at a low level. Combined with a stronger development pipeline for this year, the vacancy rate could increase over the year to between 3.% and 4.%. Rental values After several years when prime office rental levels fell, on average, across Europe, rental growth finally resumed in 26. This continued into 27, with the rental index for Western Europe registering an increase of 1.7%. Although the positive trend has continued into this year, the expectation is for rental growth to slow to 5.5% for 28. Fig 1: Western Europe Index growth in prime office rental values Index 1995 = Trend line *28 Source: King Sturge *Estimate for full year, provided Q2 28 Prime rents in London s West End have fallen slightly to 11/ft²/annum ( 1,497/m²/annum). Some uncertainty exists in the market, stemming from the uncertain economic situation. In addition, supply has increased, albeit from a historically low level, and both rising vacancy rates and falling takeup will subdue West End rental growth in the shortterm. Prime rents in the City of London office market have also fallen to 57.5/ft²/annum ( 783/ m²/annum). This may now provide a real value alternative to occupiers from London s West End and Midtown. Having reached a record 8/m 2 /annum last year, prime rents in Paris have risen once more to a new level of 83/m²/annum. It is now assumed that prime rents are close to their ceiling. Rental values are likely to stabilise, with uplift limited by the extra 1

13 vigilance now being exercised by businesses. In the Nordic region, prime rents for good quality offices in Oslo increased in 27. Rental growth is now slowing and prime rents may even have peaked, due to the increasing willingness of occupiers to renegotiate, falling demand and new office stock coming to the market. Stockholm registered continued rent rises in early 28, but over the second quarter of the year growth began to level out. This trend is expected to continue over the next two quarters and by the end of the year prime office rents could begin to edge lower. Fig 11: Central Europe Index growth in prime office rental values Index 1995 = Trend line *28 Source: King Sturge *Estimate for full year, provided Q2 28 In Central Europe, the rate at which rents were falling began to slow over 25, and bottomed out in 26. Rental growth returned with a flourish in 27, with the index for Central Europe registering a robust rise of 19.4%. The forecast for 28 is for rental growth to moderate to 13.2%. Warsaw has experienced further rental growth since Q2 27, with prime in-town rents now at 36/m²/annum. Demand for premium office accommodation remains strong, although there has been a noticeable slowdown in the growth of prime rents. Nevertheless, with a limited development pipeline in the city centre, buildings with an estimated completion between 29 and 21 are quoting higher rental values. Prime office rents in Prague remained relatively stable over the first half of the year, due to sufficient supply of new office product coming to the market. For H2 28 the expectation is for a small increase for prime in-town office space. In contrast, the intensive growth of new office rents in Budapest is expected to lead to downward pressure on prime rents over the next months. Office rental levels in Riga are currently the highest among the Baltic capitals. The demand for office property continues to outweigh supply, which has resulted in an increase in prime rents since Q2 27. The shortage of development will continue to drive rents upward over the next few years, until new large scale projects have been delivered to the market. Fig 12: Most expensive European office locations Country City Prime Rents Q2 28 ( /m²/annum) 1 United Kingdom London West End Russia Moscow France Paris 83 4 United Kingdom London City Switzerland Geneva Ireland Dublin Switzerland Zurich United Kingdom Thames Valley Italy Milan 51 1 Spain Madrid Norway Oslo Sweden Stockholm Italy Rome Germany Frankfurt Luxembourg Luxembourg Poland Warsaw United Kingdom Birmingham United Kingdom Manchester United Kingdom Edinburgh United Kingdom Bristol 374 Source: King Sturge EOPM 28 Investment Market Having reached the half way stage of 28, the slowdown in capital markets is spreading out across Europe. A weakening in investment activity is now evident in most European markets, with all but a few cities registering an outward correction in yields. 11

14 King Sturge: European Office Property Markets 28 Fig 13: Total investment volumes Europe (billion) Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan 7 8 Source: Real Capital Analytics, 28 Office Other commercial Feb Mar Apr In London, the first half of the investment year was very sluggish with low volumes of transactions. The West End has seen an outward correction in prime office investment yields of 125 basis points to their current level of 5.25%, whilst the City of London has experienced a steeper rise of 175 basis points to 6.%. The availability of debt has clearly been the biggest issue, along with fears of further yield drift outwards. This slowdown in the London investment market is expected to continue for some months. Downward adjustments in valuations could assist the investment market. However, liquidity is likely to remain poor. The reduced level of liquidity arising from the global credit crunch has also impacted on investment activity in the Dublin office market, which has seen very few transactions so far this year. Prime office investment yields are now at 5.%, representing an outward correction of 125 basis points. In mainland Europe, the Paris market performed reasonably well in the first half of 28 demonstrating its solidity. But lower investment volumes reflected the general market downturn. At present, investors are acting cautiously and having difficulty accepting lower prices in the market, with an outward correction of 175 basis points in prime office investment yields to 5.25%. In Frankfurt, prime investment yields have also moved out to 5.25%, reflecting a correction of 5 basis points. Good quality investment products are still in high demand, a position that is expected to continue over the course of %. With the exception of the sale of the Corio office and industrial portfolio for 65 million, there has not been any substantive volume transacted in the market this year. Subdued activity remains likely over the remainder of the year. The office investment market in Stockholm has performed reasonably well in H1 28, albeit the transaction volume has been lower than the previous two years, but still above historic norms. Over the remainder of the year, the transaction volume is expected to be relatively high, with a number of large deals likely to be closed during the second half of the year. In spite of this, transactions are taking longer to complete and off-market deals are becoming more common. Prime investment yields have so far only shifted out by 5 basis points since mid-27, but the market expects a further 25-5 basis points movement in the second half of the year. Office investment markets in CEE have also been exposed to the financial market turmoil. Warsaw has until very recently been dominated by foreign investors, but the global credit crunch has had a significant impact on investment activity in the city and the country as a whole. Investment volumes in H1 28 have shown an improvement over H2 27, although they remain below the levels seen a year earlier. As with other CEE markets, investment activity over the second half of the year will largely depend on when the credit crunch ends. There has been a marked decrease in investment activity in the Prague office property market, with only a few transactions completed in the first six months of 28. However, the investment market is still relatively liquid, thanks to German and Czech funds. Property fundamentals such as location, income sustainability, building quality and covenant strength are now of higher significance for investors. Prime investment yields in Amsterdam have, so far, seen an outward correction of 7 basis points to 12

15 Fig 14: Prime office yields (in-town) COUNTRY CITY Prime Yield Q2 27 (%) Prime Yield Q3 28 (%) Basis point change since Q2 27 Austria Vienna Belgium Brussels Croatia Zagreb Cyprus Nicosia Czech Republic Prague Denmark Copenhagen Estonia Tallinn Finland Helsinki France Marseille/Aix France Lyon France Paris Ile de France Germany Berlin Germany Frankfurt Germany Munich Greece Athens Hungary Budapest Ireland Dublin Italy Milan Italy Rome Latvia Riga Lithuania Vilnius Luxembourg Luxembourg Netherlands Amsterdam Norway Oslo Poland Warsaw Romania Bucharest Russian Federation Moscow Serbia Belgrade Slovakia Bratislava Spain Barcelona Spain Madrid Sweden Stockholm Switzerland Geneva Switzerland Zurich Turkey Istanbul 7.5 United Kingdom Belfast United Kingdom Birmingham United Kingdom Bristol United Kingdom Cardiff United Kingdom Edinburgh United Kingdom Glasgow United Kingdom Leeds United Kingdom London City United Kingdom London West End United Kingdom Manchester United Kingdom Thames Valley Source: King Sturge EOPM 28 Note: All yields are quoted as Gross, with the exception of the UK which quotes Net yields. 13

16 King Sturge: European Office Property Markets 28 Prime rents and yields % Glasgow % Edinburgh % Belfast UNITED KINGDOM IRELAND % Dublin 6.25% Leeds 645 Manchester 5.% City % West End 1, % % Cardiff Bristol % Thames Valley % Birmingham % % NETHERLANDS Amsterdam London Paris % Brussels BELGIUM % LUXEMBOURG Luxembourg % Frankfurt % FRANCE % Geneva Lyon 25 6.% % Zurich SWITZERLAND Milan % SPAIN % Madrid Barcelona % Aix Marseille % 14

17 NORWAY % Oslo DENMARK SWEDEN Copenhagen % % Stockholm FINLAND % Helsinki Tallinn % ESTONIA % Riga LITHUANIA Vilnius % LATVIA Prime rent Rents ( /m 2 /annum) quoted refer to headline rents in high quality buildings situated in prime locations and are assumed to be over 5m 2 Prime yield Investment yield (in%) quoted refer to a valuation of office property let at full market value and which is of the best physical quality, in the prime location, and with the best tenant s covenant and contemporary lease terms. Generally, a benchmark with which to compare other properties. RUSSIA Moscow % % Berlin GERMANY % Prague POLAND 48 6.% Warsaw % Munich AUSTRIA CZECH REP. Vienna 3 5.5% % Bratislava Budapest 24 HUNGARY 7.% SLOVAKIA ITALY Zagreb CROATIA % Belgrade % SERBIA ROMANIA % Bucharest Rome % Istanbul % GREECE TURKEY Athens % % CYPRUS Nicosia 15

18 King Sturge: European Office Property Markets 28 Fig 15: Selected office acquisitions Asset City Price ( mil.) Deal Done Size (m²) Vendor Purchaser Citigroup Headquarters London 1,4 Q ,5 Royal Bank of Scotland Derek Quinlan and Glenn Maud Willis Building London 511 Q2-8 46,78 British Land St Martins Cartier Headquarters Paris 38 Q3-7 21, Bank of Ireland KanAm Grundinvest Fonds 9 place Vendôme Paris 335 Q3-7 22, Hammerson Plc and SAS Sloan Place Vendôme AXA Reim Globen City (11 offices/ Stockholm 324 Q , Whitehall Funds Carlyle Group retail properties) Covent Garden (2 office Brussels 272 Q4-7 72, Immobiliere du Royal Evans Randall properties) Rogier SA Silver City Moscow 224 Q2-8 58,998 Neftyanoy RP Capital Group PLAZA 63 Stockholm 22 Q4-7 25, Stockholm Klara MEAG Aker Brygge (4 office/retail Oslo 23 Q3-7 32, DnB NOR Bank ASA Norwegian Property ASA properties) Fürstenhof Frankfurt 129 Q3-8 18,45 Eurocastle Union Investment Investment plc Source: King Sturge 16

19 European City Specific Summaries Please note: *estimate for the full year, provided Q2 28

20 AUSTRIA - Vienna BELGIUM - Brussels Contact: Agency and Investment Alfons Metzger Metzger Realitäten Gruppe, Gumpendorfer Strasse 72, 16 Vienna ( ) In-town Out-of-town Prime rent ( /m²/annum) 3 12 Prime yield (%) Vienna has an estimated *1.5 million m 2 of office stock. Strong demand for office space in the city over 27 resulted in takeup reaching a high of 35,m². This positive occupier activity appears to have continued into the first half of 28 and the expectation is for continuing strong demand over the remainder of the year, with take-up maintained at a similar level to that registered last year. The level of demand being registered, combined with a shortage of new office space in the city, saw the vacancy rate remain at a level below 6.% last year. The vacancy rate is forecast to reduce further to 5.% by the end of the year, despite new construction estimated to be in the region of 2,m² coming to the market in 28. The future redevelopment of the Wien Mitte and Westbahnhof railway stations will, in due course, provide new city centre office locations. Rents for in-town office space in Vienna have begun to increase as a consequence of ongoing demand and limited new construction coming to the market. The prospects for rental growth in-town remain positive over the second half of 28 and first half of 29. The rental levels for out-of-town office accommodation are expected to remain at their present level. With the exception of one particularly large deal, namely the sale of the BAWAG portfolio of 16 buildings in Vienna, Graz and Innsbruck to Signa Holdings for 45 million in November 27, the office property investment market for the city has been quiet over the early part of 28, seeing a reduced level of market activity by foreign investors. Prime office investment yields have moved out to between 5.% and 6.% as at Q3 28. Contact: Agency Cédric van Zeeland Investment: Stefan Kennes King Sturge LLP, Bastion Tower, Place du Champ de Mars 5 box 15 (8th floor), 15 Brussels ( ) In-town Out-of-town Prime rent ( /m 2 /annum) Prime yield (%) Brussels has an estimated *13.3 million m 2 of office stock. The delayed formation of a new Belgian government resulted in subdued office market activity over 27. As a consequence, take-up reduced in the city as well as the periphery of Brussels, with total take-up for last year at just over 49,m². Occupier demand for the city remained satisfactory entering into 28, with the expectation that the take-up level, estimated as of Q2 28, will be in the region of 45,m² for this year. After several years in which the overall vacancy rate for the city went above 1.%, the rate began to creep down in 26 and has remained below 1.% since then. It came to rest at 9.% at the end of 27 and given the level of occupier demand expected for this year balanced with new supply coming to the market should remain at broadly the same level or possibly even register a dip by the end of 28. Prime office rents have experienced a small drop since mid 27 to their current level of 275/m²/annum. In general, the office occupier market in Brussels has continued with a stable performance over the first six months of 28 and is expected to remain at this level of activity over the second half of the year. As with other European countries, Belgium is influenced by the current European economic climate, which may have some bearing on rental growth over the next 12 months. The volume of investment in office stock in Belgium amounted to 2,235 million in 27. Despite representing a drop of 11.5% in investment volume compared with 26, investment in office stock in Brussels rose by a solid 6.5% to 1,822 million. Prime office investment yields tightened in 27 by 25 basis points to 5.5% and so far have remained at this level into 28. Notwithstanding the current turmoil in the global financial market, Brussels prime office yields seem currently little affected and the European capital remains a very stable market, continuing to attract foreign investors. Vienna prime rents and yields Brussels prime rents and yields

21 CROATIA - Zagreb CYPRUS - Nicosia Contact: Agency and Investment Jens Moller Madsen King Sturge d.o.o., Eurotower, Ivana Lučića 2a, 1 Zagreb ( ) Contact: Agency and Investment Michalis Pantazis AMP Andreas Pantazis Ltd, Politia Business Centre, Alkeos 23, Office 32, Egkomi 244, 1642 Nicosia ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) Zagreb has an estimated *82,m 2 of office stock. There are five main office locations in the city, but most of the class A office stock is located in the CBD and wider centre zones. The city s office market has effectively doubled in size over a relatively short period of time, but remains smaller than the markets of other capital cities in Eastern Europe such as Budapest, Prague or Bucharest. There was a sizeable increase in new supply in 27, with the delivery of approximately 17,m² of modern class A office space to the city. This in turn allowed Zagreb to maintain a good level of take-up as occupiers sought to relocate to new modern premises. Demand has remained strong over the first six months of 28, with the vacancy rate reducing to 5.%, and with limited supply of new office developments coming to the market this year the vacancy rate for Zagreb should register a further small decline. The downward pressure that had been placed on rental levels as a result of increased supply appears to have dissipated over 27 and there are now signs of rental growth returning to the city. In particular, interest in established prime locations is expected to place upward pressure on rents for high quality office buildings. The office investment market continues to develop in the city and whilst only a few transactions were recorded in the last year, there has been further yield compression of approximately 5 basis points for both in-town and out-of town office product since Q2 27. Despite a more cautious approach from investors this year, in light of the recent financial market crisis, further yield compression could occur as a consequence of positive economic growth and EU accession which is expected to attract international capital. Nicosia has an estimated *51,m 2 of office stock. The city s main office locations are situated along the Arch. Makarios, Kennedy, Gr. Dhigenis and Santaroza avenues. The adoption of the euro on 1 January 28 appears to have gone smoothly. The office occupational market continues to show small but positive signs of improvement, with a slight increase in take-up registered over the first half of 28. The expectation is for the current steady conditions of the office property market to prevail for the duration of the year, albeit with take-up reaching a level in the region of 1,m², slightly below that achieved in 27. The supply of new high quality office space remains limited, with the majority of available floor plates between 25-35m². A small development pipeline for the city is expected to provide in the region of 1,m² of new office product this year. There is, however, a significant supply of secondary office space. The vacancy rate for the city as a whole continues to fall and is expected to reduce further over the year to 5.%. Rental levels for office accommodation throughout the city have risen since last year, with prime rents in-town having reached 216/m²/month. The rising cost of construction may stimulate a further small increase in rental levels for both in-town and outof-town office space. The property investment market in the city continues to develop, with prime investment yields having tightened by approximately 75 basis points for premium in-town office product since Q2 27. However, most of the city s office investment transactions to date have been for occupational purposes. Zagreb prime rents and yields Nicosia prime rents and yields

22 Czech Republic - Prague Denmark - Copenhagen Contact: Agency and Investment Angus Wade King Sturge s.r.o., Bredovský dvůr, Olivova 4, 11 Prague 1 ( ) Contact: Agency and Investment Peter Winther Sadolin & Albœk A/S, Nikolaj Plads 26, 167 Copenhagen ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) Prague has an estimated *2.3 million m 2 of office stock. Most of the city s modern office stock is currently to be found in Prague 4, followed by Prague 1. However, redevelopment is planned for Prague 9, under a seven year regeneration plan for the district. Demand for new office space in Prague over the first half of 28 has been healthy, with a large number of the future developments in the city already pre-leased. Companies in the Czech Republic have generally been performing very well and the economy is thriving and consequently demand for office space has remained firm, keeping the vacancy rate low at 6.%. Total take-up for the year is forecast to be in the region of 24,m², which if achieved would be higher than the level reached last year, although down on the record take-up of 26. The development pipeline in the capital is currently very strong, with approximately 285,m² of new supply expected to be delivered in 28. This is likely to have an adverse effect on the vacancy rate, pushing it closer to 8.% by the end of the year. Prime office rents in Prague have been relatively stable due to sufficient supply. For H2 28 the expectation is for a slight increase in prime rents for in-town office space to 264/m²/ annum. Rental levels in non-central locations have not changed significantly since last year and will see only minor increases in 28. Copenhagen has an estimated *11.2 million m 2 of office stock. Following a record year, when take-up reached approximately 45,m², the demand for office accommodation remained active over H1 28 but with the expectation that total take-up for this year will be in the region of the level achieved in 26 at around 325,m². The estimated development pipeline for the city of 18,m² scheduled for delivery in 28 is expected to stabilise rental levels, which currently stand at 255/m²/annum (DKK1,9/m²/ annum). The vacancy rate for the city has also stabilised at just below 5.%. However, some prime locations in the city have very limited availability of office space, which could signal small rental level increases in these districts in the short-term. The Copenhagen office investment market has, needless to say, been affected by the global credit crisis, which has driven down liquidity and investment activity and changed the sentiment in the commercial property market causing an outward shift in prime investment yields. The volume of investment property transactions is expected to pick up again in the second half of 28, with office property prices forecast to stabilise as soon as vendors have adjusted their price expectations. There has been a marked decrease in investment activity within the Czech office property market, with only a few transactions completed in the first six months of 28. However, the investment market is still relatively liquid, thanks to German and Czech property funds retaining the capability for large investments. Property fundamentals such as location, income sustainability, building quality and covenant strength are now of higher significance for investors, reflecting a greater emphasis on the underlying risks. The outlook for the remainder of the year is for a gradual realignment of the expectations of developers and vendors with investors, in which some developers may be compelled to accept investors expectations and sell some properties. Prague prime rents and yields Copenhagen prime rents and yields

23 ESTONIA - Tallinn FINLAND - Helsinki Contact: Agency and Investment Vitali Kõllomets Re&Solution, Foorum House, Narva Road 5, Tallinn 1117 ( ) Contact: Advice Antti Tuomela Newsec Oy, Mannerheiminaukio 1, 11 Helsinki ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) Tallinn has an estimated *49,m 2 of office stock. Activity in the occupational market for offices declined significantly in the first six months of 28, despite a large volume of new product being delivered to the market. As a consequence of the economic slowdown being felt across Europe, tenant confidence has fallen and many companies have postponed their expansion plans. This slowdown in letting activity is not expected to alter dramatically over the second half of the year. Several new office projects will be completed over this period, thereby further increasing competition in the market. This, in turn, could lead to landlords reducing rental levels, especially in class B properties, where the majority of supply is coming to the market. The vacancy rate for the city is currently very low at around 3.% to 4.%, but is expected to tick up towards 5.%, over the remainder of the year. Prime rents for in-town office accommodation have risen since last year and now stand at 26/m²/annum (EEK34/m²/month). Rental growth prospects for in-town office accommodation remain positive over the next 12 months, since demand for these premises stays high, while supply remains limited. However, a small reduction in out-of-town prime rents is forecast, due to higher competition and the increasing difficulty of finding tenants. A number of landlords of out-of-town properties have already begun to lower their rental levels and others are expected to follow. Tallinn s office investment market performed weakly in H1 28, with the only significant transaction being the acquisition of the 21,m² Marat office building. The building, which is a B-/C grade premises located on one of the major roads in the city, was acquired by Baltic Property Trust Optima at an estimated yield of 8.%. The performance of the investment market over the second half of the year will largely depend on any positive signals both in the global financial markets and the local economic environment. However, the majority of investors appear to have put the market on hold, which could mean little significant activity in the investment market until 29. Helsinki Metropolitan Area has an estimated *8.2 million m 2 of office stock. The prime office area in HMA is Helsinki CBD, however prime submarkets include Ruoholahti, also in Helsinki, Keilaniemi-Leppävaara, in Espoo and Aviapolis in Vantaa, where rents are noticeably higher than in other central areas of the city. Demand for office accommodation was stable over H1 28, with the vacancy rate for the city remaining broadly level at 8.5%, apart from in the CBD which registered a small fall over the period. However, with several new office developments being delivered in prime office locations outside the CBD, the expectation is for the vacancy rate of HMA to rise over the second half of the year. There has been a small increase in prime rents for modern office accommodation, particularly for space located in the CBD and new product coming to the market over 28 could place further upward pressure on in-town rental levels. In the other prime office areas throughout HMA prime rents are expected to remain around their current level. The investment market has been active over the first half of the year, with the total investment volume in Finland reaching over 2 billion in Q1 28 alone, as a result of three large transactions. This level of activity is not expected to be continued over the rest of the year. However, despite this being a quieter period for the investment market, active buying and selling continues. Prime office investment yields have seen an outward correction of 55 basis points to their current level of 5.25% since Q2 27. Tallinn prime rents and yields Helsinki prime rents and yields

24 FRANCE - Lyon FRANCE - Marseille/Aix Contact: Investment Christophe Audoux King Sturge SA, 36 rue Brunel, 7517 Paris ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) Lyon has an estimated *4.7 million m 2 of office stock. A significant regional office market in France, the city is divided into districts which tend to be dominated by certain sectors such as financial, hi-tech, R&D and biotech industries. Whilst these are all well connected by the transport network to the main orbital markets, occupiers are increasingly attracted to out-oftown markets because of the better quality of environment and lower rents. Following a good performance in the office market during 27, in which take-up rose to a record level of 286,m², the market was calm at the beginning of 28, registering a limited number of leasing transactions. Available supply has risen slightly, with most of this currently concentrated in the outskirts of the city. However, with no deliveries scheduled in the Part Dieu district in 28, the CBD is likely to experience a shortage of new supply. Prime rents for in-town office accommodation have risen to a new high of 25/m²/annum, whilst out-of-town rents have remained stable. The continued development of Lyon, combined with a restricted development pipeline in-town, should maintain the upward trend on prime rents, particularly in the more sought after locations. Lyon s office property investment market has been very dynamic over the past few years, registering close to a 5% increase in investment transactions between 26 and 27. There has, however, been an outward correction of 5 basis points for intown prime investment yields since Q2 27, which now stand at 6.%. So far, the financial crisis has only slightly affected the Lyon office investment market. It is expected that reasonable volume in the market, along with attractive yields and an ability to attract investors, should maintain the city s position as a potential location for investment over the course of 28. Contact: Agency Régis Negrail Investment Jean Cabrera King Sturge Méditerranée SA, Les Docks, Hôtel de Direction, 1 place de la Joliette, 132 Marseille ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) Marseille and Aix have an estimated *2.2 million m 2 of office stock. The revitalisation of Marseille is firmly underway with the Euromediterranée project, the biggest development programme to be undertaken in France since Paris La Defense. The project involves the remodelling of the entire urban area from La Joliette to the area around the St. Charles railway station. A lack of supply continues to restrict the office market in Marseille, with new schemes accounting for little more than 1% of the available supply. Most of the future stock that will come to the market will be located in Euromediterranée, Vallee Huveaune or Le Canet, with both buildings to be delivered in Euromediterranée already pre-let. The tension between demand and supply has meant prime rents have ticked up for both in-town and out-of-town office accommodation since last year, with rental levels for intown office space currently standing at 215/m²/annum. The expectation over the next 12 months is for prime rental levels to register a further small rise, as supply and demand will not be adequately balanced in the currently under supplied market. There has been a small compression of 25 basis points in prime investment yields for in-town office product since Q2 27 to 6.%, whilst out-of-town investment yields remain unchanged at 6.75%. Investment demand for high quality office product is expected to remain active and sustained in the city over the course of 28. However, any speculative activity is likely to be limited, due to new financial constraints brought about by the credit crunch. Lyon prime rents and yields Marseille/Aix prime rents and yields

25 FRANCE - Paris GERMANY - Berlin Contact: Agency Nicolas JeanJacques Investment Philippe Semidei King Sturge SA, 36 rue Brunel, 7517 Paris ( ) Contact: Investment Sascha Hettrich King Sturge Hettrich GmbH, Jaegerstrasse 59, D-1117 Berlin ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) In-town Prime rent ( /m²/month:annum) 23:276 Prime yield (%) 5.5 Ile de France has an estimated *5 million m 2 of office stock, making the region the largest office market in Europe. Paris and the Inner suburbs, which includes La Défense, the Western Business District and the emerging markets of Saint-Denis and Montreuil account for over 7% of the built stock. Most large French companies have their headquarters in Paris for reasons of status, despite the increasing competition from secondary locations, which offer quality office accommodation at a lower cost. The positive occupier trends observed in the office market of Ile de France last year continued into 28. There has been a sustained level of take-up over the first half of the year, although slightly less compared to the same period last year, with total take-up for 28 forecast to reach between 2.4 and 2.7 million m². It is now fair to say that the credit crunch has cast a veil of uncertainty over businesses in the city, with many acting cautiously. The vacancy rate for the city fell to below 5.% at the end of 27, but is forecast to creep back up to around 5.5% by the end of the year, due to moderating demand. Having reached a record 8/m 2 /annum last year, rents have risen once more to a new level of 83/m²/annum. It is now assumed that prime rents are reaching their ceiling limit. Prime rental values are expected to stabilise, limited by the extra vigilance being exercised by businesses. How the market performs over the remainder of 28 will very much depend on the performance of the French and international economies. The Ile de France office investment market performed reasonably well in the first half of 28 demonstrating its solidity, but lower investment volumes reflect the general investment market downturn. Investors are now acting cautiously and having difficulty accepting the lower prices in the market, with an outward correction of 175 basis points in prime office investment yields to 5.25% since Q2 27. Berlin has an estimated *17.8 million m 2 of office stock. Takeup of office space in the first six months of 28 has been at a broadly similar level as that registered over the same period in 27, with total take-up for the whole year forecast to be in the region of 475,m² to 5,m². If achieved, this would represent a take-up level slightly below that achieved last year. There are an increasing number of smaller lettings up to 25m² taking place, with a corresponding lack of lettings of larger premises over 5,m². Over the remaining half year, the forecast is for an increase in take-up of office space particularly within the prime office locations of City-Ost, Potsdamer Platz/Leipziger Platz. The vacancy rate for office space in Berlin remains stable at approximately 9.%. However, the vacancy rate is expected to increase in secondary locations and for ageing office space which does not meet current standards. Prime office rents have risen since Q2 27 and now stand at 23/m²/month ( 276/m²/annum), with asking rents slightly higher than this figure. The expectation is that there will be a further increase in rental levels where demand is highest, mainly in prime and central office locations within new or modernised office buildings of a higher standard. Berlin s investment market has not gone unscathed from the credit crunch, but to date, there has only been an outward correction of 75 basis points in prime office investment yields to 5.5%. The general consensus is, however, that prime office yields in Germany could move out by between 25-5 basis points in 28, depending on location. Paris prime rents and yields Berlin prime rents and yields

26 GERMANY - Frankfurt GERMANY - Munich Contact: Investment Mathias Grundman King Sturge GmbH, Kaiserstrasse 6, 6311, Frankfurt am Main ( ) Contact: Investment Mathias Grundman King Sturge GmbH, Kaiserstrasse 6, 6311, Frankfurt am Main ( ) In-town Out-of-town Prime rent ( /m²/month:annum) 36.5: :162 Prime yield (%) In-town Out-of-town Prime rent ( /m²/month:annum) 33:396 1:12 Prime yield (%) Frankfurt has an estimated *11.9 million m 2 of office stock. Both the leading German banks and the European Central Bank have headquarters in the city. The city is situated in the Rhein-Main, which is one of the most densely populated areas in Europe. Demand for office accommodation has continued at a good level into 28 and could be on course to surpass the level of 59,m² achieved in 27. The development pipeline also remains healthy and is expected to bring in the region of 25,m² of new construction to the market in 28. After several years above 15%, the vacancy rate dropped to 14.5% at the end of 27 and is forecast to reach a level of 13.% by the end of this year. Prime office rents have been rising since Q2 27 and now stand at 438/m 2 /annum ( 36.5/m 2 /month), representing an increase of 18/m²/annum. Following several years of stable rental levels, out-of-town rents have also risen to 162/m²/ annum ( 13.5/m²/month). The prospects for further rental growth over H2 28 and into early 29 remain good for intown office accommodation, whilst out-of-town rental levels are expected to remain unchanged. The city s investment market has seen a correction in prime office yields, which currently stand at 5.25%. Good quality investment products are still in high demand, a position that is expected to continue over the course of 28. Munich has an estimated *18.1 million m 2 of office stock. The capital of the federal state of Bavaria and home to car manufacturer BMW, the city, with approximately 1.3 million inhabitants, is the third largest in Germany. Munich s office property market has experienced ongoing good levels of occupational activity in the first six months of 28 and at present appears to be in a stronger position compared with other German office markets. Robust activity in the occupational market is expected to continue over the course of the year, with the forecast for total take-up set at between 5% and 15% above the level of 6,m² achieved in 27. A development pipeline of circa 2,m² is scheduled for delivery in 28 and this, combined with continued strong levels of demand, is expected to see the vacancy rate of the city dip towards 7.% by the end of the year. Prime office rents have increased since mid 27 to their current level of 396/m²/annum ( 33/m²/month). The prospects for further rental growth in-town over the next 12 months continue to be positive, whilst out-of-town rents are expected to remain unchanged over this period. The city s office property investment market, as with other Western European cities, has been affected by the credit crunch. Prime office investment yields for in-town office accommodation so far have seen an outward correction of 5 basis points to 4.75% since mid 27. A further outward correction remains a possibility, dependent on how the global financial markets perform over the second half of the year. Frankfurt prime rents and yields Munich prime rents and yields

27 GREECE - Athens HUNGARY - Budapest Contact: Agency and Investment Thomas Ziogas King Hellas, 7 Evinou str, Athens Tower Building C, Athens ( ) Contact: Agency and Investment James Kinnell King Sturge, Roosevelt Tér 7-8, 154 Budapest ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) Athens is the fourth most populous city in Europe and one of the fastest growing. New transport infrastructure, in part brought about as a result of hosting the Olympic Games, has fundamentally changed the market, creating new opportunities for well-connected decentralised office developments. The country s positive economic growth in recent years has also stimulated demand for good quality office accommodation in the city. There has, however, been very limited office leasing activity in the first six months of 28, with few transactions involving buildings over 3,m². There continues to be a shortage of class A space in the northern part of Athens, but a growing oversupply in the south of the city. Prime rents for in-town office accommodation, which have risen since Q2 27 to reach 42/m²/annum are now stabilising. Prime office rents are expected to face downward pressure across the city over the remainder of the year. Despite prime investment yields for good quality office product remaining the same since mid 27, there has been very little investment activity in the city over the first half of the year. No change is expected over the course of the year. Budapest has an estimated *2.1 million m 2 of class A and B++ office stock. Hungary has historic ties with Austria and the country is an important gateway to the developing eastern and southern regions of Europe. The Váci út corridor in District XIII and the XIth District remains the main focus for new office developments. There continues to be ongoing demand for modern office accommodation and the relatively strong take-up level being registered in the city appears, so far, to have kept pace with the high volume of supply now coming to the market. This is reflected in the vacancy rate, which remained broadly stable over the first half of the year at 13.6%. However with a development pipeline for the city in the region of 3,m² scheduled for delivery in 28 and 29, this could potentially increase to 17% by mid 29. Prime rents for premium in-town office space have reached 24/m²/annum. However, the intensive growth of office spaces in Budapest is expected to lead to downward pressure on prime rental levels over the next months, where there is a significant amount of new supply. Prime rents in the Vth District are anticipated to remain stable where less supply exists. There have been very few completed investment transactions in the first half of the year, with reported volumes of circa 76 million. This is a consequence of the low liquidity in the market. A stronger second half is expected if purchasers gain more confidence on pricing. It is unlikely, however, that there will be a significant increase in liquidity. Athens prime rents and yields Budapest prime rents and yields

28 IRELAND - Dublin ITALY - Milan Contact: Agency Declan O Reilly Investment Adrian Trueick HT Meagher O Reilly Ltd, 7 Lower Hatch Street, Dublin 2 ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) Dublin has an estimated *3. million m 2 of office stock. Following a record year in terms of letting activity when take-up reached 26,m², activity at the beginning of 28 remained fairly buoyant. As the year has progressed, it has become clear that small to medium sized occupiers are adopting an increasingly cautious approach to their requirements in view of the general economic slowdown. At the same time, larger occupiers with requirements appear to be taking a medium to long term view and pressing on with their acquisition plans. Take-up for the year is now expected to be down on the level achieved in 27, in the region of 2,m². Any demand is likely to be focused on the prime city centre districts of Dublin 2 & 4, whereas out-of-town locations are gradually feeling the effects of the general economic uncertainty that could prevail over the next 12 months. With circa 2,m² of new office space expected to be delivered in 28, the vacancy rate for the city remains broadly stable hovering around the 1.% level. Prime rents for premium quality in-town office accommodation have settled at 645/m²/annum, while out-of-town rents have dipped to 27/m²/annum. There is unlikely to be further rental growth in the second half of the year and inducements available to prospective occupiers may increase. The reduced level of liquidity arising from the global credit crunch has impacted on investment activity in the Dublin office market, which has seen very few transactions so far this year. Prime office investment yields are at 5.%, representing an outward correction of 125 basis points since mid 27. Contact: Agency and Investment Alastair Manning King Sturge LLP, 3 Warwick Street, London WIB 5NH ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) Milan has an estimated *9.3 million m 2 of office stock. Occupier demand has remained positive, with a reasonable level of takeup recorded over the first half of the year. The expectation for 28 as a whole is for take-up to reach a level of 24,m², which if achieved would be only slightly below the level achieved last year. The development pipeline for the city is improving and with circa 225,m² of new construction expected in 28, compared with just 12,m² in 27, the availability of new supply is providing tenants with the opportunity to fulfil their requirements more quickly. Prime rents now stand at 51/m²/annum with the prospect of a further small increase by the end of the year. Quality new space is commanding prime rents and the trend for companies to relocate to newer and more efficient properties is helping to raise rental levels. The office investment market has slowed since the end of 27, with evidence of investors being more cautious in the market. However, due to the market s strategic position and the availability of quality product, investors have maintained their interest in prime locations throughout the city. Prime investment yields are now at 5.25%. Out-of-town locations have seen an outward adjustment of yields, reflecting the current market sentiment. The outlook for the remainder of 28 will see investors waiting for an improvement in market confidence to justify further investment. Milan has been chosen to host Expo 215 and this is expected to boost investment and development in the coming years as future requirements expand the city s supply of class A office space. Dublin prime rents and yields Milan prime rents and yields

29 ITALY - Rome LATVIA - Riga Contact: Agency and Investment Alastair Manning King Sturge LLP, 3 Warwick Street, London WIB 5NH ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) Rome has an estimated *9.1 million m 2 of office stock. As the capital city it represents Italy s political and administrative centre, with a significant proportion of occupier demand coming from the public sector. Strict planning controls in the centre of the city mean that modern office space is at a premium. Occupier demand has remained positive going into 28, with most activity concentrated in the greater EUR district to the south-west of the city centre. This area has become an attractive office submarket, benefiting from more modern premises and larger, open plan floor plates compared to the CBD. Leasing activity is expected to continue its positive trend over the remainder of the year and activity in the peripheral areas of the city could increase. Take-up for the year is forecast to be in the region of 15,m², which if achieved would be above the level registered in 27. A lack of quality supply remains an obstacle for tenants, with restrictions on development in-town and a moderate level of new supply coming onto the market in 28. The vacancy rate is expected to remain broadly stable at 5.5%. Prime rents for out-of-town office accommodation have remained stable at 21/m²/annum, whilst in-town prime rents have now risen to 45/m²/annum due to the ongoing lack of quality supply. There remains the potential for a further small increase in rental levels this year as demand continues to outpace supply. Prime office investment yields have moved 5 basis points since mid 27 to 5.5%, and the investment market, has slowed since last year. General uncertainty in the market, coupled with the limited availability of investment grade product, has contributed to this situation. A waiting game is now being played by investors, as they look for improvements in market confidence to justify further investment. Contact: Agency and Investment Sergejs Snergirjovs Re&Solution, Vilandes 1, LV 11 Riga ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) Riga has an estimated *4,m 2 of office stock. Business activity in the city has traditionally been located on the right bank of the Daugava river, in the Old Town and the CBD. The new business districts of Űlemiste City and Rotermanni Kvartal are being developed in stages. The city experienced a significant increase in demand for modern office space last year which resulted in an extremely low vacancy rate of just 1.% at the end of 27. The economic downturn this year has led to tenants reviewing their expansion plans, and as a consequence take-up is currently at a low level with tenants increasingly price-conscious and signing up for smaller premises than planned. With a development pipeline for this year in the region of 145,m² the vacancy rate could increase to between 3.% and 4.%. An excess in occupier demand for office property in Riga has resulted in an increase in rents since Q2 27, which are currently the highest among the Baltic capitals. However, a slowing economy is now forcing potential tenants to review their expansion plans, with the expectation that occupier demand is unlikely to grow as rapidly in the second half of the year. The office property market in Riga has seen considerable yield compression in recent years. However, there has been little if any investment activity over the first half of the year with investors sensitive to risks in the markets. Prime office investment yields have seen an outward correction of 125 basis points to 7.75% since mid 27. The prospects for the remainder of the year are unchanged, with the growing likelihood that the city s office property investment market could stagnate. Rome prime rents and yields Riga prime rents and yields

30 LITHUANIA - Vilnius LUXEMBOURG - Luxembourg Contact: Agency and Investment Neringa Rastenyte Re&Solution, Jogailos str. 4, LT-1116 Vilnius ( ) In-town Prime rent ( /m²/annum) 243 Prime yield (%) 7.5 Vilnius has an estimated *243,m 2 of office stock. Activity in the city s office property market has slowed somewhat since last year, with the dampening of activity in the Lithuanian economy having a direct negative impact on the need for modern premises. The supply of modern office stock in Vilnius has so far been insufficient, with all of the modern premises (around 179,m²) in 27 fully let and a vacancy rate of circa.75% due mainly to the natural rotation of tenants. There continues to be a noticeable shortage of modern office space coming to the market, with only 64,m² of new construction in 28. Conversely, the office market is expected to face an oversupply in 21-11, as there is an estimated 18,m² of new premises being built. Many potential tenants are aware of this and have postponed relocation, in the hope of negotiating lower rents or better offices in more attractive locations. This situation could result in a small drop in the rental levels of lower grade premises. In terms of the investment market, no office property transactions were completed in Vilnius in the first half of 28. Foreign institutional investors currently appear to be quite selective on the investment opportunities they are undertaking. However, a small improvement is expected over H2 28. Several transactions, which started in H1 28, should be completed during this period and with a small outward shift in prime office investment yields anticipated, investors could be attracted to the market. Contact: Agency and Investment Michael Chidiac RealCorp Luxemboug SA, 41 Boulevard Royal, L-2449 Luxembourg ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) Luxembourg has an estimated *2.6 million m 2 of office stock. Occupier demand for office accommodation has remained consistent into 28, with a good level of transactions registered over the first half of the year. Demand is expected to remain healthy for the remainder of the year as there continues to be a number of large occupants looking for space. Although difficult to predict, given the current financial climate, the expectation is for the city to witness a satisfactory level of take-up this year of approximately 15,m², which nevertheless would be below the take-up level of 19,m² achieved in 27. The development pipeline of circa 25,m² is scheduled to be delivered to the market in 28. This low level of new construction, combined with continuing demand for modern office space is expected to maintain the vacancy rate at a low level of around 2.%, with the possibility of a small increase to 3.% towards the end of the year, dependant on the level of take-up achieved in the city. Prime office rents in-town currently stand at 432/m²/annum, representing a small drop since Q2 27. The potential for rental growth in-town appears remote and the outlook for the rest of the year and into early 29, is for prime rents to remain at their current level. Out-of town rents have, by contrast, experienced a slight increase to 3/m²/annum. In terms of the investment market, there has been a slowdown in the number of investment transactions due to a shortage of supply. Prime office investment yields have so far only seen an outward correction of 25 basis points to 5.5% since mid 27. Investment activity over the second half of the year is expected to be moderate, again due the continued lack of supply as well as the wait and see attitude of investors regarding yield levels. Vilnius prime rents and yields Luxembourg prime rents and yields

31 NETHERLANDS - Amsterdam NORWAY - Oslo Contact: Agency and Investment Bart Roelofs DRS Makelaars, Amsteldijk 194, 179 Amsterdam ( ) Contact: Agency and Investment Bjorn-Erik Anderssen DnB NOR Naeringsmegling AS, Stranden 21, Oslo N-21 ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) Amsterdam has an estimated *7. million m 2 of office stock. The centre, south-axis and IJ-River districts registered good occupational demand over the first six months of 28. However, in the south-east and West/Teleport the level of occupational demand has been slightly lower. Take-up for the whole year is forecast to be in the region of 3,m² - 35,m², which if achieved would reflect a continued healthy level of occupier demand in the city, but would be below the record take-up level achieved in 27. The development pipeline has circa 7,m² of new construction scheduled to be delivered to the market in 28, which whilst slightly lower than the volume delivered in 27, is still above the level that would place sufficient upward pressure on rents for the city as a whole. The vacancy rate for the city has begun to creep back up, having fallen to a new low of 12.% at the end of 27. The expectation is for the vacancy rate to come to rest between 14.% and 15.% by the end of the year. Prime office rents have remained unchanged since mid 27 at 335/m²/annum for in-town office accommodation, while outof-town rents have seen a small rise to 21/m²/annum. Any prospects of further rental growth over the next 12 months are more likely to be seen in class A office space to be found in the more desirable office locations. With the exception of the sale of the Corio office and industrial portfolio for 65 million, there has not been any substantive volume transacted in the investment market this year. Prime office investment yields have so far seen an outward correction of 7 basis points to 6.% since mid 27. Subdued investment activity remains likely, however, over the remainder of the year. Oslo has an estimated *8.7 million m 2 of office stock. The turmoil in global financial markets and a reversal in the positive economic trend in Norway have put a damper on leasing activity in the office market in 28. Take-up for the year is forecast at 15,m² and would, if achieved represent a sizeable drop in the 26,m² level registered last year. Developers have until recently concentrated on more profitable segments such as housing and retail, but with demand for new homes now falling, developers are transferring their focus back to the public and commercial sectors where demand remains high. The vacancy rate is currently low, having dropped to 4.6% at the end of 27. The forecast is for this rate to reduce further to around 3.7% by the end of this year. However, increasing construction activity is expected push the vacancy rate in the city back up in 29. Prime rents for good quality office premises in Oslo CBD increased by about 3% in 27, while rents for prime assets in the other Nordic capitals increased by around 1%. Rental growth is now slowing down and prime rents may even have peaked, due to the increasing willingness by occupiers to renegotiate, reduced demand and new office stock coming to the market. Investment activity in Oslo has not been immune to the fallout from the credit crunch, with transaction volumes expected to be lower this year compared with the preceding two years. Prime office investment yields have seen an outward correction of 5-75 basis points since mid 27, for which vendors will need time to adjust. The investment outlook in the second half-year is for increased activity, dependent on the normalisation of the financial markets and acceptance of the new prices. Amsterdam prime rents and yields Oslo prime rents and yields

32 POLAND - Warsaw ROMANIA - Bucharest Contact: Agency Tomasz Buras Investment Jarosław Wnuk King Sturge spółka z ograniczoną odpowiedzialnością Sp.K., Atrium Tower, Al. Jana Pawła II 25, -854 Warsaw ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) Warsaw has an estimated *3.35 million m 2 of office stock. Occupational demand has remained very strong in 28, with the largest transactions ever recorded for the city occurring in the first half of the year. With very little availability in-town, which has been the position over the last 18 months, larger occupiers have turned their attention to pre-leases and the out-of-town market, where there is still space to be had. There are a number of large lease transactions in the pipeline; hence the outlook for 28 is for continuing strong demand and the potential for takeup to achieve a level in the region of 54,m², which would be in the region of 8% - 9% above that reached in 27. The development pipeline has 285,m² - 325,m² of new construction scheduled for delivery to the market in 28. However, with the strength of demand still being registered in the city, the vacancy rate is expected to hover at a low level of around 2.% -3.%. There has been further rental growth since Q2 27, with prime rents in-town currently at 48/m²/annum. The continued strengthening of the Polish zloty against the euro has also put upward pressure on euro-dominated rents. Although demand for premium office accommodation remains strong, there has been a noticeable slowdown this year in the growth of prime rents. However, with a limited pipeline of developments in the city centre over the next few years, buildings with an estimated completion in the period 29-1 are quoting close to 48/m²/ annum. The office investment market in Poland has until very recently been dominated by foreign investors, but the US credit crunch has had a significant impact on investment activity in the city, as well as across the country as a whole. That said, investment volumes in H1 28 have shown an improvement over H2 27, but are still below the volumes seen a year earlier. As with other investment markets in Central Europe, investment activity over the second half of the year will largely depend on when the fallout from the credit crunch ends, including any rises in interest rates and inflation. Contact: Agency Mark Mannering Investment Radu Boitan King Sturge SRL, 5 Gheorghe Manu Street, Sector 1, Bucharest 1445 ( ) In-town Out-of-town Prime rent ( /m²/annum) 3 24 Prime yield (%) Bucharest has an estimated *1.4 million m 2 of office stock. With no traditional central business district, most of the office stock is located in the north of the city centre, alongside the key arteries and junctions and in out-of-town business parks. The market has been constantly growing since the early 199s, with stronger demand for modern workspace that complies with the regulations in force in Western Europe. There has been sustained growth in the demand for office space in recent years, with an observed trend towards buildings being pre-leased at an early stage of development. Demand for modern office space in the city remains strong in 28, driven by the fast expansion of existing companies and newly created enterprises emerging from the SME sector. The city has also benefited from the economic and political stability that has been brought to the country as a result of Romania joining the EU in January 27. Take-up for the year has been forecast at around 23,m², which if achieved would be above the level reached in 27. Office stock in Bucharest is still very low compared to neighbouring countries. The development pipeline is impressive for the next couple of years and includes circa 4,m² of new construction in 28. The vacancy rate for the city is currently very low at 2.%, but the increasing level of development is expected to push this towards 5.% by the end of the year. There is, however, the possibility that not all projects will meet their delivery deadlines. Under these circumstances, demand from expanding and newly created companies may create further upward pressure on office rents, especially in the CBD, where land availability remains restricted and new projects are limited and small in size. Investors proved cautious in making new acquisitions during the first six months of 28, with only a token number of investment transactions concluded, involving less than 15,m² of office space. The office investment market has seen a significant compression in prime office investment yields over the past five years, but there has been an outward correction of 75 basis points to 6.75% since mid 27. The office investment market is expected to perform better in the second half of the year, dependent on the normalisation of the financial market. Warsaw prime rents and yields Bucharest prime rents and yields

33 RUSSIA - Moscow SERBIA - Belgrade Contact: Agency Alexey Bogdanov Investment Vladimir Avdeev S.A.Ricci, in association with King Sturge, Paveletskaya emb., 8, bld. 6, Moscow ( ) Contact: Agency and Investment Srdjan Vujicic & James Lloyd King Sturge d.o.o., Usce Tower, Bulevar Mihajla Pupina 6, 117 Belgrade ( ) In-town Out-of-town Prime rent ( /m²/annum) 1, Prime yield (%) Old Belgrade New Belgrade Prime rent ( /m²/annum) Prime yield (%) Moscow has an estimated *9.8 million m 2 of office stock. Takeup in the city once again surpassed the one million m² mark last year, with approximately 1.2 million m². Strong occupier demand has continued unabated into 28, with an unusually high level of leasing transactions completed in Q2 28, which may have been as a result of increasing supply during that period. The take-up level for the year as a whole is forecast to reach 2.1 million m². Significant levels of development also characterised Moscow s office market in 27 as more than 1.5 million m² was delivered to the city, with the area outside the main MKAD ring road of Moscow attracting greater levels of development. The estimated development pipeline in 28 is even higher, in the region of 1.8 million m². Current market trends are expected to continue, including the decentralisation of the office market and the development of out-of-town business parks. Another emerging trend in the market is the development of multifunctional projects instead of individual office, retail and residential properties. There has been a notable increase in prime rental levels, due to the fact that rents have traditionally been determined in US$, but with the US$/RUR exchange rate diminishing, rents are now being determined in euro or fixed currency units. Rental growth prospects over the remainder of the year and into 29 remain positive due to the continuing high level of demand from tenants. The level of activity in Moscow s office investment market has needless to say slowed down in 28, as was to be expected given the current climate of international financial markets. The investment transactions that have taken place have for the most part been for development projects. Following several years of yield compression, prime office investment yields have seen an outward correction of 15 basis points since Q2 27 to their current level of 1.%. As with other investment markets across Europe, the prospects for office property investment in Russia in H2 28 will depend on the overall situation in global financial markets. Belgrade has an estimated *325,m 2 of office stock. The city s office stock is for the most part split over two locations: the traditional core of Old Belgrade and New Belgrade across the river Sava, with the majority of office development activity focused in New Belgrade. Despite still being in its infancy, the office sector is the most mature of the property sectors in Serbia and historically under supplied. With the recent formation of a Pro-European coalition Government, it is anticipated that there will be an improved period of political stability and international business confidence. Demand is, therefore, expected to improve over the second half of 28 and could result in a take-up level for the year of approximately 75,m², which if achieved would be above that registered in 27. This year could also see a record level of new construction in the region of 15,m² brought to the market. The higher level of development has been brought about by the steady increase in take-up through the organic growth of existing occupiers and new entrants to the market, including international corporations wishing to establish regional headquarters in the city. The raised level of available space is expected to have a positive effect on the office property market, providing a better balance between demand and supply through the offer of a greater choice of locations to tenants. With only a small increase in supply in new office space intown, rental levels are expected to remain stable. However, the increase in supply in New Belgrade, the now established central business district of the city, is likely to outweigh demand. Tenants will, as a consequence, have more choice and as a result rental levels are expected to drop slightly. Due to its comparative immaturity, the office investment market continues to be driven by opportunistic developer activity. An increase in newly completed developments is expected to create the necessary impetus for an increasingly transparent, income producing investment market in the city. Moscow prime rents and yields Belgrade prime rents and yields 2, ,

34 SLOVAKIA - Bratislava SPAIN - Barcelona Contact: Agency and Development Miroslav Barnas Investment and Professional Services Peter Nitschneider King Sturge s.r.o., Europeum Business Center, Suche Myto 1, 8113 Bratislava ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) Bratislava has an estimated *1.1 million m 2 of office stock. The country has experienced stronger economic growth over 27 and into 28, which is providing the momentum for increased occupier demand for office space in the city. The planned adoption of the euro in 29 is expected to have a beneficial effect on economic growth in the country. While, a softening of economic activity is predicted for 28, there remains the expectation of continued firm levels of take-up. The new business district emerging near the Danube is seeing increased levels of interest from developers, as areas for development in the city centre become limited. Take-up for the city is forecast to reach in the region of 2,m², which if achieved would effectively be double that registered in 27. The development pipeline expects approximately 26,m² to be delivered to the market in 28, with more than 12,m² already completed in the first half of the year. This trend should continue into 29, with more than 24,m² of new construction scheduled to reach the market. The vacancy rate crept back up to 1.% at the end of 27 and is forecast to rise to around 12.% by the end of this year, as a consequence of increased new product on the market. Contact: Agency & Investment Miguel Zornoza Paseo de Gracia, 28, 2º 1ª, 87 Barcelona ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) Barcelona has an estimated *5.1 million m 2 of office stock. The city has the second largest office market in Spain after Madrid and occupiers include multinational companies and the banking and financial services sectors. With limited development opportunities in the city centre, 22@ and Diagonal Mar are consolidating as office locations. The 22@ project has been designed to lure multinationals and blue chip R&D companies to the transformed south-eastern quadrant of the city. Cornella and San Cugat also provide alternative locations for occupiers seeking modern accommodation. Occupier demand for the city has begun to show signs of slowing in 28 as a consequence the significant weakening of Spain s economic prospects and general market uncertainty, which is having a direct influence on decisions now being made by companies in respect of office locations. Prime rents in-town are currently at 324/m²/annum, representing a small increase since mid 27. Rents are now expected to stabilise around this level over the remainder of the year. The Barcelona office investment market has not been immune to the fallout from the global credit crunch and has so far seen an outward correction in prime investment yields of approximately 75 basis points since mid 27. Prime office rents remain at 216/m²/annum, however outof-town rents have registered a dip over the same period to 12/m²/annum. Despite the large pipeline of projects which are coming to the market, the expectation is for prime rents to remain at their current level, with the possibility of a small rise over the next 12 months. The Slovak investment market remained relatively active at the beginning of 28. However, the global credit crunch has taken its toll on the office investment market in Bratislava, which is now experiencing a slowdown in activity. Prime investment yields have seen an outward correction of 145 basis points since mid 27 to their present level of 7.%. The likelihood of a major investment transaction taking place in the second half of the year seems increasingly remote. There may, however, be some office transactions in regional cities. Bratislava prime rents and yields Barcelona prime rents and yields

35 SPAIN - Madrid SWEDEN - Stockholm Contacts: Agency & Investment Miguel Zornoza King Sturge LLP, Arturo Soria 245 Edif. II, 2833 Madrid ( ) Contact: Agency and Investment Marie Bucht Newsec Advice, PO Box 7795, Regeringsgatan 65, SE Stockholm ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) Madrid has an estimated *13.8 million m 2 of office stock. Following a year of buoyant occupier activity, resulting in a takeup level of just over 88,m², occupier activity began to slow into 28 and is expected to continue in this vein over the course of the year. The significant weakening of Spain s economic prospects is having a direct influence on decisions now being made by companies in respect of office locations. The development pipeline continues at an even pace, with approximately 8,m² of new construction scheduled to be delivered to the city in 28. The vacancy rate for the city, which has been edging down from 9.% since 24 is now hovering just below 4.%. However, the expectation over the second half of the year is for the vacancy rate to increase to a level around 4.3%, as a consequence of new supply in the market and the weakening economy. Prime rents in the city centre have registered a small improvement since mid 27 to their current level of 48/m²/annum. It is now assumed that rental levels in-town have reached their peak and should stabilise around /m²/annum. Madrid s office investment market has not been immune to the fallout from the global credit crunch and has seen an outward correction in prime investment yields of approximately 175 basis points since mid 27. There still remains the possibility of a further outward correction of between 25 and 5 basis points in 29. Stockholm has an estimated *11.7 million m 2 of office stock. Good levels of occupational demand continue, with the expectation that 28 will result in a take-up level broadly similar to that registered last year, of approximately 25,m². A development pipeline in the region of 72,m² is scheduled for delivery in 28, which is roughly the same as that delivered last year. The combination of ongoing demand and moderate supply led to the vacancy rate falling below 1.% in 27, coming to a rest at 9.5% at year end. This is forecast to continue edging down towards 9.% by the end of the year. The city registered continued rental growth into 28, but over the second quarter this began to level out. This trend is expected to continue over the next two quarters and by the end of the year, prime office rents are expected to decrease slightly as a consequence of the more volatile market conditions. The office investment market has performed reasonably well in H1 28. Even if the transaction volume has been lower compared to the two previous years, it remains higher when viewed over time. Over the remainder of the year, the transaction volume is expected to be relatively high, with a large number expected to be closed during the second half of the year. However, deals are taking longer to complete and off-market deals are becoming more common. Prime investment yields have so far only shifted out by 5 basis points since mid 27, but the market expects a further yield shift outwards of between 25 and 5 basis points, generally across Sweden in H2 28. Madrid prime rents and yields Stockholm prime rents and yields

36 SWITZERLAND - Geneva SWITZERLAND - Zurich Contact: Agency and Investment Robert Mathieson Key Real Estate Consultants, 8 Chemin de Blandonnet, 1214 Geneva ( ) Contact: Agency and Investment Robert Mathieson Key Real Estate Consultants, 8 Chemin de Blandonnet, 1214 Geneva ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) Geneva has an estimated *4.3 million m 2 of office stock. Strong occupier demand, particularly for larger units of office space, is being frustrated by a limited supply of high quality accommodation. A number of significant new developments are now under consideration, taking into account the needs of specific large users, but this means new space will not be available for another two to four years, leaving continued constraints in the market. Overall vacancy remains low at 2.6%, but has risen slightly over the first half of 28. Occupier demand is expected to remain resilient throughout 28, although the impact of the announced cuts in staffing at UBS and Crédit Suisse could release space at the end of the year or in 29. A number of important occupiers are likely to tie up major pre-letting agreements for new schemes, but the impact of these will not be felt for several years. The low vacancy rate, particularly in the city centre, is pushing up prime office rents and this is expected to continue until new stock comes to the market, or recession takes hold. The prospect of the latter, whilst probable in the medium term, is unlikely over the next six to twelve months. A significant development programme out of town will create a pool of relatively cheap but modern offices with superb environments. We expect rental levels to remain stable out of town over the next six to twelve months. Despite the Banks reluctancy to lend, the first half of 28 saw more than 522 million (CHF 85 million) of transactions, comparable with the best of recent periods. The composition of buyers has, however, significantly changed, with Swiss institutions re-establishing their dominant role, particularly through a number of asset swaps and new acquisitions. In contrast, foreign investor activity has been markedly down. The financial crisis has led to these investors either withdrawing from the market, due to a lack of liquidity, or taking longer to complete transactions as due diligence is undertaken in greater depth and negotiations are extended. Zurich has an estimated *7.6 million m 2 of office stock. The city is an established centre for banking, IT and domestic/multinational companies. Companies from the service sector ie financial services or those which require highly qualified employees, such as IT or research, make up the largest group of new arrivals in the area. The city centre vacancy rate rose to 1.6% over the first half of 28. Despite this there was virtually no accommodation available of more than 1,m², resulting in upward pressure on rental levels. Elsewhere, in the city a slight rise in the vacancy rate to 4.6% over the first half of the year was also registered. Rental values outside the immediate city centre have therefore been stable. High vacancy in the north and west of the city still persists and if the recent upward trend in vacancy continues it is expected that this will lead to downward pressure on rents. The outlook for the rest of the year is the vacancy in the core city centre to remain within the region of 1.5% to 2.%, resulting in continued upward pressure on rental levels, particularly for larger units in well located areas. The spectre of UBS and Credit Suisse shedding staff may temper this, whilst offering relief by providing larger units over the next 12 months. Outside the city centre a gradual increase in the vacancy rate is expected, with more businesses taking the opportunity to relocate to better accommodation at an overall lower price level. The office investment market in Zurich has been resilient in the face of the financial crisis, with the market seeing an outward correction of just 25 basis points in prime office investment yields since Q2 27 to 4.5%. There has, however, been a marked reduction in the availability of debt to all sectors. Geneva prime rents and yields Zurich prime rents and yields 1,2 6 1,

37 TURKEY - Istanbul UNITED KINGDOM - Belfast Contact: Agency and Investment Matthew Warner King Sturge Gayrimenkul Danişmanliği Limited Şirketi Üçgen Apt 64/2, Süleyman Seba Caddesi, Vişnezade, Maçka, Istanbul ( ) In-town Out-of-town Prime rent ( /m²/month:annum) 3:36 9:18 Prime yield (%) 7.5 n/a The modern CBD of Istanbul is now focused on a strip from Esentepe through Levent to Maslak on the European side of the city. Other key business areas include Taksim and Yeşilköy, also on the European side and Ümraniye, Kavacik, Altunizade and Kozyatagi on the Asian side. Ataşehir, on the Asian side, could also become a major business district in the future, should indications that the Turkish Central Bank and other governmentrun institutions plan to relocate to the area become a reality. Letting activity tends to be concentrated on the European side, which has traditionally had the higher density of office space. In recent years Levent and Maslak have seen the greatest development of class A buildings. Prime office rents have risen to 36/m²/annum (US$529/m²/annum). Continued high level of demand, combined with limited supply coming to the market should see upward pressure on rental levels maintained over the short-term, especially for high quality office buildings in the most sought after districts of the city. Esentepe and Levent have seen the highest rents, with Maslak being some way behind. Given greater potential site availability and the fact that the Metro is due to extend to Maslak by the end of this year, rents should, however, accelerate in this market sub-sector. Contact: Agency and Investment Rory McConnell McConnell Martin, Metropole House, 95/97 Donegall Street, Belfast ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) Belfast has an estimated *75, m 2 of office stock. While the public sector has been the traditional occupier in the Belfast office market, the city is seeing an increase in private sector demand, which has led to a modest increase in prime office rental levels and a resurgence of speculative development. The Belfast property market is moderately optimistic on performance going into the second half of the year. Prime rents now stand at 197/m 2 /annum ( 14.5/ft 2 /annum), which is a small increase over the rental level registered as of Q2 27, but reflects the diminishing rate of exchange between sterling and the euro. Modest rental growth is expected to continue, with rents for high quality office property in the CBD expected to increase in the short to medium term. Investment activity slowed markedly during the first half of 28, with an outward correction in prime office investment yields of 5 basis points to 5.5% since Q2 27. There is, however, some positive movement in the market with the expectation of an increase in product coming to the market over the second half of the year. Funding remains difficult, however, with lenders exercising caution. With the general lack of quality modern stock and rising rents on the European side, combined with a desire for larger units, it is expected that more office occupiers will relocate to new emerging locations on the Asian side. The investment market in Istanbul has been gaining momentum, with interest being registered by both local and international investors. However, the scarcity of office product for investment purposes currently restricts the market and makes prime office yields difficult to predict. This should resolve itself in the medium term as more supply is brought to the market to satisfy growing investor demand. Istanbul prime rents and yields Belfast prime rents and yields

38 UNITED KINGDOM - Birmingham UNITED KINGDOM - Bristol Contact: Agency Jonathan Carmalt Investment Richard Goodall King Sturge LLP, 1 Cornwall Street, Birmingham, West Midlands, B3 2DX ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield Birmingham has an estimated *1.7 million m 2 of office stock. The central Birmingham office market has been relatively buoyant during the first half of 28. In particular, the central Birmingham office market was buoyed by some significant deals, including the 23,225m² (25,ft²) pre-let of Two Snowhill to solicitors Wragge & Co for occupation in 211, the letting of 6,373m² (68,6ft²) at 1 Brindleyplace to Deutsche Bank and the letting of approximately 3,112m² (33,5ft²) to the Tribunals Service at 54 Hagley Road. The out-of-town market also got off to a good start with the letting of 5,388m² (58,ft²) to Infor at Blythe Valley and the sale of two buildings totalling 7,897m² (85,ft²) to West Midlands Police at Birmingham Business Park. The level of occupier activity seen in the first half year is unlikely to be repeated. However, the level of occupier demand when coupled with new office developments where construction is advancing well, such as Standard Life/Saxan Securities at 45 Church Street and Ballymore s One Snowhill, suggests that central Birmingham office market take up levels for the year will be the highest since 22. Prime rents have remained stable since Q2 27 at 48/m²/ annum ( 3/ft²/annum). Better quality buildings in-town are under construction for completion late 28 and early 29, which is expected to drive rents forward. With no significant new build development activity in out-of-town locations to drive growth, rental levels are expected to be maintained at their current level. The investment market over the first half of the year has been slow as a consequence of the turmoil in the global financial markets, the underlying uncertainty and lack of confidence prevailing in the UK financial sector. Prime office investment yields have seen an outward correction of 225 basis points since mid 27 to their current level of 6.5%. It is likely that prices for office product could continue to fall in the absence of transactional volume, particularly if financial lending markets remain inactive. Contact: Agency Ian Wills Investment Oliver Paine King Sturge LLP, 4 Berkeley Square, Bristol BS8 1HU ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) Bristol has an estimated *2.1 million m 2 of office stock and is the largest office market in the west of England. The city s occupier market continued to demonstrate encouraging levels of demand, with around 46,5m² (5,538ft²) of take-up for greater Bristol in H1 28, which is in line with the average for the last 1 years. Moving into the second half of the year, there are a number of transactions in the final stages of completion, which should result in a satisfactory level of take-up in the third quarter. The fourth quarter may prove quieter, as enquiries slow over the summer period. In line with current market indications, total take-up for 28 has been forecast at the 1 year average of around 93,m² (1,1,76ft²). After several years during which the vacancy rate for the city hovered around 5.%, it is now beginning to climb once more, reaching 8.% at the end of 27. The prediction for year end is for the vacancy rate to continue to creep up towards 9.%. Prime office rents have remained stable since mid 27 at 374/m²/annum ( 27.5/ft²/annum). No change is expected in this current level, but there appears to be growing pressure to provide rent free periods, other incentives and a shorter lease term. Activity in the office investment market has been very quiet in the first half of the year. Prime office investment yields have seen an outward correction of 175 basis points so far since mid 27 and are now currently at 6.5%. Investment activity in the city s office property market is expected to remain subdued over the remainder of the year, with a further outward correction in prime investment yields remaining a possibility. Birmingham prime rents and yields Bristol prime rents and yields

39 UNITED KINGDOM - Cardiff UNITED KINGDOM - Edinburgh Contact: Agency Huw Thomas Investment Jonathan Phillips King Sturge LLP, Haywood House, Dumfries Place, Cardiff CF1 3UE ( ) Contact: Agency Susan Pegg Investment Chris MacFarlane King Sturge LLP, Lismore House, 127 George Street, Edinburgh EH2 4JN ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) Cardiff has an estimated *93,m 2 of office stock. As with other office property markets in the UK and mainland Europe, the occupational market has been adversely affected by the credit crunch and there has been a slowdown in occupier activity in the city s office market. Demand for freeholds is particularly down. A number of sound occupational transactions were secured in the early part of 28, but these enquiries are likely to have been generated pre credit crunch. The subdued activity in the leasing market is likely to be felt over the second half of the year, with the outlook remaining uncertain due to the position of the financial markets. There is a general feeling of uncertainty, which is clearly creating a much lower level of enquiries, than would have normally been expected. The development pipeline for the city expects in the region of 15,m² (161,5ft²) to be delivered to the market in 28. The vacancy rate rests at 1.% and given the volume of new development, alongside occupier demand, is expected to remain at around this level throughout the second half of the year. Prime office rents currently stand at 272/m²/annum ( 2/ft²/ annum), representing a small increase since Q2 27, but no change since Q4 27. In-town and out-of-town rental levels look set to remain unchanged over the remainder of the year and into early 29. The investment market has so far been quiet in 28, with demand continuing to ease as financial rates increase. Prime office investment yields have seen an outward correction since mid 27 and are currently at 6.75%. A further outward correction in the second half of 28 remains a possibility. Edinburgh has an estimated *1.8 million m 2 of office stock. The city is the second largest office market in Scotland after Glasgow, but historically has been a more significant market for the thriving financial sector. New development within the city centre is limited due to the historical nature of the city, but the out-of-town market has grown dramatically since the mid- 199s. The office occupier market slowed significantly in the first half of 28, with no large office lettings taking place. The development pipeline continues to be strained with very little new stock set to come to the market in 28. As a result, prime rents have maintained their level at 388/m²/annum ( 28.5/ ft²/annum). Despite ongoing interest from well financed foreign and UK based funds, prime office investment yields for city centre offices in Edinburgh have seen an outward correction to 6.5%. However, with a lack of investment transactions in town there has been little evidence upon which to base such assessments of demand. One notable deal to take place, however, occurred out of town in Edinburgh Park, where Aegon completed the sale of 1-3 Lochside Crescent to PRUPIM. The 24,25m² (263,191ft²) office building has been leased to Scottish Equitable PLC on a 3-year full repairing and insuring lease from July 27 with annual fixed rent uplifts. Deals for secondary stock have continued to take place, despite yields sliding to around the 7.%-7.5% level, with demand coming from well-financed property companies and other parties looking for opportunistic purchases. Cardiff prime rents and yields Edinburgh prime rents and yields

40 UNITED KINGDOM - Glasgow UNITED KINGDOM - Leeds Contact: Agency - Campbell Hart Investment Chris Macfarlane King Sturge, 6th Floor, 145 St. Vincent Street, Glasgow, G2 5JF ( ) Contact: Agency Richard Thornton Investment Andrew Summersgill King Sturge LLP, City Point, 29 King Street, Leeds, LS1 2HL ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) Glasgow has an estimated *2.3 million m² of office stock in the city. Despite early optimism on demand and a shortage of new Grade A stock, which will not be available before Q1/2 29, enquiry levels have eased, with no Grade A lettings over 1,m² (1,ft²) in the first half of the of 28. There are, however, approximately 26,941m² (29,ft²) of active or potential enquiries that might be realised in transactions over the middle of the year. Occupier sentiment now appears to be weakening and some relocations could be postponed. Otherwise the market is finely balanced, although there would need to be a significant pickup in the second half of the year to match last years total of 34,838m 2 (375,ft²) of class A office accommodation. The shortage of class A office stock before mid 29 could lead to prime/headline rents increasing to 48/m²/annum ( 3/ ft²/annum) as higher build costs wash through. If the market weakens significantly rent free periods could move out beyond 15 months for a 1 year deal. Activity in Glasgow s out-of-town office locations is likely to continue to be slow, with prime rents remaining at their current level of 252/m²/annum ( 18.5/ft²/ annum). Prime office investment yields continued to drift out over H1 28 to their current level of 6.5%. Glasgow s investment market, so far, has been plagued by a lack of transactional evidence and negative market sentiment, relieved only by the occasional outstanding deal. The current absence of transactions in the market and continued negative sentiment generally could delay any recovery. However, prime office investment yields are expected to stabilise in the second half of the year. Leeds has an estimated *1.4 million m 2 of office stock. The city centre office market is more expensive, both in terms of rentals and parking costs, than the out-of-town market. Out-of-town office parks situated on motorway junctions are popular, as are sites with good public transport links close to good amenities. The city centre has held up reasonably well over the first half of 28. However, despite good levels of demand in the city centre, the time taken for companies to actually sign up is stretching and the speed with which transactions are completed is slowing. The out-of-town office market is also experiencing much weaker levels of demand. Prime office rents have ticked up since Q2 27 to their current level of 354/m²/annum ( 26/ft²/annum). The development pipeline for the city is weak and a shortage of new build in the city centre could give rise to further rental growth in 24 months time. In contrast, an over-supply in the out-of-town market is putting downward pressure on rental levels, which currently stand at 259/m²/annum ( 19/ft²/annum). Office property investment transaction volumes are significantly down on 27 levels and prime investment yields have seen an outward correction of 175 basis points to their current level of 6.75% since mid 27. Prime single let class A office values are, however, expected to stabilise over the second half of 28, with performance being driven by the potential of rental growth as opposed to yield compression and capital growth. Glasgow prime rents and yields Leeds prime rents and yields

41 UNITED KINGDOM - London UNITED KINGDOM - Manchester Contact: Agency Mark Bourne/David Hanrahan Investment - James Beckham/Simon Beckett King Sturge LLP, 7 Princes Street, London EC2R 8AQ ( ) - City King Sturge LLP, 3 Warwick Street, London WIB 5NH ( ) West End City West End Prime rent ( /m²/annum) 783 1,497 Prime yield (%) Central London has an estimated *18.4 million m 2 of office stock in the City, West End, Canary Wharf, Midtown and South Bank. West End: Office market fundamentals of relatively limited supply and solid demand remain stable and the diverse tenant base should continue to insulate its occupational market against further shocks. Following two years of exceptional growth, the recent levels of activity in the West End are more of a return to normality, with headline rents still being signed on prime buildings. Supply has increased, albeit from a historically low level, and both rising vacancy rates and falling take-up will create doubt for West End growth. Prime rents have fallen slightly and transactions are taking longer to sign as incentives continue to increase and tenants adopt a wait and see approach. The first half of the investment year was very sluggish. The availability of debt has been the biggest issue, along with fears of further yield drift outwards and downward pressure on rents. Downward adjustments in valuations could assist the investment market. However, liquidity is likely to remain poor. City: Demand has weakened owing to capital market uncertainty affecting core tenants in the financial and business services sector. This, alongside the delivery of a number of significant schemes, has caused supply to increase towards 7.8%. Inevitably, the market is now moving in favour of the tenant, with downward rental pressure anticipated for the next two years. The relatively subdued state of the market has continued through to mid 28, with a transaction volume of 1.8 billion ( 2.3 billion) compared to 4.9 billion ( 6.2 billion) in the City office market as at mid 27. With the credit markets still uncertain equity buyers, and in particular overseas investment funds, remain dominant and activity has been mainly focused on prime stock. Contact: Agency Chris Mulcahy Investment Simon Merry King Sturge LLP, One Piccadilly Gardens, Manchester M1 1RG ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) Manchester has an estimated *1.4 million m 2 of office stock. The city centre attracts occupiers in banking, finance, professional services and government. The South Manchester office market attracts corporate occupiers, primarily due to the proximity of the airport and the motorway network. The city s office market has continued to see occupiers committing to take space in the first six months of 28. This has been most prevalent in the city centre rather than in the out-of-town markets. The most active occupiers, to date, have been from the banking, professional and government sectors. Transactions have included Pinsent Masons Solicitors, Baker Tilly, the Highways Department and Government Office NW. Transactions currently under offer include 6,53m² (7,ft²) to PWC, 1,858m² (2,ft²) to BDO Stoy Hayward, 2,23m² (24,ft²) to the Insolvency Service and 4,645m² (5,ft²) to the Bank of New York Mellon. The outlook for the second half of the year is for the city centre to continue to register demand for good quality office accommodation, but for activity in the out-of-town to maintain a much slower pace. Freehold acquisitions have also dipped due to reduced availability and changes in terms of finance. Prime office rents have increased since mid 27 to their current level of 48/m²/annum ( 3/ft²/annum). The potential for further rental growth remains good in central Manchester but high supply in South Manchester could result in rental levels registering a small dip over the next 12 months. Prime office investment yields have seen a sizeable outward correction of 175 basis points to their current level of 6.25% since mid 27. Given the present low level of investment activity in the market a further outward correction remains a possibility in the second half of the year. London prime rents and yields 2, 8 Manchester prime rents and yields 5 8 1, Prime rent - City ( /m 2 /annum) Prime yield - City (%) Prime rent - West End ( /m 2 /annum) Prime yield - West End (%) 39

42 UNITED KINGDOM - Thames Valley Contact: Agency Philip Papenfus Investment Angus Minford King Sturge LLP, 3 Warwick Street, London W1B 5NH ( ) In-town Out-of-town Prime rent ( /m²/annum) Prime yield (%) The Thames Valley has an estimated *5.6 million m 2 of office stock and is one of the wealthiest areas in Europe with a wellestablished office market. Occupiers include companies in the pharmaceutical and TMT sectors. There has been a shift in favour for in-town centres with good amenities and rail transport. Business parks in the Thames Valley have reacted by providing improved amenities and still have the advantage of generally larger, more efficient floor plates. Considering general market conditions, the Thames Valley occupational market has experienced a strong start to the year with 85,47m² (92,ft²) of space taken-up during the first six months of the year and continued growth in headline prime rents in some core Thames Valley markets such as Hammersmith, Maidenhead and Staines. The level of available space has begun to increase marginally, but this is currently largely due to new space under construction which will be completed later in the year. Going forward we expect to experience a slowdown in occupier demand, but we anticipate that take-up for the year as a whole will reach circa 148,64m² (1.6 million ft²), below the five year average of 167,22m² (1.8 million ft²). While the level of space under offer is tailing off in the short term there are a number of new significant requirements which have recently come to the market and should convert to take-up in the medium term. As with most of the office markets across the UK, the Thames Valley s office investment market has seen an outward correction in prime yield levels since Q2 27 of approximately 175 basis points to 6.75%. Demand for prime stock has been limited to predominantly cash purchasers and some overseas funds and there is limited availability. Secondary stock has been severely affected by limited availability and the high cost of debt from the lending banks. In both the primary and secondary markets there continues to be a mismatch between vendors and purchasers expectations. Over the remainder of the year, investment activity is likely to be limited in the prime market unless a further run on redemptions occurs amongst the UK retail funds. Activity in the secondary market will remain limited, with the continued reluctance of banks to lend at realistic levels. Thames Valley prime rents and yields

43 What are the main European real estate tax issues?

44 About the BDO International Real Estate Practice BDO International is the world s fifth largest accountancy network. It has more than 32, people in over 626 offices across 11 countries. BDO s international real estate team provides its clients in the real estate and construction sectors with a broad range of tax, audit, accounting, corporate finance, business recovery and investment management services. It has a leading presence in the property industry and uses its extensive international network of offices for the benefit of its clients and often introduces them to opportunities and key contacts in other countries. BDO Stoy Hayward LLP, the United Kingdom member firm of BDO International, has co-ordinated the preparation and collation of the tax information in the following pages which have been approved by the relevant BDO International member firms. Our clients include a wide range of real estate investors and developers ranging from listed companies and REITs, through cross border real estate funds and infrastructure funds to sovereign wealth funds and substantial private companies and investment syndicates. We also act as tax and corporate finance advisers and auditors to leading professional service firms in the real estate and construction sectors. Local BDO International real estate tax contacts are listed under each tax section. Alternatively, feel free to contact the London Office real estate tax team as follows: - Stephen Herring Tax Partner, Real Estate & Construction Telephone: +44 () stephen.herring@bdo.co.uk Robin Hutton Tax Director, Real Estate & Construction Telephone: +44 () robin.hutton@bdo.co.uk Stephen Hanlon Cross Border Tax Manager Telephone: +44 () stephen.hanlon@bdo.co.uk Key Tax Issues in Cross Border Real Estate Transactions Real estate transactions are diverse and complex and invariably need to be tailored to fit both the differing circumstances of the transacting parties as well as the particular nature of real estate assets. The investor needs to consider the location of the real estate, the need for and advantages of structuring the investment through a suitable conduit jurisdiction and the tax position of the investment company, real estate fund or syndicate. Initially, it is invariably sensible to consider the particular features of the taxation of local real estate. At this level, registration taxes, capital duties, withholding taxes on rent and interest, the treatment of capital gains and the calculation of taxable rental income including tax depreciation and earnings stripping or thin capitalisation aspects will all be key drivers. It will often, but by no means always, be appropriate to interpose a conduit entity in a separate jurisdiction which does not tax capital gains or dividends. The commercial needs for this include the flexibility of inward investment and the options available for partial or total exits on the realisation of the investments. The structure will require an overarching entity which will typically be resident in the country of the investors or will often be a tax transparent entity such as a partnership enabling investors in multiple jurisdictions to invest on a tax efficient basis. Increasingly, in the present market place with more restrictive access to external bank finance, it will be financially efficient for investors to provide shareholder debt to facilitate future refinancing when debt markets return to equilibrium. The location for the captive financing entity will have legal, accounting and taxation implications. Stephen Herring, Tax Partner, Real Estate & Construction, London comments that BDO s hands-on, partner-led approach ensures that clients benefit from partner advice to identify and implement optimal and practical solutions to the often complex, tax, accounting and property finance issues which inevitably arise in cross border real estate transactions. 42

45 Preface to Individual Country Real Estate Tax Summaries It will be appreciated that the taxation legislation, case law, tax treaties and tax authority practices in all of the countries included in the following pages can only be summarised in the space available. Similarly, it will be understood that real estate transactions are often subject to more complex taxation arrangements than, typically, apply to ordinary trading ventures. Nevertheless, we consider that these summaries provide a useful introduction to the taxation of real estate rental income, capital gains and transfer taxes in each country. Invariably, tax treaties give the right to tax real estate income to the country in which the real estate is located. Most countries, not surprisingly, exercise this right and often seek to protect their tax base by applying special rules to tax real estate income and control the deductions available against it. In our view it is imperative, before real estate is acquired, not only to decide upon the appropriate ownership entities and structure but also to prepare a robust financial projection which includes the incidence of all real estate taxes which will be payable on its acquisition, ownership and ultimate disposal. Stephen Herring Tax Partner, Real Estate & Construction BDO Stoy Hayward LLP 55 Baker Street London W1U 7EU Disclaimer BDO International is a world wide network of public accounting firms, called BDO Member Firms, serving international clients. Each BDO Member Firm is an independent legal entity in its own country. The network is coordinated by BDO Global Coordination B.V. incorporated in the Netherlands, with an office in Brussels, Belgium, where the Global Coordination Office is located. BDO Global Coordination B.V

46 Austria Contact: Reinhard Rindler +43 (1) Foreign individuals or corporate investors may invest in Austrian property directly, through a partnership or through a local company. Currently, profits realised by companies are taxable in Austria at the corporate income tax rate of 25%. A minimum level of corporate income tax is due in lossmaking periods (dependent on the legal status of the corporation). Such payments can be credited against real liabilities in future periods. Losses can be carried forward indefinitely against up to 75% of annual profits. Profits of individuals are taxed at progressive income tax rates of up to 5%. Generally, for individuals, the taxable rental income is calculated upon a cash receipts and disbursements method, mainly adjusted by a deduction for depreciation. In this case losses cannot be carried forward. Partnerships are tax transparent in Austria, with the consequence that each single partner is subject to tax in Austria. Each partner in the partnership is taxed at tax rates of up to 5% (for individuals) or 25% (for companies). For companies, taxable income has to be calculated according to GAAP. Generally any expenses incurred for the purpose of the real estate business are deductible, including maintenance and repairs, administration expenses, financing costs, insurance premiums, depreciation and real estate tax. Tax deductions for substantial repairs and maintenance expenditure has to be spread over a period of 1 or 15 years (under certain circumstances). There is no specific thin capitalisation legislation in Austria. However, the tax authorities require reasonable debt financing arrangements, the terms of which are set on an arm s length basis. For example, where the interest rate is higher than an arm s-length rate, a tax deduction would be denied for the excessive interest. Generally, capital gains arising on the disposal of real estate, or the disposal of shares in an Austrian property holding company, are subject to 25% corporate income tax for corporate vendors. Speculative transactions of individuals for non-business purposes, (i.e. private purposes), are only taxable if the real estate is disposed of within ten years from the date of acquisition (in special cases fifteen years). Those taxable gains are taxed at the progressive income tax rates of up to 5%. The provisions of Austria s double tax treaties generally give Austria the right to tax gains on the disposal of Austrian real estate wherever the alienator is resident. The transfer of real estate is subject to 3.5% property transfer tax (note: the rate is reduced to 2% if real estate is transferred between close relatives and/or spouses), plus a 1% registration fee, based on the consideration paid. The transfer of property as a result of a certain type of merger is also subject to property transfer tax. For the transfer of all of the shares, or the unification of all of the shares in the hands of one shareholder, of a company which owns real estate, property transfer tax is also levied. However, the tax assessed value is normally considerably less than the market value. Capital transfer tax is imposed at a rate of 1% on the contribution of capital to companies, both in the form of cash or in kind. Annual property tax of up to 1% is levied on the tax assessed value of Austrian real estate. An additional tax of 1% of the tax assessed value of land is payable for land without buildings, meaning that tax on undeveloped land is effectively up to 2% of the tax assessed value of the land. Both taxes are deductible for (corporate) income tax purposes. The transfer of property in case of inheritance or by a gift is subject to inheritance and gift tax. From 1 August 28 inheritance and gift tax have been abolished. Depreciation in respect of buildings, but not land, is tax deductible. The deductible depreciation is calculated using the straight line method, in which the annual depreciation is a fixed percentage of costs. The allowable rate varies between 1.5% to 3%, depending on the legal form of the owner and the use of the property. Plant and machinery depreciation is allowable at rates of between 1% to 2%, depending on the specific asset category. 44

47 Belgium Contact: Marc Verbeek + 32 () Resident and non-resident companies under corporate ownership are ordinarily subject to Belgian tax at a rate of 33.99% on their taxable income, including rental profits and capital gains. Companies owned directly by individuals can benefit from reduced rates where the taxable income is less than 323k. An 11.25% surcharge applies to the final tax liability, unless adequate quarterly payments are made through the tax year in question to settle the final tax liability. If Belgian immovable property is owned by foreign entities the Belgian double tax treaties generally provide that income from immovable property will be taxable in the member state where the immovable property is situated (i.e. Belgium). For corporate tax purposes, generally the taxable rental income and capital gains are calculated on normal accounting principles, but some special rules apply. Generally any expenses incurred for the purpose of the rental business are deductible - including real estate tax, which is calculated as a percentage of deemed net rental value. However certain specific expenses are disallowed, such as regional taxes. Interest paid to connected parties is allowable to the extent that the interest is calculated at a commercial market rate and thin capitalization restrictions are satisfied. There is no fixed safe haven debt equity ratio in respect of connected party debt. However, when the connected party is a private individual shareholder, or a foreign corporate director, a 1:1 debt equity ratio generally applies. A debt equity ratio of 7:1 applies where the lender is either an individual or a company resident in a low tax jurisdiction. There is no system of group taxation in Belgium, so where a real estate company is acquired, it can often be problematic to obtain Belgian tax relief in respect of interest on acquisition borrowings. Depreciation charged under Belgian GAAP on an asset is tax deductible. For example, plant and machinery depreciation is generally allowable at rates depending on the respective standardised useful life. Land itself cannot be depreciated. Commercial buildings will normally be depreciated at 3% and industrial buildings at 5%. The standard depreciation method is the straight-line method. A declining-balance method is generally optional, but will for most real estate companies not be allowed. Any corporate entity is subject to corporate income tax on capital gains as part of its total income at the standard corporate tax rate. Fixed assets which have been held for at least five years may qualify for a form of re-investment relief on sale, which allows the tax to be deferred, providing that the proceeds are reinvested in tangible and intangible assets. The tax due is spread over the depreciation period of the new asset. As a general rule neither the acquisition nor renting of real estate is subject to VAT, so any VAT charged on costs and services will be a cost to the business. However, a taxable person can opt for the application of VAT when selling or leasing a new building. VAT grouping can be a valuable option. Often real estate companies are acquired rather than property, due to the perceived high rates of transfer tax in Belgium. The acquisition of Belgian real estate is subject to Registration Duty at a rate of 12.5% upon the higher of the purchase price and market value (except in the Flemish region where the rate is generally 1%). This also applies to the transfer of real estate to the shareholders of a real estate company being liquidated, except when it has the form of an SPRL, in which case the Registration Duty rate is 1%. Acquisitions of corporate real estate entities are exempt from Registration Duty but there are, of course, certain legal, commercial and other taxation issues which would arise. For example, it is not generally possible to stepup the base cost to market value. No capital duty is paid in Belgium on the issue of shares. Capital gains on shares realised by individuals are generally exempt. If realised by companies, they will be exempt, provided the subsidiary meets the subject to tax requirement. Belgium has a tax ruling system whereby advance assurance in respect of the tax treatment of a transaction can be sought from the tax authorities. A notional interest deduction is now available for tax purposes, calculated as 4.37% of a company s net equity. Belgium has had a REIT regime for listed companies since 1995 (Sicafi). 45

48 Croatia Contact: Jeni Krstičević +358 (1) Income from real estate realised by companies in Croatia is subject to corporate tax at a rate of 2%. Taxable profit is the accounting profit adjusted for non deductible and non taxable items in accordance with the provisions of Croatian law. All charges from abroad are, however, subject to Foreign Currency Inspectorate scrutiny. Losses can be carried forward for utilisation in future periods, up to a maximum of five tax years. The tax year in Croatia is generally the calendar year, but it is possible to agree a different period end with the Croatian tax authorities. A tax return must be submitted to the Croatian tax authorities within four months of the business year end (generally by 3 April following the relevant calendar year). For tax purposes, depreciation is calculated on straightline basis. The ordinary rate for buildings is 5%, but it may be doubled to 1% in certain circumstances. Most other relevant assets would be depreciated at 2%. The book value of property (i.e. the tax depreciated value) is treated as the cost for the purposes of the gain calculation. The disposal of shares in a real estate company held by a non-resident with no permanent establishment in Croatia is exempt from tax. No capital duties are payable in Croatia upon the issue of shares. In order to encourage reconstruction and development of certain areas, the Government of Croatia may issue a decree, whereby certain taxpayers are exempt from tax, or their tax rate is reduced. Benefits can include: Accelerated depreciation is allowed for tax purposes Reduced profits tax-depending on the level of local investment and number of employees can result in a %, 3%, 7% or 1% tax rate Tax free zones, e.g. the Vukovar-Srijem county is fully exempt from profits tax for the period from 25 to 214 Other tax favoured zones benefit from the reduced rates of 1% or % Regions under special government protection enjoy reduced rates of 15%, 5% or % The Croatian tax authorities do not give advance rulings on the tax treatment of a particular transaction. Transfer pricing rules apply in Croatia, with the effect that all payments to connected parties must be arm s length in order to be deductible. A debt:equity ratio of 4:1 will generally be allowed in relation to interest on loans from shareholders with a shareholding of 25% or more, or at least 25% of the voting power. A third party loan which is guaranteed by a shareholder will be deemed to have been made by that shareholder for this purpose. Real estate transfer tax of 5% of the market value of the property is payable on the part of price which was not a qualifying asset for VAT purposes for the seller (typically the value of land and utilities, or full value if the property was built before 1998 or the seller is not VAT registered). Zagreb MANI II VAT of 22% should be paid on the remaining part of the purchase price. If a buyer is VAT registered, it can generally reclaim any VAT suffered at the end of the next VAT period (usually one month). Capital gains on disposals of property located in Croatia are included in taxable income and subject to corporation tax at 2%. 46

49 Cyprus Contact: Karlos Zangoulos Cyprus resident companies are subject to income tax at the rate of 1% on their worldwide income. Nonresident companies are taxed on Cyprus-source income only. Interest, repairs and maintenance costs and other expenses incurred wholly in respect of the rental business are generally allowed as deductions against income. Capital allowances in respect of Cypriot property are calculated at the rate of 3% of the original cost of construction of the property, except for hotels and industrial buildings where the rate is 4%. This is computed on a straight line basis. In the event that the building is sold or otherwise transferred to a new owner, the new owner is entitled to claim the unexhausted balance of the original cost over the remaining life of the building. The purchase price is therefore not relevant in the calculation of capital allowances for second and subsequent owners. Capital allowances in respect of foreign property are calculated at the rate of 3% of the acquisition price. Transfer fees are calculated on the purchase value of the land interest acquired. This applies to individuals and companies at the following rates: Up to 85,43 3% 85,431-17,86 5% Over 17,86 8% Capital gains tax is payable on a disposal of Cyprus property or shares in certain Cyprus property-owning entities at the 2% rate, after deducting indexation allowance (calculated using the official rate of inflation). Individuals are allowed a tax free allowance (currently 17,86) in respect of capital gains. Where the property has been the owner s main residence for a period of more than five years then this allowance is increased (currently to 85,43). Where a company or individual engages in frequent transactions, or where the property was held for a short time, the profit may be regarded as being of trading nature and may be subject to income tax rather than capital gains tax. As a member of the EU, Cyprus has signed the three EU directives. However, they are of limited application as there is no withholding tax under Cypriot domestic law. A special defence tax is payable at an effective rate of 2.25% of the gross annual rental income by all commercial property owners. There is no withholding taxes on dividends paid abroad. Consequently Cyprus entities are commonly used by non-resident persons as vehicles through which to own Cypriot (and foreign) property. Individuals are subject to income tax on the rental income after deduction of interest, capital allowances and an amount of 2% in lieu of expenses. Personal allowances are granted to non-resident individuals owning real estate who pay taxation according to the normal tax bands and tax rates. Where property is jointly owned, personal allowances are granted to both owners. Joint ownership of Cypriot property by non-resident couples is therefore common. As a general rule the renting of real estate is exempt from VAT, so any VAT charged on costs and services can not be reclaimed and is a cost to the business. Similarly VAT incurred on the acquisition or construction of rental property can not be reclaimed. The rate of VAT in Cyprus is 15%. 47

50 Czech Republic Contact: Jan Tuma Real estate investments are most commonly made via a Czech resident company. They may also be made through branches of foreign companies. Profits are taxable in the Czech Republic at the normal corporate income tax rate of 21%. The Corporate tax rate will reduce to 2% for 29 and 19% for 21. Taxable income is generally computed on the basis of normal accounting principles, and generally any expenses incurred for the purpose of the property rental business are deductible. Property development companies are typically exempt from RETT, as the first transfer of real estate is always exempt. Real estate tax varies from CZK 1 to CZK 1 per square metre, depending on the type of building structure and its location. No capital duty is paid in the Czech Republic on the issue of shares. The Czech Republic has fully adopted the various EU Directives (e.g. the Parent Subsidiary Directive, the Interest and Royalties Directive and the Mergers Directive). Interest paid to connected parties is allowable to the extent that the interest is calculated at a commercially supportable market rate and the thin capitalisation restrictions are satisfied (see below). New thin capitalisation rules were introduced on 1 January 28 which tightened the rules regarding the tax deductibility of interest. The allowable debt-to equity ratio is 6:1 (4:1 from 29) for most loans; for loans from a related party, the ratio is 2:1 (3:1 for banks and insurance companies). Depreciation in respect of buildings, but not land, is tax deductible. The allowable rates vary between 1.2% and 3.4% for straight line depreciation and run for a period of either 3 or 5 years, depending on the type of real estate. Reducing balance depreciation is also possible in certain circumstances. Quinlan Explora Jupiter, Prague Any entity is subject to corporate income tax on capital gains on the sale of Czech property as part of its total income at the normal 21% rate. There is no charge to corporate income tax on the sale of shares in a Czech company by a non-czech resident company, provided it is sold to another non-czech resident. If shares in a real estate company are sold to a Czech resident the gain is subject to tax, unless it is exempted by the appropriate double tax treaty. VAT on residential buildings is 9%; for other buildings the rate is 19%. It is payable on acquisition of the property, if it is acquired within 3 years of the date of construction. The acquisition of Czech real estate is subject to Real Estate Transfer Tax ( RETT ) at a rate of 3% upon the higher of the purchase price and the market value. 48

51 Denmark Contact: Hans-Henrik Nilausen Real estate investments can be made directly by either non-resident companies, individuals, or indirectly via a Danish company. Companies with taxable income from letting real estate are taxed at the corporate tax rate of 25%. There are progressive rates of up to 59% for individuals. There is no wealth tax in Denmark. However, an annual land tax has to be paid to the local administration. This tax varies from 1.6% to 3.4% of the official valuation of the land. Generally, taxable rental income is calculated on normal accounting principles but certain special rules apply. In most cases any expenses incurred for the purpose of the rental business are deductible. Interest paid to connected parties is allowable to the extent that the interest is calculated at a commercial market rate and thin capitalisation (debt to equity) restrictions are satisfied. The allowable debt/equity ratio in respect of connected party debt is generally 4:1. Where the ratio of 4:1 is exceeded, an interest deduction may be denied on that part of the controlled debt that should have been converted into equity in order to observe the 4:1 debt equity ratio. However, the thin capitalisation rules do not apply if the creditor is an individual, if the connected party debt is DKK 1 million or less, or if the taxpayer can prove that a similar financing could have been obtained from a third party lender. In addition to the thin capitalisation rules, there are two further rules restricting interest deductions: - interest may only be deducted up to an average interest return (6.5% at July 27) on the tax value of the company s qualified working assets (roughly fixed assets other than investments, plus stock). Excess interest restricted under this rule is lost. - interest expenses can only be deducted up to a maximum of 8% of the company s Earnings Before Interest and Taxation (EBIT). To the extent that interest is restricted under this rule it may be carried forward to future periods. However, the total interest deduction is again subject to this restriction. Industrial buildings and office buildings adjacent to them qualify for tax depreciation of up to 4% per annum of the acquisition price. Residential properties cannot be depreciated for tax purposes. Land also may not be depreciated for tax purposes. Plant and machinery may be depreciated at up to 25% using the reducing balance method. On sale, the tax depreciation is clawed back in full up to the level of the disposal proceeds Capital gains are taxed at 25% for companies and up to 59% for individuals. All gains are taxable, but losses are only allowable if the building qualifies for tax depreciation (i.e. industrial buildings or adjacent office buildings). The provisions of Denmark s double tax treaties generally give Denmark the right to tax gains on the disposal of Danish real estate, irrespective of where the vendor is resident. The acquisition of Danish real estate is not subject to stamp duty. However, a registration fee is payable. This registration fee is calculated as a fixed amount of DKK 1,4 plus.6% of the purchase price. As a general rule, neither the acquisition nor the renting of real estate is subject to VAT. However, it is possible to apply for a voluntary VAT registration which will be beneficial in some circumstances. This is not possible for most residential buildings. No capital duty is paid in Denmark on the issue of shares. Since 25, Danish companies have not been taxable on income from foreign permanent establishments or real estate unless international tax consolidation is elected for. These two rules apply to all interest and not just that on connected party debt. However, there is a deminimus limit of DKK 2million of interest, below which these rules cannot reduce the allowable interest. 49

52 Estonia Contact: Urmas Võimre Estonia charges tax on the income of companies and permanent establishments only when their income and capital gains are distributed or are deemed to be distributed. For every 1 of gross distributed profits, 21 of tax is due, resulting in a net distribution available to shareholders of 79. Non-residents are taxed on income from Estonian property businesses at a flat rate of 21%. Dividends paid to non-resident companies owning less than 15% of an Estonian company incur an additional 21% withholding tax, which also applies to dividends paid to low-tax jurisdictions. Where a non-resident disposes of shares in an Estonian company, more than 5% of the value of which is comprised directly or indirectly of buildings or land situated in Estonia, and, at the time of disposal, that non-resident had a shareholding of at least 1% in the company, the gain is subject to 21% income tax. Otherwise, gains on the disposal of property company shares are not generally taxable. Stamp duty is payable on the acquisition of real estate at variable rates, but may not exceed EEK 4,. The rate of income tax for individuals is being reduced to 2% in 29,19% in 21 and 18% in 211. The rate of the distribution tax on companies will be reduced correspondingly to 2/8, 19/81 and 18/82 of the net distribution. From 1 January 29 the Estonian corporate tax system will comply fully with the EU Parent-Subsidiary Directive. No additional withholding tax is deducted on dividends paid to non-resident individuals. Withholding tax of 21% is applied to interest (including interest upon debt secured on real estate) only to the extent that it exceeds an arm s length basis. Estonia has a tax treaty network by way of which the applicable withholding tax rate could be reduced. Deductions against rental income are not allowed for individuals except if the individual registers with the tax authorities as a sole proprietor carrying on a business. A sole proprietor has to pay income tax (at 21%) and social security contributions at a rate of 33% on his/her net profit. Social security contributions are deductible for income tax purposes, and no further contributions are due when income exceeds EEK 65,25. Where the individual in receipt of rental income is not a registered sole proprietor, it is his or her gross rental income that is liable to income tax, at the rate of 21% (by way of withholding). Deductions are not relevant to Estonian companies due to the distribution basis of calculating taxable profits, as described above. There are no tax depreciation rules due to the distribution basis of taxation in Estonia. Non-residents pay income tax of 21% on capital gains made from the disposal of real estate or rights over real estate located or registered in Estonia. 5

53 Finland Contact: Heikki Muikku A property company incorporated in Finland is subject to Finnish corporate tax on its worldwide profits and gains. Foreign property companies that own property in Finland are subject to tax on all income from that property. Profits are taxable in Finland at a flat corporate tax rate of 26%. Taxable profit is determined in accordance with generally accepted accounting principles with only minor adjustments for tax purposes. A company s income from non-business activities (e.g. rental income) is regarded as personal income. Profits and losses from business (i.e. trade) and nonbusiness sources are treated separately for tax purposes. Consequently, losses from one source cannot be offset against income from the other source. Capital gains realised on the sale of Finnish real estate or shares in a Finnish resident property company will normally be taxed at the standard corporation tax rate of 26% if the owner is a corporation, or at 28 %, if the owner is an individual. Gains realised by a non-resident company on the disposal of shares in a Finnish real estate company will, in certain cases, be subject to corporation tax in Finland. However, the provisions of tax treaties will be observed. In some cases there is a participation exemption available for capital gains derived by companies from the sale of shares. However, this exemption is not applicable to real estate companies or to the sale of shares of real estate companies. Property rental payments are generally VAT exempt. However, a landlord or real estate company may register voluntarily for VAT, provided the lessee is using the property for VATable activities, or is the Finnish Government. Sale of real estate is VAT exempt but if real estate is sold to a non-taxable person less than ten years (in some cases five years) from the beginning of the calendar year during which new or major construction work on the property was finalised, the seller is liable to repay a proportion of the VAT reclaimed on the development on a time apportioned basis. Property tax is charged annually at.5%-3% (depending on the municipality where the property is located) on the value of the property which must be determined by a fixed formula. Farming land and forests are exempt. These rules are the same regardless of whether the taxpayer is a resident of Finland or not. The purchase of Finnish land is subject to real estate transfer tax at 4% on the purchase price. Generally, the purchase of shares in a Finnish company that holds property outside of its main trade is subject to transfer tax at 1.6% on the share price (only if either the seller or purchaser is resident in Finland). However, if the purchased shares relate to a real estate company then transfer tax is levied, even if both parties to the transaction are non-residents. Finland does not currently have a REIT regime, however the Ministry of Finance is preparing an amendment of tax laws to introduce a REIT regime. It is expected the new rulings will take effect from the beginning of 29. The expenses incurred in acquiring or maintaining a business are deductible and are accounted for on an accruals basis. Expenses that generate income over a period of at least three years are divided equally across the corresponding tax years. Costs in connection with acquiring fixed assets are deductible as depreciation. The depreciation of buildings and other structures is computed on the total value of the structure using the declining balance method for each building separately, with a maximum rate varying from 4% up to 25%, depending on the type of building or structure. Finland does not charge withholding tax on interest, and there are no formal thin-capitalisation rules. There is a legal precedent where a debt/equity ratio as high as 15/1 has been accepted. As such, it is relatively straightforward to structure the debt for a Finnish property in a tax efficient manner. 51

54 France Contact: Carine Duchemin +33 () Income from, and capital gains realised on the sale of, real estate in France are taxable in France, whether or not received by a French resident (subject to any relevant double tax treaty). A French company is subject to corporate tax. The standard rate of corporate tax is 33.33%. A permanent establishment may give rise to branch tax, payable at a rate of up to 25% on the net after tax profit of the branch. There are some exemptions available from branch tax (which in any case does not apply within the EU). An investment through a partnership, which has not elected to be liable to corporate tax, gives rise to a tax charge at the entity level, but which is payable by the partners. Generally any expenses incurred for the purpose of the rental business are tax deductible including local taxes and registration duty. Interest paid to connected parties is allowable to the extent that the interest is calculated at a commercial market rate and thin capitalisation restrictions are satisfied. Interest payments that fail all three of the following conditions may be restricted: - the debt:equity ratio exceeds 1.5:1 - the interest cover is below 4 to 1 - interest payments by the relevant company to related companies are greater than interest payments received from related parties. The taxable gain on the direct disposal of a property (usually the difference between the sale price and the net book value) is taxed at the standard corporate tax rate. Subject to any double tax treaty in place, a disposal of property (or shares in a property holding company) by a non-resident company would be subject to withholding tax at a rate of 33.3%. VAT or registration duty is payable on the acquisition of real estate. In general terms, if a second hand building is acquired, the acquisition is outside the scope of VAT. However, the acquisition of land and the purchase of any building during its construction (and including the first disposal of a new property) will be subject to VAT at 19.6%. Registration duty is payable at a rate of up to 5% on the acquisition of shares in French real estate company, or a direct acquisition of a property. It is calculated on the purchase price, plus any other consideration provided. Registration duty is tax deductible for French companies or branches. A nominal duty ( 375/ 5) is payable in France on the issue of shares. France has a well established Real Estate Investment Trust regime (SIIC). Under this regime, companies whose main activity is the leasing of properties, which have a share capital at least equal to 15m and are listed on a French regulated market, can elect for the regime. Provided certain conditions are met, SIIC companies are exempt from corporate tax on both their rental income and any capital gains that arise on the sale of their properties or shares in qualifying subsidiaries. However, if the excessive interest payments are less than 15, then all of the interest payable should be allowable under the thin capitalisation rules. Depreciation in respect of buildings, but not land, is tax deductible. The allowable rates for real estate range from 2% to 5%. Certain specified assets may be depreciated using accelerated depreciation methods. Plant and machinery depreciation is allowable at rates depending on the respective standardised useful life. On sale, the tax depreciation is clawed back up to the level of the disposal proceeds. 52

55 Germany Contact: Martina Elisabeth Luetticken +49 (4) Real Estate investments are most commonly made by way of either non-resident companies or German partnerships. For 28, any corporate entity is subject to corporate income tax at an effective rate of %. Individuals investing either directly or by way of German partnerships are taxed at their individual tax rate. A German company is, in principle, also subject to trade tax, which is a local tax at rates varying from 7% to 17.15% from 28 onwards. Trade tax is not deductible for corporate income tax purposes from 28 onwards. Passive rental income is, however, often exempt from trade tax. Non-residents are not liable to trade tax providing they do not have a permanent establishment in Germany. Accordingly, it is generally safer for trade tax purposes for investment in Germany to be structured through nonresident corporations that are tax resident in jurisdictions which offer treaty protection and do not charge tax on the German rental income. Generally the taxable income is calculated on normal accountancy principles, but for a non-german resident with only passive income, the taxable rental income is calculated on a cash receipts and disbursements method mainly adjusted by a deduction for depreciation. However, pursuant to government proposals the rental income of non-german resident corporations may be qualified as trading income from 29 onwards. Amongst other consequences, the taxable income would be determined pursuant to normal accountancy principles under the proposed new rules. As a general rule neither the acquisition nor the renting of real estate is subject to VAT. However, an option to tax may be possible. In this case it is important to make sure that the investor is entitled to input tax deductions. Generally any expenses incurred for the purpose of the rental business are deductible. Interest paid to connected parties is allowable to the extent that the interest is calculated at a commercial market rate. From 28 the thin capitalisation rules have been replaced with a new interest deduction limitation. In general, net interest paid is only deductible to the extent it is equal to or less than 3% of the earnings before interest, taxes and depreciation (EBITDA for tax purposes), unless the aggregate of net interest paid is below 1,,. Depreciation in respect of buildings, but not land, is tax deductible. The allowable rate varies from 2% to 3%. In the case of an exceptionally short useful life for a building higher rates apply. Plant and machinery depreciation is allowable at rates depending on the respective standardised useful life. On sale, the tax depreciation is clawed back up to the level of the disposal proceeds. The acquisition of German real estate is subject to Real Estate Transfer Tax ( RETT ) in most cases at a rate of 3.5% of the purchase price, depending on the location of the property. As a general rule RETT also applies on the acquisition of shares in a company or interest in a partnership owning German property, but generally the tax base is at 6-7% of the fair market value of the property (the standard assessed value). In asset deals RETT is added to the tax base of the property and can be tax deductible as depreciation. Where shares in a corporation are acquired RETT is part of the acquisition costs of the shares and not deductible as depreciation. No capital duty is paid in Germany on the issue of shares. If the property is rented out, an option to tax is possible only if the lessee uses the property exclusively for VATable activities. Thus an option is generally not possible for the renting of residential buildings. German companies may elect to convert to German REIT status. Subject to meeting a number of conditions, qualifying rental profits in a German REIT will be exempt from corporate income tax, the solidarity surcharge and municipal trade tax. Profit distributions are subject to full taxation on the level of the shareholder for corporate shareholders i.e. participation exemptions do not apply. 53

56 Greece Contact: Marios Eleftheriadis Companies tax resident or with a permanent establishment in Greece pay corporation tax at a rate of 25% on their tax adjusted profits. Non-resident companies are also obliged to maintain accounting records in Greece, if they own property located in Greece. Rental income is subject to a surtax of between 1.5% and 3%, depending on the circumstances of each case. Foreign companies, established in countries regarded as tax havens, are subject to an annual 3% property tax (quantified by reference to the value of the property owned). In arriving at taxable income, resident companies generally may deduct the costs and expenses (including depreciation and finance charges) accumulated in generating rental income. The acquisition of Greek real estate is subject to Real Estate Transaction Duty ( REDT ) at a rate of 1% of the purchase price. The REDT is due before the sale and purchase is completed. The aforementioned tax applies to both individuals and companies. Also, real estate is subject to an annual Real Estate Tax ( ETAK ) at.6%. A capital duty of 1.1% is due on the issue of shares. A transfer tax of 5% is due by corporate entities on the transfer of non-listed shares. The taxation of real estate in Greece and, in particular, the taxes levied on the transfer of the ownership of such property is currently going through a phase of transformation, the previously levied Real Estate Conveyance Tax being gradually replaced by Value Added Tax. Because the transitional arrangements are fairly complex, investors are advised to seek and secure competent professional advice prior to a transaction. Individuals are also subject to tax in Greece on their rental income in a similar fashion to companies, albeit at progressive income tax rates of up to 4%. Depreciation is tax deductible for corporate entities at rates of between 2% and 12%, depending on the type of property. However, for the first three years, newly established entities either may not deduct depreciation, or in certain circumstances they may be allowed to deduct 5% of the depreciation that would otherwise be deductible. For individuals, profits on the sale of real estate are subject to capital gains tax at the following rates: 2% if the real estate has been held for less than 5 years. 1% if the real estate has been held for between 5 and 15 years. 5% if the real estate has been held for 15 to 25 years. No capital gains tax is due if a real estate asset has been held for more than 25 years. Capital gains tax due on the sale of a property must be paid to the tax authorities before the sale is completed. With regard to companies, all profits and gains are treated equally and are taxed at the standard rate of 25%. 54

57 Hungary Contact: Dr. Linda Danicz Most real estate investment is structured through resident entities (whether a company or branch), as direct non-resident property investment requires permission from the relevant regional authority. The most common entity for real estate investment is a private limited liability company. However, partnerships can also be good vehicles for certain classes of investor. Companies resident in Hungary are subject to general corporate income tax at a rate of 16%. The first HUF 5 million is taxable at a rate of 1% (provided certain conditions are met). A 4% solidarity tax also applies. If the taxable profits calculated according to the general rules are less than 2 percent of total revenues minus certain costs, special rules apply. The gain on a disposal of shares in a property owning company by a foreign holding company is generally not taxable in Hungary. The acquisition of commercial property and land is subject to a transfer tax at a general rate of 1%. Immovable property used as a dwelling is subject to rates between 2% and 6%. A transfer tax rate of 2% is available if a real estate developer, real estate fund or real estate leasing company (financial lessor) purchases the property. A condition for applying the preferential rate for a real estate developer is that the land is sold within two years. Real estate funds and financial leasing companies do not have any fixed holding period limitations. There is stamp duty of HUF 1, on the establishment of a limited liability company, HUF 6, for a public limited liability company and HUF 5, for partnerships. The local business tax rate is capped at 2% by law but varies depending on the municipality in which the company/branch is located. Taxable income is based on financial statements prepared in accordance with Hungarian accounting standards. Generally, business expenses are deductible for corporate income tax purposes. As a general rule, from 1 January 24, losses can be carried forward indefinitely, subject to certain conditions and the agreement of the Hungarian Tax Authority. Tax losses cannot be carried back. There is generally no withholding tax on interest paid either to Hungarian or foreign entities. Transfer Pricing rules apply if the interest on loans from connected parties exceeds the market rate. In this case interest may be partially disallowed. If the prescribed debt:equity ratio of 3:1 is exceeded, the interest on the excess will not be deductible. These thin capitalisation rules apply both to connected party debt and third party debt (but not to bank debt). Depreciation is deductible at set rates as defined in the Corporate Income Tax Act. For leased real estate the rate is currently 5% per annum. However, depreciation of long life structures, including certain buildings, is restricted to 2%. The gain on a disposal of property by a Hungarian company will be added to its taxable rental profits. The gain on a disposal of shares in a property owning company by a Hungarian holding company would similarly be added to its taxable profits. 55

58 Ireland Contact: Mark Hynes Irish corporate entities are subject to corporation tax of 25% on rental income. Furthermore, closely held companies may be liable to a 2% surcharge on rental income that is not distributed to shareholders within 18 months of the end of the accounting period. Non-resident entities are similarly subject to corporation tax of 25% on rental income from Irish real estate. The tax rates for non resident individuals depend on the level of income in Ireland. If total taxable income is less than 35,4, tax will be payable at 2%. For income in excess of this amount, the rate is 41%. Irish VAT law in respect of the supply of property has undergone fundamental changes effective from 28 (subject to certain transitional measures). Commercial lettings are now generally VAT exempt, although there is an option to tax available. However, subject to certain conditions, this option to tax is restricted where the landlord is connected with the tenant. Sales of commercial property are VAT exempt if the property is more than five years old or, if less than five years old, has been occupied for more than two years. However, there is a joint option to tax available for the purchaser and vendor. This option may be advantageous for the vendor where it has claimed a VAT input credit on the original purchase/development of the property. Generally any expenses properly incurred for the purpose of the rental business are deductible. However certain specific expenses are disallowed, such as tenant entertaining. Capital expenses, such as expenditure enhancing the value of the property or legal fees on the acquisition of the property, are not available for deduction against rental income. Instead, these costs are allowable when calculating any capital gains tax on the eventual disposal of the property. New industrial buildings qualify for allowances calculated at 4% per annum on a straight line basis. Second hand buildings are generally depreciated over their deemed remaining tax life. Tax life of a new industrial building is generally 25 years. Capital allowances on plant & machinery are calculated at 12.5% per annum. Any gain (including those by non Irish residents) arising on the sale of land or property will be subject to Irish capital gains tax at the rate of 2%. In computing the amount of the gain, the original cost will be indexed to take account of inflation up to 31st December 22. Indexation ceased after that date. Ireland always has the primary taxing rights in respect of income or gains on land or property situated in the Republic of Ireland. Where the owner is resident in a tax treaty country, relief will generally be available in the country of residence for any tax paid in Ireland. There is stamp duty payable on the purchase of land or property. If acquiring commercial property, the rate of stamp duty will be between % (value less than 1,) and 9% (value exceeds 15,). If acquiring residential property, the rate of stamp duty for investors will be % for the first 125,, 7% for the next 875, and 9% for the excess over 1,,. The rate of stamp duty can often be reduced to 1% by acquiring shares in a company owning the land. No capital duty is payable in Ireland on the issue of shares. Any gain on the sale of Irish land will be subject to Irish Capital Gains Tax, regardless of whether the land is owned by an individual or a company. In appropriate circumstances, it is recommended that land is owned directly by the individual so as to minimise any Irish tax payable. There are no annual or other wealth taxes if a nonresident owns land in Ireland. Under current Irish tax law, interest on borrowings is deductible against rental income. There are no thin capitalisation rules in Ireland. Tax depreciation in respect of freehold buildings is allowed on certain property assets. These include investment in childcare facilities, private hospitals and private nursing homes. 56

59 Italy Contact: Giorgio Farina During the last two years, many amendments have been introduced regarding real estate tax regulations. In particular, changes to the tax rates for corporate income taxes (IRES and IRAP) were proposed in the Finance Act 28. Italian resident companies and permanent establishments are now subject to corporate income tax (IRES) at 27.5% (reduced from 33%). They are also subject to a regional tax (IRAP) at the rate of 3.9% (reduced from 4.25%) on rental income. A local tax on real estate (ICI) is charged on an annual basis at.4% to.7% based on a cadastral based value of the property. The rate is set by the relevant local authority. Certain sales of residential and commercial buildings (by local companies or permanent establishments) are subject to VAT at 4%, 1% or 2%. In addition to VAT, a small registration tax at a fixed amount of 168 and a proportional registration tax at 4% are also due. If VAT does not apply, a proportional registration tax at a rate ranging from 3% to 18% is due. to the extent they are equal to or less than 3% of gross operating profit. All fixed assets (except for land and residential buildings), are depreciable for tax purposes. The depreciation rate for fixed assets is typically 3% for buildings, with a rate of 1.5% applying for the first year. The value of the land must be segregated from the value of the buildings and it is not depreciable. A specific rule applies to calculate the land value (if it is not separately recognised in the accounts of the owner): 2% of the total value (increased to 3% for industrial buildings). If real estate (other than residential buildings) has been held for over three years, taxation of any capital gain on sale can be deferred over a maximum period of five years. On purchases of real estate, registration tax (stamp duty) is generally charged between 3% and 1% upon the purchase price if no VAT is applicable. A registration tax at the rate of 18% applies on agricultural properties. No capital duty is payable in Italy on the issue of shares. The Finance Act 28 amended the thin capitalisation rules. The new rules will require special attention by non-resident purchasers of Italian real estate when considering a tax efficient acquisition structure. A transfer of a commercial building executed between a constructor (within four years from the construction or restructuring undertaken by it) as transferor and any entity as transferee is subject to VAT, usually at 2%, a fixed 168 registration tax and a proportional 4% registration tax. A transfer executed between other entities (including a constructor, if the transfer is made after four years from the construction or restructuring undertaken by the constructor), as transferor and another entity (other than a financial entity) as transferee is generally zero-rated for VAT purposes (under the reverse charge rule) and subject to a fixed 168 registration tax and a proportional registration tax at 4%. Under certain circumstances, the seller can exercise an option for the application of VAT. Non-resident individuals are taxed on their Italian source income at progressive rates from 23% to 43%. In general, business expenses, other than those specifically prohibited by law, are deductible for tax purposes. From 28 interest charges (including those under lease agreements), net of interest income, are tax deductible 57

60 Latvia Contact: Vita Liberte If the real estate investment vehicle is a Latvian company, that company will pay corporate income tax at 15%. Individuals investing via a Latvian partnership or directly will pay personal income tax, at a flat rate of 25%. Corporate partners in a Latvian partnership will be liable to corporate income tax on their profit share. It is also possible to invest in Latvian real estate via a foreign or offshore entity, but income remittances may then be subject to higher withholding tax (see below). There is no withholding tax on rents paid to a non-resident individual but tax is payable at 25% on the net income upon filing a tax return. However, any remittances of income (including rents) paid to a person located in a deemed tax haven country are prima facie subject to withholding tax of 15%, whether the remittances are made directly or via intermediaries. The list of taxhaven countries includes sixty eight jurisdictions. The tax authorities will, however, waive the requirement to withhold if satisfied that the transaction did not have a tax-avoidance motive. Withholding taxes are also imposed on rental payments to a non-resident company without a permanent establishment in Latvia. The rate is 5%. It must also be noted that non-resident companies that are members of Latvian partnerships face a withholding tax of 15% on any remitted profit share (i.e. the partnership withholds the Latvian corporate income tax due on the non-resident company s share of the Latvian partnership s profits). Dividends paid to non-resident companies have a general withholding tax rate of 1%. However, dividends paid to a company of a type listed in Annex 1 to the EC Parent- Subsidiary Directive and resident in any other EU or EEA state are exempt from this withholding tax, provided that the foreign company has held at least 15% of the shares and/or voting rights in the Latvian distributing company for a period of at least two years. If the shareholding period is not satisfied, payment of a guarantee covering 1% of the dividends to be paid will generally secure the exemption. Interest payments to an associated non-resident company are subject to withholding tax of 1%. Interest payments to a non-resident individual (on, for example, shareholder loans) are subject to 25% withholding tax. In general, neither the sale proceeds nor rental income from real estate are subject to VAT, but the first sale of unoccupied real estate is subject to standard-rate VAT of 18%. In computing income for both corporate income tax and personal income tax purposes, all expenses reasonably connected with the real estate investment may be deducted (including mortgage and other loan interest, repairs, advertising, agents fees, and the cost of visits to the property for business purposes). For corporate income tax purposes only, thin capitalisation rules apply to limit deductible interest in certain cases. Interest paid at rates above market rates may also be restricted, but neither rule generally applies to interest paid to Latvian or other EU credit institutions, or to any lender resident in Latvia. For corporate income tax purposes, payments to related parties are only allowed to the extent they are at arm s length. Companies can carry forward rental deficits for five years. Where control of a company (+5% of shares) changes, deficits brought forward remain available, provided that the business carried on in the prior two years continues for at least five years after the change. Individuals may carry forward losses from business activities, including real estate letting businesses, for a maximum of three years. Tax depreciation is available at various rates, using the reducing balance method. Buildings, structures and perennial plantations may be depreciated at 1%. Most types of plant and machinery are tax depreciable at 4%. Capital gains on the disposal of Latvian real estate are taxable for both personal and corporate income tax purposes. The exemption for property held for five years or more by an individual does not currently apply to nonresidents. Capital gains are computed by subtracting the acquisition cost from the sale proceeds. There is no allowance for retail price inflation. A non-resident company with no permanent establishment in Latvia, however, is subject to a 2% withholding tax on the sale proceeds. From 12 June 27, the disposal of shares in a company where more than 5% of the value of its assets consists directly or indirectly of Latvian real property is treated as if it were a disposal of the underlying real property, unless the shares are publicly quoted on an EEA stock exchange (subject to transitional provisions). Real estate tax of 1% per annum is levied on the registered (cadastral) value of land, which will almost always be considerably lower than market value. There is no capital duty upon the issue of shares in Latvia. Special economic zones give companies entitlement to signficant corporate income tax and real estate tax reliefs. Withholding tax on interest payments is being reduced gradually to % by 213 in line with the terms of the EU Interest and Royalties Directive. 58

61 Lithuania Contact: Vilma Narbutienė Companies are charged to corporate income tax at a standard rate of 15%. A permanent establishment of a foreign company is subject to the same rate of tax as a resident company. Personal income tax is currently charged at 24% on most types of income and at 15% (charged by withholding) on certain income, such as dividends (for residents and nonresidents). Non-resident companies without a permanent establishment in Lithuania are liable to 1% withholding tax on rental income from Lithuanian immovable property. There is no withholding tax on rents paid to non-resident individuals. A 15% withholding tax applies to dividend payments and a 1% rate applies to interest, subject to lower rates required by tax treaties or EU Directives. Neither the acquisition of nor rental of real estate is generally subject to VAT. An option to apply VAT may be advantageous but once the option is exercised, it must remain in place for 24 months. Generally all expenses incurred in the usual course of business are deductible although certain limits apply, such as which taxes can be deducted. However, rental income of individuals is subject to tax at 15% on the gross rents, without any deductions. The only exception is if the rental is part of a business, in which case the landlord, if registered as a sole proprietor carrying on a business, may opt for taxation at 24% on net rents. Capital gains in Lithuania are taxable as ordinary income. For non-resident companies without a permanent establishment, there is a withholding tax of 1% on the disposal proceeds of immovable property. However, it is possible to file a tax return and be taxed at the general corporate rate applicable to net rents (i.e. 15%). Gains on the disposal of shares by companies are generally taxable, but gains on disposals of holdings of 25% or more may be exempt under certain conditions. For non-resident individuals, similar rules apply. Disposal proceeds will be subject to withholding tax of 15%, but the net gain will be taxable at 24% if a tax return is filed. The exemption for property held for three years or more does not currently apply to non-residents. Gains on the disposal of shares in Lithuanian companies by nonresidents are not generally taxable in Lithuania. Owners of real property, regardless of their residence status, are liable to land tax at rates of between 1.5% and 4% on the acquisition price (the actual rates are set by local authorities). Corporate entities also pay an annual real property tax at rates of between.3% and 1.% on the cadastral value of the property. The precise rate varies between one local authority and another. Reliefs and reductions may be available. The tax is deductible in computing income for corporate tax purposes. No capital duty is paid in Lithuania on the issue of shares. There is also no stamp duty on the transfer of real property. Certain reliefs are available for investment in Lithuania s free economic zones. Losses generally may be carried forward for a maximum of five years. Land is not depreciable, but exceptionally, an impairment write-down to market value may be made if that has fallen below acquisition cost. Depreciation on buildings and other fixed assets is allowed on either a straight-line or declining-balance method. The straight-line method is the norm for commercial buildings. Dwelling houses may be depreciated at 5% per annum and other buildings at 6.67% per annum; some new buildings qualify for depreciation at 12.5% per annum (all on a straight-line basis). 59

62 Luxembourg Contact: Michael Probst Real estate investments can be made directly by nonresident individuals, companies or indirectly via an investment in a Luxembourg property company. Personal income tax is levied on an individual s income arising from property located in Luxembourg. The tax rate is progressive, ranging between % and 38%. It should be noted that tax losses on rental income are not available for future offset. Taxable rental income is calculated as gross rental income less deductible expenses. These expenses include repairs and maintenance, interest and finance charges, property tax, insurance premiums, tax depreciation or, alternatively, an allowable lump sum expense. The lump sum expense is calculated as the lower of 2,7 or 35% of gross annual rentals. Interest costs are excluded from the lump sum expense. Real estate income arising within a Luxembourg tax resident company is taxed on the same basis as commercial profits. Real estate owning companies which are taxed on commercial activities are subject to corporate income tax at progressive rates up to a top rate of 22% for profits (including capital gains) greater than 15,, plus a 4% surcharge on the corporate income tax amount (resulting in a maximum effective tax rate of 22.88%). In addition, a local municipal business tax of 3% of the adjusted business profit plus a multiplier (of between 2% and 3% depending on that local authority) is applied. For example, in Luxembourg City, this gives an effective rate of 6.75%. Accordingly, the maximum effective corporate tax rate is 29.63% in Luxembourg City. these thin capitalisation rules provided that the interest rate is set at a supportable market rate. Tax depreciation is allowed (on a straight line basis) on the capital cost of buildings (but not land). The allowable rate varies from 2% to 6%. The capital cost includes any registration duties, notary and architect fees. In the absence of a supportable specified allocation, land is assumed to be 2% of the total purchase price. The transfer of property is outside the scope of VAT, unless a transfer of ownership of land has occurred prior to its construction or if an application has been made to apply VAT. Similarly, the letting of property is a VAT exempt service, unless the real estate lessor opts for it to be taxable which may, in certain circumstances, be beneficial. The transfer of property located in Luxembourg is subject to a registration duty of 6% and a mortgage duty of 1%. In addition, in Luxembourg City itself, a municipal surcharge of 5% of this rate is also applied to registration duties, so that the overall transfer charge can amount to 1% for properties located in Luxembourg City. The registration duty is calculated on the higher of the purchase price (inclusive of VAT) and the market value. A.5% capital duty is levied on subscriptions for the share capital of a company. This also applies to subscription consideration provided in kind. However, capital duty will cease to apply from 1 January 29. Luxembourg introduced a new regime for investment funds with the Law of 13 February 27 on the Specialized Investment Fund (SIF). Put simply, this type of vehicle is not subject to tax on its income but instead on its equity at a rate of.1%. Revenues arising from a commercial activity through a permanent establishment of a non-resident company are also taxed as commercial profits. This only applies to non-resident companies that build properties with the sole intention of resale. In this case, losses are available for future offset. Rental income realised by a non-resident company does not qualify as a commercial profit if the company has built or bought properties without the sole intention of resale. Such companies are only subject to corporate income tax at the rate of 22.88%. Tax losses on rental income in this case are not available for future offset. The allowable debt:equity ratio in respect of connected party debt is 6:1. Interest payments are deductible within 6

63 The Netherlands Contacts: Norbert Rosmalen The net rental income of both resident and non-resident companies is subject to corporate tax at the following rates: 2% for the first 4. of profit; 23% for the next 16. of profit; and 25.5% for the excess. A structure with a hybrid entity (e.g. CV or cooperative) is often considered to optimise debt financing / interest deductions. Certain conditions have to be taken into account. Generally, taxable income is calculated upon normal accounting principles and any expenses incurred for the purpose of the rental business are deductible, although certain expenses such as penalties and fines are not deductible. Interest and capital gains (unless they can be deferred) are included in taxable income. As a general rule, neither acquisition nor renting real estate are subject to VAT. However, an option to apply as a VAT entrepreneur may be possible and advantageous. Certain conditions have to be met, and it is important that the user of the real estate is entitled to VAT deduction. Interest payable on loans from related parties is allowable to the extent that the thin capitalisation rules are satisfied. The allowable debt:equity ratio is 3:1. The interest on any excess is not tax deductible insofar as the excess debt exceeds 5,. If an interest deduction is limited under these rules, companies may also choose to apply a group debt:equity ratio. This may provide an escape route. In certain structures, other limitations of interest deduction may apply. Under certain circumstances debt may be re-characterised as equity for fiscal purposes: i. some types of loss financing; ii. a sham document (i.e. parties only used the loan as legal form but intended something else); iii. a profit-participating loan. An annual depreciation charge from 1% to 3% on buildings, but not land, is deductible for Dutch corporation tax purposes. Higher rates may be allowable subject to proof that the useful economic life of the building is shorter. The straight-line method is usually applied and is based upon the original acquisition cost. From 1 January 27 the depreciation of real estate is limited. Real estate held for investment purposes cannot be depreciated below the so-called WOZ-value. This is a value that is determined by the municipal tax authorities and is used for tax purposes. If real estate is occupied within the group, depreciation can take place down to 5% of the WOZ-value. Anti-abuse rules have been introduced to counter perceived tax avoidance relating to real estate depreciation. Where it can be demonstrated that the fair market value of a building lies below the WOZ-value, then depreciation to write the asset down to its fair market value is still possible. A transitional rule applies for real estate that has not been depreciated for a period of three years on 1 January 27. Plant and machinery within commercial real estate is generally depreciated at a rate of between 5% and 1%, again using the straight-line method. For other assets generally a minimum depreciation period of five years applies. Both resident and non-resident companies are subject to tax on capital gains realised upon the sale of Dutch property, at the corporate tax rates. The gain equals the difference between the sales proceeds and the fiscal (i.e. tax depreciated) book value. If the property is replaced by another asset in the year of sale or within three years of the sale and has the same economic purpose as the one sold, the capital gain could be deferred by the creation of a reinvestment reserve. The amount of this reserve is deducted from the purchase price of the new property for tax base cost purposes. The acquisition of Dutch real estate attracts real estate transfer tax (RETT) at a rate of 6% based upon its fair market value. RETT also applies to the acquisition of legal or economic title of at least 1/3 of the shares in a company, where 7% or more of its assets are Dutch property. Real estate tax is levied annually by the municipalities upon the owners of immovable property. The tax rate differs for each municipality. Real estate tax is deductible for corporate income tax purposes. No capital duty is due in the Netherlands upon the issue of shares. Structuring foreign real estate via a Dutch limited liability company could offer attractive tax planning opportunities by using the extensive Dutch tax treaty network. The changes to the Dutch participation exemption, as of 1 January 27, have also improved the attractiveness of the Netherlands as a jurisdiction for holding European property. As part of a general reform of the Dutch Corporate Tax system, there are current proposals for the introduction of a separate tax regime for real estate investment companies. The specifics of the proposals and the timings of their introduction are unclear at this time. 61

64 Norway Contact: Olav Mjanes Corporate rental profits in Norway are assessed at a flat rate of 28%. Taxable profits are computed on an accruals basis. Maximum tax depreciation rates apply to fixed assets, on a reducing balance basis, depending on the deprecation category. However once the depreciated asset is valued below NOK 15. it becomes fully deductible from taxable profits. These rules apply both to Norwegian companies and foreign companies that hold property in Norway. Corporate Income Tax is reportable to the tax authorities based on the company s fiscal year. Realised capital gains on the sale of Norwegian real estate are subject to tax at the same rate as rental income for both Norwegian and foreign companies. Losses can be offset against gains and 2% of the resulting balance will become either taxable or deductible annually on a reducing balance basis. Norway does not tax foreign resident shareholders who sell shares in a Norwegian or a foreign company which holds Norwegian real estate. Accordingly, holding shares in a real estate company will not of itself create a taxable permanent establishment in Norway. However, if an individual is undertaking a trading business in Norway (including the buying and selling of shares) this could, in principle, lead to a permanent establishment being created and the profits would be taxed in Norway. Capital gains relating to the disposal of Norwegian real estate are taxable in Norway regardless of residence. It is common to hold real estate through a limited company. A Norwegian limited company is generally exempt from taxation of capital gains related to shares in other Norwegian companies/companies within the EEA Area. Companies are assessed for corporate tax individually. However, where common direct or indirect (including foreign) ownership is greater than 9% a group is formed. Loss relief is possible within such a group. income generating expenses. A non-resident individual foreign property owner is liable to pay.9% to 1.1% in wealth taxes on the value of his property. Realised capital gains on the sale of Norwegian real estate are subject to tax at the same rate as rental income. Real estate located in Norway is subject to real estate tax ( eiendomsskatt ) payable at a local level, and the amount can vary significantly depending on the location of the property. This tax is deductible in determining taxable income. Stamp duty is levied at 2.5% on the consideration paid for the real estate. This tax is calculated when the deed that transfers the ownership has been registered in the property register. This is a national tax and does not vary based on area or the size or type of property. Norway currently does not have specific REIT legislation. New DnB NOR HQ in the Bjørvika district VAT is payable at a standard rate of 25% with reduced rates for certain goods and services. The sale and rental of real estate is exempt from VAT. It is, however, possible to register for VAT on a voluntarily basis for the rental of real estate. Rental profits attributable to resident or non-resident individuals are taxed at a flat rate of 28%. Higher rates may apply when an individual rents out property to such an extent that the activities are considered as business income. The rental of at least 5 flats or business property exceeding 5 m2, are normally considered as business income. Deductions are allowed for operating costs and 62

65 Poland Contact: Rafal Kowalski Polish resident companies are liable to pay corporate income tax at 19%. capital tax of.5%. The tax is payable on incorporation and share capital increases. Since 1994 Poland has planned to change the basis of calculation of the local tax on property. Instead of the surface area basis for a building/ land, the basis would be the value of the real estate. However, no date for the introduction of this change has been determined. Branches of foreign entities can be established in Poland under certain conditions. The income from these undertakings is also usually taxed according to the normal corporate income tax rules unless, on the basis of a tax treaty, there is no permanent establishment in Poland. All real estate is subject to local real estate taxes. The tax is payable on land, buildings and structures. The government determines the maximum rate but each local authority is empowered to establish the annual rate of this tax in its area. Generally any expenses incurred for the purposes of the rental business are deductible. Interest is allowable to the extent that it is paid. Connected party interest is subject to thin capitalisation restrictions. The allowable debt:equity ratio in respect of connected party debt is 3:1. As a result, interest paid on that part of the loan that exceeds three times the value of the share capital is not tax-deductible. Depreciation is allowable as a deduction for tax purposes. The allowable rate varies from 1.5% to 1% for buildings and other structures on a straight-line basis. Plant and machinery depreciation on commercial real estate varies from 7% to 2% on a straight line basis. As an alternative certain assets can be depreciated at a multiple of 2 or 3 times the standard straight line rate on a reducing balance basis until the point in time that the allowances claimed under the two methods are equal. No separate tax on capital gains applies. Any gains or losses of a capital nature are combined with all other income or losses and charged to tax at a rate of 19%. Capital losses arising are therefore tax deductible against all income but only 5% of the loss can be utilised each year. Entities which are not liable to VAT are obliged to pay stamp duty (described as a transaction tax ) due on the registration of legal documents at a rate of 2%. VAT is applicable for the sale of real estate between VAT payers. A VAT rate of either 22% or % may apply, depending upon the real estate category. Limited liability and joint stock companies are liable to 63

66 Romania Contact: Andrei Antimia The Romanian Constitution does not allow foreign individuals and entities to own land in Romania. However, after five to seven years from the EU accession date, individuals and companies resident within an EU member state will gain the right to own real estate property in Romania. Given the above limitation on land ownership, the most common way of structuring foreign investments in Romanian real estate is through a Romanian Limited Liability company (SRL). In the case of investment through a Romanian company (SRL), the income derived from real estate property is subject to corporate tax at a 16% rate. Generally, the taxable income (from rental, leasing or sale of the property, as the case may be) is calculated on normal accounting principles but special rules apply for interest costs, tax depreciation and service charges. Withholding tax at a 16% rate applies to most taxable revenues paid to non-resident companies, including capital gains. As a general rule, the rental and sale of real estate is VAT exempt, except for new buildings. However, an option for taxation is available. There is also a penalty tax, to be set by local authorities between 8%-1% which is imposed in relation to buildings that have not been re-valued in the last three years. Land tax is chargeable on the owners of the freehold land at a fixed amount per square metre depending on the location and use of the land. Individuals must register for VAT purposes if they engage in an economic activity involving real estate. An individual may become a taxable person for VAT purposes if they undertake supplies of new buildings or development land. An individual may become a taxable person even for a single supply of a new building if it is proven that they started the construction of the building for the purpose of selling it. Stamp duty is no longer payable on the acquisition of real estate. Instead, there are transfer taxes and fees are payable (usually by the seller) on real estate transactions, although these are not generally considered to be a significant cost. No capital duty is paid in Romania on the issue of shares. Following EU accession, Romania has implemented most of the EU Directives. The Parent-Subsidiary Directive has applied from the accession date, whilst the Interest and Royalties Directive provides for a transitional period and will be fully applicable from 1 January 211. Generally any expenses incurred for the purpose of generating taxable income are deductible. However certain requirements must be met in relation to service fees. Interest is generally deductible for corporate tax purposes. The allowable debt: equity ratio in respect of connected party debt is 3:1. This does not apply where the loan is granted by Romanian, or most foreign, banks or other financing institutions. Romanian companies are subject to corporate income tax on capital gains charged at a rate of 16%. Non-resident companies are generally taxed at a rate of 16% on gains from the disposal of Romanian real estate or shares in a Romanian company. However, this is subject to relevant tax treaty provisions which may provide for a capital gains tax exemption in Romania. Building tax is generally chargeable upon entities at.25% to 1.5% of the gross book value of the building. 64

67 Russia Contact: Dmitry Strelnikov Real estate investments are most commonly made either via a Russian company, or a branch of a non-resident company. Inbound investments are often structured via Cyprus entities or entities of other foreign countries where the relevant double tax treaty provides a degree of protection from Russian taxation. Rental profits are generally taxable at the rate of 24%, applicable both for Russian entities and permanent establishments of foreign entities. In certain regions, this rate may be reduced to 2%. Procedures for the calculation of the tax base are generally the same for Russian entities and permanent establishments of foreign entities. If a foreign entity owns Russian real estate, its Russiansource income from renting the property is taxable (via a withholding mechanism) at the rate of 2%. Depreciation in respect of immovable property is tax deductible. It is calculated in line with the classification of fixed assets approved by the Russian Government. Different types of real estate are subject to different depreciation rates e.g. office buildings may have an expected tax life of 3 years, whereas warehouses may have an expected tax life of 15 years. It should be noted that certain international double taxation treaties may provide protection from the withholding tax described above. Generally, rental income is also subject to Russian VAT at the rate of 18%. There are no significant taxes or duties applicable upon the acquisition of the real estate. The acquisition of real estate in Russia is subject to state registration duty of approximately 215. There is no capital duty payable upon the issue of share capital in Russia. However, there is a minor state registration duty of up to 2,9 upon the issue of shares. There are no expected significant changes in Russian direct taxation relevant for real estate property investors. However, the Russian Government intends to replace property taxes (both individual and entity) and land tax with a unified real estate tax in 21. Further to the issues discussed above, investors should be aware that immovable property is subject to Russian property tax at the general rate of 2.2% charged on the net book value of assets. Depreciation is calculated based on the historical cost of the immovable property. No revaluation of historical cost for profits tax purposes is generally allowed (except in the case of, for example, reconstruction and modernisation). 1% of the historical cost of fixed assets can be allowable as a one-off deduction. Land is not depreciated. However from 27, expenses in connection with the purchase of land rights have been deductible in certain circumstances. A direct disposal of Russian immovable property by a Russian company or a foreign company with a permanent establishment in Russia is taxable at the normal profits tax rate (24%). Nordstar Tower Moscow, Khoroshevskoe highway, 2-2 Where a foreign entity does not have a permanent establishment in Russia, proceeds from the sale of immovable property located in Russia or sale of shares in a Russian real estate entity (if Russian immovable property constitutes more than 5% of its assets) is subject to withholding tax at a rate of 24% (if the net gain is taxed) or 2% (if the gross proceeds are taxed). 65

68 Serbia Contact: Olivera Doslic Serbian corporate income tax is charged at a rate of 1%. Taxable profits are determined by adjusting the taxpayer s accounting profit, stated in its income statement, in accordance with the Corporate Income Tax Law. Generally any expenses incurred for the purpose of the property rental business are deductible. Expenditure for health care, cultural, educational, scientific, humanitarian, religious, environmental protection or sport-related purposes can be deducted but only to the extent that it does not exceed 3.5% of the total revenue. Expenditure for humanitarian purposes can be recognised only if it was made through humanitarian organisations registered for such purposes. Expenditure on investment in culture can be deducted but only to the extent that it does not exceed 1.5% of the total revenue. Membership fees paid to chambers of commerce and industry, unions and associations can be deducted but only to the extent that they do not exceed.1% of the total revenue. Membership fees paid and donations made to political parties can be deducted in full. Interest payable to connected parties is subject to the thin capitalisation rules. A tax credit for investment in fixed assets may be available for large companies in the current tax year for 2% of the value of the investment made. The tax credit may not exceed 5% of the tax liability in the current tax year. Serbian companies are chargeable to tax on capital gains at a tax rate of 1%. For non-residents withholding tax on capital gains is charged at 2%. Capital losses incurred in one tax year can be offset against capital gains realised in the same year. The remaining capital loss can be carried forward and offset only against capital gains in the future, but cannot be carried forward for longer than ten years. The first transfer of the right of disposal related to newly constructed structures and the first transfer of the owner s share in newly constructed structures are subject to VAT at rate of 18%. Transfer tax is payable at a rate of.3% on the market value of registered shares. Tax on the transfer of other absolute rights (including leases of development land) is payable at a rate of 2.5%. No capital duty is paid in Serbia upon the issue of shares. Real estate owned by legal entities is subject to a property tax of.4% based upon its book value. Contributing absolute rights in equity capital of joint stock companies and limited liability companies is free of transfer tax. Under Serbian thin capitalisation rules, interest paid in respect of connected party debt cannot exceed four times the value of the connected party s share capital, multiplied by 11% of the interest rate granted on loans to commercial banks on 31 December of the previous year by the Serbian National Bank. For loans in other currencies, the interest paid in respect of a debt from a connected party cannot exceed four times the value of the connected party s share capital multiplied by 11% of the rate of the central bank which issued the currency. Interest and related costs in excess of that amount may be included as expenditure in the tax statement for the following year. 19 Avenue, New Belgrade Depreciation of real estate is tax deductible at a fixed rate of 2.5% calculated on a straight line basis. Plant and machinery depreciation is allowable as a tax deduction at different rates, ranging from 1 to 3% on a reducing balance basis, depending upon the asset category. 66

69 Slovak Republic Contact: Dagmar Emilova The rate of corporate income tax in Slovakia is 19%. The taxable profit is generally the accounting result as determined under Slovak statutory accounting rules, adjusted for tax purposes. The municipal authorities levy rates on the ownership/ occupation of real property. Rates are deductible for corporate income tax purposes. Generally, necessary expenses incurred to generate and maintain rental income are allowable in arriving at the taxable income. Deductions can include depreciation costs, interest and finance charges, real estate taxes, repairs, maintenance and other types of rental expenses. Alternatively, the taxpayer can make a general expense claim of up to 4% of the rental income instead of itemising deductions. Tax depreciation is calculated on an asset-by-asset basis, on a straight-line or reducing-balance basis, at statutory rates, and is generally available for expenditure incurred on commercial buildings (but not on land). Tangible fixed assets are classified into depreciation groups to which different depreciation periods apply, generally between twelve and twenty years. Taxpayers do not have to depreciate an asset every year. Tax depreciation may be interrupted in any year and continued in a later year without a loss of the total tax depreciation available. A lessee can depreciate a tangible fixed asset held under a financial lease. For tax purposes, the depreciation period equals the leasing period, and the depreciation base equals the acquisition value of the leased asset without VAT, plus expenses related to acquisition of the leased asset that the lessee incurred before the asset was put into the use. An entity can carry forward a tax loss for a period of up to five years after the year in which the loss arose. VAT applies to all taxable supplies at a rate of 19%. However the transfer and leasing of real estate (with some exceptions) generally represent an exempt supply. There is no real estate transfer tax and no stamp duties or similar taxes on share or other property transfers, although small administrative fees are payable to register such transactions. Property tax is divided into: land tax, building tax and a tax on apartments, and is calculated based on the area of the real estate, its location and its type. The basic rate of land tax is usually.25% of the cadastral value (depending on the type of land) and is generally payable by the owner of the land, or custodian of land if owned by the state, or the lessee for leases over 5 years. If ownership cannot be determined, it is payable by the occupier of the land. Building tax and tax on apartments are calculated at a rate per square metre occupied by the finished building/ apartment, generally payable by the registered owner of the building/apartment. No capital duty is paid in the Slovak Republic upon the issue of shares. The Slovak Republic is now part of the EU and as such is adopting the various EU tax directives. Tax Incentives can include discounts on the price of publicly-owned real estate. This is treated as state aid. Various conditions must be met in order for a company to qualify for state aid. These include a minimum amount of investment in qualifying fixed assets, the amount depending mainly on the type of project and where it is located. The value to be used as the basis for tax depreciation depends on how the asset is acquired and is acquisition cost; or the taxpayer s own costs incurred, if the asset is acquired or developed internally. Gains derived from the alienation of property are generally part of the taxable profit for the year of disposal. The tax treatment of capital losses depends on the type of asset on which they arose. As such, capital gains on Slovak real estate are chargeable to tax at the standard rate of 19%. In some cases, capital losses are non-deductible. Omnipolis, Trnavská cesta, Bratislava 67