Research & Forecast Report Czech Republic Q3 2015

Q3 2015 Review

Contents Investment ................................................. 3 Summary Q3 2015................................... 3 Prognosis ................................................. 4 Office ......................................................... 5 Summary Q3 2015................................... 5 Prognosis ................................................. 8 Industrial .................................................... 9 Summary Q3 2015................................... 9 Prognosis .................................................11 Key Definitions ......................................... 12

2

Quarterly Review | Q3 2015 | Czech Republic | Colliers International

Investment Summary Q3 2015 > The first three quarters of 2015 saw a total €2.33 billion of real estate investment transactions close across the Czech Republic. This was a 50% increase on the same period in 2014 and huge increase of 225% above the level seen in 2013.

> This already makes 2015 the most successful year in terms of investment volumes since the global financial crisis. The retail sector has been the most active investment segment, with €172 million of transactions closing during 2015. Q3 reflected this trend with €170 million of retail transactions closing, including the purchase of the flagship Louis Vuitton store on Prague’s prime luxury shopping street Pařížská for a record yield. The property was acquired by Komerční banka’s new real estate fund IKS-KB Realitní Fond. A cyclical benchmark for regional shopping centres in the Czech Republic was also set in the purchase of the Varyáda centre in Karlovy Vary, which was purchased by the EPG Group for a sub 6.50% yield.

July with the MINT Investments advised IKS-KB Realitní fond making its debut acquisition of the Olbrachtova 9 building in the popular Budějovická neighbourhood. The total purchase price was in the region of €50 million. Other transactions closed during the quarter included Europa Capital’s purchase of the Hadovka Office Park, Cimex’s purchase of Vyšehrad Garden, Revetas’s purchase of the A7 Office Centre and the acquisition of the Panorama Office building, also by funds managed by MINT Investments. These deals were notable in that they signified a broadening of investors’ outlook from core, well leased properties into either more asset management intensive opportunities, or those in traditionally weaker office sectors.

> The logistics sector had another relatively subdued 3 months, with only two transactions closing, however one of these was the final transfer of ownership of the Amazon fulfilment centre in Dobrovíz to the AEW managed Logistics fund, albeit the deal itself was agreed at the end of 2014. The centre is the single largest warehouse to have been developed in the Czech Republic to date, having a GLA of 133,000 m2.

Investment volumes 2008 – 2015f (€ Million)

> Despite the popularity of the retail sector, the largest transaction in Q3 was the purchase of the RPG Byty residential investment platform from a business controlled by Czech billionaire Zdeněk Bakala by Round Hill Capital. The total transaction volume amounted to approximately €700 million and comprised a portfolio of 43,000 apartments in the Ostrava region of the Czech Republic.

> The office sector saw an improvement in transaction volumes in Q3, with a total of €206 million of purchases closing during the quarter, a 77% increase on Q2. The single largest office transaction so far this year closed in

3

Source: Colliers International

Quarterly Review | Q3 2015 | Czech Republic | Colliers International

>

Q3 was also interesting in that it witnessed the continued arrival of new capital to the Czech market, both international and local in nature. Besides the new Komerční banka fund and the entry of Round Hill Capital as mentioned above, we also saw local investment managers such as Redside Funds establishing new real estate investment funds that compete with many of the more established investor groups. For example, Redside’s maiden purchase for its NOVA Real Estate vehicle was the Bluehouse portfolio of retail properties, a transaction amounting in excess of €60 million and which attracted interest from several other well-known investors.

Investment transactions in Q1-Q3 2015 by sector

Source: Colliers International

Prognosis

Q1-Q3 2015 Investment transactions by country of origin

> It is now clear that 2015 will be a record year post financial crisis and we expect that it will also be the single most successful year on record in terms of real estate investment volumes in the Czech Republic. We expect volumes to breach the €2.5 billion mark and will eventually reach close to €3 billion of transactions.

> The trend of yield compression is set to continue, with yields for prime offices set to dip below 6% for the first time in the past seven years.

> Investors will continue to search for yield in sectors and sub-markets that have been relatively overlooked during recent years. Source: Colliers International

Prime investment yields 2004-2015

Source: Colliers International

4

Quarterly Review | Q3 2015 | Czech Republic | Colliers International

> Vacancy rate of A-class office stock was 16.8%

Office

compared to the 15.5% vacancy of B-class offices. The ratio of A-class modern stock to B-class modern stock was 69:31.

Summary Q3 2015 SUPPLY

> Total office stock in Prague stood at 3.19 million m2 by the end of Q3 2015. There were four office buildings completed out of which two properties were refurbishment projects. New supply totalling 55,200 m 2 hit the market in Q3.

> The two new construction completions in Q3 included 2

Aviatica (23,100 m ) in Prague 5 and Corso Court (16,900 m2) in Prague 8. Refurbished buildings included B3 Pankrác (11,500 m2) in Prague 4 and Aero House (3,700 m2) in Prague 8.

> Of the new office space delivered in Q3 nearly 40% was leased prior to completion which largely came out of Skanska’s Corso Court being fully pre-leased at completion. A very high amount of pre-leasing activity has been witnessed in this and the previous quarter.

> In absolute terms, Prague 5 had the largest amount of available office space (106,200 m2) and this represented one-fifth of total vacant office space in the city. Prague 5 overtook Prague 1 in Q3 due to the completion of Aviatica (23,100 m2) which only had 20% of its space pre-leased, however is set to be fully occupied / leased shortly.

> Prague 4 also overtook Prague 1 in terms of available office space. Prague 4 had 99,300 m2 of vacant office space while Prague 1 was at 82,900 m2. The least amount of vacant office space was found in Prague 10 (20,400 m2) and thereafter in Prague 3 (21,600 m2) and Prague 9 (21,900 m2). These three districts are not considered core office locations or the subject of much new office development.

> Prague’s highest vacancy rate as in the previous quarter was seen in Prague 7 (33.6%). The district with the lowest vacancy rate was Prague 4 (11.6%).

VACANCY/AVAILABILITY

> Despite the fairly strong delivery pipeline in Q3, Prague

Stock and new supply

vacancy rate actually dropped slightly by 0.4 percentage points to 16.4% in Q3 compared with Q2.

> Total vacant space in Prague amounted to 522,500 m2, an almost identical number to Q2, however 25% higher on a year-on-year (y-o-y) comparison.

> Surprisingly A-class offices had a higher vacancy rate than B-class offices at the end of Q3 (both A- and Bclasses are considered as modern office premises). All four buildings completed in Q3 are technically categorized as A-class. Source: Colliers International / Prague Research Forum

5

Quarterly Review | Q3 2015 | Czech Republic | Colliers International

PIPELINE

Take-up and Vacancy

> The last quarter of 2015 is expected to deliver one further office building – Enterprise (29,000 m2) in Prague 4. Enterprise will be the third largest building completed this year. Total annual supply for the full year of 2015 will therefore be 190,000 m2.

> 51% of the new office space delivered to the market in 2015 will be constructed in Prague 4 which reinforces the popularity of this district to developers (and occupiers). Thereafter, the second most active development pipeline will be witnessed by Prague 5 which will account for 29% of new office constructions.

> Construction was launched on two further projects in Q3, namely Five! (14,200 m2) in Smíchov in Prague 5 and Futurama Phase III (9,100 m2) in Karlín in Prague 8.

> There is 96,300 m2 of offices space under construction at the moment. The largest projects under construction are Enterprise (29,000 m2) in Prague 4, Five! (14,200 m2) in Prague 5 and City Deco (13,200 m2) in Prague 4.

> New office supply in 2016 will not keep pace with the development activity of 2015 or 2014. Office construction levels will be dramatically scaled back with only around 42,000 m2 coming on line in 2016 and this figure could even be less due to a dispute on an office development in Prague 8 of 16,700 m2, which has caused construction to be stopped. It would appear however that 2017 may be back on par with 2014 in terms of new office development assuming none of the planned projects face delay, which is a distinct possibility.

Source: Colliers International / Prague Research Forum

Q3 2015 Gross take-up in Prague districts

DEMAND

> Q3 total gross take-up at 92,400 m2 was 32% lower quarter on quarter (q-o-q), which was not such a surprise given that Q2 registered the highest quarterly gross takeup figure recorded to date. Q3 total gross take-up maintained approximately the same level y-o-y.

> Net take-up at 53,700 m2 was 25% higher than Q2 figure and represented 58% share of the gross take-up figure which is unusually high yet an encouraging sign. This high proportion of net take-up was the main reason why the office vacancy rate was pegged back in Q3.

> Lease renegotiations registered 37,600 m2, making up a 41% share of Q3 demand. This was a decrease of 41% qo-q and a decrease of 27% y-o-y.

> The largest transaction in Q3 was the renegotiation of Novartis (11,200 m2) at Gemini B in Prague 4.

6

Quarterly Review | Q3 2015 | Czech Republic | Colliers International

Source: Colliers International / Prague Research Forum

> Other significant transactions included the new lease of 2

CPI at their own project Quadrio (6,200 m ) in Prague 1 and the new lease of Commerzbank in Charles Square Centre (3,500 m2) in Prague 2.

Q3 2015 Vacancy (m2) by district

> Prague 4 (28%) as in the previous two quarters was the district with the highest total leasing activity. Cumulatively for the three quarters of 2015, Prague 4 has accounted for 38% of all office leasing activity. Other districts that experienced healthy levels of leasing during Q3 were Prague 8 (17%) and Prague 1 (14%).

> The most active business sectors in Q3 were Pharmaceutical companies (19%), followed by companies offering Professional services (16%) and then IT companies (15%). IT companies count as the most active business sector in leasing terms in 2015 so far with a 15% share of all office transactions.

> Year to date total gross take-up was 292,900 m2 (up 32% y-o-y) and total net take-up (up 73% y-o-y) represented 117,400 m2 (or 40%) of this figure RENTS

> Prime headline rents remained stable in Q3 compared to the previous quarters in 2015.

> Prime rents have been under pressure in recent years; however in Q3 rents were comparable with Q2 and ranged between €18.50 and €19.50/m2/month.

> The upper range of inner city rents remained at €14.5016.50/m2/month. The outer city range remained at €13.00-14.50/m2/month.

> We have however noted a slight dip in prevailing headline rents from €16.50 to €15.50/m2/month in the office neighbourhood of Smíchov in Prague 5. This has been caused by an increase in vacancy rates in this area.

> The city wide average rent has also kept at stable level of €13.20/m2/month.

> The above rents are headline rates, while the actual net effective rent is broadly 12-15% less when “tenant incentives” are taken into account.

7

Quarterly Review | Q3 2015 | Czech Republic | Colliers International

Source: Colliers International / Prague Research Forum

Prognosis > Prague is experiencing increasing levels of leasing activity from corporate organisations with a number of office deals being concluded in excess of 5,000 m2 (there were 8 deals greater than 5,000 m2 concluded in 2015 compared with 6 deals in 2014).

> Q3 was one of the busiest quarters in terms of net takeup (53,700 m2), which we consider to be a direct consequence of a positive economic climate.

> With a healthy level of total gross take-up in Q3 (92,500 m2) and unfilled occupier demand, the full year take-up results for 2015 should surpass the previous record of 332,000 m2 from 2014.

> Because of a very low delivery pipeline expected in 2016 (some of 40,000 m2 compared with 190,000 m2 in 2015) we expect to see vacancy rates to begin markedly dropping next year and especially for those office buildings that came to the market in the past 2-3 years.

> Healthy levels of net demand, lower new office supply and falling vacancy is unlikely to have a major influence on Prague office rental growth, which we predict to remain more or less flat in 2016.

8

Quarterly Review | Q3 2015 | Czech Republic | Colliers International

> In absolute stock terms, this vacancy translates to 315,000 m2 of immediately available space.

> The most significant portion of existing unoccupied

Industrial Summary Q3 2015 SUPPLY

premises was owned by the developer / investor CTP, who at the same time also had the largest share of completed modern industrial stock in the Czech Republic.

> Geographically the highest amount of vacant stock was in the Prague region (118,000 m2) and in vacancy rate terms was 5.3% (down from 6.9% in Q2).

> Including new Q3 warehouse supply, the total industrial

> The second largest stock of available industrial space was

inventory of the Czech Republic stood at 5.54 million m2, having grown by 408,000 m2 (or 8%) from the start of this year.

located in the Pilsen region (49,600 m2), followed closely by the South Moravia region (46,500 m2) and thereafter the Moravia-Silesia region (40,200 m2).

> Q3 was the strongest quarter so far this year in terms of new supply, with a total of 268,600 m2 delivered to the industrial / warehousing market.

> All new premises realised in Q3 were a result of built-tosuit leasing transactions and there was no new speculative warehouse space completed in this quarter.

> An previously owner occupied building of 10,000 m2 in the Prague-West area was purchased by the developer Segro in Q3, and this building was added to the total industrial stock.

> The largest share of Q3 new building completions was

PIPELINE

> Some 376,800 m2 was under active construction at the end of Q3 2015.

> With the completion of the two largest buildings (Amazon and Primark) the industrial development pipeline has dropped back but still remains at almost double levels compared to the past eight quarters, when the volume of industrial space under construction ranged between 150,000 m2 and 190,000 m2.

Stock and new supply

seen in the Prague region (54%) and helped by the handover of the Amazon fulfilment facility (133,000 m2) to this occupier.

> The second largest stock increase was recorded in the Pilsen region as a result of the Primark distribution centre (61,900 m2) coming on line. VACANCY/AVAILABILITY

> Czech Republic’s industrial vacancy rate continued to generally decline in the past six quarters (with one exception in Q4 2014 which reported a slight increase) and reached 5.7% (down from 6.9% in Q2). This was the lowest level of vacancy recorded over the past five years.

9

Source: Colliers International / Industrial Research Forum

Quarterly Review | Q3 2015 | Czech Republic | Colliers International

> The share of speculative developments in the construction

Take-up and vacancy

pipeline has risen to approximately 30%, compared to 1015% in the past several quarters. DEMAND

> Gross take-up was 344,700 m2 in Q3. This represented a slight decline of 7% in demand compared to Q2 and stood at 14% less year-on-year (y-o-y).

> Net take-up accounted for 223,100 m2 and was ca. 65% of the above gross take-up figure.

> As seen in Q2, new demand in Q3 was largely driven by pre-leases (57%), the largest being a 28,600 m2 pre-lease to a logistics services provider for premises at CTPark Prague East at Nupaky.

> The bulk of new demand was once again transacted in Prague (55%), which was surprisingly for once followed by the Ústí nad Labem region (9%), Pilsen region (8%), Karlovy Vary (7%) and then Hradec Králové (7%). This shows a slight shift in demand, where occupiers look to new regional markets which offer a sufficient labour pool.

> The net take-up results dropped 14% quarter-on-quarter

Source: Colliers International / Industrial Research Forum

(q-o-q) and 3% down y-o-y.

> Logistic services providers dominated net leasing activity in Q3 accounting for a 43% share, which was considerably supported by two larger transactions with undisclosed 3rd party logistic providers on the Prague market. Manufacturers followed at 33% and then Distribution Companies with a 24% share.

Q3 2015 Net take-up by occupier type

> Lease renewal deals made up the remaining 35% of Q3 gross take-up. Sumisho Global Logistics concluded the largest lease renewal (26,600 m2) at CTPark Pilsen.

> On year to date basis (Q1-Q3 2015), net take-up totalled 679,300 m2 and exceeded the demand figure of 508,300 m2 on y-o-y basis. This represented a very heathy 33.5% growth in net take-up activity.

> The largest share of the aggregated net demand was recorded in the Prague region (36%), followed by the Pilsen region (18%) and then the South Moravia region (9%).

> While the gross take-up figure for Q1-Q3 reached 958,100 m2, this was only marginally more on a y-o-y comparison.

10

Quarterly Review | Q3 2015 | Czech Republic | Colliers International

Source: Colliers International / Industrial Research Forum

RENTS

Vacancy in regions

> Headline rents in the regions, for a five year lease term, ranged between €3.70-3.90/m2/month in Prague; €3.704.00/m2/month in Pilsen; €3.75-3.95/m2/month in Ostrava and €3.95-4.25/m2/month in Brno.

> Mezzanine office space (within the industrial buildings) is leased for €8.00-9.00/m2/month.

> Service charges within modern industrial parks are typically around €0.50-0.65/m2/month.

> Incentive packages vary depending on the level of competition within the particular regional submarket which may create larger gaps in the actual effective rents.

Prognosis > As developers increased the level of speculative construction we may see the vacancy rate rising marginally again in the course of 2016 but we doubt this to have a material impact on the vacancy levels in 2016.

> We confidently expect the final annual gross take-up in 2015 to significantly exceed the 1 million m2 mark, however it may fall slightly short of the 2014 record year of 1,386,800 m2.

> Nevertheless the industrial and warehousing market has continued to remain robust and a number of new entrants are circling the Czech Republic and considering whether to establish a presence in this country.

> We are seeing continuing interest coming from foreign owned e-retailers and from the manufacturing sector. Locations close to the Czech-German border, such as Ústí nad Labem and Pilsen are experiencing increased levels of occupier enquiries from such potential new entrants.

> With growing popularity of e-retail and its increasing share on total retail spending, we may see further retailers in the country setting up e-shops and changing the retail environment in the coming years. This will subsequently affect the industrial market as the distribution patterns change.

11

Quarterly Review | Q3 2015 | Czech Republic | Colliers International

Source: Colliers International / Industrial Research Forum

Key Definitions > PRIME NET INITIAL YIELD: The yield an investor is prepared to pay to buy a Grade A building, fully-let to high quality tenants at an open market rental value in a prime location. Lease terms should be commensurate with the market. As a calculation Net initial yield = First years’ net income/purchase price (prior to deducting fees and taxes).

> PRIME HEADLINE RENT: Represents the top open-market tier of rent that could be expected for a unit of standard size commensurate with demand, of the highest quality and specification in the best location in the market at the survey date. This should reflect the level at which relevant transactions are being completed at the time but need not be exactly identical to any of them, particularly if deal flow is very limited or made up of unusual one-off deals. If there are no relevant transactions during the survey period, the quoted figure will be more hypothetical, based on expert opinion of market conditions. The figure excludes service charges, taxes, and tenant incentives.

> TOTAL COMPETITIVE STOCK: Office Market: Includes the gross leasable floor space in all Grade A and Grade B buildings, including owneroccupied buildings and government owned properties. Ancillary office space is only included if it can be reasonably used independently of the primary use of the building in which it is located. Industrial Market: Includes the gross leasable floor space in all Grade A buildings, including speculative and built to let stock, however, excluding owner occupied buildings. Other reference points include that the building must be heated and have a clear usable height minimum of 6 metres.

> SPACE UNDER ACTIVE CONSTRUCTION: Represents the total amount of gross leasable floor space of properties where construction has commenced on a new development or where a major refurbishment / renovation is ongoing at the survey date.

> VACANT SPACE: > TOTAL OCCUPATIONAL MARKET ACTIVITY (GROSS TAKE-UP): Total Occupational Market Activity is the total floor space known to have been let or sold as one of the following activity types during the survey period: Pre-let, New Occupation / Lease, Renewal / Renegotiation, Expansion, Sub-lease and Sale & Leaseback.

> NET TAKE-UP: Office Market: Net Take-up represents the sum of all Total Occupational Market Activity categories which represent a net increase in demand for space, i.e. excluding renegotiations & renewals and relocations within existing office stock.

Office Market: The total gross leasable floor space in existing properties that meet the Competitive Stock definition, which is physically vacant and being actively marketed at the survey date. Space should be available for immediate occupation. Industrial Market: The total net leasable floor space in existing properties that meet the Competitive Stock definition, which is physically vacant at the survey date. Any office/mezzanine, sanitary and technical areas as well as custom-built corridors/tunnels and canopies are included in the final figures (as of Q1 2015).

Industrial Market: Net Take-up represents the sum of all Total Occupational Market Activity categories which represent a net increase in demand for space, i.e. excluding renegotiations & renewals.

12

Quarterly Review | Q3 2015 | Czech Republic | Colliers International

Primary Author:

502 offices in 67 countries on 6 continents

Lenka Oleksiaková

United States: 140

Lenka Oleksiaková - Senior Associate | Industrial Agency

Senior Associate – Industrial Agency | Czech Republic +420 226 537 618 [email protected]

Contributors: Matěj Cihelka - Associate | Office Agency Tomáš Berka - Senior Associate | Investment Services

Canada: 31

Chris Sheils - Director | CEE Investment Services

Latin America: 24

Omar Sattar - Managing Director | Czech Republic

Asia Pacific: 199 EMEA: 108 Colliers International | Czech Republic

€1.75

Slovanský dům, Na Příkopě 859 / 22 110 00 Prague 1, Czech Republic

billion in annual revenue

+420 226 537 618 www.colliers.cz

160 million square meters under management

16,300 professionals and staff

About Colliers International Group Inc. Colliers International Group Inc. (NASDAQ: CIGI; TSX: CIG) is a global leader in commercial real estate services with more than 16,300 professionals operating from 502 offices in 67 countries. With an enterprising culture and significant insider ownership, Colliers professionals provide a full range of services to real estate occupiers, owners and investors worldwide. Services include brokerage, global corporate solutions, investment sales and capital markets, project management and workplace solutions, property and asset management, consulting, valuation and appraisal services, and customized research and thought leadership. Colliers International has been ranked among the top 100 outsourcing firms by the International Association of Outsourcing Professionals’ Global Outsourcing for 10 consecutive years, more than any other real estate services firm.

colliers.com

Copyright © 2015 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.