Research & Forecast Report Czech Republic Q1 2015

Q1 2015 Review

Contents Investment ................................................. 3 Summary Q1 2015 ................................... 3 Prognosis ................................................. 4 Office ......................................................... 5 Summary Q1 2015 ................................... 5 Prognosis ................................................. 7 Industrial .................................................... 8 Summary Q1 2015 ................................... 8 Prognosis ................................................ 10 Key Definitions .......................................... 11

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Quarterly Review | Q1 2015 | Czech Republic | Colliers International

Investment Summary Q1 2015 > Q1 2015 proved to be the busiest first quarter since the financial crisis, with €760 million of transactions closing, continuing the trend of the last couple of years for sustained growth in investment volumes. We also saw the return of the German Open Ended Funds with Union Investments confirming the appeal of the Czech Republic to major institutional investors.

> The retail sector has dominated investment volumes, with three significant transactions closing during Q1. The numbers were heavily influenced by the purchase of the Palladium retail and office complex in central Prague by Union Investments for its UniImmo Deutschland open ended fund. The transaction volume was approximately €570 million and represented the largest single asset transaction ever closed in the Czech Republic.

centre. The transaction volume amounted to €50 million.

> The logistics sector also continued to see investor interest following the record breaking 2014 investment volumes, with TREI Real Estate Czech Republic disposing of the Penny Market Distribution centre in Prague to ZFP Realitní Fond.

> Q1 saw two hotel transactions close with CA Immo disposing of both the Diplomat Centre in Plzeň and Europort located at Václav Havel Airport Prague. Both properties comprise mixed use assets with large hotel components operated on a management contract by Marriott under their Courtyard brand. The price and purchaser were both undisclosed but we believe that the total volume of both transactions amounted to around €32 million.

> Due to the effect of the Palladium and Campus Brno transactions, the most active investor group during Q1 were European Institutional funds. Other investors active in the first quarter included both local and international private equity groups.

> Investor interest in both well leased retail properties and portfolios requiring greater asset management input was also further underlined by the second and third largest transactions to complete during Q1.

Investment volumes 2008 – 2015f (€ Million)

> The second largest was Peakside’s debut transaction in the Czech Republic with the acquisition of a diversified portfolio of regional retail assets from Atrium European Real Estate. The total transaction volume amounted to approximately €69.50 million and comprised 72 separate properties located throughout the country.

> The third major retail transaction to close in Q1 was the purchase of the Campus Square shopping centre in Brno by funds managed by CBRE Global Investors. AIG Lincoln developed the centre in 2008 and it now comprises a well performing stabilised regional retail

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Source: Colliers International

Quarterly Review | Q1 2015 | Czech Republic | Colliers International

> The average transaction volume in Q1 was €108.6 million, however if the Palladium deal is disregarded, the average deal size drops to €31.7 million. This is generally in line with long term trends, however still below the 2014 average of €48 million, or €38 million if the large P3 / VGP deal is excluded.

Investment transactions in Q1 2015 by sector

Prognosis > 2015 could be a record year in terms of investment volumes, with a number of large transactions dominating the investment activity, driven by the significant inflows of capital to the real estate sector on a Global level.

> We are currently registering interest across asset classes and the risk spectrum (core to opportunistic) from local, European and Global investment groups.

Source: Colliers International

Q1 2015 Investment transactions by country of origin

> We forecast the retail sector to continue to attract large amounts of capital, with a number of single asset and portfolio transactions currently in play both in Prague and at regional locations.

> There is continued demand for the logistics sector; however the key factor that will influence transaction volumes is the availability, or lack thereof, of product.

> Offices will remain a target asset class with many investors seeking core product. Transactions at the prime end of the market will however be constrained by the lack of suitable product.

Source: Colliers International

Prime investment yields 2004-2015

> We expect a handful of office deals to close in the coming months that will demonstrate where prime yield levels sit and for new cyclical benchmarks to be set.

> Investor demand will be dominated by large international groups. This will encompass institutional investors from the likes of Germany and Austria as seen in the past, but also we expect to see the emergence of new groups from Western Europe and both the US and Asia, either directly or via pooled investment funds.

Source: Colliers International

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Quarterly Review | Q1 2015 | Czech Republic | Colliers International

PIPELINE

Office

> Between Q2-Q4 2015 we are expecting a further 2

149,000 m of new office space to be delivered to the market.

Summary Q1 2015

> Around 29% of this additional 2015 office supply has been pre-leased so far.

SUPPLY

> In Q1 2015 total office stock in Prague stood at 3.06 2

million m . Q1 saw two new office buildings completed, 2 totalling 34,500 m .

> Projects completed in Q1 were Metronom (29,900 m2) 2

in Prague 5 - Nové Butovice and Meteor C (4,700 m ) in 2 Prague 8 - Karlín. Only 670 m of this new space was pre-leased at opening.

> New office projects launched in Q1 included Classic 7 III 2

2

(6,300 m ) in Prague 7, Park Radlice (6,400 m ) in 2 Prague 5 and City Deco (13,200 m ) in Prague 4. VACANCY/AVAILABILITY

> Given that four new buildings slated for 2015 are over 2

20,000 m means that annual supply is set to reach a 2 five year peak at 180,000 m . This represents double the five year average annual supply delivered between 2010-2014.

> This recent spurt of new development will however be significantly scaled back in 2016 with only around 2 44,000 m of new offices scheduled in that period.

> The major projects scheduled for this year are BB 2

> The vacancy rate currently continued to creep upwards; and passed the 17% mark in Q1. This is a result of slower demand absorption versus new office space that was delivered throughout 2014 / Q1 2015.

Stock and new supply

> Total vacant space in Prague amounted to 521,800 m2, 2

compared with 396,900 m y-o-y.

> Prague 1 continued to offer the largest amount of 2

available office space (103,300 m ), followed by 2 Prague 5 (88,900 m ), while the least amount of vacant 2 space was in Prague 3 (13,700 m ).

> Prague’s highest vacancy rate was recorded in Prague 7 (35.9%) while the district with the lowest vacancy rate was Prague 4 (7.5%). Source: Colliers International / Prague Research Forum

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2

Centrum Delta (32,500 m ) and Enterprise (29,000 m ) 2 both in Prague 4 and Penta´s Aviatica (27,000 m ) in Prague 5.

Quarterly Review | Q1 2015 | Czech Republic | Colliers International

DEMAND

Take-up and Vacancy

> Q1 2015 total gross take-up at 70,800 m2 was slightly ahead of the corresponding figure y-o-y.

> Net take-up on the other hand was 41% up y-o-y and at 2

20,770 m made up a 29% share of Q1 demand.

> Lease renegotiations were also up 39% y-o-y and at 2

28,400 m made up a 40% share of Q1 demand.

> The balance of Q1 gross take-up of 21,630 m2 was represented by tenants simply relocating within the existing office stock.

> The three largest transactions in Q1 2015 were the pre2

lease of Microsoft (11,590 m ) at BB Centrum Delta in 2 Prague 4, ExxonMobil´s renegotiation (9,230 m ) at Luxembourg Plaza in Prague 3 and Wüstenrot´s 2 renegotiation at Kavčí Hory Office Park (6,090 m ) in Prague 4.

Source: Colliers International / Prague Research Forum

> Given the above mentioned deals, Prague 4 was the top district in terms of total leasing activity / gross take-up in Q1 2015 (49%), followed by Prague 5 (16%) and Prague 3 (13%).

Q1 2015 Gross take-up in Prague districts

> Most active business sector in Q1 was IT (25%), followed by Manufacturing (18%) and then Finance (13%). RENTS

> Prime rents which have been under pressure for some time now are stable for the time being, however in the 2 CBD they rarely reached above €19/m /month.

> The upper range of inner city rents decreased by around 2

€1 to €14.50-16.00/m /month, while the outer city range 2 remained at €13.00-14.50/m /month. Most of the transactions are however being agreed at the mid-tolower end of the above mentioned ranges.

> The citywide average only slightly decreased and was 2

€13.20/m /month.

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Quarterly Review | Q1 2015 | Czech Republic | Colliers International

Source: Colliers International / Prague Research Forum

Prognosis > Office take-up started on a positive note in 2015 and there are several known office requirements of over 5,000 m either close to signing or actively seeking new space.

Q1 2015 Vacancy (m2) by district

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> Early indicators lead us to believe that total gross take-up 2

in 2015 will be around the 300,000 m mark and broadly in line with the past few years.

> Given the active development completion pipeline for 2015, we expect to see further increases in Prague’s office vacancy rate over the course of this year.

> With a significantly reduced number of offices completing in 2016 should mean that vacancy levels will start to dip again next year.

> Rental growth is highly unlikely in 2015 while downwards pressure on rents and attractive tenant incentive packages will remain a feature of the letting market.

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Quarterly Review | Q1 2015 | Czech Republic | Colliers International

Source: Colliers International / Prague Research Forum

Industrial

PIPELINE

> At the close of Q1, industrial premises totalling 2

399,000 m were under construction. In line with the long-term trend, almost all of the premises in the construction pipeline (93%) are custom-built for tenants secured on a pre-lease.

Summary Q1 2015 SUPPLY

> Three new industrial buildings totalling 39,900 m2 were completed in the country during Q1 2015. Two of these halls were built in Prague and the third in Ostrava. The 2 vast majority of this new space (31,000 m ) was developed on a speculative basis.

> At the end of Q1, total modern industrial stock in the

> Majority of the new space is being delivered to the Prague 2

2

Czech Republic stood at 5.15 million m with 40% being 2 located in the Prague region (just over 2 million m ).

> The South Moravia region still ranked second in terms of 2

total stock (828,000 m ), thereafter followed by the Pilsen 2 region (697,000 m ).

Stock and new supply

VACANCY/AVAILABILITY

> The amount of immediately available warehouse space in 2

the Czech Republic declined slightly from 421,800 m in 2 the previous quarter to 402,500 m in Q1. In percentage terms, the countrywide rate of vacancy declined by 50 bps and stood at 7.82% at the close of Q1.

> An opposite trend was seen in Prague where the stock of 2

vacant space increased during Q1 to 164,300 m (vacancy rate of 8.04%). This was partly due to the completion of a speculative hall by Prologis on the western outskirts of 2 the city (29,900 m ).

Source: Colliers International / Industrial Research Forum

> In other parts of the country, the Pilsen region housed the second largest volume of vacant premises (after Prague) 2 amounting to 77,600 m , followed by South Moravia with 2 55,500 m of modern industrial space ready for occupation.

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2

region (211,700 m ) and the Pilsen region (116,300 m ). This is a result of the largest buildings in the pipeline being constructed at these locations - Amazon’s 2 distribution centre in Prague (133,000 m ) and Primark’s 2 distribution centre in Bor (62,000 m ).

Quarterly Review | Q1 2015 | Czech Republic | Colliers International

DEMAND

> Gross take-up reached 238,100 m2 in Q1, which despite

Take-up and vacancy

being 5-13% less than the equivalent quarter of the previous two years, still represented a busy leasing market.

> Industrial leasing activity continued to largely come in the form of net take-up (i.e. occupiers securing new space / expanding as opposed to renewing leases) and reached 2 190,900 m in Q1. Encouragingly this represented a jump of 40% y-o-y.

> Unlike in the past two years, where pre-lets accounted for the largest share, net take-up was more evenly spread in Q1. Tenants expanding formed the largest share (36%), followed closely by new leases (34%) and thereafter prelets (31%).

> The manufacturing sector returned to its role as the main demand driver (replacing e-commerce) and accounted for 64% of the Q1 net take-up. Automotive companies were the most active within the sector. While the logistic sector contributed 23% of all new space leased.

> Lease renegotiations accounted for 20% (47,200 m2) of the Q1 total leasing activity, remaining below the five year average share of gross take-up for the second quarter in a row.

Source: Colliers International / Industrial Research Forum

> The largest lease transaction of Q1 was concluded with a French manufacturing company for custom-built premises 2 at VGP Park Pilsen (21,800 m ).

Q1 2015 Net take-up by occupier type

RENTS

> Rents for Grade A warehouse space did not show any major swings in Q1, however the size of tenant incentive packages did vary depending on the level of competition within the particular regional submarket.

> Headline rents in the regions, for a five year lease term, 2

ranged between €3.60-3.90/m /month in Prague; €3.702 2 4.00/m /month in Pilsen; €3.70-3.85/m /month in 2 Ostrava and €3.85-4.25/m /month in Brno.

> Mezzanine office space (within the industrial buildings) is 2

leased for €8.00-9.00/m /month.

> Service charges within modern industrial parks are 2

typically around €0.50-0.65/m /month.

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Quarterly Review | Q1 2015 | Czech Republic | Colliers International

Source: Colliers International / Industrial Research Forum

Prognosis

Vacancy in regions

> Currently there are several known large pre-lease requirements being negotiated at different locations across the country. These transactions should underpin the overall demand figures and we could be heading for 2 close to 1 million m in gross take-up for 2015.

> The

management restructuring planned by the Volkswagen Group in 2015 might also have impact on Škoda Auto and its future plans in the Czech Republic. This may involve the increased outsourcing of certain activities, which in turn would create additional demand for industrial premises in the vicinity of the Škoda car factories.

> The major developers are rumoured to be eyeing up the purchase of a number of smaller sized existing industrial parks as a means of expanding their portfolios.

> Furthermore as industrial developers continue with additional land acquisitions and leasing activity remains buoyant, we could expect to see incidences of speculative development on the rise.

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Quarterly Review | Q1 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.

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Quarterly Review | Q1 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: Jana Beeby - Associate | Office Agency Tomáš Berka - Senior Associate | Investment Services

Canada: 31

Chris Sheils - Director | CEE Investment Services

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Omar Sattar - Managing Director | Czech Republic

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