RESEARCH

POLAND

COMMERCIAL MARKET H1 2016

OFFICE MARKET IN REGIONAL CITIES NICOLAS BUSINESS CENTER, Global Center, Wrocław

Total office stock in 6 major regional markets

3.37 212,000

OFFICE MARKET IN WARSAW

m sq m

High new supply in H1 2016: Total stock:

in 31 schemes

4.9

Office space under construction:

m sq m

770,000

New supply:

350,000 in 16 schemes

sq m

Offices under construction:

576,000 Vacancy rate:

15.4% of total stock

2

sq m

sq m

sq m

Record-breaking volume of lease agreements:

245,000

sq m

COMMERCIAL MARKET IN POLAND

RESEARCH

RETAIL MARKET

Total retail stock :

11

m sq m

Exceptionally low volume of new supply in H1 2016:

83,000

sq m

New supply dominated by extensions of retail schemes :

53%

ZGORZELEC PLAZA, Zgorzelec

90% of supply under construction developed as shopping centres :

570,000

sq m

INVESTMENT MARKET

EUR

2.05

bn

invested in Poland in H1 2016

EUR

891

m

volume of the largest transaction in the history of Polish market Share of retail sector in total transaction volume:

49%

HORIZON PLAZA, Union Investment, Warszawa

3

OFFICE MARKET IN WARSAW The first half of 2016 brought: a record-breaking new supply, an increase of vacancy rate and a take-up volume slightly higher than the half-year average in recent years.

At the end of first half of 2016, the total stock in the Warsaw office market was estimated at 4.9m sq m and increased by over 500,000 sq m in the last 12 months. This is the result of growing activity among developers which completed large-scale projects over last monthns.

Total stock:

4.9

m sq m

New supply:

350,000 in 16 schemes

The new supply in the Warsaw office market reached 350,000 sq m in the first half of 2016 being over 40% higher than the half-year average in the last 5 years. It should be indicated that the new supply in Warsaw has never been so high. From January to June 2016, 16 office buildings have been completed, including i.a. Warsaw Spire A (59,100 sq m), Q22 (46,400 sq m), Atrium 2 (20,200 sq m), Prime Corporate Center (20,100 sq m) and Grzybowska 43 (10,600 sq m). The office stock increased not only in the Central Business District but also in the Żoliborz area after the completion of second phase of Gdański Business Center (49,000 sq m) or alongside Aleje Jerozolimskie Ave. where Eurocentrum Office Complex Delta (25,000 sq m) and Astrum Business Park (22,600 sq m) were completed.

sq m

Offices under construction:

576,000

sq m

Vacancy rate:

15.4% of total stock

CHART 1

Vacant space by location (sq m) Q2 2015

CBD Służewiec Przemysłowy Aleje Jerozolimskie Żoliborz

4

300 000

250 000

200 000

150 000

100 000

50 000

0

Other

Source: Knight Frank, PORF

Since the beginning of the year an increase in the rate of vacancies has been observed. At the end of second quarter 2016, the vacancy rate accounted for 15.4% while the vacant space amounted to 767,000 sq m. The vacancy rate increased mainly in the Central Business District (17.3%) and was higher by 3.1 pp. than in the first quarter of 2016. Consequently, the majority of vacant space was offered in the Central Business District – 36% and in Służewiec

Strong demand in the Warsaw office market noticed in the second half of last year encouraged developers to commence next projects. Since the beginning of 2016 a few large-scale projects have been started, including i.a. Sienna Towers (74,000 sq m) developed by Ghelamco Poland, the second phase of West Station II (37,000 sq m) belonging to HB Reavis or EC Powiśle (26,000 sq m) by White Star and Tristan Capital Park. Consequently, at the end of the second quarter of 2016, approximately 576,000 sq m was under construction, of which the significant volume was located in the Central Business District and alongside Jerozolimskie Ave.

Q2 2016 vs. Q2 2015

Q2 2016

Przemysłowy area. The new lease agreements in existing buildings accounted for 43% of the take-up volume, pre-lease transactions represented 17% of all agreements. The remaining take-up volume represented renewals – 31% and expansions - 9%. Additionally, positive sentiment was confirmed by the significant net absorbtion.. The result, which reached 145,000 sq m in the first half of 2016, was almost twice as high as the same period in 2015.

The take-up in the first half of 2016 reached around 360,000 sq m and was slightly lower than in the corresponding period of 2015 (386,000 sq m) but still higher than the half-year average in the last 5 years (324,000 sq m). The majority of office space has been leased in the Central Business District and Służewiec NORTH GATE, Deka Immobillien

RESEARCH

COMMERCIAL MARKET IN POLAND

RIVERSIDE, Savills Investment Management

Przemysłowy – 28%. However, the distribution of the vacant space is different in both locations. In the Central Business District, approximately one third of vacant space is available in new buildings, completed in the period of 20152016. While in Służewiec Przemysłowy over half of the vacant space is offered in buildings from 2005-2009.

The asking rents have remained stable for most office buildings. A slight decrease has been noted in Służewiec Przemysłowy due to the increase of vacant space. The CBD rates ranged between EUR 14 and 24/sq m/month, while asking rents in buildings outside the city centre were quoted at EUR 10.5-18/sq m/ month. Effective rents remained lower than the asking rents by 15-25%.

360,000

sq m

leased in H1 2016, still higher than the half-year average in the last 5 years

CHART 2

Net absorption, annual supply and vacancy rate 2008 - H1 2016

Net absorption

Annual supply

Annual supply - forecast

Vacancy rate

500 000

— 18%

450 000

— 16%

400 000

— 14%

350 000

— 12%

300 000

— 10%

250 000

— 8%

200 000

— 6%

150 000

— 4%

100 000

2015

2014

2013

2012

H1 2016/f

Source: Knight Frank, PORF

2011

— 0% 2010

- sq m 2009

— 2%

2008

50 000

5

OFFICE MARKET IN REGIONAL CITIES Figures for office market in H1 2016 confirm further dynamic development of this sector in regional cities. High developers’ activity is reflected in systematic growth of modern office stock. Increasing supply is accompanied by record high demand.

At the end of June 2016, the total office stock in six major regional markets approached 3.37 million sq m. In the first half of current year, approximately 212,000 sq m of office space in 31 schemes was completed. The result is exceptionally high, when compared with an average annual supply in the last few years. Most of the space was delivered to the market in Kraków (66,400 sq m), Tricity (52,700 sq m) and Wrocław (48,300 sq m). The largest completed buildings include two schemes by Echo Investment – Tryton Business House (21,300 sq m) in Gdańsk and the 1st stage of O3 Business Campus (19,200 sq m) in Kraków, University Business Park B (18,700 sq m) in Łódź owned by GTC and Pegaz (18,500 sq m) developed by UBM Polska in Wrocław.

Although a significant volume of new supply was recorded since the beginning of the year, over 770,000 sq m of office space has been identified at the construction stage in major regional markets, of which over 90% is offered for rent. Based on the developers’ schedules, it is expected that as much as 330,000 sq m may be delivered to the market by the end of 2016. Kraków remains an undisputed leader in terms of supply under construction with over 290,000 sq m of new offices being developed and next place is occupied by Wrocław (158,000 sq m of space under construction). H1 2016 was also a period of record-breaking tenants’ activity. Over the course of January to June 2016, lease agreements amounting to 260,000 sq m were signed in six major regional markets, which was 54% more than an

Total office stock in 6 major regional markets:

3.37 212,000 m sq m

High new supply in H1 2016:

in 31 schemes

sq m

Office space under construction:

770,000

sq m

Record-breaking volume of lease agreements:

245,000

sq m

CHART 1

Total office stock, vacancy rate and prime rents in major regional markets H1 2016

18% — Katowice 405,000

16% —

Poznań 396,000

14% — 12% —

Tricity 629,000

10% —

Wrocław 757,000

Łódź 347,000

8% — 6% —

Kraków 833,000

4% — 2% — 0% —

12

Source: Knight Frank, PORF

6

13

14 EUR/sq m/month

15

16

average annual take-up within the last 5 years. Kraków once more proved its leading position with lease transaction volume at the level of 109,000 sq m, while further 53,000 sq m and 36,000 sq m was leased in Wrocław and Tricity respectively. The demand for office space is driven mainly by companies representing business services sector, which is dynamically growing in Poland. According to our estimates, BPO/SSC, IT and R&D centres occupy from 20% of office space in Tricity to nearly 50% of local stock in Kraków, while in Warsaw it is barely 6%. Positive market sentiment is also confirmed by net absorption level. In H1 2016, it amounted to 138,000 sq m, which is comparable to the analogical period of previous years. As a consequence of a dynamically growing supply, space availability slightly increased. At the end of June, approximately 356,000 sq m has remained vacant in major regional markets, which accounted for 10.6% of total stock and 11.9% of rentable space. Vacancy rate varied between 6% of total stock in Kraków and 14.3% in Katowice. Due to the significant volume of new supply predicted by

COMMERCIAL MARKET IN POLAND

RESEARCH

CHART 2

Demand for office space in major regional markets 2011 - H1 2016

Kraków

Wrocław

Remaining 4 markets 600,000 — 500,000 — 400,000 — 300,000 — 200,000 — 100,000 —

2015

2014

H1 2016

Source: Knight Frank, PORF

2013

2012

2011

sq m —

WROCŁAW 101, Crownway Investments, Wrocław

CHART 3

Office space occupied by business services sector H1 2016

— 100%

— 80%

— 60%

— 40%

— 20%

— 0%

Office space occupied by BPO/SSC, IT and R&D centres

Warsaw

6%

Tricity

21%

Poznań

23%

Katowice

33%

Wrocław

36%

Łódź

36%

Kraków

48%

Source: Knight Frank

the end of this year, further growth of availability of office space is expected in most of the markets. Despite dynamic changes in office supply and demand, asking rents and lease conditions have remained unchanged. At the end of June 2016, the lowest asking rates were offered in Łódź – from EUR 8.5 to 13 per sq m per month and the highest level was noted in Wrocław: EUR 10-15.5 per sq per month. According to our estimates, effective rents remain approximately 10-15% lower than asking rents. PORTO OFFICE, Detemo Investments, Kraków

7

RETAIL MARKET

The first half of 2016 distinguished limited developers activity. In this period they delivered barely 83,000 sq m of retail space, of which 70% was completed in Q2 2016. Even though almost 290,000 sq m of retail space will be completed in H2 2016, the annual supply will not reach the level recorded in previous years.

Exceptionally low volume of new supply in H1 2016:

83,000

sq m

New supply dominated by extensions of retail schemes :

53%

90% of supply under construction developed as shopping centres

570,000

sq m

At the end of H1 2016, the total retail stock in Poland exceeded 11m sq m while the retail density amounted to 286 sq m/1,000 inhabitants. The retail supply can be divided into three formats: shopping centres, totalling 9.5m sq m, retail parks – 1.3m sq m and outlet centres – 200,000 sq m. Despite the noted decrease of developers activity, the volume of space under construction was relatively high and amounted to 620,000 sq m. Over 90% of the space was developed as traditional shopping centres, located usually in the major agglomerations. These are i.a.: Posnania in Poznań (100,000 sq m), Galeria Północna in Warsaw and Wroclavia in Wrocław (64,000 sq m each).

ALBATROS, Albatros Kołobrzeg, Kołobrzeg

8

New retail supply 2014 - H1 2016

New schemes Extensions

100% — 90% — 80% — 70% — 60% — 50% — 40% — 30% — 20% — 10% — 0% —

Source: Knight Frank

H1 2016

m sq m

CHART 1

2015

11

In H1 2016, extensions of existing retail projects prevailed in new supply and amounted to 44,000 sq m in total. This volume was represented by small extensions of the schemes as a part of modernisation, but also by adding retail parks to traditional shopping centres. The remaining space was delivered in three new shopping centres located in the small-sized cities (below 100,000 citizens): Galeria Glogovia in Głogów (21,000 sq m), Karuzela Września in Września (12,000 sq m) and Galeria Awangarda in Bartoszyce (6,000 sq m).

2014

Total retail stock :

RESEARCH

COMMERCIAL MARKET IN POLAND

CHART 2

Retail space under construction by location H1 2015 vs. H1 2016

8 major agglomerations

Grzybowska medium-sized markets 43, Wisher Enterprise (100.000 - 400.000 inh)

small-sized markets (< 100.000 inh)

H1 2015

H1 2016 21%

16%

66%

83%

2%

13%

SUPERSAM, Griffin Real Estate, Katowice

Source: Knight Frank

Almost 50% of the retail space under construction is to be completed in H2 2016. The high development pace recorded in the last years in the small- and medium-sized cities makes them more and more saturated. Consequently, there was limited activity from developers in these markets. More and more saturated retail market force developers to look for an alternatives to traditional shopping centres. An example of the new approach in Warsaw are mixed-use

schemes i.a: Hala Koszyki and Centrum Praskie Koneser under construction or ArtN at the advanced planning stage. These citygenic areas will combine working, shopping and entertainment function in one place.

Simultaneously, brands such as Celio and Mothercare, withdrew from the Polish market. Headline rents for prime retail units (below 100 sq m) in prime shopping centres recorded an upward trend. Warsaw has maintained its leading position in terms of prime rents – up to EUR 150/sq m/month. Lower rates were noted in regional markets and depend on a number of factors, e.g. tenant brand, the size of the unit and its location within a project.

In H1 2016, several new brands entered to the Polish retail market. These are i.a. Tallinder – the premium brand of LPP Group in Galeria Bałtycka in Gdańsk, Sketchers in Galeria Mokotów in Warsaw and U.S. Polo Assn had its debut in Manufaktura in Łódź.

CHART 3

New retail supply by location (sq m) 2007 - 2016f

8 major agglomerations 8 major agglomerations - forecast medium markets (100.000 - 400.000 inh)

800,000 — 700,000 — 600,000 —

small-sized markets (< 100.000 inh)

500,000 —

small-sized markets - forecast (< 100.000 inh)

400,000 — 300,000 — 200,000 — 100,000 —

H1 2016\f

2015

2014

2013

2012

2011

2010

2009

2008

Source: Knight Frank

2007

sq m —

9

INVESTMENT MARKET

Positive sentiment and better perception of Polish market by international entities resulted in the record-breaking transaction volume of EUR 2.05 bn in the first six months of 2016 in Poland and twice exceeded the result from the same period of 2015. The largest deal in the history of Polish and the CEE region market was finalised in Q2 2016. South African fund Redefine Properties took over 75% of the Echo Prime Properties portfolio consisted of 18 retail and office assets with a total value of EUR 891 m.

In H1 2016, the largest investors’ activity was observed in the retail sector where acquisitions constituted 49% of total volume of finalised deals, while the acquisition of office properties made up 38% and the share of industrial sector accounted for 13%. In the office sector in the first six months of the year, nearly 60% of signed transactions were concluded in the regional markets. Beside the largest Redefine Properties transaction, the most significant acquisitions with the highest value were the purchase of Aleja Pokoju 5 office building in Krakow by German fund Warburg-HIH Invest Real Estate, the acquisition of Alchemia II in

Gdańsk by PHN and the purchase of three office projects Forum 76 in Łódź, Opera in Gdańsk and Okrąglak&Kwadraciak in Poznań by Benson Elliot Sharow Capital. Currently, yields for office assets located outside the Warsaw market fluctuate between 6.256.50% and their fall is expected in the coming quarters.

EUR

2.05

invested in Poland in H1 2016

EUR

891

m

volume of the largest transaction in the history of Polish market

Transaction investment volume in the office sector in Warsaw exceeded EUR 316 m in the first half of 2016. Yields for the Warsaw prime assets are expected to shrink while in H1 2016 reached a level of 5.50% in locations within CBD and yields for assets located outside the CBD varied between 6.75%

Share of retail sector in total transaction volume:

49%

CHART 1

Investment transaction volume 2004 - H1 2016

Office

bn EUR

Retail 0

H1 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004

Source: Knight Frank, IRF

10

Industrial 1

Other

Hotels 2

3

bn

4

5

COMMERCIAL MARKET IN POLAND

RESEARCH

CHART 2

Investment transaction structure by sectors H1 2016

RETAIL EUR 1bn

OFFICE EUR 789m 2% retail park 3% DYI

INDUSTRIAL EUR 255m

40% Warsaw

1% supermarkets & discount stores

48% portfolio 52% single asset transactions

60% regional cities 94% shopping center

Source: Knight Frank, IRF

-7.25%. The largest acquisitions in the office market in Warsaw in the first six months of 2016 included the purchase of Warsaw Corporate Center and Wiśniowy Business Park by Valad, Warburg-HIH Invest Real Estate purchase of Prime Corporate Center, acquisition of Zaułek Piękna by GLL and Oxygen Park by Golden Star Group. Unabated high investors activity was observed in the retail sector. The total volume of signed contracts in H1 2016 amounted to EUR 1bn, out of which a significant part was included in the Redefine Properties portfolio transaction. Moreover, there were a few smaller deals of a value less than EUR 10m that were finalised. The largest retail investment transactions in the first half of

2016 are acquire of Corso by First Property Group, the purchase of Jantar Shopping Centre in Słupsk by CBRE Global Investors and purchase of Ferio Konin by German fund Union Investment. Prime yields in the retail sector have remained at the level of 5.50% with tendency to compress.

portfolio, including 5 warehouse assets and industrial park Annopol Business Park by American fund Hines and the acquisition of Metropol Park Błonie by Hillwood and acquiring the Amazon scheme in Poznań by German fund GLL.

The most sought-after projects in the industrial sector remain portfolio assets. Due to the good warehouse market condition investors are more willing to allocate their funds in that segment. In the first six months of 2016 the investment volume of industrial transactions accounted for EUR 255 m. Prime yields for warehouse assets remained at the stable level of 7.00%. The largest deals concluded in H1 2016 are purchase of NBGI

EUROCENTRUM OFFICE COMPLEX, Capital Park, Warszawa

11

COMMERCIAL MARKET

As one of the largest and most experienced research teams operating across Polish commercial real estate markets, Knight Frank Poland provides strategic advice, forecasting and consultancy services to a wide range of commercial clients including developers, investment funds, financial and corporate institutions as well as private individuals. We offer: strategic consulting, independent forecasts and analysis adapted to clients’ specific requirements,

Contacts in Poland +48 22 596 50 50 www.KnightFrank.com.pl

market reports and analysis available to the public,

RESEARCH

tailored presentations and market reports for clients.

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Reports are produced on a quarterly basis and cover all sectors of commercial market (office, retail, industrial, hotel) in major Polish cities and regions (Warsaw, Kraków, Łódź, Poznań, Silesia, Tricity, Wrocław). Long-term presence in local markets has allowed our research team to build in-depth expertise of socio-economic factors affecting commercial and residential real estate in Poland.

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