www.arcoreal.bg

Real Estate Market OverviewSofia, August 2012

www.arcoreal.bg

GDP

Analysts' forecasts for GDP growth from the beginning of the year have been revised, but are still positive – in the region of 0.5 %. Unemployment & Personal Income

A significant growth of unemployment was recorded in the beginning of 2012. In the second quarter, it stabilized at 10.8 %. Average monthly salary in Jun was EUR 386 – a 9 % increase on an annual basis.

FDI

Foreign buyers of vacation properties have reappeared on the market. In the first half of 2012, foreign direct investments were EUR 220 million – 80 % more than in the same period last year. Nevertheless, FDI remained tiny – 0.6 % of GDP.

Banking Sector

Interest rates on mortgages decreased both in leva and in euro. In the beginning of 2012 they were 8.2 %, while in June they were in the range of 7.5 %-7.6 %. In the same period, the amount of newly granted mortgage loans in leva rose from 22 million leva in January to over 44 million leva in June. Monthly volumes in euro are in the range of 60 million leva.

Macroeconomics

4

6

8

10

12

2008 2009 2010 2011 2012

Unemployment (%)

Jul

Unemployment(%)

200

250

300

350

400

2008 2009 2010 2011 2012

Average monthly wages (EUR)

Jun

Average Monthly Wages(euro)

Data source: Bulgarian National Bank

wGDP is expected to grow in 2012

wInflation grows (3.1% in July) as a result of hiking oil prices

wSlowing growth of the unemployment rate at 10.8% in June

-8-6-4-202468

10

2008 2009 2010 2011 2012

Gross Domestic Product (annual real growth rate, %)

forecast

Gross Domestic Product(annual real growth rate %)

0

5

10

15

20

2008 2009 2010 2011 2012

Foreign direct investment (% GDP)

Jun

Foreign Direct Investment(% of GDP)

Interest Rates,Mortgages

78899

10101111

2007 2008 2009 2010 2011

â ëåâîâå â åâðî

July

BGN EUR

www.arcoreal.bg

Rents

Housing rental rates in Sofia are in the range of EUR 2.20-4.00 per sq. m. per month. Average asking price is in the region of EUR 2.90 per sq. m. per month. Customers receive about 10% discount during negotiations.

Yield on residential properties is in the range of 3.80-6.50%. With average yield of about 5%, the sector is largely unattractive to professional investors.

Demand

Demand for apartments with area between 50 and 80 sq.m. has grown significantly over the past six months. More than half of the inquiries fall in this segment, domi-nated by one-bedroom apartments. Demand for apart-ments with area between 80 and 120 sq. m., mostly two-bedrooms, decreased significantly in the last six months, and only one-third of customers are interested in this segment.

One third of the clients look for dwellings in EUR 30,000-50,000 range. Another third – between EUR 50,000 and 80,000. Current demand is close to average market price, just under EUR 700 per sq. m., and we do not expect major changes before the year end.

Supply

After clearing statistical errors, housing stock in Sofia went above 45 million sq. m. This results in 35 sq. m. per registered resident of the capital, still less than average indicator for Bulgaria – 39 sq. m. per capita. It is worth noting that supply of newly-built large apartments is higher than actual demand, while in case of one-bedroom apartments it is just the opposite.

Supply in areas where the new subway line passes has significantly decreased in anticipation of price hike in the coming months.

Pipeline

The number of issued building permits continues to decline. In the first half of 2012, permits for 71,000 sq. m. were issued – 23 % less than in the same period of 2011. The first half of 2012 marked a minimal growth of commenced construction projects to 56,000 sq. m. We expect this trend to develop in the coming months.

Sales Prices

For the first time in five years, prices in all market areas have fallen below EUR 1,000 per sq. m. Within a year, average price in Sofia fell by -6 % to EUR 674 per sq. m. in June 2012

After a decline over past few years, prices in the CBD are now in the region of EUR 990 per sq. m. Differentiation between other market areas was clearly visible. The more demanded areas performed better than market average: prices fell in the Southern areas by only -2 %, and around Parks by -4 % this year. Buyers have managed to drive the market down in more price sensitive areas, particularly in the Western areas by -9 % and in Plain Suburbs by -19 %. Growth of asking prices near Han Kubrat Metro station by 9 % from the beginning of 2012 makes the neighbourhood overvalued.

Residential

0

0.15

0.3

0.45

0.6

- 50 sq m 50-80 sq m 80-120 sq m 120 sq m +

2011 H1 2012

Sales Prices (EUR/sqm)

Source: Arco Real Estate Bulgaria

Source NSI:

Source: Arco Real Estate

Demand for apartments by size

Sofia Residential Pipeline (’000 sq m)

Range Average

0

125

250

375

500

2008 2009 2010 2011 2012

Commencements Permits

Ðàéîí

Êâàðòàëè Ñðåäíà öåíà åâðî/êâ.ì.

1. CBD Doctor's Garden, Medical Academy, Oborishte 988

2. Parks Ivan Vazov, Izgrev, Iztok, Lozenets, Hladilnika, Yavorov 985

3. Broad Center Beli Brezi, Borovo, Geo Milev, Gotse Delchev, Zona B-5-18-19, Krasno Selo, Lagera, Motopista, Reduta, Slaviya, Strelbishte, Hipodruma 782

4. Southern American College, Bakston, Vitosha, Krastova Vada, Malinova Dolina, Manastirski Livadi, Pavlovo 738

5. South-eastern Dianabad, Darvenitsa, Mladost, Musagenitsa, Sudentski Grad 722

6. Mountain Suburbs

Bankya, Belovodski Pat, Bisitritsa, Boyana, Bunkera, Vladaya, Gorna Banya, Detski Grad, Dragalaevtsi, Karpuzitsa, Kinocentar, Knyazhevo, Pancharevo, Simeonovo 710

7. Western Banishora, Gevgeliyski, Zapaden Park, Ilinden, Krasna Polyana, Ovcha Kupel, Razsadnika, Sveta Troitsa, Serdika, Fondovi zhilishta, Tsentralna Gara 632

8. Eastern Druzhba, Levski, Malashevtsi, Or landovtsi, Poduyane, Poligona, Slatina, Stefan Karadzha, Suhata Reka, Hadzhi Dimitar 606

9. North-western Zaharna Fabr ika, Lyulin, Moderno Predgradie, Nadezhda, Obelya, Svoboda, Tolstoy, Triagalnika 549

10. Plain Suburbs Benkovski, Birimirtsi, Botunets, Busmantsi, Voenna Rampa, Vrazhdebna, Gara Iskar,

Gorublyane, Ivanyane, Iliyantsi, Kazichene, Kremikovtsi, Kr ivina, Kumaritsa, Malo Buchino, Obelya, Republika, Svetovrachane, Seslavtsi, Suhodol, Filipovtsi, Hristo Botev

433

3

910

2

4 5

8

1

6

7

8

3

Area Neighborhoods Sales PriceEUR/sqm

www.arcoreal.bg

Source: Arco Real Estate

Source: Google, Arco Real Estate

6

www.arcoreal.bg

Office SpaceDemand

In the first half of 2012, the unstable demand was due to the economic uncertainties on both local and regional levels. The prevailing demand is from companies taking advantage of favourable rents and better quality of newly completed projects. Companies entering the market or expanding are few.

Customers' inquiries ranged between EUR 4-8 per sq. m. per month. In addition to discounts, on average 8 %, landlords are inclined to offer prospective tenants finishing of the leased space and a rent-free period.

Current Supply

Oversupply has dominated the market since 2009. With projects that were completed in the first half of 2012, office stock surpassed 1.56 million sq. m. Class A buildings are 20 % of the total stock.

The CBD offices represent about 10 % of the stock. The area benefits from excellent access on feet and by public transport and from the most developed infrastructure in the city.

Midtown offices add about 10 % to the stock. The area benefits from good access by public transport and developed infrastructure.

Areas along or near the Main boulevards accommodate 60 % of the Sofia office stock. Good access by car and public transport defines the area. The Periphery accommodates about 20 % of the stock. There are no requirements to the location and it is difficult to see Class A offices in this area.

Pipeline

Pipeline gradually drains out with no new project commencements in the first half of 2012. Newly issued building permits are for less than 5,000 sq m.

Vacancy

The growing stock and prevalence of relocating companies keep about a quarter of the office space vacant.

In the past quarter, the relocation of two banks' headquarters from the CBD to buildings on the Ring Road reduced the gap in vacancy levels between the CBD and the periphery.

Rents

Rental rates are still drifting towards the equilibrium point. Many landlords, instead of reducing the rent, offer additional incentives to potential tenants. With the

Office Stock by Market Area(%)

Office Rents Range(EUR/sqm/month)

Source: Arco Real Estate

exception of some extreme offers, transactions with prime office space are signed in the range of EUR 10-12 per sq. m. per month. Secondary locations find tenants at EUR 3-5 per sq. m. per month after offering additional incentives to potential tenants.

Investment Market

In current market situation, strategic investors focus on more mature markets. Opportunistic investors demand high yields, which are usually achievable with properties in adverse financial condition. In this context, we do not expect by the end of the year deals happening at yields below 10 %.

H

Source: Arco Real Estate

www.arcoreal.bg

Retail SpaceDemand

With the opening of two shops in the largest Sofia malls, the Swedish fashion retailer H&M has entered the Bulgarian market. Continued expansion of large retail chains and supermarkets is more noticeable in the province than in the more saturated Sofia market.

More than half of the demand for shops is in the range of 30-100 sq. m. The next most popular segment is between 100-300 sq. m. Half of the potential tenants expect to pay a monthly rent up to EUR 1,000. Those ready to pay above EUR 3,000 per month represent 10% of all inquiries.

Current Supply

The gross leasable area of existing malls in Sofia has remained unchanged in past 2 years at 210,000 sq m. Out of Sofia, it is worth noting the opening of Galleria Burgas – GTC's second project in Bulgaria.

Pipeline

Construction of Paradise Centre, Bulgaria Mall and Sofia Ring Mall is advancing. The former two should be ready by the Christmas shopping season, increasing the GLA of Sofia malls by 50% to 320,000 sq m.

Vacancy

Vacancy rate of Sofia malls is below 10%, while the most popular ones run on almost full capacity.

We expect high-street retail market to revitalize with completion of renovations in the city centre and launch of the second metro line.

Rents

Rents in malls are about EUR 24 per sq m per month for an average-sized shop. The most sought after locations in Sofia can reach rent of EUR 45 per sq. m. per month. The demand for secondary locations is at about EUR 9 per sq m per month.

Investment Market

The only significant investment deal this year is for bauMax Pleven. There is no market evidence of yields expected by investors for premium locations, but for good retail space in Sofia it is unlikely to be less than 10%.

Retail center BLVD Residence

Source: Arco Real Estate

Demand for retail space by size(Sofia)

Demand for retail space by rent price(Sofia)

Source: Arco Real Estate

www.arcoreal.bg

This report is published for general information only. Although high standards have been applied in the preparation of the information, analysis, view and projections presented in this report, no legal responsibility can be accepted by Arco Real Estate Bulgaria for any loss or damage resultant from the contents of this document. As a general report, this material does not necessarily represent the view of Arco Real Estate Bulgaria in relation to particular properties or projects. Reproduction of this report, in whole or in part is allowed with a proper reference to Arco Real Estate Bulgaria.

For more information, please contact our team:

Georgi GeorgievHead of Valuation & Advisory ServicesGeorgi.Georgiev@arcoreal.bg+359 2 917 3079; +359 89 464 4943

Evgeni VasilevEvgeni.Vasilev@arcoreal.bg+359 2 917 3077; +359 89 566 4567

Arco Real Estate38A Cherkovna Str.BLVD Residence1505 Sofia

Arco Real Estate Bulgaria

wBroad international and local experience

wExtensive portfolio of services for comprehensive catering after client's needs

wAvailability of qualifications and licenses to guarantee quality of the final product

Consistent quality achieved through

wExtensive research

wThoughtful analysis

wAdherence to the highest professional standards

The mission of Arco Real Estate is to be a comprehensive and valued provider of real estate solutions.

The vision of Arco Real Estate is to becomea symbol of real estate.