Colliers International_Research and Forecast report_Croatia 2015

Summary

Recent Trends

Boosted by the country’s economic recovery and historically low interest rates across the eurozone, the Croatian real estate market experienced several significant investments in retail, office and hotel and hospitality sectors in 2015. While the retail and office segments are experiencing upward pressure on rental prices, the industrial market, despite being the least developed sector, saw increased activity.

Market Prognosis

The Croatian real estate sector expects several developments and transactions in 2016, underpinned by better economic climate, yield opportunities and improved investor sentiment. As most active markets in the coming year we see retail, office and hotel and hospitality sectors.

RESEARCH & FORECAST REPORT CROATIA 2015 OVERVIEW

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2 Research and forecast report | 2015 | Croatia | Colliers International

Economic Overview

Summary

Croatia’s GDP grew 1.9% in Q4 2015; the fifth consecutive positive quarter. Such growth confirms the economy’s renewed strength following six years of recession. The expansion in Q3 (2.8%) and Q4 (1.9%) likely reflected improvements in both domestic demand and the contribution from the external sector. According to Croatian Bureau of Statistics the first estimate shows that the gross domestic product increased in real terms by 1.6% in 2015, compared to 2014.

Recently higher EU funding and improving bank loan availability led to some investment recovery. Another record tourist season gave the important leverage to both foreign and (indirectly) local demand.

2015 World Bank’s Doing Business Report has brought improvements where Croatia has leaped from 89th place in 2013 to 65th place in 2014 in ease of doing business. Significant improvements were achieved in reducing the time for registering the property and dealing with construction permits which are very important factors of investment climate.

Population 4.284.889

Top 3 Cities 1.096.743 25,60%

Zagreb 790.017 18,44%

Split 178.102 4,16%

Rijeka 128.624 3,00%

Source: Colliers International on Croatian Bureau of Statistics

Prognosis

Croatia appears to be on a steady recovery path, driven by renewed dynamism in domestic demand and a general recovery in the Euro area. The prognosis for 2016 is as follows:

> GDP recovery is expected to attain a tepid 1.2%

> Private consumption will also add to growth as the labour market stabilises

> Relatively stronger growth in the EU should further stimulate exports, which are expected to grow by 4.7%

> Unemployment rate is forecast to decrease to 17.8%

> As a result of acceleration in core inflation and attenuating private sector deleveraging pressures, inflation is forecast to pick-up to 1.0%

> Key threats to stronger recovery are still related to continuing fiscal imbalance, high tax burden and an inefficient judiciary

Further investments in network infrastructure could enable Croatia to leverage its geo-strategic position.

Key Economic Figures

2014 2015 2016e

GDP % -0,4 0,9 1,2

Inflation CPI % -0,2 -0,3 1,0

Private Consumption %

-0,7 0,6 0,7

Industrial production (%) 1,3 1,9 2,5

Unemployment % 19,6 18,2 17,8

Source: Colliers International on Focus Economics

-3,0

-2,0

-1,0

0,0

1,0

2,0

3,0

4,0

2013 2014 2015 2016F 2017F 2018F

GDP growth, Consumption, Retail sales, Industrial production and forecasts

Economic Growth (GDP, annual var. in %) Private Consumption (annual var. in %)

Retail Sales (annual variation in %) Industrial Production (annual var. in %)

Source: Colliers International on FocusEconomics


Office Market Supply and Vacancy

The majority of office supply is located in Zagreb where almost all foreign and domestic companies present on the Croatian market have their headquarters. Second-tier cities with significant office supply in Croatia are Split and Rijeka.

At the end of 2015, total office supply in City of Zagreb stood at approx. 1.28 million m

2 including A and B class

competitive, owner-occupied and mixed-occupied buildings.

The supply is still limited for requirements above 1,500 – 2,000 m² in quality buildings.

Zagreb’s office vacancy rate currently stands at 14%. A class buildings have significantly lower vacancy levels in comparison to B class buildings. New office completions in 2015 totalled 18,500 m² of space (VMD Kvart Strojarska building B).

Demand

A significant market activity has been recorded at the beginning of 2015 due to expiry of many leases i.e. lease relocation and renewals, in the public sector, financial and telecommunication sector. We expect that the demand will continue to predominantly come from IT companies and BPO’s. Total Gross Take-up in Zagreb in 2015 amounted to 42,000 m².

Key office figures 2015

Total stock in m² 1.275.555

Gross Take-up in m² 42.000

Vacancy 14,00%

Prime Headline Rent €14.5/m²

Average Monthly Rent A class €12/m²

Average Monthly Rent B class €8-€11/m²

Source: Colliers International

Rents

The prime headline rent in Zagreb has been stable in the last few years and currently ranges from €14 to €15/m²/month. Average rent for A class buildings bottomed up following a gradual decrease in the past few years and currently stands at €12/m²/month. An increase in A class rent is expected as a result of domestic economy’s growth and small pipeline.

The secondary rent across the city ranges from €8 to €10/m²/month. In older buildings and buildings in suburban areas we expect downward pressure on the rent levels.

In order to attract tenants and increase occupancy levels, building owners continue to offer incentives for their major tenants. Some owners offer a full free fit out according to tenant’s needs, but at the ordinary fit-out level. Rent free period is usually granted for 1 to 3 months if the lease agreement is longer than 3 years. Fit out contribution ranges from €50 to €100 per square meter.

Pipeline and Prognosis

An additional 26,300 m² of office space will be added to Zagreb’s office market in 2016. New office arrivals in this period include Poslovni Centar Adris (10,800 m²), Conditum office project (9,500 m²), and Vrbani building (6,000 m²). Poslovni Centar Adris, owner occupied building, will be the first office building in Croatian market with international green building certificate - LEED GOLD.

As a consequence of the upcoming increase in supply, we see growth of take up activity with either stagnation or minor changes in vacancy levels. Given that the office building coverage is relatively high in CBD area, city centre and eastern part of Zagreb, we anticipate future office greenfield developments in Novi Zagreb (southern Zagreb) and western part of Zagreb. Central business district zone will continue to have the highest demand. Demand will remain strongest for Central business district zone.

Split, the second largest city in Croatia, has one significant office development in its pipeline. Works have already started on the €65m Westgate project (50,000m² of GBA). The first of the two planned towers will house the central offices of Splitska banka and the regional office of Societe Generale.

0,00%

2,00%

4,00%

6,00%

8,00%

10,00%

12,00%

14,00%

16,00%

18,00%

-

200.000

400.000

600.000

800.000

1.000.000

1.200.000

1.400.000

2007 2008 2009 2010 2011 2012 2013 2014 2015

Zagreb Office Market Stock and Vacancy

Total Stock e.o.y Yearly addition Vacancy



Retail Market

Supply and Demand

2015 and Q1 2016 saw major retail openings in Split and Dubrovnik. SUB City, the first contemporary shopping centre in Dubrovnik area, opened in September 2015 with approx. 12,000 m

2 NLA. After a number of delays, Mall of Split has

finally opened its doors in March 2016. As one of the largest malls in Croatia, Mall of Split added 61,700 m² of NLA and more than 200 retail units to the market.

Mall of Split:

Source: poslovni.hr

The latest big-box openings on the Zagreb market are the following:

> Croatian market leader Konzum has opened Super Konzum Radnička in Zagreb, on the site of the former Mercator center. The new Super Konzum’s concept also offers a standalone Tesco F&F store (new market arrival).

> Konzum has also opened Klik Konzum center, a 5,000m² large distribution centre for online shopping. The new Konzum Klik centre has replaced former Getro big-box in Vrbani.

The most popular high streets in Croatia are Ilica in Zagreb, Marmontova in Split, Korzo in Rijeka and Stradun in the Old Town of Dubrovnik. Occupancy levels in those streets are above 90%. After years of high-street rents decline, rental growth is forecast, driven by improved consumer spending and continual growth of tourism.

Rents

Average rent in prime shopping malls in Zagreb ranges between €20 and €25/m²/month. Rents in prime Zagreb shopping malls recently reached their bottom, and therefore we expect a rental growth in the following period. An increase in rents is mainly driven by consumer spending growth. Rents in high street depend on the micro location and the size of the premise and range from €25/m² to €100/m²/month.

Key retail figures - Zagreb Market

Total shopping mall NLA app. 480,000 m²

Average Prime Headline SC Rent €20/m²

Average Prime High Street Rent €60 - €70/m²

Pipeline and Prognosis

> Global Port Holding and Bouygues signed a preliminary Concession for development of mixed use project in Dubrovnik. The project will comprise a new cruise terminal, shopping mall with 14,000 m

2 GLA and 77

shops, multi-story garage and main international city bus station. The works on site are planned to start in H2 2016.

> MID Europa Fund is planning a development of a new shopping mall in Pula, the last larger city in Croatia without modern retail offering. The mall will have 30,000 m

2 GLA and 90 retail units. Construction works will start

in 2016.

> Tertiary cities Samobor and Imotski will also get new shopping malls in 2016. Shopping Gallery Samobor will open its doors in March 2016. This retail park will count 12 stores on 8,500 m² of leasable area. A new mall in Imotski will open its doors in H2 2016, adding 6,900 m² of NLA and around 40 retail units to the market.

Taking into account positive trends in consumer spending, tourism and economy in general, we expect an upward pressure on rents. Zagreb shopping centre market is saturated and several subprime malls are in need of repositioning on the market.

Development opportunities can still be found, especially in secondary and tertiary cities where retail parks could be the most appropriate solution considering the smaller catchment area.

30%

26% 8%

7%

6%

3% 3%

15%

Zagreb high-street structure

Fashion and shoes

F&B

Multimedia

Jewlery andaccessoriesFinancial services

Health & Beauty

Vacant

Other




Industrial/Logistic Market

Supply and Demand

The industrial and logistics sector remains the least developed real estate sector in Croatia, and is characterised by lack of modern Class A warehouse supply. Zagreb area has a total industrial and logistics stock of approx. 900,000 m², a small fraction of which of can be classified as “modern’” by European standards. Zagreb area and its satellite cities serve as the main focal point for business and location where majority of the logistic stock is situated. Much of the city’s industrial space is situated in the old industrial zones located in the city outskirts, particularly to the east and west of the city around Žitnjak, Jankomir and Jastrebarsko.

Main logistics zones in Zagreb area

Jankomir West

Sveta Nedjelja West

Žitnjak East

Sveta Helena North East

Rugvica South East

2015 saw several new large logistics developments, all located within Zagreb’s catchment area:

> Zagrebačka Pivovara (Zagreb Brewery) - 43,000 m² distribution and logistics centre located in Zaprešić

> Kaufland - 64,500 m² distribution and logistics centre in Jastrebarsko

> RALU Logistika - 13,000 m² distribution and logistics centre in Rugvica

> Lagermax - 17,000 m² distribution and logistics centre in Luka

Besides Zagreb and its surroundings, the most important industrial and logistics zones are Kukuljanovo near Rijeka and Dugopolje near Split.

Generally, the reason for low market activity in the last years mostly lies in very limited options of available modern logistic properties on the market. The lack of adequate supply has led the end-users to consider BTS (Built-to-Suit) projects or outsource their operations to logistics service providers.

The largest portion of demand for modern warehouse space comes from logistics services companies, food and beverage retailers, electronics retailer and other consumer goods retailers. The most demanded surfaces are those of 2,000 m² and 5,000 m², but there is also a significant interest for 10,000 m² premises. Important elements on the demand side are: premises equipped with modern ramps for loading and unloading, truck manipulation possibilities, ceiling height, office space surface, kWh quantity, floor capacity, vicinity to the highway, etc.

Rents & occupancy

Vacancy rates in Zagreb’s modern industrial warehouse market are estimated at very low levels due to the lack of larger available surfaces. Current market vacancy level stands at approx. 5.5%.

Key industrial / logistics figures - Zagreb

Total stock app. 900,000m²

Vacancy 5.5%

Prime headline rent €4 - €5.5/m²

There are no indicators of change in prime rents within Zagreb area, which range from €4 to €5.50/m²/month. Rents for older and refurbished industrial premises are also stable and range from €3 to €4.5/m²/month. Rents in Dugopolje and Kukuljanovo vary widely and can go above €5, whilst the average amounts to approx. €4.25, for both locations. Rents in Kukuljanovo were stable in recent years.

Average rent prices

Zagreb area - prime rents €4 - €5.5/m²

Zagreb area - older premises €3 - €4.5/m²

Kukuljanovo (Rijeka) €4.25/m²

Dugopolje (Split) €4.25/m²

Prognosis

An increase of demand for logistics space is continuing and many tenants are looking for better quality options and consider BTS (Built-to-Suit) projects as most convenient solution. We expect that trend to continue in 2016 which will drive pre-development and development of new logistic centres. A further drop of the vacancy rate can be expected which might trigger new developments.

According to the trends on logistic market we assume further corrections of land prices what will directly affect the attractiveness of this segment for investors and developers. One of the biggest barriers for larger scale developments is the communal contribution, paid per cube meter. However, some local municipalities are putting effort into attracting investors by creating business zones with favourable conditions.

0,0

1,0

2,0

3,0

4,0

5,0

6,0

Vienna Zagreb Belgrade Bratislava Budapest

Prime logistics & distribution rents

Prime rent (€/m²/month)






+3.2% +8.0% +3.3% +5.1% +5.5% +9.3%

+2.8% +7.0% +4.0% +3.3% +2.6%

+7.7%

-

10

20

30

40

50

60

70

80

2010 2011 2012 2013 2014 2015

Mill

ion

s

Tourist arrivals and overnights (actual + YoY % change)

Arrivals Overnights

HTL Market

Summary

Croatian tourism has experienced another record year in terms of tourist arrivals (+9% yoy) and overnight stays (+7% yoy). The summer of 2015 saw the opening of 25 new hotels on the Adriatic coast, predominantly brownfield investments.

The largest new hotel development in 2015 was an €80m brownfield investment in the Dubrovnik Riviera Hotels project. The investor, HUP-ZAGREB, delivered a new 5-star Sheraton Dubrovnik Riviera Hotel and upgraded Hotel Astarea to the 4-star category. Doğuş Group has continued investing in the Croatian coast with the latest €25m greenfield investment in D-Resort Šibenik, a 4+ star hotel, with 69 luxurious rooms and suites, and three exclusive villas.

The biggest players on the hotel market are Plava Laguna (with its brands Istraturist, Adriatic Luxury hotels and Plava Laguna), Valamar Riviera (owned by Austrian investment firm EPIC) and Maistra (part of Adris Group).

The hotel and hospitality sector is currently the most attractive sector for developers and investors due to the continually high growth of tourist arrivals and overnight stays, available funding and attractive brownfield investment opportunities available through the privatisation of state owned enterprises/RE portfolios.

Pipeline

> The bidding process for the development of the former Croatian tourist jewel Kupari tourist complex near Dubrovnik ended in October 2015, with one binding offer from the Avenue Group, headquartered in Vienna. The majority shareholder of the Avenue Group is the Russian investor Sergej Gljadelki. The Avenue Group submitted the offer, along with the letter of intent from Marriott International (in this case Ritz Carlton), with a projected investment of at least €100m, marking a grand entrance into the Croatian tourism sector.

> Company Razvoj golf owned by Aaron Frenkel obtained the first building permit for the construction of the Sport-recreational center with golf courses on Srđ, Dubrovnik. The Golf Park Dubrovnik is a +€1 billion real-estate international project and Croatia’s largest greenfield investment.

> The latest privatisation project in Dubrovnik has received lots of interest in November 2015. The state owned hotel group Maestral Hotels Dubrovnik, which owns five hotels in Dubrovnik, is the most recent company to go up for sale. The Centre for Restructuring and Sale (CERP) has received 15 letters of intent for the purchase of the hotel chain.

> The former Croatian Government decided to initiate the procedure for expression of interest for the development of Muzil project near Pula, which would involve the construction of a large tourist complex. The value of the Muzil project is estimated at €150 to €200 million, and it is expected that the call for investors will be published in 2016.

Prognosis

Looking ahead, investment activity in the hotel sector is expected to continue, especially in brownfield investments. New entrants on the market can be expected, notably international hotel brands currently not present on the Croatian hotel market.

24%

24%

1%

37%

13%

Overnights 2015

Hotels

Camps

Youth hostels

Privateaccommodation

Other objects

Source: Colliers International on Croatian Bureau of Statistics

Source: Colliers International on Ministry of Tourism


Resorts and Luxury Residences Supply and Demand

The largest supply of luxury villas in Croatia can be found in the following key areas:

> Istria (Pula, Umag, Rovinj, Medulin. etc.)

> Opatija

> Split area

> Dubrovnik area

> Island: Hvar, Brač, Pag, Krk

The most prominent resorts in Croatia are Skiper Resort in Istria, Punta Skala - Falkensteiner near Zadar and Radisson Blu - Dubrovnik Sun Gardens, offering residences on sale with rental and property management programs.

Buyers’ structure is diverse. At a national level, Slovenians account for the largest portion of international buyers. Buyers in the south include Swedes, Slovakians and the Brits. The latter are particularly attracted to Dubrovnik. Historic apartments inside the city walls still offer rental yields exceeding 6%.

The most demanded luxury residences are smaller ones with the price up to €500,000. Generally, we can say that the supply does not meet current demand characteristics. On the one hand, there is a lack of smaller luxury villas listed for sale, whilst on the other hand there is a lack of larger high-end villas offered for rent. Therefore, such trends show potential in new luxury developments, which would meet the market needs.

Prices

This market is characterized by low liquidity and big discrepancy between asking and transaction prices, especially in Dalmatia.

The prices of residences within the aforementioned Croatian resorts are in the range between €170,000 for studio apartments and €1 million for top penthouses. The buyers’ psychology is quite different now than few years ago when buyers responded to created sense of urgency and the fear of loss with very limited information. Today, sense of urgency is not as effective since buyers believe they will be rewarded with better price and benefits if they wait with the purchase, and negotiate first.

Prognosis

We expect demand increase from wealthy European buyers who are interested to invest in upgrading of their lifestyle by purchasing their coastal holiday home. Interest in investment product will lead to demand for well-priced, cleverly designed, smaller properties which produce yield.

The average property price is expected to slightly increase due to landmark projects already on the market and coming to the market, influencing the image of Croatia as an attractive investment and second home destination. Due to high demand of high net worth individuals for branded residences there is a big opportunity in the mix-use branded developments. Key to success of developers entering the Croatian real estate market is to deliver a product which the market demands. Strategy is confidence - absolute clarity and transparency of the purchase process, the investment company, bank following the projects and clean ownership papers.

43%

35%

8%

14%

Buyers' structure

Slovenia

Germany,Italy, Austria

Scandinavia,UK

Other

€ 350k - 550k

€ 500k - 700k

€ 450k - 650k

€ 450k - 650k

€ 450k - 650k

€ 400k - 600k

€ 350k - 550k

Makarska

Hvar Island

Brač Island

Novalja(Pag)

Opatija

Poreč(Istria)

Rovinj(Istria)

Average villa net price

Skiper Resort

Punta Skala

DSG





17

2 2

6

2

7 8

5

2008 2009 2010 2011 2012 2013 2014 2015

Number of hotel transactions

Investment Overview

Summary

Boosted by the country’s economic recovery and historically low interest rates across the Eurozone, Croatia has witnessed an increase in “active investor” interest in 2015 with several significant investments predominantly in the hotel and hospitality sector.

With several years left to run in the global and European investment cycle, and opportunities gradually diminishing elsewhere in Europe (and globally), this is a good time to consider taking a stronger investment position in Croatia.

Capital Markets

The Croatian commercial real estate market saw an extension of the upward trend with the hotel and hospitality market as the most attractive sector for investors, proved by several large transactions in 2014 and 2015.

Retail sector saw one major deal in 2015, the Avenue Mall Osijek sold by GTC.

The office sector also recorded a few significant transactions in 2015:

> Tower Property purchased 15 floors of the 26 storey VMD property (10,700 m² of net-leasable area) for €23.7 million providing a yield of 8.5%.

> CA Immo has bought out the remaining 35% share of portfolio of offices located in Central and Eastern Europe, including Zagrebtower. The gross yield of the portfolio amounts to 7.9%.

Prognosis

The Croatian real estate sector expects several developments and transactions in 2016, underpinned by a better economic climate, yield opportunities and improved investor sentiment. After several years of low liquidity 2016 will see strong investment transactions, especially in retail and office sectors. The prices have declined which led to better yield opportunities.

Retail sector has the most announced transactions for early 2016:

> Morgan Stanley is completing the acquisition process of two prime shopping centers, City Center Zagreb One East and West in Zagreb.

> Tower Property plans to purchase 4 Konzum stores and shopping centres in Croatia for €66.4 million. The South African Fund will acquire Sub City Centre in Dubrovnik, Meridijan 16 shopping centre in Zagreb and two Konzum big-boxes, one in Zagreb and one in Velika Gorica.

With the forthcoming supply, mainly driven by bank disposals, we anticipate several transactions closing in 2016, making it the record year in investment sale volumes.

Gross yields - 2015

Prime Office Yields 8,50%

Prime Retail Yields 8,50%

Prime Industrial/Logistics Yields 11,00%

Prime Hotel Yields 8,00%

69% 2%

29%

CRE - Transaction Volumes in 2015

Hotel

Retail

Office





w

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.

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CROATIA

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Colliers International_Research and Forecast report_Croatia 2015