Colliers (Ukraine) Maret Overview 2010

Ukraine 2010 | Real estate Review | Colliers International | 1

© Colliers International Ukraine 2010 This report is intended as general market research and based upon material in our possession or supplied to us, which we believe to be reliable. Whilst every effort has been made to ensure its accuracy and completeness we cannot offer any warranty that factual errors may not have occurred. We would like to be told of any such errors so that these can be corrected. Colliers International takes no responsibility for any damage or loss suffered by reason of the inaccuracy or incorrectness of this report. The information presented in this report may not be used without the prior written permission of Colliers International Ukraine.

All the forecasts and scenarios made by Colliers International in this report are based on macroeconomic indicators, provided in Economic Overview. In case of deviations of real macroeconomic indicators from those we used as basic, our prognosis might be ether optimistic or pessimistic accordingly.

2 Economic Overview

6 Office Premises

14 Industrial Premises

18 Retail Premises

26 Hotel Market

29 Investment Overview

ECOnOMIC OvERvIEW

2 | Colliers International | Real estate Review | Ukraine 2010

POlITICAl HIgHlIgHTs As it was expected, the main efforts of Ukrainian statesmen in 2009 were focused on economic recession fighting and preparation for presidential election scheduled for January 2010. Joint efforts aimed for economic recovery failed to unite officials and as the result the confrontation between Prime Minister, President and Parliament was observed during the whole year.

Experts suggest that certain stabilization of political situation may appear not earlier than 2011 since local council and Parliamentary elections (for the new elected president to form pro-president majority) are planned for 2010.

BUdgET By the end of 2009 actual deficit of state budget amounted 6.5% of GDP instead of previously forecasted 3%. Main rea-sons for the growth were: rise in price of

Russian gas from $180 to $220 per 1,000 cubic meter (or 18% higher), increase of stress of the society due to rising unem-ployment and additional expenditures for H1N1 outbreak control.

Even though the state budget income and expenditures items for 2010 are correlative to the items of 2009, experts’

Current Account Balance and Fiscal Balance 1998-2013

Source: Focus Economics, October 2009

Current account balance

% o

f GD

P

Fiscal balance

-8% 1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010F

2011F

2012F

2013F

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Economic Indicators2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F

Population (million) 46.9 46.6 46.4 46.1 45.9 45.7 45.4 45.0 44.7

gdP (Usd billion) 86.1 107.8 142.7 180.3 121.1 131.8 153.2 176.1 202.6

gdP (annual variation in %) 2.7 7.3 7.6 2.1 -13.8 1.9 3.7 4.9 5.0

Consumption (annual variation in %) 20.6 15.9 17.1 11.8 -13.8 0.5 3.8 5.5 5.6

Industrial Production (annual variation in %) 3.1 6.2 10.2 -3.1 -20.0 3.9 5.2 6.1 6.3

Retail sales (annual variation in %) 23.4 26.4 29.5 17.3 -13.0 2.6 2.0 1.7 1.6

Unemployment (%) 7.2 6.8 6.4 6.4 10.5 9.7 9.2 9.3 9.1

Fiscal Balance (% of gdP) -1.8 -0.7 -1.1 -1.5 -6.5 -4.1 -3.2 -1.9 -1.3

Consumer Prices (annual variation in %) 10.3 11.6 16.6 22.3 14.8 10.7 8.6 6.5 6.2

Exchange Rate (vs. Usd end-of-period) 5.1 5.1 5.1 7.7 8.7 8.6 8.3 8.2 7.8

Current Account Balance (Usd million) 2,531 -1,617 -5,272 -12,763 -617 -490 -1,723 -1,950 -2,069

Current Account Balance (% of gdP) 2.9 -1.5 -3.7 -7.1 -0.5 -0.4 -1.1 -1.1 -1.0

Trade Balance (Usd million) -1,135 -5,194 -10,572 -16,091 -4,404 -4,896 -5,386 -5,576 -6,298

Exports (Usd million) 35,024 38,949 49,840 67,717 42,462 46,907 53,317 57,590 62,546

Imports (Usd million) 36,159 44,143 60,412 83,808 46,348 51,157 58,190 63,166 68,843

International Reserves (Usd million) 19,391 22,359 32,479 31,543 23,664 24,573 25,811 29,335 30,375

External debt (Usd million) 39,619 54,512 79,956 101,654 102,805 106,164 114,843 126,990 131,372

External debt (% of gdP) 46.0 50.6 56.0 56.4 84.9 80.6 75.0 72.1 64.8

*F - Forecastsource: Focus Economics Consensus Forecast, October 2009


By the end of 2009 actual deficit of state budget amounted 6.5% of GDP instead of previ-ously forecasted 3%.

forecasts regarding the probable deficit vary. The reason for that is the Improve-ment of Social Standards Law adopted by the Parliament.

This law stipulates the increase of mini-mum wages for over 20% during 2010. Thus, the budget deficit initially planned by the government was within the limit of 4% of GDP, however, it may achieve the level of 8-12% of GDP after the abovementioned law is put into force. In case if the new elected President sustains a veto on the law, the government will be able to retain the deficit within the planned limits.

COnsUMER PRICE IndEX Consumer price index (CPI) in 2009 de-creased due to government efforts aimed for monetary contraction. Consequently, the government managed to comply with the IMF agreements in 2009 keeping the CPI at the level of 12.3%. The inflation decrease up to 10-11% is expected by the end of the 2010.

The inflation level recession is the key factor causing the decrease of borrowing costs in commercial banks. If the govern-ment succeeds in decreasing of inflation level, the credit interest rate may get back to pre-crisis level of 10-12% by 2011 midyear. THE EXTERnAlsECTORThe external trade dynamics in Ukraine, as well as in majority of European countries has considerably slowed down during 2009.

Comparing to 2008, the export volume decreased by 37.2% and import volume - by 44.6% that in absolute measures approximately corresponds to the levels of 2006.

In metallurgical industry, that composes about 40% of the total export volume of the country, positive dynamics was observed during the 2H of 2009. Thus, due to devaluation of domestic currency, manufacturers obtained an opportunity to offer competitive prices against the back-ground of gradual restoration of world demand for metal-roll, serving as the basis for forecasts regarding industrial production in Ukraine in 2010.

The reduction of production cost will most likely result in activation of con-struction works; scope of such works has dropped by more than 50% in 2009 comparing to the same period in 2008. Thus, due to reduction of prices for construction works and materials, the internal rate of return of many residential and commercial real estate projects falls back to positive values.

gdPReduction of GDP in Ukraine as of the end of 2009 amounted to “-13.8%” comparing to 2008; in Eastern Europe region exceeded in the extent of downturn only by Baltic countries.

Reduction of GDP in 2009 actually neutralized the growth during the last 3 years, evening out GDP to the level of 2006 in money terms.

The full economic recovery to pre-crisis levels may already be expected in 2012 – 2013 unless a new wave of economical perturbations takes place.

Consumer Price Index2008-2009

Source: State Ministry of Statistics, December 2009

2009

100%

105%

110%

115%

120%

125%

Jan

Febr

March

April

May

June

July

Aug

Sept

Oct

Nov

Dec

2008

Import / Export Dynamics


Import

$ bi

llion

s

Export

0 1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010F

2011F

2012F

2013F

10

20

30

40

50

60

70

80

90

100

ECOnOMIC OvERvIEW


HOUsEHOld InCOME And EMPlOyMEnT Unemployment level in Ukraine has increased up to 10.5% in 2009 that corresponds to the average level in EU countries.

Major redundancies took place in the 1H of 2009. However, in the second part corporate sector mostly adapted to new conditions and labor market situation has become stable.

Unemployment growth and reduction of income negatively influenced the purchasing power and priorities of the population: thus, durable goods sales decreased by 30-70%, while consump-tion of FMCG goods remained at the same level.

Experts forecast moderate recovery of durable goods in 2010 - 2013 as con-sumer crediting and real income of the population gradually increase.

CURREnCy EXCHAngE RATE NBU refusal to fix domestic currency exchange rate in November 2008 resulted in considerable reduction of national currency value: thus, in

December 2008 UAH/USD exchange rate increased from 5.1 up to 8.5 (or 40% devaluation).

In 2009 the UAH exchange rate remained stable with tendency for moderate revaluation that amounted to around 5% (from 8.5 UAH up to 8.05 UAH per 1 USD) as of the end of the year. Over the medium term, the tendency of moderate strengthening of UAH is likely to continue as it is required for local financial sector to lighten external credit interest and

GDP


Nominal GDP Growth, $ bln.Real GDP Growth, % Y-O-Y

0 -15%

-10%

-5%

-0%

5%

10%

15%

1998199920002001200220032004200520062007200820092010F2011F2012F2013F

50

100

150

200

$ bl

n.

Industrial Output, Y-O-Y1998-2013


Indu

stri

al o

utpu

t, y-

o-y

-25% 1998199920002001200220032004200520062007200820092010F2011F2012F2013F

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Unemployment Rate and RetailGrowth 1998-2013


Unemployment Rate (ILO)

-15% 1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010F

2011F

2012F

2013F

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Retail Private Consumption


principal payments had been previously taken in foreign currency.

FdIAccording to official data from NBU, FDI flows into Ukraine reached approximately $4.7 bln during 2009, what is about 47% of the FDI volume in 2008. The greatest share of FDI was directed into banking sector for recapitalization of Ukrainian branches by mother companies.

Consumer Confidence Index in Ukraine


03’04

10’04

03’05

09’05

02’06

06’06

10’06

02’07

06’07

10’07

02’08

06’08

10’08

01’09

03’09

06'09

45

55

65

75

85

95

105

115

125

Index of Current Situation

Index of Economic Expectations

Consumer Confidence Index

Inde

x

Banking Sector Indicators1998-2013


Exchange Rate, UAH/USD, end of year

UA

H/U

SD

0 1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010F

2011F

2012F

2013F

1

2

3

4

5

6

7

8

9

10

Discount Rate of NBU

Dis

coun

t ra

te o

f NBU

FDI 2002-2011

E- estimation F - ForecastSource: ICPS, 2009

FDI per year, $ bln.

0 2002

2003

2004

2005

2006

2007

2008

2009E

2010F

2011F

2

4

6

8

10

12

$ bl

n.

According to official data from NBU, FDI flows into Ukraine reached approximately $4.7 bln during 2009, what is about 47% of the FDI volume in 2008.


OFFICE PREMIsEs

OvERvIEWKyiv office market in 2009 may be nominally divided into two periods: recession and stabilization. In fact, the first half of 2009 office market witnessed general slowdown of business activity provoked by global economic crises, started at the end of 2008. However, Q1 was characterized by the most critical trends when panic and fluctuating market conditions prevailed; nevertheless starting from Q2 the situation exposed the first signs of stabilization.

Furthermore, key market indexes expressed strengthening trends during the second half of the year: thus a decline in rental rates almost ceased, vacancy rate growth significantly slowed down.

At the same time, stock of perspective office space supply continued declining: due to high cost of financing and low level of rental rates many developers froze the projects completed less than 50%; in addition to this, developers completely refused to start construction of large-scale non-phased projects with GLA of more than 50,000 sqm.

ТREnds g Vacancy decrease in office projects

of high class. g Strengthening of rental rates in

all types of office buildings with optional insignificant deviations.

g A general slow down of new office space supply and commissioning term rescheduling.

g Further rotation of tenants without additional external take-up of office premises.

g Growth of office space either basic or completely fitted-out.

sUPPlyThe stock of new office space supply in Kyiv amounted to 110,000 sqm in 2009, 11% up to existing stock. Thereby, total cumulative stock of office premises available in the capital as of January 01, 2010 reached 1,095,000 sqm, or around 390 sqm per 1,000 inhabitants.

The stock of new office space supply in 2009 is 45% down comparing with the same index of 2008.

Traditionally, all delivered projects in 2009 were represented only by local companies.

According to announcement of developers, the stock of new supply in 2010 could be as high as 150,000 sqm. However, taking into consideration high probability of commissioning term rescheduling of several large-scale objects, (that is typical situation) actual new stock may be considerably less (within the range of 50,000 – 80,000 sqm).

Major part of new office premises (around 60%) is traditionally located in the center and semi-center districts of Kyiv*, whereas the rest 40% in non-central area.

In case of all announced project delivery in 2010 and 2011 the ratio of central and non-central location will be within the range of 70% vs. 30% and 75% vs. 25% correspondingly. It is obvious, that in mid-term outlook previously expected formation of new development sites in non-central districts of the city proved to be groundless and as a result, Business Park format niche continues to be almost vacant.

Traditionally, all delivered proj-ects in 2009 were represented only by local companies.

Kyiv Delivery and Pipeline, Office Segment

Source: Colliers International, January 2010

Total Stock, beginning of the yearNew Supply

0 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010F

2011F

200

400

600

800

1 000

1 200

1 400

thnd

, sqm

*-CBd and adjacent territory within 2 km radius


Major Office Projects Commissioned in 2009# name Address glA, sqm developer

1 Protasov BC 2/1 grynchenka st 20,300 “Roza” Factory

2 HPBC II BC (phase 1) 12 Amosova st 16,000 IsA Prime developments

3 IRvA BC (phase 2) 10/14 Radyshcheva st 11,300 IRvA

4 Business Center on Mahnitohorska st (phase 1) 1А Mahnitohorska st 8,663 FIM group

5 Praha BC 6 sosyury st 8,500 Ukrainian developer

6 vremena goda BC 16 Kudryashova st 7,060 nEsT

7 Capital Hall BC 31 Zhylyanska st 7,000 Miskzhytlobud

8 Business Center on Haydara st 50b Haydara st 6,250 Ukrainian developer

9 livoberezhny BC 2 Raskovoyi st 6,000 sns

10 Business Center on Polyova st (phase 3) 24 Polyova st 5,500 Ukrainian developer

11 Kyyanovsky BC 7 Kyyanovsky lane 3,600 Ukrainian developer

12 River Plaza BC (phase 1) 9 naberezhno-Khreshchatytska st 1,380 IsA Prime developments

source: Colliers International, January 2010

The stock of new office space supply in 2009 is 45% down comparing with the same index of 2008.

Major Office Projects to be delivered in 2010# name Address glA, sqm developer

1 Esplanada BC 1 sportyvna st 48,000 Mandarin Plaza

2 HPBC II BC(phase 2) 12 Amosova st 17,000 IsA Prime developments

3 River Plaza BC(phase 2) 9 naberezhno-Khreshchatytska st 16,000 IsA Prime developments

4 Business Center on novokonstantynivska st 18 novokonstantynivska st 12,000 IsTIl Real Estate

5 Business Center on Kharkivske Highway (phase 2) 201-203 Kharkivske Highway 10,200 RElE

6 Eleven 11 solomenska st 10,000 Ukrainian developer

7 Forum Kinetik BC 12 lyvarskiy lane 9,896 FMg


dEMAndCumulative take up in 2009 totaled around 85,000 sqm, 23% down comparing with 2008 and 66% down comparing with 2007.

As of the end of 2009, total occupied office space in Kyiv amounted to 860,000 sqm that are in line with the first half of 2008. Thereby, the space occupied by tenants actually did not adjust downwards during 2009; at the same time upwards adjustment was not observed as well.

Take up of new supply in 2009 resulted in most cases from redistribution of existing demand but not due to new market entries (demand of mentioned companies amounted to only 1% of cumulative take up).

The most active tenants and buyers are foreign (International and Russian) companies, share of their take up increased from 64% in 2008 up to 83% in 2009, whereas a share of Ukrainian companies, on the contrary, decreased from 36% to 17%.


OFFICE PREMIsEs

Bul’v.Lesi Ukrainky

pr-t 40-ric

hchia Zhovtn

ya

Chervonozorianyi prosp.

Аkademika Schusieva

Bohatyrs’ka

Kil’tseva doroha

prosp.Peremohy

Ole

ny T

elih

y Mel’nykova

Kikvidze

Naberezhne Shose

Frunze

Bratyslavs’ka

bul’v.Perova

pros

p.Yu

riia

Hah

arin

a

Metro bridge

Paton’s b

ridgeChervonoarm

iis’ka

2810

29255

24

96

4

13

2116

15

81711

14

1822

23

12

1

2

20 19

32

33

3034

3

31

7

6

9

36

37

5

26

1

2

bul’v.Tarasa Shevchenka

8

3

277

354

GLA: >20 001 sqm

Delivered up to 2009

Delivered in 2009

Pipelined in 2010-2011

CBD

1

1

1

1

1 GLA: 8 000-20 000 sqm

Borschahivs’ka

Major Existing and Projected Top End segment Business Centers, Kyiv


Take-up, by Type of Transaction*


Relocation and ExpansionMarket Entry

0 2005 2006 2007 2008 2009

20

40

60

80

100

Landlords of office premises gave preference to international tenants due to their potentially higher economic security, being consentient with a bit lower rental rates to secure cash flow and minimize the risk of vacancy increase.

As it was expected, extremely passive demand was exposed by companies of financial sector: relative share of financial sector in total take up amounted to 6% vs. 35% and 41% in 2008 and in 2007 correspondingly. Poor activity of this sector is caused by structural reforms of banking system in 2009 together with rotation of players. According to forecasts of experts, banking system strengthening is expected in 2010-2011, after that demand from financial sector will express gradual growth.

The largest scope of professional office premises lease transactions was registered for office premises exceeding 1,000 sqm (approx. 80% of total take up). Ukrainian companies’ take up was characterized by small-scale premises transactions (not exceeding 500 sqm), whereas International Companies concluded agreements in most cases for middle scale space (1,000 – 3,000 sqm).

By the type of tenants’ business activity, absolute champion of professional office premises take up in 2009 was IT industry (32.5% of total lease transactions), FMCG and retail sector (13.7%) and telecommunication companies (11.3%).

Companies with steady-state business did not miss the chance to upgrade the class of occupied office space not

* - Based on information of Kyiv Research Forum (KRF) and internal data of Colliers International. does not include information about companies which a) became out of business (this area came back to landlords), b) contracted rented area without relocation or c) moved to the non-classified premises.


Major Existing and Projected Top End segment Business Centers, Kyiv# name glA, sqm # name glA, sqm

Before 2007 2008

1 Forum BC 23,000 26 BC on Horkoho st. 16,000

2 Podol Plaza BC 23,000 27 vector BC 15,000

3 Horizon Park BC (Phase 1) 16,000 28 leonardo BC (Phase 2) 14,840

4 Renaissance BC 15,000 29 Illinskiy BC (Phase 3) 14,400

5 Illinskiy BC (Phase 1) 14,430 30 BC on Fizkultury st. 11,000

6 Europe Plaza BC 14,000 31 BC on R. Okipnoi st. 10,580

7 Kubic Center (Phase1, 2) 13,400 32 Prime BC 9,460

8 Horizon Tower BC 13,000 33 BC Mikom Palace 9,420

9 Inkom 12,700 TOTAl before 2009 985,000

10 leonardo BC (Phase1) 10,000 2009

11 IOHC 10,000 34 Protasov BP 20,300

12 stand BC 10,000 35 Horizon Park BC II (Phase 1) 14,850

13 Artyom BC 9,870 36 BC on Mahnitogorska st. 8,660

14 Olimpiyskiy BC 9,275 37 BC Prague 8,500

15 BC on Pochayninska st. 9,000 TOTAl for 2009 110,000

16 Kontraktoviy BC 8,000 Expected openings in 2010 - 2011

17 Kanyon BC 8,000 1 Kontinental BC 48,000

18 FIM BC 8,000 2 Alliance Plaza 46,000

2007 3 Topaz BC 20,000

19 Parus BC 54,000 4 Horizon Park BC II (Phase 2) 18,250

20 Eurasia BC 25,000 5 Toronto Kyiv BC 18,000

21 BC on verkhniy val st. 13,800 6 River Plaza (Phase 2) 16,000

22 Farehnheit BC 10,600 7 BC on novokonstantynivska st. 12,000

23 KOMOd 10,000 8 BC on solomenska st. 10,000

24 grand step BC 9,500 9 Forum Kinetik BC 9,900

25 Illinskiy BC (Phase 2) 8,250 TOTAl for 2010-2011 200,000


Distribution of Take-up, by Nationality*


International CompaniesRussian Companies

Ukrainian Companies

67.6

15.6 16.8

exceeding previously adopted budgets as due to rental rates decrease current fee for A and B+ class premises almost equals to pre-crisis rates for В- and С class correspondingly.

Basing upon sample data regarding the companies, around 85% of all office transactions were the expansion of occupied space, in addition 49% of all lease transactions were characterized by relocation with BC class improvement.

REnTAl RATEs And vACAnCy Starting from the second half of 2009 there was observed a trend of gradual returning to long-term lease agreements. Thereby, in the first half of 2009 and Q4, 2008 the Landlords agreed to fix reduced rental rates for a short period of time, so to have an option of price policy reviewing as office market recovers. At the same time, tenants aimed to fix the term of agreement for the period of 5-7 years. As an intermediary solution, landlords and tenants conclude 3 year lease agreements with higher indexation * - Based on information of Kyiv Research Forum (KRF)

and internal data of Colliers International. does not include information about companies which a) became out of business (this area came back to landlords), b) contracted rented area without relocation or c) moved to the non-classified premises.


OFFICE PREMIsEs

Distribution of Take-up, by Sectors*


Financial SectorNon-Financial Sector

0 2004 2005 2006 2007 2008 2009

20

40

60

80

100

Major office lease transactions, 2009

Tenant Type of ActivityArea (sqm)

Building location

sport life Entertainment 7,000 Protasov BP nC*, Close to CBd

Astelit/TM life:) Telecommunications 6,423 HPBC II (phase 1) nC, Close to CBd

global logic IT 5,690 Protasov BP nC, Close to CBd

ECO Retail 4,500 Business Center, 24 Polyova st nC

luxoft IT 4,000 IRvA BC nC

Oriflame FMCg 3,600 livoberezhniy BC nC

Ciklum IT 3,500 HPBC II (phase 2) nC, Close to CBd

Raiffeisen Bank Aval Finance 3,000 Parus BC CBd

global logic (expansion) IT 3,000 Protasov BC nC, Close to CBd

sanofi Aventis Pharmaceutics 2,623 Prime BC CBd

Huawei Telecommunications 2,036 Irva BC nC

siemens (OsRAM) IT 2,000 HPBC I nC, Close to CBd

sunInbev FMCg 2,000 Fahrenheit BC CBd

ABB Manufacturing 1,826 Protasov BP nC, Close to CBd

HP IT 1,538 Karat BC nC, Close to CBd

Boehringer Ingelheim Pharmaceutics 1,510 Business Center , 26 Turhenivska st CBd

Honeywell IT 1,500 Irva BC nC

serna (glencore) Agricultural trading 1,382 leonardo BC CBd

Basf Manufacturing 1,200Business Center, 9 naberezhno-Khreshchatytska st

CBd

suntrade (Bunge) Manufacturing 1,067 leonardo BC CBd

3M Manufacturing 1,000 HPBC II BC (phase 1) nC, Close to CBd

Forum Bank Finance 1,000 Business Center , 23 gagarina st nC

Hoffman la Roche Pharmaceutics 717 leonardo BC CBd

Clin star Pharmaceutics 600 Irva BC nC

Metropolia service Providing 598 Europa Plaza BC CBd

Wnd IT 589 Eurasia BC CBd

Wnd Construction&Estate Property 530 Business Center , 3a leyptsihska st НЦ

dogus Construction&Estate Property 527 Karat BC nC, Close to CBd

Mars FMCg 500 Podol Plaza BC CBd

OsCE Embassy 500 B. Khmelnytskogo CBd

Austrian lawyers service Providing 500 Business Center , 11 Myhailovska st CBd

source: Colliers International, January 2010 *nC –non-central location **CBd – central business district

Distribution of Occupied Office Premises, by Size*


501-10001001-2000

<500>30012001-3000

9.9

20.2

13.9

9.3

46.5

49% of all lease transactions were characterized by reloca-tion with BC class improve-ment.

* - Based on information of Kyiv Research Forum (KRF) and internal data of Colliers International. does not include informa-tion about companies which a) became out of business (this area came back to landlords), b) contracted rented area without relocation or c) moved to the non-classified premises.


Office Lease Transaction Type, Size*


With contractionTo similar area

With expansion

RELOCATION 2009

84.9

11.73.4

Office Lease Transaction Type, Quality*


Moving to the lower classMoving to the same class

Moving to the higher class

RELOCATION 2009

60.5

10.7

28.8

2.7

Office Lease Transaction Type, Combined*


RELOCATION 2009

With expansion and quality decreasingWith expansion in the same class

With expansion and quality improvement

To similar area with quality improvementWith contraction and quality improvement

To similar area in the same class

48.8

8.6

19.7

16.7

3.5

Typical Office lease Conditions in 2009Term of lease Agreement Typical lease term is 3y. At the same time, lease

agreements for 5+ years become more popular

Prolongation Option yes

Currency of Rental Payments Usd/sqm/month, (UAH/sqm for Class C)

Rent Payable in Advance Monthly or quarterly

security deposit/ Bank guarantee Rental payment for 1-2 months

Indexation of Rent 4–10% annually, depending on currency of agreement

Operating Expenses $4–6/sqm /month, net of vAT

Handover Condition (landlord’s Work) Partially equipped premise with open-space lay-out (sometimes including suspended ceiling with lighting and floor coating)

Method of Measurement BOMA standards have become popular among landlords of professional buildings

standard Remuneration for Agent 8.33–16.00% of annual rent, net of vAT

notary Fee 0.2% of the contract value

Tax liabilities of Tenant as % from Rent vAT of 20%

Parking Fee (net of vAT) ground parking: $40–120/lot/month;Underground parking: $100-350/ lot/month

Parking Ratio City center: 1:100 – 1:250 sq m.Outside the city center: 1:50 – 1:100 sq m


rate, i.e. 4 - 10% instead of previously ones 2-4% per year.

Decline of rental rates for all classes of office premises was abrupt, not gradual. The most significant decrease was registered from the end of December 2008 and up to February 2009: fall of rental rates amounted to 30-50% in all classes in USD comparing to the level of September 2008.

However, from March 2009 the pace of decline slowed down and almost stopped by the end of Q3, when majority of Landlords reached minimal accepted rental rates. Decline in the second and third quarters amounted to 20% in USD comparing to the level of September 2008.

Thus, maximum decline of rental rates comparing to pre-crisis level amounted

to 60% for Class A and 68-69% for classes C and B correspondingly.

Some Landlords of Class C office centers fixed rental rates in national currency; at the same time, rental rates for Class A and B were traditionally set in USD.

By analogue with rental rates, vacancy rate of office premises sharply increased in Q4, 2008, having jumped by the end of the year 18% and reached 20-21% in the mid of 2009. As of the end of 2009, vacancy stabilized at the rate of 20%.Vacancy rate dynamics can be described as uneven, and exposed various rates in different classes of office premises. Thereby, in the second half of 2009 a moderate decline of vacant space in A class was registered, while in premises of B and C class one can rather observe stabilization.

* - Based on information of Kyiv Research Forum (KRF) and internal data of Colliers International. does not include information about companies which a) became out of business (this area came back to landlords), b) contracted rented area without relocation or c) moved to the non-classified premises.


OFFICE PREMIsEs

Considering the fact that general rate of occupied office premises was approximately the same during the whole year, the main reason for the rise of vacancy rate and further decline of rental rates was new office centers entering the market. First tenants were offered favorable commercial terms that resulted in wrong impression of rental rates decline. However, along with occupancy rate increase, commercial terms achieved fair market rates.

Assuming the fact that average vacancy rate on the market is relatively high, the level of occupancy in particular business center varies due to difference in quality and commercial terms. The difference in vacancy rate of business centers included in the same class may vary from 0-5% up to 80-100%. Thereby, occupancy rate increase in office premises of higher quality (including business centers

delivered in 2009) resulted from tenant’s relocation from less professional objects. FORECAsT* g Basing upon current rental rates,

market players’ intentions and also actual demand and new supply we can conclude that by the end of 2009 office real estate market achieved its bottom line.

g All segments will witness the strengthening of rental rates in 2010. Taking into consideration the shortage of A class office premises supply, this segment may be characterized by insignificant growth of rental rates due to considerably higher indexation of annul rental rates and absence of favourable commercial terms on behalf of Landlords for the prospective tenants in new lease agreements

Asked Rental Rates for Kyiv Office Premises

Class 1 september 2008 1 January 2010 Range, %

Class А $70-85 $28-35 58-60%

Class В $40-65 $13-20 67-69%

Class С $25-40 $8-13 67-68%


Vacancy and Prime Rental Rates 1997-2010

Source: Colliers International, January 2010Class А

0 1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008(3Q)

2009

2010F

10

20

30

40

50

60

80

70

0%

5%

10%

15%

20%

30%

35%

40%

45%

25%

$/sq

m/m

onth

Vac

ancy

Rat

e

Vacancy Rate

Vacancy Dynamics, by Class 2009


10%1 January 2009 1 January 20101 July 2009

12%

14%

16%

18%

20%

22%

24%

Vac

ancy

Rat

e

Class A Class B and С


g We may expect further competitive expansion of Landlords. This process will be characterized by two trends: part of Landlords is going to make an accent to the advanced service and quality of premises and the second part is going to provide the policy of price reduce.

g The number of pre-lets signed before one year or more in advance of project completion date continue to keep low level, as a result of distrust to developers’ announcements regarding timely delivery of the projects and available vacant office space.

g It is very likely that the market will see only those business centers developers of which possess sufficient funding themselves.

g The forecast of some market players regarding tenants' relocation during crisis period first of all from premises of high quality proved to

be false. Basing upon real situation, only minor share of companies left Ukrainian market due to economic crisis, while majority companies survived and continue business activity on the market having optimized their structures and adjusted long-term strategies in line with new situation. Taking into consideration that rental rates of office premises considerably fell down comparing to pre-crisis level in all segments, companies with steady-state business get the opportunity to improve office premises quality, not exceeding previously adopted budgets. That is a reason for stable demand for office objects of high quality in 2010.

We may expect further competi-tive expansion of Landlords. This process will be charac-terized by two trends: part of Landlords is going to make an accent to the advanced service and quality of premises and the second part is going to provide the policy of price reduce.

* - The forecast is based on economic data available. In case the macroeconomic conditions are not accomplished, the forecast outcomes might be too optimistic or pessimistic.

IndUsTRIAl PREMIsEs


MARKET OvERvIEWFirst half of 2009 was characterized by instability, which started in the fourth quarter of 2008 due to economic downturn. Abeyance was the main feature of the market during the first quarter of 2009, resulted in developers’ and tenants’ adaptation to the new market conditions.

Starting from the second half of 2009, the deceleration of industrial output was observed in Kyiv region, which allows forecasting the gradual increase of main tenants’ of warehouse facilities goods turnover. However, significant changes in the industrial market should not be expected earlier than 2010-2011.

TREnds g Insignificant decline in vacancy level

for warehouse facilities as a result of decrease of new supply of modern warehouse space in 2009.

g Stabilization of rental rates for class A and B warehouse facilities.

g Further slowdown of construction pace of new speculative warehouse objects and postponement of new projects delivery until 2010.

g Further decline of rental rates for low quality warehouses space.

g In case of economy stabilization, there is a tendency for increase of lease agreements’ terms.

sUPPlyDuring 2009, the volume of new supply of high quality warehouse space amounted to 87,000 sqm, what is 77% less than new supply during 2008. Therefore, the total stock of modern warehouse premises reached 806,000 sqm by the end of 2009. It is worth mentioning that cumulative supply of high quality warehouse space commissioned during 2009 is by 70,000 sqm lower comparing

to the previously announced volume, which is a result of construction cessation of the projects, previously planned for delivery in 2009.

Four warehouse facilities were delivered to the open market in 2009: g the first phase of Olvita warehouse

facility for frozen foods (8,500 sqm of total area),

g the second phase of BF Warehouse Facility (36,000 sqm of total area),

g MMK Logistic Center (24,500 sqm of total leasable area),

g Top-Trans (17,500 sqm of total leasable area).

In spite of the overall decrease in demand, several companies have commissioned warehouse facilities for owner occupation during 2009; therefore, total stock of warehouse space for owner occupation amounted to 35,600 sqm or 41% of the total supply.

PERsPECTIvE sUPPlyOverall, we estimate that speculative supply in 2010 will amount from 80,000 sqm to 130,000 sqm of modern warehouses space. Warehouse facilities built for owner occupation will not exceed 10,000 sqm.

Among Class A projects announced for delivery, the first phase of Kyiv Logistic Park warehouse facility (approx. 15,000 sqm of GLA) and Terminal Brovary logistics facility (approx. 49,200 sqm of GLA), which was planned for the delivery in January 2009, the construction of which was postponed for an indefinite time, have high probability to be commissioned in 2010.

Class B premises scheduled to open in 2010 will be represented by Impeco

Kyiv Delivery and Pipeline, Warehouse Segment


Total Supply as of beginning of the year

New Supply during the year

0 2005 2006 2007 2008 2009 2010F

200

400

600

800

1000

thnd

, sqm

During 2009, the volume of new supply of high quality warehouse space amounted to 87,000 sqm, what is 77% less than new supply during 2008.


2

5 4

13

6

19

1

45

8

216

20

2122

26

2

23

1

2

3

1

1

36

4

5

924

13

14 615

119

8 171025

2312

18 4

7

Е-373, M-07Kovel Highway

(Poland)

Е-40, M-06Zhytomyr Highway(Hungary, Slovakia)

Borispol Airport

Е-95, M-01Chernihiv Highway

(Russia, the Baltic States)

M-04Dnipropetrovsk Highway

Е-95, M-05Odesa Highway

Е-40, M-03Kharkiv Highway

(Russia)

Projects commissioned before 2009

Commissioning in 2009

Warehouse properties

Announced to be commissioned in 2010

Speculative supply

Owner occupied

Completion of construction by 2014 Completion of construction by 2017Completion of construction by 2017

New Ring Road

Road interchange


Major Existing Projects

# PropertyArea, sqm

Commissioning # PropertyArea, sqm

Commissioning

before 2009 for Open Market

1 Mirage-1 (gostomel) 15,000 2006 14 Brokbusiness (gostomel) 3,000 2007

2 FIM Center (Chaika) 23,000 2006 15 Mirage-2 (phase 2,3) 14,000 2008

3 Unilogic Park/Merx Brovary (phase 1) 15,000 2006 16 West gate logistic (phase 1,2) 78,000 2008

4 l-town (Obukhiv) 10,000 2006 17 Prommash Brovary (phase 12) 9,000 2008

5 Obukhiv-II (Obukhiv) 10,000 2006 18 BF Warehouse Facility (phase 1) 35,000 2008

6 Mirage -2 (phase 1) 7,000 2007 19 MlP-Chaika (phase 1, 2 and 3) 98,000 2008

7 KMP (phase 1) 9,300 2007 20 Metal-Holding 4,800 2008

8 Prommash Brovary(phase 1) 4,600 2007 21 logistic Park Kopylov 27,000 2008

9 WWM Center 10,000 2007 22 Komodor 59,500 2008

10 Omega-1 15,000 2007 23 Plazma logistic 20,000 2008

11 logistic Park East 1 18,000 2007 24 Customs Terminal 7,800 2008

12 East gate logistic (Boryspil) 40,000 2007 25 Energoprylad 11,000 2008

13 Andakta (gostomel) 5,200 2007 26 Avgust Plus 7,000 2008


Major Existing and Pipelined Projects

IndUsTRIAl PREMIsEs


logistics complex with the total leasable area of 8,400 sqm, the commissioning of which was delayed from 2009 and Tehnoyarmarok - 1,2 (38,380 sqm of total GLA), and two projects with the total area of 18,800 sqm.

Share of Class B warehouse premises will considerably decline in 2010 reaching 6%, which indicates that in spite of economic downturn, foremost developers are interested in realization of high quality warehouse facilities.

Ukrainian developers’ share in cumulative supply of warehouse space announced for delivery in 2010 will amount to 51%. Traditionally, significant share of local developers is explained by the fact that most of the land plots, favorably located for industrial projects development, are

owned by local developers. International developers’ share in new supply that is expected to be commissioned in 2010 constitutes 49% including the projects, delivery of which was postponing starting from 2008.

The majority of projects scheduled for delivery in 2010 are located in the direction of Chernihiv, Е-95/М-01 highway (50%). Also significant part of projects is located on the right bank – in the direction of Kovel (36%) and on the Ring Road, in the vicinity to Vyshneve (14%). Notably, commissioning of new projects is not planned in the direction of Zhytomyr, Е-40/М-06 highway in 2010, which was one of the most popular locations during the previous years.

Major Existing Projects# Property Area, sqm Commissioning

before 2009 Owner Occupied1 Kuehne&nagel (gostomel) 17,000 20062 Raben 10,000 20063 Asnova 10,000 20064 UvK Over10,000 20065 skandinavia Refrigerated Facility 2006

6Kviza (phase 1) (Martusovka, Boryspil Ring Road)

10,000 2007

7 Biocon (phase 1) 10,000 20088 ICT 8,500 20089 Raben 20,000 2008

in 2009 for Open market1 logistic Center ММК (Brovary) 25,000 20092 Olvita 8,500 20093 Top-Trans 17,500 20094 BF Warehouse Facility (phase 2) 36,000 2009

in 2009 Owner Occupied1 Falbi 12,000 20092 Ice Terminal 18,000 20093 Raben 5,600 2009

Projects Announced to Be Commissioned in 2010 for Open Market 1 Kyiv logistic Park (phase 1) 15,000 20102 Terminal Brovary 49,200 20103 logistic complex 14,000 20104 Tehnoyarmarok-1 (Bucha) 10,380 20105 Tehnoyarmarok-2 (vorzel) 28,000 20106 logistic complex 4,800 20107 Impeco 9,000 2010


Developers of Announced Projects for 2010 (by Origin)


InternationalUkrainian

49% 51%

Announced Supply by Major Highways, 2010


Е-95/M-01 ChernihivЕ-373/М-07 Kovel

Ring Road

36

50

14

Demand Structure, 2009


Retail

Distributors

TelecomunicationsFMCGOther

Logistics

Manufacturer

18%

33%14%

21%

7%5%

2%


dEMAndDuring 2009, total amount of requests for warehouse property (demand) amounted to approx. 430,000 sqm, which is 50% lower comparing to indicators recorded in 2008. The major portion of requests was originated by companies, interested in moving from warehouse facilities into more qualitative ones under condition of lower or similar rental rates .

Comparing to 2008, demand structure has also changed drastically: currently, the larger share of the warehouse premises is occupied by retail operators (33% in 2009 compared with 22% in 2008), followed by distributors (21% /14%), and logistic operators (18% /39%). The manufacturers’ share decreased from 19% to 14%, whereas telecommunications gradually enlarged (from 5% to 7%).

The highest demand was observed for Zhytomyr and Boryspil directions. Warehouse premises in Brovary also enjoyed high demand.

Overall rental transactions in 2009 amounted to 162,157 sqm that equals to 38% of total registered requests. To com-pare, 260,000 sqm of quality warehouse facilities were leased out in 2008.

The retail operators, distributors and logistic operators occupy the largest portion in take-up structure, which cumulatively generated within 88% of totally leased premises in 2009. Moreover, the significant increase of space required by retail operators and distributors is worth mentioning. Logistic operators has reduced their portion thrice – to 20% in new absorptions.

REnTAl RATEs And vACAnCyIn the end of 2008 and first half of 2009 the growth of vacancy level weakened landlords positions, which resulted in further reduction of rental rates in new lease agreements. Within mentioned period, the maximum decline of rental rates achieved 56% compared to the mid of 2008.

At the mid of 2009, rental rates for the short-term agreements dropped the most significantly - to $6-6.5 per sqm/month (here and further rental rates do not include VAT and service charges). Decrease of rental rates for long term agreements was slower and amounted to $6.5-7.5 per sqm/month .

Based on the closed transactions, an average rental rate for Kyiv warehouse market was $6.7 per sqm/month. Overall, rental rates slacken the decline rate in the 2nd quarter, and reached the level acceptable for landlords in autumn of 2009.

For the short term agreements the landlords could accept currency risks, whereas for the long term agreements the mentioned framework was unattractive for them.

The portion of vacant warehouse

facilities at the end of 2009 has lessen to 24% due to the delayed demand, taking into consideration that the vacancy rate was about 30% in the first half of 2009 . The increase of vacancy level was mostly caused by increase of speculative supply at the beginning of 2009.

Rental rates presented in this Report are given net of VAT and operational expenses.

FORECAsTs*g Cessation of construction of new

industrial facilities until restoration of project financing.

g Renewal of insignificant investors’ and new international companies’ interest in Ukrainian logistic market is expected not sooner than Q3-Q4 2010, following the improvement of macroeconomic conditions in the country.

g Increase in demand for high quality warehouse space is possible due to the relocation or expansion of established market players.

g New warehouse developers will not enter the market until the restoration of low credit costs and the assurance of the profitability of warehouse projects.

g Rental rates will most likely remain stable during 2010 due to the limited future supply of high quality warehouses facilities.

g Vacancy level could slightly decrease during the second half of 2010.

g Resumption of regional developers’ activity is possible starting from Q3 2010.

Take-up by Tenant Type, 2009


DistributorsPharmaceuticsTelecomunicationsManufacturer

Logistics

Retail

20

2246

55

1



RETAIl PREMIsEs

REvIEWEconomic recession started in Q4, 2008 had negative influence upon the purchasing power and consumers’ preferences resulted in remarkable decrease of all types of goods’ turnover excluding FMCG (Fast Moving Consumer Goods).

During the first half of 2009 both tenants and landlords made efforts to adjust to new economic realities, striving to keep business profitability in fluctuating economic environment. Mostly negative trends were dominating during this period: decrease in demand for retail premises; some retailers froze further development or even left regional cities; this process was characterized by stores close down and rental rates downturn as well; development of new shopping centers was temporarily put on hold both in Kyiv and regions.

Starting from Q3, however, rental rates and vacancy in Kyiv and cities with population over 1 million expressed strengthening trends. Limited stock of high quality retail premises, successful business processes optimization and retargeting of key retailers at “medium” and “medium minus” price segments enabled key players to adjust promptly to the new market conditions.

EXTERnAl RATIngsAccording to Global Retail Development Index 2009 (GRDI), published by AT Kearney Rating agency, Ukraine kept its previously hold 17th position.

Risks growth was registered in two groups of indicators: rise of country risks due to permanent political instability; market advantages decreased due to devaluation of national currency. At the

same time, growth of those risks was balanced by strengthening of the time factor –costs for market entry were significantly reduced thanks to declining prices for construction works and land plots. At the same time, market saturation with retail premises kept low level due to suspension of new shopping and entertainment center construction in the regions.

TREndsg Adaptation of Shopping/ Shopping

and Entertainment Centers projects to new economic environment (reduction of area, number of levels; absence of multifunctional use option); active search of strategic investors/ financial partners; local and foreign developers incline to achieve compromises.

g Development and construction beginning of limited number of projects, by developers possessing sufficient equity or foreign investments.

g Demand revival for retail premises in successful shopping centers and main shopping streets of Kyiv.

g Further retargeting of retailers at brands/products of “medium” and “medium minus” price categories.

g Strengthening of rental rates in Kyiv shopping centers.

g Decrease of vacancy rate in shopping centers of Kyiv and regional cities of more than 1 million people

nEW sUPPyNew supply of retail premises in 2009 amounted to 119,300 sqm, that is 34% up to new supply of 2008. Thus, total stock of gross leasable area of retail premises in the capital slightly exceeded 550,000 sqm, or around 200 sqm per 1,000 inhabitants* (as compared with Western

New supply of retail premises in 2009 amounted to 119,300 sqm, that is 34% up to new supply of 2008.

Retail Trade Potential, Ukraine (Y-O-Y)

Source: Focus Economics, January 2010

-15% 1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010F

2011F

-10%

-5%

0%

5%

10%

15%

20%

25%

35%

30%

Household Real IncomeRetail Trade Turnover

Household Consumption


Europe countries this index equals to 800 – 900 sqm per 1,000 inhabitants.)

In 2009 Kyiv market witnessed opening of three shopping centers focused on furniture and household goods (Specialized Retail Centre): the first phase of SC Domosfera, SC Araks and SC 4Room, targeting at customers with different income rates. Gross leasable area of mentioned SC amounts to 70,300 sqm or 60% of total new supply of 2009.

The year was marked by the opening of the first phase of Dream Town shopping and entertainment center (GLA – 45,000 sqm, located in one of the most densely populated residential district of Kyiv - Obolon). Among the advantages of this center we can mention: excellent location, providing high pedestrian accessibility, direct proximity to subway, and top grade tenant mix. The disadvantages are narrow

shape of the building and lack of parking lots in comparison with property area. Delivery of the first phase of Dream Town added 38% to the new supply.

The remaining 2% of new supply of retail premises in 2009 were represented by delivery of the 4th phase of Bilshovyk mixed-use facility. The largest part of the premises is occupied by multiplex movie theater. PIPElInEd sUPPyAccording to announcements, in 2010 Kyiv market will see the commissioning of several shopping/ shopping and entertainments centers of total leasable area up to 170,000 sqm. The most significant projects are expected to be the second phase of Sky Mall shopping and entertainment centre (GLA ~ 45,000 sqm) and Esplanada (GLA ~ 32,000 sqm)

Kyiv Delivery and Pipeline, Retail Segment


Total Stock, beginning of the yearNew Supply

1000

sqm

0 2001

2002

2003

2004

2005

2006

2007

2008

2009

2010F

2011F

100

200

300

400

500

600

700

800

The global Retail development Index 2009, A.T. Kearney

Country Risk

Market Attractiveness

Market saturation

Time pressure

2004 (11th position in rating)

43 32 83 79


46 34 82 90


42 37 76 81


41 43 44 88


42 40 38 60


30 33 46 87

0 = high risk 0 = low attractiveness 0 = saturated 0 =no time pressure

100 = low risk 100 = high attractiveness 100 = not saturated 100 = urgency to enter

source: A.T. Kearney, 2009

Limited stock of high qual-ity retail premises, successful business processes optimization and retargeting of key retail-ers at “medium” and “medium minus” price segments enabled key players to adjust promptly to the new market conditions.

* по данным Комитета Статистики Украины на 01.11.2009 г. население г. Киев составляет 2,78 млн. жителей

According to Global Retail Development Index 2009 (GRDI), published by AT Kearney Rating agency, Ukraine kept its previously hold 17th position.


RETAIl PREMIsEs

new supply of Retail Premises in KyivProperty name Address developer gBA, sqm glA, sqm

shopping centers commissioned in 2009dream Town (1st phase) Obolonskyi Ave. stolytsa 83,500 45,000Araks 110 velyka Okruzhna st. Ukrainian developer 30,000 27,000domosfera (1st phase) stolychne Highway devision 30,500 22,3004Room 6 velyka Okruzhna st. Eurasia-Ukraine 40,000 21,000Bilshovyk (4th phase) 6 getmana st. Megamarket - 4,000Total 119,300

shopping centers pipelined for delivery in 2010sky Mall (2nd phase) 2 Henerala vatutina Ave. Panorama group 67,000 45,500Marmalade 1 Industrialna st. Ukrainian developer 47,000 33,500Continental (Esplanada) 1 sportyvna sq. Tri O 41,000 32,000Promenada Park (1st phase) 4 v. Okruzhna st. Promenada Center - 23,000**Rainbow 1а syvashska st. n-M 25,000 19,000Mega-City 19 Kharkivske Hwy. Ukrainian developer 25,400 13,700sC on Balzaka st 91/29 Balzaka st. steltex Investments 5,300 3,710Total 170,410

shopping centers pipelined for delivery in 2011dream Town (2nd phase) Obolonskyi Ave. stolytsa 83,500 45,000Итого 45,000

** -excluding existing hypermarket Auchansource: Colliers International, January 2010

Major Existing and Projected for 2009-2010 shopping Centers, Kyiv# name glA, sqm # name glA, sqm

Before 2006 2007

1 Karavan 38,000 24 sky Mall (dniprovska Prystan) 18,000

2 Renovated department store Ukraina 24,000 25 Materik 15,800

3 Magellan 22,400 26 Komod 10,000

4 Alta Center 17,000 2008

5 Metropolis 15,000 27 Blockbuster 26,800

6 Promenada Center 15,000 28 Kvadrat on Perova (Avrora) 19,100

7 Piramida 12,000 29 Materik on dniprovska naberezhna 18,400

8 Kvadrat on Borshchahivka st. 11,800 30 Bilshovyk (3rd phase) 6,000

9 Aladdin 10,200 31 darnitsa 6,000

10 gorodok 10,000 32 Karavan (4th phase) 2,000

11 Metrograd 10,000 2009

12 globus-II, III 9,600 33 dream Town (1st phase) 45,000

13 globus-I 9,000 34 Arax 27,000

14 Makros 8,500 35 domosfera (1st phase) 22,300

15 Central department store (TsUM) 8,000 36 4 Room 21,000

16 dytyachyi svit 8,000 **Total stock as of 1 January 2010 554,100

17 Arena City 8,000 Pipelined for 2010-2011

18 Mandarin Plaza 7,500 1 sky Mall (phase 2) 45,500

19 Kvadrat on lukianivka 6,200 2 dream Town (phase 2) 45,000

20 Europort 6,000 3 Marmalade 33,500

2006 4 Esplanada 32,000

21 Bilshovyk 21,200 5 Promenada Park 23,000

22 Plazma 8,800 6 Rainbow 19,000

23 UA global 7,500 7 Mega City 13,700

**Total new supply in 2010-2011 215,410

**-exsting retail premises supply including shopping centers with glA less than 6 000 sqm, that are not mentioned in the list.source: Colliers International, January 2010


Among major advantages of the second phase of Sky Mall can be singled out: professional concept, appropriate tenant mix (new brands will be represented in Ukraine), and sufficient number of parking lots (for 4,000 cars). However, complicate pedestrian accessibility and regular traffic congestions at the access way to Sky Mall can be state as drawbacks of the project.

Shopping and entertainment center Esplanada, situated within 5 minutes of walking distance from the main street of Kyiv, will most likely become the most popular centrally-located development for the nearest future. The principal

advantages of this SC are central location, well-balanced concept and proximity to the metro station; the major disadvantages comprise insufficient amount of parking lots and intricate layouts. It is difficult enough to forecast the volume of perspective supply in 2011. Taking into consideration the past years experience, complicated economic circumstances and political instability, the delivery of some objects may be rescheduled from 2010 to 2011.

At the same time, construction of new projects to be started in 2010 most likely will not be delivered until the end of 2011. Thus, new supply in 2011 may amount

GLA: > 25 001 sqm

Delivered up to 2009

Delivered in 2009

Pipelined in 2010-2011

1

1

1

1

1 GLA: 6 000 - 25 000 sqm

pros

p.Aka

demika

Hlus

hkov

a

prosp.40-richchia Z

hovtnia


prosp. 50-ty richchia Zhovtnia

Аkademika Schusieva

Bohatyrs’ka

Mar

shal

a H

rech

ka

Luhova

prosp. PeremohyKil’tseva D

oroha

Kil’tseva Doroha

Kil’tseva Doroha

prosp.Nauky

prosp.Peremohy

Borschahivs’ka

Ole

ny T

elih

y

Stetsenka

Mel’nykova

Kikvidze

Sche

rbak

ova

Chervonoarm

iis’ka

Frunze

Bratyslavs’ka

bul’v.Perova

prosp.M.Bazhana

Pivdennyi bridge

Nad

dnip

rian

s’ke

sho

se

Kharkivs’ke Shose

pros

p.Yu

riia

Hah

arin

a

Brovars’kyi prosp

Metro bridge

Paton’s b

ridgeV

yshhorods’ka

pros

p.A

kade

mik

a Pa

lladi

na

bul’v.Lesi Ukrainky

Industrial’na


Major Existing and Projected for 2009-2010 shopping Centers, Kyiv

The most significant projects are expected to be the second phase of Sky Mall shopping and entertainment centre (GLA ~ 45,000 sqm) and Esplanada (GLA ~ 32,000 sqm)


RETAIl PREMIsEs

to 45,500 sqm (excluding the objects announced for 2010 but with probable rescheduling of delivery term).

REgIOnsDelivery of many regional projects was postponed for later periods, while development of many objects at early construction stages or at the stage of "project" was being put on hold.

In 2009 the market witnessed the opening of Riviera Shopping City (GLA – 75,000 sqm) in Odessa, Continent shopping center (GLA ~ 16,000 sqm) in Donetsk, specialized furniture SC 6th Element (GLA – 8,000 sqm) in Odessa. Shopping and entertainment center Apollo (GLA ~ 20,000 sqm) located on Tytova St., Dnipropetrovsk and SC Depot Centre (GLA ~ 16,000 sqm) situated on Golovna St., Chernovtsy.

The second and third phases of Global UA retail and entertainment centre (of total area 8,000 sqm and 40,000 sqm correspondingly) were commissioned in Zhytomyr (~ 300,000 inhabitants), developed by Ukrainian group of companies Merx.

As of the moment, it is the only shopping centre in the city possessing an excellent location, professional concept and competent tenant mix.

The opening of Riviera Shopping City, the first regional shopping centre in Odessa, was the most significant event on the regional markets. Its principal advantages comprise strong anchors as Real, OBI, Zara, Marks&Spencer, Comfy, Eurasia and IMAX cinema, professional concept, excellent visibility and transport accessibility, and ample number of parking lots (for 2,400 cars). Thanks to

above mentioned factors and appropriate tenant-mix (many brands opened in this SC their first stores in Odessa), Riviera Shopping City has every chance to become the most popular retail centre among both citizens and guests of Odessa.

dEMAndMarket share was redistributed among large-scale retail operators (supermarkets/hypermarkets) in the first half of 2009. Some players even froze further development and left Ukrainian market (for example, Russian retail-operator Vester and Ukrainian O’key ).

At the same time, other retailer chains as Metro Cash & Carry, Fozzy Group, ATB-market, ECO market, Evrotek, Auchan, Novus have indeed strengthened their positions by opening new stores or acquisition of other players. For example, Auchan increased the number of its hypermarkets up to 7, four of which are located in Kyiv.

In spite of significant turnover downward, major operators of household appliances and electronics (Foxtrot, Eldorado, Technopolis and Comfy) upon close-down of unprofitable stores, continued their development both in Kyiv and large regional cities. Thus, as a result of crisis, Ukrainian operator Domotechnika was liquidated; however, 18 out of 24 supermarkets were acquired by Russian chain Eldorado. The demand growth was registered for professional retail premises both in Kyiv and large regional cities from furniture operators (Eurasia, BRW, Margo) they incline to continue development in 2010.

As a result of construction industry business activity decline (around 50% down to the level of 2008), the


expansion of DIY retail chains slowed down. International players were rather passive during 2009 - only OBI opened one supermarket in Odessa. At the same time, Ukrainian company Epicenter continued its active expansion and opened one of the world largest DIY hypermarket (GBA – 56,000 sqm) and four standard hypermarkets in the regions. In accordance with previous forecasts, a number of retail chains have made a decision to liquidate unprofitable stores that in most cases related to small or industrial cities; Furthermore, many retailers refused to develop brands of “middle plus” and “high” price segments. Despite previous pessimistic expectations, only several retail chains left Ukrainian market in 2009.

Crisis has unequally influenced on tenants’ activity and correspondingly affected take-up structure in 2009. A number of brands that exposed great interest for independent entering Ukrainian market in 2008 (H&M, Kiabi, Douglas Rivolli, Deichmann, New Yoker, C&A, etc.), postponed their expansion both because headquarters refused to develop new risk markets during the crisis period and due to limited or high-cost prime retail stock. Thereby, the major consumers of retail premises in 2009 were operating companies in Ukraine supplying FMCG and goods targeted at mass-market customers.

lAUnCH The chain of hypermarkets Real (subdivision of METRO GROUP) opened its first store (GLA ~ 12,500 sqm) as a tenant of Riviera Shopping City, Odessa. As of today, the expansion strategy of Real primarily focuses on Kyiv and regional cities with population over 1 million.

Actively expansion exposed BT Invest Company, representing the development of new multi-format food stores Novus. BT Invest aimed to develop in three different segments: convenience stores (area of 500 – 1,000 sqm), hypermarkets (7,000 sqm), while main format is supermarket (area of 3,000 sqm). Expansion strategy of Novus includes both construction of new shops and acquisition of existing local chains with further re-branding. First supermarket with an area of 3,500 sqm BT Invest opened in the first phase of SEC Dream Town at the end of 2009; several days after, the second store was launched on Velyka Okruzhna St.

Forth world largest DIY operator LEROY MERLIN (by turnover), a part of French company Groupe Adeo, announced its intention to enter Ukrainian market. The area of LEROY MERLIN hypermarkets varies from 6,000 to 19,000 sqm. According to preliminary information from Ukrainian office, first hypermarket of this chain will be opened in Kyiv in 2010; at the moment, company has started recruitment process.

Furthermore, in the beginning of 2010 Praktiker opened its first store in Kyiv. Hypermarket of total area 10,000 sqm is located on Velyka Okruzhna St., near Novus supermarket.

Vist-Service company announced its plans to transform regional retail chain of household appliances and electronics Comfy into nation-wide operator (previously company was focused on Eastern region of Ukraine). Expansion priorities are given to Western and Central regions of Ukraine, where Comfy intends to open up to 25 new stores annually. Thus, in December of 2009 Comfy


RETAIl PREMIsEs

opened its first supermarket of 3,500 sqm in SC Alta Center in Kyiv.

In fashion segment there were new market entries of such brands as VeroModa, Jack & Jones (both Argo company, shops are located on Khreshchatyk St.), Bershka, Pull&Bear, Stradivarius (Zara Ukraine: Riviera and DreamTown shopping and entertainment centers), Garcia (Dream Town), etc. In 2009 Kyiv also witnessed the opening of first stores of Organic Cosmetics, IT operator MOYO, book supermarket Chitai Gorod and house décor - Butlers.

Russian entertainment chain Kronverk Cinema has represented on the market its first 7-hall multiplex in shopping and entertainment centre Dafi located in Kharkiv.

REnTAl RATEs And vACAnCyAs compared to other commercial real estate segments, retail sector was influenced by economic recession least of all. The most sharp fall of rental rates did not exceed 40% to pre-crises ones; moreover, in the second half of the year in successful shopping centers of Kyiv the discounts for rental payments exposed downward movement and by the end of the year the rates amounted to more than 80% of pre-crises figures.

Thus, rental rates in successful SC/SEC actually reached the level of 2006-2007.

Average vacancy in Kyiv retail objects almost kept the pre-crisis position and amounted to 3-4% and 1-2% at the end of 1H and 2H 2009 correspondingly. Occupancy dynamics for new retail premises also remained at high level: for instance, SC Dream Town commissioned

in Q3 reached occupancy rate of 97% till the end of the year.

Situation in regional SC/SEC is not as positive as in Ukrainian capital, especially in cities with population less than 500 thousand inhabitants or industrial regions: starting from the autumn 2008 base rental rates for units of 100-300 sqm reduced by 45-60% in US dollars. Vacancy rate in successful regional shopping centers as a rule does not exceed 5-10% while in less successful analogues or in objects opened at the end of 2008 occupancy rate may be lower than critical 30%.

FORECAsT* g All previously started developments

in Kyiv most likely will be delivered in 2011.

g According to forecasts the total stock by that moment may reach approximately 770,000 sqm or 275 sqm per 1,000 inhabitants. This index is relatively low comparing with other European capitals. For reference: as of July 01, 2009 in Warsaw there were 810 sqm of retail premises per 1,000 inhabitants in Budapest – 620 sqm, in Prague – 615 sqm; in average this index for Western Europe amounts to 800-900 sqm. Thus, in line with economic recovery and stabilization of political situation, and corresponding expansion of economic activity by the end of 2011 demand for professional retail premises most likely will exceed supply, initiating rental rates growth, however not so sharp as in 2007-2008.

g In 2010, there is a high probability of rental rates setting with minor fluctuation of +\-10% and vacancy rate stabilization within +\-1.5-3%

Average vacancy in Kyiv retail objects almost kept the pre-crisis position and amounted to 3-4% and 1-2% at the end of 1H and 2H 2009 correspond-ingly.


both on the market of the capital and in large regional cities.

g Due to significant decrease of purchasing capacity and demand for retail premises from tenants, in mid-term outlook most development activity will be concentrated in Kyiv and cities with population over 1 million inhabitants Cities with population less than 500,000 inhabitants are expected to be

adequately focused on by developers not earlier than 2011-2012

g It is likely that we will see further re-targeting of chain operators at brands of “medium” and “medium minus” price segments, as these brands will keep popularity in 2010 due to lack of actual preconditions for significant growth of population incomes.

Average Base Rental Rates in Kyiv Shopping Centers, USD/sqm/month (sections 100-300 sqm)


USD

0 2005 2006 2007 2008 2009 2010F

20

40

60

80

100

120

USD

/sqm

/mon

th

Base Rental Rates in selected Kyiv shopping Centers, 2005-2009 Usd/sqm/month (sections 100-300 sqm)

Property 2005 2006 2007 2008 2009

globus, 1st phase 100-180 120-150 180-240 200-250 120-170

Caravan 40-100 100-140 110-170 150-200 100-120

Pyramid – 60-90 50-101 80-190 50-80

Komod – – 70-110 80-120 60-80



Thus, rental rates in successful SC/SEC actually reached the level of 2006-2007.


HOTEl MARKET

MARKET REvIEWIn general, market trends established in the 1H of 2009 were entirely confirmed in the 2H of 2009. The opening of InterContinental five-star hotel was one of the most marking events at on the hospitality market of Kyiv in 2009. As previously forecasted, no new projects were delivered in this market segment due to complications with real estate project financing.

However, in spite of existing problems the range of international chains are still interested in expanding their presence in regional cities of Ukraine, in particular Rezidor Hotel Group announced the opening of the Park Inn hotel in Dnipropetrovsk; Accor plans to develop the hotel project in Lviv. TREndsg Development of hotel projects at

early construction stages (less than 50% completed) was temporary put on hold.

g Major international chains keep declaring their interest in operating hotels in Ukraine.

g Temporary weakening of demand in the top-end segment of Kyiv hospitality market due to business activity decay in the country and in the world.

g Stabilization of the room rates in most of the hotels.

g Stabilization of the average occupancy level in all segments of the market.

nEW sUPPlyThe opening of five-star InterContinental hotel (Zhytomyrska St., 2a) added 272 rooms to the top-end segment of Kyiv hospitality market stock in 2009.

Moreover, the two flotels (hotel on the water) Pharaon (25 rooms) and Baccarat (200 rooms) were delivered in Kyiv during the 2009.

PERsPECTIvE sUPPlyThe year 2009 made sufficient corrections to earlier announced projects of hotel and other commercial real estate segments. Since development of many hotel projects was postponed, the probability of their delivery to the market

Rezidor Hotel Group an-nounced the opening of the Park Inn hotel in Dnepro-petrovsk; Accor plans to de-velop the hotel project in Lviv.

scheduled Major Hotel Projects (4-5 stars)

name Address Category RoomsExpected delivery

Kyiv

Fairmont 1a naberezhno-Khreshatytska st. 5 stars 257 2010-2011

Ibis 25 T.shevchenka Av 3 stars 215 2010-2011

Holiday Inn 79 Antonovycha st. 3-4 stars 210 2011-2012

Radisson Royal, Kyiv 35-37 v.vasylkivska st 4-5 stars 425 2012-2013

Hilton 28-30 T.shevchenka Av 5 stars 257 2012-2013

Regional Cities of Ukraine

Park Inn dnipropetrovsk 4 stars 250 2011-2012

novotel lviv 4 stars 70 2012-2013

n/a –not availablesource: Colliers International, 2010


until 2011-2012 is rather low considering the construction terms and volume of announced projects and lack of project financing.

In 2010-2012 years the realization of projects of Fairmont Grand Hotel (Naberezhno-Khreshatytska St., 1a) and Holiday Inn (Antonovycha St., 79) is highly possible.

It bears mentioning that in spite of crisis, international operators remain highly interested in cooperation with both Kyiv and regional developers. In 1H of 2009 developers announced their plans to open the Park Inn Hotel (Rezidor) in Dnepropetrovsk, Novotel and Ibis hotels (Accor Group) in Lviv, and the three-star Etap hotels (Accor) in Kyiv, Lviv and Kharkiv. The representative of Wyndham Hotel Group international hotel chain signed memorandum of cooperation with “Gerts” group of companies about the development of Donetsk hotel infrastructure. Moreover, such

international chains as Hilton, Marriott, Accor and others are considering different areas and projects for development.

dEMAndRegarding State Service of Tourism and Resort, 20.7 mln of foreign citizens visited Ukraine during 2009, what is 18% less than in 2008. If to analyze the structure of touristic inflow, the fall of demand for hospitality is evident: the amount of business trips has shortened by 24% and the amount of visitors from EU has also shortened by 38% comparing with 2008. The number of tourists from Russian Federation was shortened insignificantly - by 7%.

PRICIng And OCCUPAnCyAccording to our estimation, in 2009 average room occupancy of four-five star hotels in Kyiv was approximately 40-50% against 70-80% in 2008 and 2007.

The decreasing demand for three-five star hotels in Kyiv promoted room rates to remain at previous levels and even to decrease for 5-10% in some hotels of this segment.

Comparing to the room rates in 2009, the asking room rates for 2010 for all the hotel categories did not change sufficiently.

As in 2009, most of the hotels offer a flexible discount system in order to stimulate the growth of demand. Discounts may vary at the range of 10-20% (special offers), and in some hotels even reach up to 40-50%.

In 2010-2012 years the realiza-tion of projects of Fairmont Grand Hotel (Naberezhno-Khreshatytska St., 1a) and Holi-day Inn (Antonovycha St., 79) is highly possible.

Annual Supply of Hotel Rooms (4-5 stars) in Kyiv, 2004-2012

E- estimation F - ForecastSource: Colliers International, January 2010.

4 Star 5 Star

0 2004

2005

2006

2007

2008

2009

2010E

2011-2012F

200

400

600

800

1000

1200

1400

1600

1800

2000

Num

ber

of R

oom

s


HOTEl MARKET

Bul’v.Lesi Ukrainky

v.Lesi Ukrainky

Indutrial’na

Borschahivs’ka

Mel’nykova

Chervonoarm

iis’ka

Frunze

Che

bul’v.Tarasa Shevchenka

Existing hotels

Pipelined hotels

prosp.Peremohy


Naberezhne Shose

2

9

1011

12

3

4

5

3

4

5 2

1

8

61

7

CBD


Existing and Pipelined Hotels in Top-end segment, Kyiv

Existing and Pipelined Hotels in Top-end segment, Kyiv# Hotel Address

Existing hotels

1 InterContinental 2a velyka Zhytomyrska st.

2 Hyatt Regency Kyiv 5 Tarasovoi st.

3 Premier Palace 5-7/29 shevchenka Bulv.

4 Opera 53 Khmelnytskogo st.

5 Radisson BlU Hotel Kyiv 42-44 yaroslaviv val st.

6 Riviera 15 sahaidachnoho st.

7 Podol Plaza Hotel 7а Kostyantynivska st.

8 dnipro 1/2 Khreschatyk st.

9 President-Hotel Kyivskyy 12 Hospitalna st.

10 natsionalnyy 5 lypska st.

11 Kyiv 26/1 Hrushevskoho st.

12 salyut 11b I. Mazepy st.

Pipelined openings (2010-2012)

1 Fairmont 1a naberezhno-Khreshatytska st.

2 Ibis 25 T. shevchenka Av

3 Holiday Inn 79 Antonovycha st.

4 Radisson Royal, Kyiv 35-37 v.vasylkivska st

5 Hilton 28-30 T. shevchenka Av


FORECAsTs*g Insufficient increase of new

supply within 2-3 years. Herein there are both new constructions (temporarily frozen), and existing projects at high completion level and construction permits in place.

g Regional hotel projects will be developed mostly under management of international chains.

g Demand for hotel services will be stabilized within the limits of existing supply.

g The room rates will stabilize at current levels or grow insignificantly upon condition of further economic growth and stabilization of UAH exchange rate; the discount policy will not be as aggressive as in 2009.

g Gradual recovery of project financing in hospitality area in 2010; at the same time, tough credit requirements will be also prolonged.


Hotel Room Rates

CategoryAverage Price Per Room,Usd/ standard double

5 star 450-600

4 star 200-400

3 star 90-160



InvEsTMEnT OvERvIEW

glOBAl InvEsTMEnT ClIMATE As a result of worsening of global economical and finance system, the volumes of global investment transactions in the segment of commercial real estate were decreasing during the 5 quarters running, from the Q1 of 2008 until the Q3 of 2009. In general, the relative volumes of global investment transactions in 2009 have decreased to 69% comparing with 2007 and 30% comparing with 2008.

However, in the Q3 of 2009 appeared new trends, such as reduction of capitalization rates and growth of both sales and average investment transaction volume. The main item, discussed by the financial publics in this respect is whether the recovery is of ”V”-type shape, i.e. the standard cycle, or of “W”-shape, when short-term improvement is followed by another slowdown.

It is clear that while industry experts try to give unambiguous answer to this question, some of potential investors refuse from potential purchases, continuing to accumulate suspended demand.

Globally, the major share of investment activity was noted in Asian-Pacific region (essentially, at the expense of China), while the greatest slowdown is reported for the EMEA region (Europe, Middle East, and Africa), where the most active players are Great

Britain, Germany, France and Russian Federation.

In all global regions without any exception there were slowdown of international investors’ activity, which had made 40%-100% of all purchases in 2007-2008; at the same time, the local investors with equity have begun to play the main role. That is why the activity is so high in Asian-Pacific region, where local players historically are the most active buyers.

UKRAInE As it had been previously forecasted, Ukrainian commercial real estate market was free from classic investment transaction in 2009: owners did not accept one-sided offers from potential buyers.

Undoubtedly, the main cause of transaction absence in Kyiv was lack of supply of prime commercial real estate properties. Objects of this kind were not presented for sale to the open market in 2009, while the most part of investment transactions in Ukraine traditionally were held in this segment. Globally, objects of prime commercial real estate form 60-70% share of total investment transactions volume.

Lack of supply of prime real estate means, that the most active category of purchasers such as institutional investors and specialized international funds has been observing “empty shelves” since the middle of 2007.

In general, the relative volumes of global investment transactions in 2009 have decreased to 69% comparing with 2007 and 30% comparing with 2008.

Total volume of Investment Transactions in Commercial Real Estate, blnRegion 2007 2008 2009

*EMEA 406.3 226.2 110.2

*Americas 554.4 157.1 52.5

*AsiaPac 273.4 162.3 218.1

TOTAl 1,234.1 545.6 380.8

source: RCA Analytics, december 2009 *-does not include transactions less than $10 mln

Global Sales Volume and Caps

Source: RCA Analytics, December 2009Volume Cap Rate

0$

50$

100$

150$

200$

250$

300$

350$

Billi

ons

6.00%

6.25%

6.50%

6.75%

7.00%

7.25%

7.50%

7.75%

07Q1

07Q2

07Q3

07Q4

08Q1

08Q2

08Q3

08Q4

09Q1

09Q2

09Q3

09Q4


InvEsTMEnT OvERvIEW

Low pace of new construction in 2010-2011 will improve the situation insignificantly. Thus, resulted from panic and uncertainty expectations of yield for prime segment to fall within 17%-20% (in the 1H of 2009), and then 15%-17% (in the 2H) turned out to be absolutely groundless.

At the same time, non professional commercial objects with low occupancy rate and non-central location could not find owners even with discussed yield of 18-20%; since potential buyers were afraid of high vacancy risks because of low competitiveness of such objects in comparison with professional analogues.

InvEsTORsFollowing the global trends, the structure of local investment market has shifted to national players. The equity volumes of such companies are usually not large, varying within $10-20 millions. The demand generated by this type of investors in Kyiv remained unsatisfied due to high asset values, while regional markets were not taken into consideration because of both low transparency and lower attractiveness.

At the same time, decrease of prices for commercial real estate objects attracted interest of non-typical players with considerable finance resources, who

Kyiv Prime yields 2005 2006 20072008

(1-3Q)2009E 2010F 2011F

Office market 12 .5% 10.0% 9.0 -9.5% 8.0 -9.0% 15.0 -18 .0% 13.0 -16.0% 11.0 -13.0%

Retail market 12 .0% 11.0% 9.5 -10.0% 8.0 -9.0% 14.0 -17.0% 13.0 -16.0% 10.0 -12 .0%

Warehouse market - - 10.5 -11.0% 9.0 -11.0% 17.0 -19.0% 14.0 -17.0% 12 .0 -14.0%

E – estimation F - forecastsource: Colliers International

Investment Transactions in Ukraine, 2006-2008

year Property Type glA, sqm

seller Buyer volume, $M

2006 leonardo-1 office 10,000 yaroslaviv val Quinn group undisclosed

2006 Ukraina retail 24,000 nCH Quinn group 59

2006 Pyramida retail 12,000 Universal star Co. 1849 PlC / Apollo 24

2007 globus retail 18,600 local developer london&Regional 200

2007 Iceberg office 25,116 nEsT Eurasia group 142

2007 Podil Plaza office 23,000 demir london&Regional 63

2007 nTBC-II office 9,460 IsA Eurasia group 56

2007 Millenium office 6,500 nCH Privat group 31

2007 Andakta logistic 5,200 Andakta london&Regional 11

2008 Baltic logistic Park logistic 46,000 Eurocon / vicus Akron 7

2008 Horizon Office Tower office 13,000 IsA undisclosed undisclosed

2008 Aladdin retail 10,200 Aladdin Meyer Bergman 60

2008 East gate logistic logistic 58,100 gld Invest Akron 53

2008 Alta Centre retail 13,500 local developer vK development 48

2008 sosnovaya Roshcha hotel n/a TnK-BP Heliopark 30

2008 logistic Park East 1 logistic 18,000 Aladdin Europa Capital 25

2008 portfolio office 13,000 gooioord B.v private investor undisclosed


Average Deal Size

Source: RCA Analytics, December 2009

0$

20$

40$

60$

80$

100$

120$

Billi

ons

Americas EMEAAsiaPac

1 '07 2 3 4 1 '08 2 3 4 1 '09 2 3 4

Global Sales Volumes, by Regions

Source: RCA Analytics, December 2009

0$

20$

40$

60$

80$

100$

140$

160$

120$

Billi

ons

EMEAAmericas

AsiaPac

07Q1

07Q2

07Q3

07Q4

08Q1

08Q2

08Q3

08Q4

09Q1

09Q2

09Q3

09Q4

Most investors in 2009 aimed to adapt to new market conditions and to define the list of potential objects to invest in. Consequently, deferred demand was formed, which may become active in the 2H of 2010 in case of key macroeconomic indicators’ improvement.


have begun seeking for wide-range investment possibilities into assets in Ukraine and abroad.

International companies in 2009 continued demonstrating “wait-and-see” approach, researching the market. The interest of such companies was focused mostly on the prime assets. In view of lack of such assets on the market, some players started considering the opportunities of entering into the projects at final development stages.

The banks and financial institutions (the ones of which the significant part of mortgage portfolio is real estate objects) were very hesitant to act as sellers and mostly preferred debt restructuring. As a result, there was no distressed assets oversupply to the market. Important to mention, that local distressed assets always exceeded the nominal loan value.

sEgMEnTsDuring 2009 the most speculative demand was observed in retail, office and hotel real estate market segments. However, because of discrepancy among landlords and investors about desired pricing level, parties did not come to a compromise.

Thus, no classical investment transactions were registered on Ukrainian market during 2009; at the same time, there were purchases through transactions by cross charge (purchase of the project of hotel

Leipzig by company ISTIL Real Estate (Kyiv)) or through exchange of assets (share redistribution in regional projects of shopping centers between company XXI century and its local partners).

No investment transactions or asset exchange deals were registered in office or industrial segments. FInAnCIngIn the Q4 of 2008 the economic downturn resulted in panic in the financial segment, which provoked the massive deposit outflow and decrease of banking system liquidity. Situation became so serious, that National Bank of Ukraine had to recapitalize and to constitute temporary administration in strategic banking establishments of the country.

The cost of credits and claims on borrowers have become much tougher in 2009: thus, interest rate in commercial banks for borrowings in USD and EURO have increased from 10-12% (in 2008) up to 16-18%; to secure the credit, banks begun to request mostly only financial and\or circulating assets as a loan security.

In the 1H of 2009 commercial banks refused to consider new requests for practically all kinds of loans disbursements, but in the 2H the situation has changed. Some international banks were ready to resume real estate financing in

the volume up to 40% of capital expenditures, allowing developers to complete development of the objects at final construction stage.However, the main source of financing in 2009 was equity and partner capital.

FORECAsT*g Most investors in 2009 aimed to

adapt to new market conditions and to define the list of potential objects to invest in. Consequently, deferred demand was formed, which may become active in the 2H of 2010 in case of key macroeconomic indicators’ improvement.

g Yield compression for prime property. Previous expectations of the capitalization rate at the level of 18-20% for this segment have not proved, having appeared as the result of panic and were based on one-sided preferences of potential buyers. Therefore, in 2010 reaching compromise between sellers and buyers is possible through reduction of capitalization rates in prime segments till the level of 13-16% in office and retail segments and 14-17% in the warehouse segment.

g Gradual improvement of the situation in local banking system is expected. Industry experts believe that starting from 2010 several banks may recover financing for real estate sector with simultaneous decrease of interest rates. To meet credit requirements will be problematic for the majority of developers; at the same time it gives a possibility to finish objects with completion rate of 50% or more.

g Competitive projects with realistic size and which are attracti ve for end-users have high probability for development start-up.

Ukrainian Banking sector *Total Credits, at the End of Period *Total deposits , at the End of Period

Indicators december 2008

november 2009 dynamics december

20 08november

20 09 dynamics

Bln, UAH 734.02 722 .67 -1. 54% 359.74 328 , .06 - 8 .80%Bln, Usd 95.3 90 . 3 -5 .24% 46 .7 41.0 0 -12 .18%Official Exchange Rate

7.70 8 .0 0 7.70 8 .0 0

source: national Bank of Ukraine* does not include financial sector


Documents

Colliers (Ukraine) Maret Overview 2010