re as on.pointMarch 2012

Residential Markets in Central European Capitals

Bratislava • Bucharest • Budapest • Kiev • Ljubljana • Prague Riga • Sofia • Tallinn • Vilnius • Warsaw • Zagreb

The situation of residential markets in Central and Eastern Europe moderately improved during 2011, though growth levels varied considerably between countries and property prices were largely left out of the growth trend.

In cooperation with /WRV JonesLangy$)]J LaSallf

Real value in a changing world

2 On Point • Residential Markets in Central European Capitals • March 2012

Despite of persistent difficulties for some developers, the residential markets of Central and Eastern Europe overall experienced decent growth in demand, while the scale of supply was geographically diversified and prices continued to decrease, though at a decelerated pace.

2011 Market Review

On Point * Residential Markets in Central European Capitals * March 2012 3

The past three years have undoubtedly been among the most eco- nomically difficult in the post-socialist history of Central and Eastern Europe. This is especially true for the real estate sector, including the commercial housing market, as well as for the financial sector that is an indispensable ingredient for the property industry. Against this background, market actors across regional residential markets can on the whole be pleased with the results of 2011, as most CEE markets have eventually come out of the downturn and noticed visible improvement in demand. However, the level of demand re- covery differed greatly across the region, while the scale of new supply was diversified across the region and prices were largely left out of the growth process.

The most resilient residential markets, including major Polish cities and Prague, noted considerably increased interest from homebuy- ers, while at the same time developers were eager to launch a sig- nificant amount of new projects to the marketplace. In the threeBaltic capitals there was an observable recovery in demand, though developers were still rather cautious in introducing new supply to the market. The trend was very similar in Bratislava. In contrast, the level of improvement was less pronounced in the residential markets of Budapest, Kiev, Bucharest, Sofia, Zagreb and Ljubljana. In these cities, there were little changes in demand and supply com- pared to the situation in 2010, which may be interpreted as a stabili- zation of the market, yet on a low level. In particular, there was in- significant new supply to these markets, whereas transactions mod- erately increased compared to 2011.

Generally speaking, the price decline in the last 2-3 years as well as a stabilized market situation was able to fuel demand for new hous- ing in 2011, though to a varying extent in different cities. At the same time, supply was still reasonably limited in most CEE coun- tries, except of the major Polish markets and Prague, while every- where new projects were rather small-scale and phased into stages.

Figure 1: Dwelling completions in CEE capital cities, 2002—2011

Source: REAS based on national statistical office data

4 On Point • Residential Markets in Central European Capitals • March 2012

Following significant price drops in 2009 and 2010, prices in the 12 CEE capital cities decreased at a decelerated pace in 2011. Still, 8 out of 12 analyzed capitals noted a further price decline. The change in asking prices on local primary markets varied between -7% in Sofia, a price stagnation in Vilnius and a double digit price growth in Tallinn. Compared with the price peak, it can be stated that developers in Ljubljana and Warsaw were the most successful in defending the average asking price level, as the Q4 2011 price level stood at 90% and 86% of the price peak, respectively. Zagreb, Bratislava and Bucharest also revealed notable results of over 80%, while Prague was just below this threshold. The remaining half of the analyzed capitals indicated substantial losses in the property price level between the local peak and Q4 2011. In this context, it should be borne in mind that prices were pushed to unsustainable levels during the boom period by speculative investment demand.

From an economic standpoint all countries in the CEE region saw positive growth rates in 2011 and, thus, they continued the economic recovery that started in 2010. According to preliminary data from Eurostat from 15th February 2012, the highest growth in GDP was recorded in the Baltic States of Estonia (8.0%) Latvia (6.1%)and Lithuania (4.5%) as well as in Ukraine (4.7%) and Poland (4.0%). The economies of Slovakia (2.9%), Bulgaria (2.2%), the Czech Republic (1.8%) and Romania (1.7%) expanded by reasonable growth rates, whereas Hungary (1.4%), Slovenia (1.1%) and Croatia (0.6%) revealed only moderate growth.

However, the weak macroeconomic performance of the euro zone

overshadowed regional performance and impacted on CEE growth

prospects in the near future. In the beginning of 2012 all Big Three rating agencies lowered the sovereign debt rating of Slovenia, while two downgraded Slovakia, leaving two regional euro members with a negative outlook. Although Estonia was spared a downgrade, the Bank of Estonia has recently reduced the economic growth forecast for the Baltic country. Though to a lesser extent, the economic per- formance of the remaining CEE countries is likewise strongly corre- lated to the performance of the euro zone.

As a consequence and due to domestic austerity measures, market sentiment dropped considerably in many CEE countries recently. In the Czech Republic, the market mood deteriorated due to the changed VAT rate and low economic growth prospects, while Hungary remained in a difficult economic/political/financial situation. The Baltic States embarked on austerity programs relatively early, their housing markets started to rebound positively in the recent months, yet the local markets are small and households' investment mood remained restricted. In spite of progress in the EU-accession pro- cess, Croatia showed a poor business mood. In most of the remaining EU countries market sentiment only slightly worsened, while in Ukraine domestic demand remained limited.

In spite of external factors and market mood deterioration, the per-formance of residential markets in the CEE region in 2011 was overall positive. Most markets recorded growth in demand and, though not everywhere, also in supply. Price decreases were less severe and, considering the fact that new supply was overall price- wise better adjusted to local demand and thus reduced the

average price level, one could speak of stabilization even in pricing

On Point * Residential Markets in Central European Capitals * March 2012 5

terms.

6 On Point • Residential Markets in Central European Capitals • March 2012

2012 Market OutlookAt this point last year, the CEE region had just experienced a period of economic revival in 2010 and the market outlook for 2011, though uncertain, looked fairly promising. In contrast, the current market outlook for 2012 is largely negatively, influenced by the anticipated slowdown of the world economy and in the euro zone in particular.

In fact, the macroeconomic environment within CEE begun to deteriorate already in H1 2011 and market confidence still remains fragile. A recent economic brief by the European Commission remarked that the ongoing financial market turbulences within the euro zone are likely to have a negative impact on the CEE region as a whole. At the same time, the EC analysts state that the impact should vary considerably across regional countries. From a GDP growth perspective, Ukraine, the Baltic States and Poland have the best macroeconomic outlook for 2012, followed by Bulgaria and Romania. Slovenia and Slovakia are likely to note a growth rate of around 1%, while the Czech Republic, Croatia and Hungary are predicted to record slightly above zero growth rates.

From a residential property market mood perspective, the whole region has lost momentum at present. Even in the major Polish urban markets, despite of remarkable sales results in 2011, most market players look into the near future with concern. Nonetheless, from a long-term perspective many CEE markets reveal promising fundamental demand drivers, such as

a quantitative shortage of housing and a lack of qualitative housing choice. There are dynamicgrowth prospects in the formation of new households in the region as well. Furthermore, there is still a gap in economic standing and mortgage market growth between the CEE and Western Europe. Thus, the regions' long-term potential remains high and at present developers and investors can build up their market position and create investment portfolios.

In 2012 developer activity will focus on proven products in liquid markets. Banks are likely to support this development, while they will obstruct investing in projects that do not conform to the market. Moreover, banks will be selective in investing in local markets with weak demand. Adequate due diligence will be crucial for all market players.

In the near future the key factors for the development of the residen- tial markets in CEE will be:

• the accessibility of mortgage loans for homebuyers and the lending policy of banks;• the scale of lending activity, i.e. ability and willingness of house- holds to take a mortgage under the present financial conditions and the macroeconomic situation;• the impact of austerity measures and other changes in the legal or tax framework on housing demand;• the readiness of banks and other financial institutions to issue construction loans and land financing dedicated for residential investments.

On Point * Residential Markets in Central European Capitals * March 2012 7

Figure 2: Quarterly Growth in Residential Prices in CEE Capital Cities, 2008—2011 (Index: Q4 2008 = 100)

120 100 80

eo

40 20

0

i- 1

----------------------------1-------------------1-------------------1-----------------1---------------------1-------------------1-------------------1-------------------1----------------------1----------------1-------------------1------------------1---------------------1-----------------1---------------------1

Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011

Warsaw Prague Bucharest Tallinn Riga Vilnius

Budapest ---------------------------Bratislava --------------------------Sofia -----------Ljubljana -------------------------------Zagreb ----------Kiev

Source: REAS, growth rates calculated based on asking prices per square metre of apartments on the primary market

Figure 3: Comparison—Warsaw, Prague, Bucharest

2007 2008 2009 ■ 2010 ■ 2011

Source: REASFigure 4: Developer projects for sale in Warsaw in Q4 2011

Source: REAS; price listing in local currency for units delivered in shell and core

Figure 5: Developer projects for sale in Prague in Q4 2011

Source: REAS; price listing in local currency for turnkey apartments excl. kitchen

Figure 6: Developer projects for sale in Bucharest in Q3 2011

Source: REAS; price listing in EUR for shell and core units in Greater Bucharest

On Point * Residential Markets in Central European Capitals * March 2012 9

Capital City Case StudiesThis year's edition offers an insight into three CEE capital cities with very different residential markets. At the outset there is War-saw, the region's by far largest residential market and one of the most dynamic markets in Europe. Then again Prague has the most mature and sophisticated primary housing market within CEE. Eventually, Bucharest combines the highest pent-up demand for housing, while at the same time it offers an adolescent market within the structural context of the European Union. According to REAS' market monitoring, the Polish and Czech capitals presented a remarkable market performance in 2011, whereas a subtle stabi- lization was observed in Romania's largest metropolis.

WarsawWarsaw was the absolute best performer amongst the CEE capital cities in 2011. About 11,600 apartments were sold on the primary residential market, i.e. an increased number of transactions by 9.2% year on year. New supply was high, as developers launched 124 new projects for sale in 2011 that covered almost 13,000 units. As a consequence, the market offering reached a record high of over 18,000 units available for sale in more than 400 projects, though a gradually decreasing supply by developers in H2 2011 soothed the market. The average price of the offering decreased by 2.8% comparing the annual averages and 6.6% comparing Q4 2011 to Q4 2010, mainly due to the launch of low-priced projects.

PragueThe Czech capital city revealed a robust market performance in 2011. On the sales side the residential market noted a remarkable growth rate of 32% compared with 2010, translating into about 4,500 apartments sold in developers' projects in 2011. Encouraged by improving sales and anticipating the impact of the announced VAT change, developers felt encouraged to introduce new supply to the market especially in H1 2011. New projects were price-wise better adjusted to contemporary demand, while price reductions in the unsold stock further fueled sales. Alike Warsaw, the offering in Prague makes about 1.6 times the annual sales, though the share of ready yet unsold units remains high at 30% of the offering.

BucharestIn spite of strong market fundamentals, Bucharest's primary mar-ket continued struggling with the downturn during 2011. The major problem was the demand side which remained restricted due to several reasons, including the impact of macroeconomic weak- nesses on the purchase power and investment sentiment of pro-spective homebuyers. Also there is an apparent lack of trust of buyers for developers in particular due to various unfinished and frozen projects. Yet, those developers that remained active on the marketplace were largely able to defend prices. Though the annual average asking price slightly decreased by 1.4%, a price

growth of 5% was observed, comparing the average of Q4 2011 to Q4 2010.

On Point * Residential Markets in Central European Capitals * March 2012 11 JONES LANG

LASALLE'

On Point * Residential Markets in Central European Capitals * March 2012 13 Real value in a changing

world

The report has been prepared by REAS in cooperation with Jones Lang LaSalle

About REASREAS is an expert advisor in the planning and development of housing projects in Central Europe. REAS consultants are the leading specialists in market research, urban and housing development, design, development management, project financing, marketing and sale of residential projects. REAS partners, as advisors to the World Bank and the Government of Poland, have played an active role in the Polish housing sector reforms. Independence and objectivity, combined with extensive knowledge and long-term experience, allow REAS to support its clients at every stage of a housing project. Since 1997, REAS has been advising developers, investment funds, banks, local governments and other institutions in their operations in the residential market in Poland. As result of a strategic partnership, Jones Lang LaSalle and REAS offer integrated services in commercial and residential real estate in Central and Eastern Europe. For further information, please visit our Web site, www.reas.pl.

On Point * Residential Markets in Central European Capitals * March 2012 15

Key ServicesMarket research, analysis & forecasting Competition monitoring & analysis Highest & Best Use studies Guidelines for architects and review of designs Marketing & sales consultancy Consultancy regarding Developer Bill in Poland

Development consultancy, location analysis,

recommendations regarding the project-mix and functionality of units Property valuations (RICS, TEGOVA, USPAP, IVSC)Business plans & financial feasibility studies Capital raising & search for equity partners Investment sites disposal & acquisition

On Point * Residential Markets in Central European Capitals * March 2012 17

About Jones Lang LaSalleJones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2011 global revenue of $3.6 billion, Jones Lang LaSalle serves clients in 70 countries from more than 1,000 locations worldwide, including 200 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 195 million square metres worldwide. LaSalle Investment Management, the company's investment management business, is one of the world's largest and most diverse in real estate with $47.7 billion of assets under management.

On Point * Residential Markets in Central European Capitals * March 2012 19

Contacts:Pawet SztejterPartner, Head of Advisory R E A S | Residential Advisors Warsaw+ 48 22 380 21 00 pawel.sztejter@reas.pl

Maximilian MendelDirector, CEE Research & Advisory R E A S | Residential Advisors Warsaw+ 48 22 380 21 18 maximilian.mendel@reas.pl

Kevin TurpinHead of Research CEE & SEE Jones Lang LaSalle Prague+ 420 227 043 131 kevin.turpin@eu.jll.com

On Point * Residential Markets in Central European Capitals * March 2012 21

Residential Markets in Central European Capitals • March 2012OnPoint reports include quarterly and annual highlights of real estate activity, performance and specialised surveys and forecasts that uncover emerging trends.

www.reas.plwww.joneslanglasalle.com

Information on supply, demand and pricing was derived from own research and regional expertise. If not otherwise declared, prices refer to the average asking price per sq. m. of new apartments.

© Copyright 2012 by REAS Spotka z ograniczonq odpowiedzialnosciq Spotka Komandytowa. All rights reserved, except where noted otherwise. No part of this publication may be reproduced or transmitted in any form or by any means without prior written consent of REAS. It is based on material that we believe to be reliable. Whilst every effort has been made to ensure its accuracy, we cannot offer any warranty that it contains no factual errors. We would like to be told of any such errors in order to correct them.