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2016

INVESTMENT ATLASWHY BULGARIA

A Cushman & Wakefield | Forton Research Publication

Forton is a premium commercial real estate advisory company. We are a subsidiary of AG Capital, the largest real estate company in Bulgaria, and Member of the Cushman & Wakefield Alliance in Bulgaria, Serbia and Macedonia. Our alliance with Cushman & Wakefield, the world’s largest privately owned real estate advisory firm, contributes to the successful blend of local real estate insight and experience with international expertise. So is Cushman & Wakefield our gateway to investors in more than 55 countries all over the world. We employ this hands-on experience to add value to our clients’ real estate projects and developments.

We offer the following advantages:

Strict application of Cushman & Wakefield’s methodology and professional quality standards.

Full compliance with the Royal Institution of Chartered Surveyors’ (RICS) ethical standards (Red Book 2014) and the International Valuation Standards 2013. Among the biggest real estate consultancy companies in Bulgaria Forton is the only RICS regulated firm and the only company that has 3 certified RICS members. At present Forton has 2 Registered Valuers by RICS.

Complete coverage of the Bulgarian commercial real estate market.

Access to knowledge and data within Bulgaria’s leading real estate service group, involved in all important markets and all property types.

BULGARIA - KEY FACTSArea: 110,910 sq. km

Population: 7.2 million (2015)

Capital City: Sofia

Currency: Lev (BGN). Fixed exchange rate pegged to Euro at 1.95583 Leva for 1 Euro

Government type: parliamentary republic

EU Member (2007), NATO Member (2004)• Political and business stability - EU Member; Currency board

maintained since 1997; Low budget deficit and government debt

• Low cost of doing business - 10% corporate tax rate (0% in high unemployment areas); 10% personal income tax; Lowest cost of labor within EU; Favorable office rents and low cost of utilities

• Educated and skilled workforce• Government incentives

CUSHMAN & WAKEFIELD / FORTON 3

WHY BULGARIA

A STORY OF SUSTAINED GROWTH Job gains provide the grounds for increased consumption

Maintained macroeconomic stability, EU capital support allow government to keep moderately expansionary stance

Geographical focus of investment widens

A mid-size country in the periphery of Europe, Bulgaria has rarely been in the spotlight for its economic performance. Yet a complete lack of attention would be largely undeserved. In the post-recession environment, it has actually performed pretty well on a relative basis despite persisting global uncertainties. Going forward, a recovery in the labor market should support consumption and ensure a smooth shift in gears from external to domestic demand.

Since 2009 the economy has either outperformed or delivered in line with expectations. At 3 per cent real GDP growth in 2015 was the strongest since 2008 and 10th highest in the 28-member European Union.

Net exports accounted for two thirds of the GDP gains in 2015 as the dynamics of consumption and investment grew at a slower pace. The contribution of the latter two nevertheless remained positive.

A more balanced picture is expected over the next three years as consumption and (after that) investment recover. A forecasted slowdown in 2016 is expected to be only temporary with GDP growth on the rise again in 2017 and 2018 according to the European Commission, the Government and the Bulgarian National Bank. Whereas the forecasts do have small differences in the magnitude of the change they are unanimous for the direction of economic development. And some analysts in the banking sector actually expect the figure to surpass last year’s 3 per cent.

Broken down to components, GDP is expected to get more support from consumption in the near future. Job creation and the low level of inflation should prop up consumer confidence and real wage growth. This has already resulted in increased residential investment in the recent couple of years. Meantime inflation appears to be bottoming out and move to a more pro-growth territory.

At just below 27 per cent Bulgaria has the third lowest gross government debt/GDP ratio in Europe. Public finances are under control with the deficit at 2.1 per cent of gross domestic product in 2015 and under 2 per cent expected in 2016.

The good fiscal standing of the government, low interest rates and the € 20-billion EU aid programs should do enough to sustain a moderately expansionary stance. What is more, continued infrastructure investment has already brought benefits, especially in underdeveloped regions. The extensions of the Trakia and Maritsa Motorways to Burgas and Turkey respectively have already opened new areas for greenfield investment in logistics and manufacturing such as Yambol and Dimitrovgrad. More of the same is expected in the Southwest and the Northeast.

ECONOMY

Contribution of Components to GDP Growth

Source: National Statistical Institute (f) Forecast / Ministry of Finance / Spring Macroeconomic Outlook 2016

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

2014 2015 2016 (f) 2017 (f) 2018 (f) 2019 (f)

CONSUMPTION FIXED INVESTMENT NET EXPORTS GDP REAL YOY (%)

Harmonized Index of Consumer Prices

(f) Forecast / Ministry of Finance / Spring Macroeconomic Outlook 2016

-2.00%

-1.00%

0.00%

1.00%

2.00%

2014 2015 2016 (f) 2017 (f) 2018 (f) 2019 (f)HARMONIZED INDEX OF CONSUMER PRICES

Source: National Statistical Institute and Ministry of Finance

Government Finances to GDP (2015)

-4.0%-3.0%-2.0%-1.0%0.0%1.0%

0.0%20.0%40.0%60.0%80.0%

100.0%

EU-2

8

EURO

ZON

E

BULG

ARIA

CZE

CH

REP

.

ESTO

NIA

CRO

ATIA

LATV

IA

LITH

UAN

IA

HU

NG

ARY

POLA

ND

ROM

ANIA

SLO

VEN

IA

SLO

VAKI

A

GROSS DEBT DEFICIT

Source: Eurostat

4


WHY BULGARIA

ECONOMY

Bulgaria is an appreciated location by foreign investors. Currency stability is backed by law-enacted fixed exchange rate of the Lev to the Euro (before that the Deutsche mark), successfully maintained for almost 20 years now. The corporate income tax at 10% is one of the lowest in Europe.

The macroeconomic imbalances built up until 2008 have largely been addressed with the current account positive in four of the last five years for the most part thanks to a vibrant export sector.

The availability of educated labor force along with EU membership have attracted investment in sectors ranging from IT to business process outsourcing, to the global automotive industry supply chains, logistics and retail. Foreign direct investment has grown in line with the economy over the last several years at flat 3.6 per cent of GDP between 2013 and 2015.

The recovery of the labor market continues unabated as hiring progresses in the service and manufacturing sectors. Following a long period of job losses the labor market was recovering in 2014 and 2015 with a total of 130,000 new jobs created and growth in the number of employed of 1.98 and 2.41 per cent respectively. The improvements are expected to continue further down the way. The Ministry of Finance forecasts 0.5 growth in employment in 2016 and 0.6 per cent for the next two years.

Overall, the economic prospects remain positive while risks appear to weigh more on the upside of the forecasts. A shift from export to domestic demand growth drivers will be welcome by the real estate industry.

ECONOMY

Government Investment

Source: Eurostat

€ 0.0

€ 1.0

€ 2.0

€ 3.0

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2013 2014 2015 EU-28 (% GDP) EUROZONE (% GDP) BULGARIA (% GDP) BULGARIA (€ BN, RHS)

Labor Market

Source: National Statistical Institute (f) Forecast of the Ministry of Finance

4.0%

6.0%

8.0%

10.0%

12.0%

2,850

2,900

2,950

3,000

3,050

3,100

2014 2015 2016 (f) 2017 (f)

EMPLOYED ('000) UNEMPLOYMENT RATE


WHY BULGARIA

OVERVIEWAfter several-year long recovery the Sofia office market is now in expansionary mode in terms of leasing and development activity. The sector’s promising prospects are backed by improving economic fundamentals, healthy growing supply and sizable tenant requirements.

With annual take-up volume between 120,000 and 150,000 square meters the office market in Sofia continues to benefit from an influx of IT and BPO firms along with traditional tenants, such as pharma companies and banks. The second tier cities have also become attractive for the outsourcing sector, due to the increasing competition in the capital.

On the investment side, historically low interest rates and the significant volume of quality stock offer plenty of opportunities for institutional investors from across the risk spectrum. Yields compare favorably to Central and Eastern Europe and investors are increasingly inclined to look for opportunities. The levels are projected to further decrease.

HOT SPOTSWith 1.8 million square meters stock the Sofia office market offers well-diversified product for tenancy and investments. At the same time, the stock is relatively new with about 60 per cent of the projects completed in the last 10 years.

The inquiries from the IT and BPO companies have had the most positive impact on the office market over the last few years, with these tenants accounting for 50 per cent of the leasing volume. Other sizable groups are pharma companies and financial sector.

Sofia remains appealing location for outsourcing, because of the high-quality offices, affordable rents, low maintenance costs and well educated workforce with good knowledge of foreign languages.

Most of these tenants are looking for prime offices with excellent location and easy access. For this reason, the large projects alongside main boulevards, such as Tsarigradsko Shose, Bulgaria and Nikola Vaptsarov are preferred.

Notable projects on Tsarigradsko Shose Blvd., such as ETC, Megapark and Capital Fort are fully let with rents in the prime end. Capital Fort – the last completed large project on the boulevard, registered the largest office lease in 2015, signed with Visteon. The US technology company expanded from 7,300 square meters initially to 8,600 square meters in the office building.

With the extension of the metro network the areas of Business Park Sofia and Sofia Airport have also become increasingly attractive. Large international companies, such as HP and Coca Cola, have renegotiated their leases in the zone around Business Park Sofia. The area is becoming highly attractive for new office developments due to the improvement of the infrastructure and the concentration of modern residential and commercial properties.

The Central Business District is another growing area with 75,000 square meters prime office space under development. Along with City

OFFICE MARKET

+359 (0)2 489 90 81 www.businesspark-sofia.com

MORE THAN A BUSINESS LOCATION• Largest office park in Southeastern Europe• The leading business location in Sofia• Institutional grade A offices with fully flexible space• 187,000 square meters of total built-up area• More than 175 companies and 11,000 employees• Sustainable green environment and architecture

Sofia - Prime Rents and Yields

7.80%

8.10%

8.40%

8.70%

9.00%

9.30%

9.60%

2012 2013 2014 2015 201611.5

12

12.5

13

13.5

14

PRIME RENT (€/SQM) YIELDS

Source: Cushman & Wakefield / Forton

Sofia - Stock vs. New supply

0

500

1,000

1,500

2,000

2013 2014 2015 2016 2017 (f)

Tho

usan

ds

STOCK

NEW SUPPLY Source: Cushman & Wakefield / Forton

Sofia - Take up and Net Absorption


0

20

40

60

80

100

120

140

160

180

2012 2013 2014 2015 2016 (f)

Tho

usan

ds

TAKE UP NET ABSORPTION SQM ('000)

8

+359 (0)2 489 90 81 www.businesspark-sofia.com

MORE THAN A BUSINESS LOCATION• Largest office park in Southeastern Europe• The leading business location in Sofia• Institutional grade A offices with fully flexible space• 187,000 square meters of total built-up area• More than 175 companies and 11,000 employees• Sustainable green environment and architecture

WHY BULGARIA

Tower and Millennium Center, the newly started second part of Polygraphia Office Center is among the prime projects there, set for delivery by the end of 2017.

Encouraged by stable demand and recovering rents over the last couple years, many developers have started or are considering new phases of their projects. An example is Infinity tower, one of the top performers on Bulgaria Blvd., anchored by international companies such as Telus, Cargill, Lewis Dreiffus and game developer Imperia Online. After opened with 40 per cent preleases in 2014, now the building is fully let and the developer considers new office body with 16,000 square meters leasable area. Sofia Airport Center (SAC) – an office and logistic park near the airport, is also expecting second office building to be started, after the first one is already 100 per cent let.

As of the middle of 2016, the total stock under construction in Sofia amounts to 177,000 square meters, set for delivery by the end of 2018. Since the developers and banks are cautious, oversupply is unlikely, at least in the short term.

Although the existing Class A and B office space stands at 1.8 million square meters, the market still suffers shortage of prime space that meet tenants’ requirements. This results in gradually decreasing vacancy in combination with growing share of the preleases in the take-up volume.

Exemplifying the latter trend, around 50 per cent of the office space under construction is either prelet, or under negotiation.

Since 2014 certain office markets outside Sofia have also become interesting for the tenants. BPO and IT companies, which have already established their operations in Sofia, found their next office locations in the second-tier cities as Plovdiv, Varna, Burgas, Ruse etc.

OFFICE MARKET

IT AND BPO COMPANIES – FROM RISING STARS TO GROWING BUSINESSAfter being recognized as favorite destination for IT and BPO business in EMEA for 2014, Bulgaria keeps on track. The country remains in the focus of the IT and Shared Services sectors with a number of growing businesses exemplifying the trend.

Currently, IT and BPO industry employs over 40,000 specialists across the country with plans for additional 20,000 new jobs by 2020. The largest IT employer HP has more than 10 years of experience on the domestic market, currently engaging above 6,000 workers.

The home-grown leader in application development software and services Telerik was renamed Progress in the mid-2016, following the acquisition by the US technology giant a year before. The company plans to reach 900 employees in Bulgaria by 2020, which will be 40 per cent staff increase.

Following its growth strategy, Progress Software Corporation (NASDAQ:PRGS) announced the acquisition of a second Bulgarian company - OneBit Software, and is planning to open a digital transformation hub in Bulgaria. In line with these projects, the US based company is to start a built-to-suit office development, next to its present building in Sofia.

Leading companies such as HP, SAP Labs, Visteon, Coca Cola HBC, IBM, Unify, CSC, Cargill, Epam, TeleTech, PaySafe, 60K, Telus, Sutherland

etc. are also represented on the market, most of them with stated plans to enlarge their operations. Some of these companies have already established operations outside Sofia. For example, Unify, Telus and 60K are presented in the second largest city Plovdiv, Concentrix and Sutherland have offices in Varna and Burgas respectively. Ruse and Veliko Tarnovo are considered to be next destinations on the IT and BPO map.

For those businesses the country offers the best combination of costs, risks and operating conditions that are of great importance for the successful operation of the outsourcing companies around the world.

According to AT Kearney’s Global Services Location Index for 2016 Bulgaria is ranked 12th among 55 countries, assessed by three major criteria: financial attractiveness, people skills and availability, and business environment. However, in European plan Bulgaria is in second position with only Poland ahead.

The key advantages of the country are the low corporate taxes as well as the availability of affordable and skilled workforce. Every year around 60,000 students graduate from the universities in the country while 50% of them acquire majors that meet the demands of the BPO sector. Moreover, the outsourcing sector is represented by its own Association which promotes the country as Shared Services destination worldwide and makes efforts to improve the business environment.

is the stock under construction as of mid-2016

is the vacancy in office projects that conform to the requirements of international tenants15%

177,000 m2

RENTSFollowing a small increase in the beginning of 2016 the headline rents for class A offices in Sofia are now stable at €13/sq m/month. This is the level in CBD submarket as well as alongside the main boulevards where about half of the Class A and B supply is concentrated.

Taking into account that the pipeline scheduled for completion by the mid-2018 is below 10 per cent of the existing stock, it is unlikely the new supply to affect significantly the market. Rents are expected to slightly increase over the next quarters.

INVESTMENTOffices provide an attractive investment opportunity in view of the stable rents and the high occupancy rates, especially in the prime market segment. The activity in Sofia is now concentrated on the best performing projects with class A specification, so the investors could benefit from the growing and high-potential market.

With regard to technical specifications and occupancy there are properties available for sale that can meet an international investor requirements.

The yields are expected to decrease. The balance between higher return on investment and moderate risk level is the main advantage of Bulgaria.


WHY BULGARIA

OVERVIEW The industrial segment is among the fastest developing on the Bulgarian commercial property market, driven by the increasing demand and improving economic performance. Most of the existing stock across the country is in poor condition or small-sized which provides ground for new projects.

While the market in Sofia is driven mostly by the logistic sector, the interest in automotive parts manufacturing outsourcing has led to increasing development activity across the country. Preferred locations are the large industrial zones, as well as towns and cities alongside international transport corridors.

On the investment side, the market still provides limited opportunities due to the shortage of modern space with long term leases.

HOT SPOTSWith more than 870,000 square meters stock Sofia is the largest industrial market countrywide. Most of this supply is for owner occupation or in poor condition, so the increasing tenant demand for modern space and the rental growth provide ground for new speculative developments.

The reviving development activity results in almost 50,000 square meters of logistic space for lease that have been completed or are to be delivered by the end of 2016. More than half of these facilities have been pre-let, reflecting the appetite for space that meet tenant’s requirements.

Some of the mentioned developments are phases of larger industrial and logistic parks that have been planned before the crisis but remained on the drawing boards for years. Such example is Logistic park East Ring which will be spread over 22,000 ha in the Elin Pelin industrial area, eastern of Sofia. The first two phases, each with 6,400 square meters GLA were completed and fully pre-let, so the developer Glorient Investment BG is now considering start of the third one.

Also in the East of Sofia, stages of Industrial Park Sofia East and Sofia Ring Road Logistic Park have been started in the recent years, exemplifying the mentioned trend. Along with this, international logistic and light industrial operators, such as Gebrueder Weiss, Festo and Trisa, have developed their own bases.

While the industrial areas around Sofia remain key target for investors in logistic space, most of the demand across the country is concentrated in the light-industrial, mainly sewing and automotive segments. Bulgaria has become increasingly attractive outsourcing destination for such operations, thanks to its low manufacturing costs, favorable tax rates, and good geographical location.

Due to the lack of suitable brownfield supply, many companies buy land for industrial developments or map out built-to-suit projects.

The latest could be exemplified with the factory of Osram Lighting which is under construction in Plovdiv, as well as the planned one of the Japan Yazaki Corporation near Maritsa Highway in the south part of the country.

The industrial zones around the second largest city Plovdiv are highly preferred by international manufacturers, as well, due to the convenient location, developed infrastructure and skilled work force. Among the large factories already operating in the region are these of ABB, Liebherr, Schneider Electric, Sensata. SMC Automation, Willy Elbe and Osram Lightings were the latest new arrivals to the region.

The interest of the automotive sector is shifting also to regional cities with industrial traditions and human power. The third factory of Teklas Bulgaria in Kurdzhali, the first one of Nexans Automation in Pleven and those of Standard Profile in Stara Zagora are among the notable examples.

INDUSTRIAL MARKET


Sofia - Prime Rents and Yields

9.00%

9.50%

10.00%

10.50%

11.00%

11.50%

12.00%

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2012 2013 2014 2015 2016 (H1)

RENTS (€/SQM/MONTH) YIELD (%)

Sofia - Industrial Stock and Pipeline

0

200

400

600

800

1,000

2012 2013 2014 2015 2016 (H1)

Tho

usan

ds

STOCK PIPELINE SQM



WHY BULGARIA

RENTSThe beginning of 2016 was marked by rental growth due to the raising demand of industrial space in Sofia. The levels for prime logistic space reached €4.20 /square meter, which represents 12 per cent annual increase. Rents are higher for the prime logistics area near Sofia Airport, exceeding €5 /sqm.

The new speculative projects will balance the market in a short-term plan. However, due to their relatively small size, the supply in general will remain insufficient to meet the occupier growth.

INVESTMENT

Thanks to the outsourcing wave in the light industry sectors, the interest in purchases of land for industrial developments continues. The accumulation of modern stock in the major cities opens door for large transactions with income generating assets. For the time being, this trend is supported by single examples, such as the acquisition of the Zobele’s factory in Plovdiv by a local company at the beginning of 2016. However, with the market becoming more mature the opportunities will increase.

16


WHY BULGARIA

MARKET OVERVIEW With more than 850,000 square meters stock the Bulgarian retail market is now entering more mature phase, offering diversity of projects and formats. The years of rapid development left behind and now it is time the existing schemes to reconsider and make their market positions stronger.

The market is vibrant, underpinned by the strong growth in consumption and economic recovery in the post crisis years. The expansion of fashion and shoes retailers, especially value and middle-class brands, remains main source of activity not only in Sofia but in the secondary cities, as well. The dynamics in the convenience format is also strong, fueled by the demand of Health & Beauty retailers as well as FMCG (Fast Moving Consumer Goods) sector.

Investor interest remains strong, shifting from the distressed acquisitions to well performing schemes. The competitive environment and the lack of new developments outline opportunities for institutional investors as dominating centers stabilize their market positions.

HOT SPOTS Shopping centers

The shopping center market in Sofia and main cities seems well developed with dominating schemes and struggling ones. Roughly half of the supply, 718,000 square meters in total, is concentrated in Sofia where there are 9 schemes under operation. The major cities are well presented as well, since most of them were on developer’s focus in the pre-crisis years.

As of now, banks and developers are cautious due to the fact that the market is considered saturated. Development activity has slowed down in the last couple of years and the projects under construction take only 2 per cent of the market pie.

With its 17,500 square meters Markovo Tepe Mall in the second largest city Plovdiv is the sole project under development, set for opening in October 2016. In Sofia there are no new deliveries since 2014, when 95,000 square meters of shopping centers were released on the market. The lack of new competitors allows the existing ones to improve their footfall and turnovers.

The activity is concentrated in restructuring of underperforming shopping centers, which is the case with City Center Sofia (CCS). The mall was acquired by Revetas Capital in 2014 and went through full restructuring and tenant mix refreshment.

There is room for retail schemes to be developed as part of large mixed-use projects, besides that. Such projects are already under development in Sofia, which is the case with Grand Kanyon – multifunctional complex of the Turkish developer Garanti Koza, which will comprise 38,000 square meters retail center along with residential part and a hotel.

RETAIL MARKET

Shopping Centers stock per cities

0 200 400 600 800

Burgas

Veliko Tarnovo

Pleven

Ruse

Stara Zagora

SQM ('000) Source: Cushman & Wakefield / Forton

Varna

Gabrovo

Plovdiv

Sofia

Total


Shopping Centers Prime Rents and Yields

8.00%

8.20%

8.40%

8.60%

8.80%

9.00%

9.20%

9.40%

0

5

10

15

20

25

30

2012 2013 2014 2015 2016 (f)

RENTS (€/SQM/MONTH) YIELDS

18


WHY BULGARIA

RETAIL MARKET

Improving market fundamentals have put back Bulgaria in the list of the expansion plans of large international brands. A wide range of retailers – from fast fashion operators to luxury brands, debuted on the local market in the last couple of years. Mango and Forever 21 are among the newcomers in the fast fashion, as well as Escada and Tomy Hilfinger in the upscale class and Philipp Plein among the luxury brands. Meanwhile, retailers with longer market presence enter across the country, which is the case of H&M and LC Waikiki.

DIY and FMCG

The revival of the Do-It-Yourself, furniture and home décor segments helped recover the tenant interest in retail parks and the big-box format, as well. Danish home décor chain JYSK is among the most active expanding retailers with plans for 35 stores in Bulgaria in a long term plan.

IKEA, which opened its first store in Sofia in 2011, is also on course to increase its presence across the country through smaller format stores. The first order & collect point opened in Retail Park Varna in mid-2016. The second one is scheduled for opening in Burgas, the fourth largest Bulgarian city, by the end of the year.

The restructuring in the Do-It-Yourself and FMCG sectors is source of activity in the big-box and the convenience stores segments. Following the ownership change in 2014, Praktiker and BauMax (renamed HomeMax) are now in process of chain optimization. Leading supermarket chains, such as Kaufland, Lidl,

Billa and the Lithuanian T Market are strengthening their positions across the other operators are facing financial troubles, such as Picadilly, while at the same time Carrefour left the market. Meanwhile, new retailers, such as Macedonian KAM market enter the market.

RENTAL LEVELSSupported by the growing consumption and the reviving retailers’ interest, prime rents in Sofia rebounded. In the mid-2016 the levels reached €28/sqm/month for prime space in the shopping malls in Sofia compared to €20/sqm/month a year earlier. It is likely that the effect of the stagnant consumption is overcome and the market is back on the way of growth.

The prime locations on main streets such as Vitosha Blvd. in Sofia also registered slight increase, reaching EUR 46/sqm/month in 2016 compared to EUR 44/sqm/month a year earlier.

INVESTMENT ACTIVITYFollowing the peak of the destressed acquisitions in 2015, now the investors’ focus shifts on well-performing shopping centers in Sofia and the main cities. Such transactions were completed in H1 2016 with the acquisitions of Mall Plovdiv and Retail Park Plovdiv, with €26 million total value. Whereas the market in 2015 was dominated by domestic purchasers, foreign investors are now coming back.


WHY BULGARIA

SOLID MARKET FUNDAMENTALS MAKE THE CASE FOR STRONGER INVESTMENT Economy remains resilient to headwinds

Opportunities found across real estate sectors

Relative pricing attractiveness

Availability of core product

Never has the case for real estate investment in Bulgaria been stronger over the last eight years. The economy has largely been resilient to external headwinds with growth gradually accelerating. The banking system has just passed an asset quality review which confirmed its stable standing. Private consumption and investment are improving backed by continued activity in export service and manufacturing sectors. In turn this has opened new markets for development such as secondary city offices and countryside industrial.

No surprise the investment market reacted positively with development land remaining in lead position. Preliminary data suggests 2016 is on track to at least repeat the previous year’s € 247 million transaction volume with €115 m already achieved through the second quarter.

Although deals were predominantly focused on the low-value end of below € 20-m there were also some notable investment-quality assets changing hands, namely the Sofia Airport Center business and logistic park which benefited from continued growth in Sofia’s offices, the Mall of Plovdiv, which is among the top performing shopping centers nationwide, and Retail Park Plovdiv. All were very much the result of the momentum built-up in 2015. The sales process of Mall of Plovdiv lead by Forton/Cushman & Wakefield attracted several new players and thus signaled money was chasing deals even if only half of the interests in the asset were on offer.

Largely due to these transactions cross-border capital topped local investors for the second time since 2011 (2014 was largely on par). Nevertheless domestic players also supported liquidity, especially in more specialist sectors such as seasonal hotels on the Black Sea where the number of assets on the market suggests room for more.

Overall, the market has been balanced on a sector level. Owner-occupiers in retail and industrial were a major source of demand over the last several years giving evidence of the strong underlying economic fundamentals for the real estate market.

The broad picture suggests that there is much more to be done in offices and retail which are altogether much larger in terms of individual lot sizes. Several big and high quality assets are on the table, with more potentially ones trading activity improves.

It should be noted that traditional real estate investors have been slow in their reaction, extending the window of opportunity over

INVESTMENT MARKET

Investment Breakdown (2014 through mid-2016)


Office 20%

Retail 25%

Industrial 6%

Hotel & Leisure

17%

Residential 2%

Other 30%

Prime Yield Movements

6.00%

7.00%

8.00%

9.00%

10.00%

11.00%

12.00%

2014 2015 2016 2017(f)

Prime Office Yield Prime Retail Yield

Prime Industrial Yield

Source: Cushman & Wakefield / Forton.

Historic and Forecast Investment Volumes (€ mln)


€ 0

€ 50

€ 100

€ 150

€ 200

€ 250

€ 300

€ 350

2014 2015 2016 (f)

22

the next couple of years.

The general constraints of the market such as low liquidity and the lack of sufficient client base in certain segments are however well-known mainly due to the lack of motivated sellers in the post-crisis period. Since 2014 an increasing sellers and buyers activity has been registered. As evidenced by the SAC transaction however or several office transactions back in 2014, value-add opportunities are considered by new investors.

Offices are one example with modern buildings achieving close to zero vacancy rates, rents already growing and very strong pre-leasing activity suggesting scarcity of product even going forward. Buildings due for completion in two years are now considered by large international occupiers in banking or pharma or fast-growing IT and BPO firms. A number of sizable office assets have matured and are potential acquisition targets. Flexible rent conditions such as leases averaging up to five years, indexed rents, or expiring rent concessions suggest assets provide favorable income profiles, further backed by overall rental growth in the market.

In retail, although challenges remain for a lot of the shopping centers, some are coping with them better than others. Less dependence on food or other big box retail anchors, fashion-oriented tenant-mix, a strong leisure element, good management skills and proximity to growing-income customers or international tourism markets have been the pillars of performance in the sector. Overall this suggests there is more than just the capital city to target, with sufficient history of performance and consumer base in shopping centers in all four major cities. Beyond that, lender acquisitions and restructuring of

some secondary assets of reasonable quality suggest the existence of opportunities for investor groups up the risk curve.

In industrial and logistics the focus is expected to remain on build-to-suit or development deals so long as stock remains scarce. Given the more specialized nature of the logistics real estate markets it is more likely to see industrial developers in this market with the typical institutional funds chasing exposure through mixed-use deals with an industrial/logistic component, mainly in inner-city Sofia.

As regards pricing evidence remains very scarce and suggests yields are not based on next year’s net operating incomes but on market sentiment, synergies with other assets in the particular investor’s portfolio and development/redevelopment potential. Historically, yields have fluctuated between 6.5 and 9.75 per cent for institutional quality offices, shopping centers and retail parks. Prime yield expectations have hardened over the last couple of years, more so in the office and industrial sectors but also in retail as of late. In part the low level of institutional activity is caused by the persisting disagreement in valuations between potential buyers and sellers. Going forward as the market generally improves in all sectors and uncertainty diminishes, lower yield levels will become more acceptable and will stronger the presence of value-added investors.

To conclude, improving macroeconomic fundamentals combined with higher returns compared to CEE markets with the same level of risk should add more to the attractiveness of the Bulgaria real estate market. Bulgaria should continue to attract investors for the benefits of tapping a new opportunity, diversification and expansion of their international client base.


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