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European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
European Property office market 2010/11
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European Property office market 2010/11

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  • 1. European Office Property Markets 2010/11
  • 2. King Sturge: European Office Property Markets 2010/11 Contents Executive summary 2 What are the main European real estate tax issues? 37 Europe-wide analysis 3 Courtesy of BDO LLP City summaries 13 Austria 40 Belgium 41 Western Europe 14 Bulgaria 42 Austria Vienna 14 Croatia 43 Belgium Brussels 14 Cyprus 44 Cyprus Nicosia 15 Czech Republic 45 Denmark Copenhagen 15 Denmark 46 Finland Helsinki 16 Estonia 47 France Lyon 16 Finland 48 Marseille/Aix 17 France 49 Paris 17 Germany 50 Germany Berlin 18 Greece 51 Frankfurt 18 Hungary 52 Munich 19 Ireland 53 Greece Athens 19 Italy 54 Ireland Dublin 20 Latvia 55 Italy Milan 20 Lithuania 56 Luxembourg Luxembourg 21 Luxembourg 57 Netherlands Amsterdam 21 Netherlands 58 Norway Oslo 22 Norway 59 Spain Madrid 22 Poland 60 Sweden Stockholm 23 Romania 61 Switzerland Geneva 23 Russia 62 Zurich 24 Serbia 63 UK Belfast 24 Slovakia 64 Birmingham 25 Spain 65 Bristol 25 Sweden 66 Cardiff 26 Switzerland 67 Edinburgh 26 Turkey 68 Glasgow 27 UK 69 Leeds 27 London 28 Manchester 28 Newcastle 29 Thames Valley 29 Central, Eastern and Emerging Europe 30 Bulgaria Sofia 30 Croatia Zagreb 30 Czech Republic Prague 31 Estonia Tallinn 31 Hungary Budapest 32 Latvia Riga 32 Lithuania Vilnius 33 Poland Warsaw 33 Romania Bucharest 34 Russia Moscow 34 Serbia Belgrade 35 Slovakia Bratislava 35 Turkey Istanbul 36 1
  • 3. King Sturge: European Office Property Markets 2010/11 Executive summary of a recovery in office development activity. This situation is unlikely to change in the near future Greek crisis highlights economic divisions with speculative funding remaining extremely within Europe scarce. • A north-south divide is emerging in the Eurozone • A combination of improving demand and limited economy. Portugal, Ireland, Greece and Spain supply is expected to bring a more widespread (PIGS) remain mired in recession into 2011 and decline in vacancy over the next year. the core recovers at an unspectacular rate. Rents close to their trough • By contrast, outside of the single currency area, • London and Paris have been the first western the UK and the Nordics post stronger-than- markets to see evidence of a prime rental upturn average performance to lead growth in the west. in early 2010 - most other centres have been flat. • Central and Eastern European (CEE) economies • In CEE, fortunes have been mixed, with Moscow experience the most vigorous rebound longer and Istanbul rebounding, but softer conditions term, registering GDP rises of more than twice prevailing in other centres. the Eurozone average. • Even in the most vulnerable cities, the outlook Occupier demand set for slow recovery is for stability over the rest of 2010, though the • There have been tentative signs of a turnaround prospects for growth are expected to remain in western office occupier demand, led by Central subdued. London. Investment recovery broadens • In CEE, the recovery is not as well established, • Since mid-2009, there has been a healthy revival but activity is expected to move ahead by the in European office investment activity, spreading end of this year, driven by Warsaw and Moscow. from west to east as confidence has improved. • With economic uncertainty high, further recovery • Prime office yields have moved sharply inwards will be gradual, but prospects will be underpinned in the west and are back to their long-term by the resumption of office employment growth. averages in some markets. Supply stabilises in 2010 • In the east, prime yields moved outwards for • Office vacancy rates have stabilised at high much of the last year, though there are signs that levels over the last 12 months, with further they have now peaked. deterioration in some centres counter-balanced • The outlook is for continued recovery, albeit by improvement in Moscow and London. cautious, with occupier fundamentals expected • Outside of Central London, there is no evidence to drive investment performance across Europe. Prime office rents and yields 2010Q2 1,000 16% /m2/annum Prime yield % 800 12% /m2/annum 600 8% 400 4% 200 0 0% London West End Geneva Paris London City Zurich Moscow Milan Luxembourg Frankfurt Stockholm Dublin Istanbul Oslo Munich Athens Madrid Manchester Edinburgh Thames Valley Bristol Birmingham Leeds Glasgow Amsterdam Helsinki Warsaw Vienna Cardiff Newcastle Prague Bucharest Brussels Marseille Berlin Lyon Sofia Budapest Copenhagen Nicosia Riga Zagreb New Belgrade Tallinn Bratislava Vilnius Belfast Source: King Sturge Q2 2010 2
  • 4. Navigating uncertain waters All the PIGS are set for prolonged recession, with only Ireland emerging strongly over the longer term. Europe’s office markets and the Spain, one of the star performers in the 2000s and economic recovery the Eurozone’s fourth largest economy, is expected to experience three years of falling output. Sovereign debt crisis highlights different speeds of recovery across Europe Table 1: GDP forecast 2010-15 At the start of 2010, optimism about the Eurozone Annual % GDP was growing. An upturn in world trade from mid- 2009 2010f 2011f 2012-15f 2009 had brought a return to growth, ending the Eurozone worst recession since 1945. There were hopes Austria -3.4 1.2 1.6 2.1 that the legacy of the financial crisis would be less Belgium -3.0 1.4 2.0 2.3 of a drag than in other parts of the world, and that Cyprus -1.7 -0.3 1.8 3.3 the Continental economies would, for once, out- Finland -8.1 0.4 3.0 3.5 perform. France -2.5 1.2 1.7 2.1 Germany -4.9 1.8 1.8 2.1 The onset of the Greek debt crisis in the spring Greece -2.0 -4.3 -3.2 1.1 Ireland -7.1 -1.0 2.8 3.8 has brought a more sober assessment of growth Italy -5.1 0.5 0.7 1.6 prospects. Greece’s financial problems reached a Luxembourg -3.4 1.9 2.5 3.1 head in May 2010 and eventually forced a German- Malta -1.5 2.3 2.1 3.0 led EU bail-out. But, this €110bn assistance package Netherlands -4.0 1.2 2.0 2.4 has yet to narrow bond spreads in the exposed Portugal -2.6 -1.1 -1.5 1.5 economies, indicating markets are unconvinced Spain -3.6 -0.6 -0.2 1.7 that the problem has disappeared. Slovakia -4.7 3.0 4.0 4.6 Slovenia -8.1 0.8 1.5 2.9 There are a number of reasons for the lingering Eurozone -4.1 1.0 1.2 2.1 concern. The contagion threat from Greece to other Other Western Europe larger nations is the main worry, with Spain, Ireland, Denmark -4.9 1.2 2.2 2.5 Italy and Portugal also struggling to meet their fiscal Norway -1.5 0.7 2.3 2.4 targets. In addition, big EU banking exposures - Sweden -4.7 0.8 2.8 2.4 notably in France and Germany - have raised the Switzerland -1.5 1.8 1.7 2.1 spectre of a second financial crisis if there were a UK -4.9 1.1 2.3 3.2 sovereign bond default. Many countries have also Central and Eastern Europe responded to Greece’s problems by tightening their Bulgaria -5.0 -1.0 3.7 6.4 fiscal policy. This has brought an abrupt end to the Czech Republic -4.1 1.7 3.2 4.4 stimulus of the last year or more, and is expected to Estonia -14.1 0.5 3.6 5.2 dampen the recovery. Hungary -6.2 0.9 2.8 4.5 Latvia -18.0 -3.5 2.2 6.3 North-South divide in the Eurozone Lithuania -14.8 0.2 3.9 6.4 Better than expected Q2 data have eased the fears Poland 1.9 3.0 3.4 4.9 of a double-dip recession, but Eurozone growth Romania -6.9 -1.8 2.7 5.7 forecasts have generally moved downwards since EU-27 -4.2 0.9 1.6 2.4 the spring. The impact of these revisions has not Other CEE been even across the single currency area, however, Russia -7.8 5.0 4.8 5.0 with a distinct north-south split emerging (table 1). Turkey -4.7 5.9 5.8 6.7 Croatia -5.8 -0.5 2.6 4.5 In the south, the so-called PIGS (Portugal, Ireland, Serbia -3.0 1.5 3.0 4.5 Source: Oxford Economics, Summer 2010 Greece and Spain) have been downgraded most because they face the toughest fiscal challenges. 3
  • 5. King Sturge: European Office Property Markets 2010/11 By contrast, the core Continental nations are conditions. This growth is expected to be sustained. holding up better. Germany, France and the Benelux By contrast, Serbia and Croatia are recovering countries are due to experience a steady recovery at a more lacklustre pace, with demand weighed over the next two years. These economies should down by fiscal concerns and external volatility. EU also see a return to job creation by next year. The convergence goals ensure a strong recovery from laggard is Italy, where structural problems are more next year, but they will remain vulnerable in the serious and GDP growth weaker, but its economy is short-term. set to emerge from recession in 2010. Employment drivers point to robust office Overall, Eurozone GDP is forecast to grow by 1.0% demand this year and 1.2% in 2011, with a return to trend Total employment is set to lag the recovery in GDP growth of around 2.0% a year over the medium this year, but the worst impact has been outside term. Employment continues to contract into of traditional office occupier sectors (chart 1). 2011, but hiring resumes thereafter. This is still a Office employment in the EU-27 fell last year as solid performance, but less impressive than was the financial crisis hit hard and a further decline of expected before Greece’s troubles flared up. -0.5% is expected this year1. But from 2011, office hiring resumes and continues at a rate that exceeds Outside the single currency area in the west, the most other sectors. As increases in headcount are outlook is better. The UK has benefited from sterling associated with rising take-up, these projections depreciation and recent decisive fiscal action. From indicate healthy fundamentals for occupier demand. 2011, both GDP and job growth out-strip those of all its larger EU partners. The Nordic economies are Chart 1: Employment growth in EU27 – all sectors and office jobs also emerging from the recession more vigorously. 4 The prospect there is for annual growth of almost Forecast 3 2.5% over the next five years, well above the single currency average. 2 annual % change 1 Eastern bloc emerges strongest 0 Emerging economies in Central and Eastern Europe -1 (CEE) saw some of the deepest contractions in -2 output last year, as manufacturing was decimated -3 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 by the global slump. After a tentative start this year, All sectors however, these nations are set to see the strongest Office jobs growth rates in the recovery, with GDP increases of Source: Oxford Economics 5% a year or more in prospect over the longer term. This begs the question of which European office Central Europe’s largest economy, Poland, was centres are likely to do best in future. An indication the only EU nation to avoid recession in 2009 of this is provided by breaking down forecasts to and sees a rapid return to health, along with the a regional level. Office activity is concentrated in Czech Republic and Slovakia. The Baltic States, urban areas and because of this growth in almost Romania and Bulgaria continue to struggle in 2010, all of Europe’s city centres exceeds the EU regional but experience expansion rates far in excess of averages. Table 2 gives a ranking of forecasts for western norms thereafter. Hungary manages to selected EU cities up to 2015. post decent growth too, despite persistent budget deficit problems. On these measures, the larger international centres in the west perform well, in line with recent market Elsewhere the picture is also healthy. On the fringes evidence. London is the second fastest growing of Europe, Russia and Turkey have shown a strong 1 Office employment consists of financial and business rebound in 2010 on the back of improving global services plus public administration jobs 4
  • 6. city and by far the largest creator of office jobs. But in office take-up for three years in 2010 (chart 2)2. Frankfurt, Paris, Amsterdam, Munich and Milan are The recovery is currently patchy, but with evidence also set to expand at healthy rates, despite sluggish of improving sentiment. A majority of centres national performance. Here the key is the global expect activity to revive over the rest of the year reach of these markets, allowing them to rise above and overall take-up is projected to expand by 10% an uncertain domestic outlook. on 2009. In the east, structural change has meant that the There remain important differences between rapid GDP growth has not always translated into western cities. The most significant increases in office jobs. But this situation is changing. Bucharest demand are expected in the larger global centres, is expected to see the highest growth of any notably Central London and Paris. These markets major office centre over the next decade, albeit went into the downturn earliest and hardest as from a very low base. This expansion is driven by the financial crisis hit. But as the recovery in world exceptionally strong growth in the underdeveloped demand has gathered pace, led by emerging Asia, business services sector. Budapest, Warsaw, Sofia they have also seen the quickest turnaround, with and Prague will also see dynamic conditions. demand picking up in London from mid-2009. Table 2: Office hotspots 2010-15 Elsewhere, the upturn is more gradual, but there are signs of recovery in Stockholm, Copenhagen, Office jobs Office job New office Lyon, Munich and Berlin. More surprising, some in 2009/ growth jobs created 1,000s 2010-15 by 2015 cities in the beleaguered PIGS economies are /%pa /1,000s expected to record growth, Dublin notably. By Bucharest 251 6.5 109 contrast, the main laggards are Vienna, Amsterdam London 1,249 2.6 212 and UK regional centres, which remain well behind Helsinki 206 2.6 32 London’s upturn. Frankfurt 268 2.4 37 Budapest 319 2.4 47 Chart 2: Western Europe Growth in total office take-up index Munich 344 2.2 46 140 Amsterdam 328 2.2 47 120 Warsaw 374 2.2 53 100 Index 2000 = 100 Sofia 246 2.1 35 Trend line 80 Prague 331 1.8 35 60 Paris 1,204 1.3 96 Milan 555 1.2 49 40 EU27 48,951 1.2 3,910 20 Source: Oxford Economics, July 2010, based on NUTS3 regions 0 1996 1998 2000 2002 2004 2006 2008 2010 Source: King Sturge Slow office recovery led by global centres Demand in CEE has followed a different profile to Occupier markets have been struggling against the west (chart 3)3. These developing office markets a challenging economic background since 2008. saw almost uninterrupted expansion in the decade The slowdown in leasing activity accelerated last before the credit crunch and remained resilient into year, when a sharp drop in total take-up saw many 2008. But by last year, the global downturn led to an centres at their lowest ebb since the early 1990s. The initial signs for 2010 have been more promising, however, and the outlook for the year as a whole is 2 Western centres are Amsterdam, Athens, Berlin, Birmingham, Bristol, Brussels, Copenhagen, Dublin, Edinburgh, Frankfurt, generally more positive across the continent. Geneva, Helsinki, Leeds, London City, London West End, Luxembourg, Lyon, Madrid, Marseille/Aix, Milan, Munich, Estimates from the King Sturge network in the Nicosia, Paris, Prague, Stockholm, Vienna, Zurich. 2010 figures are based on H1 data and an estimate for the rest of major western European cities indicate the first rise the year. 5
  • 7. King Sturge: European Office Property Markets 2010/11 even more abrupt slowdown than in the west, with the recovery in a challenging economic climate. total take-up dropping by about a third. While this upturn is expected to remain cautious and uneven with very different rates of improvement in Recent indications from the CEE have been different cities, fundamentals remain supportive more positive, but so far recovery is also more of continued expansion. With office employment uneven than in the west. A dramatic rebound in expected to resume its expansion from next year, Moscow’s volatile office market has been the most this should support underlying activity over the encouraging feature, along with impressive take- medium to long term. up in Warsaw. On the basis of the latest evidence, renewed expansion is also projected for Bucharest Vacancy to stabilise in 2010 and Bratislava by the end of 2010. The supply situation has been different in the current cycle. Office vacancy rates rose sharply in But other CEE cities are expected to see take-up the downturn of 2008 and 2009, but are expected dip further, including Prague and Budapest. This to flatten off this year. An unweighted average of is partly because these markets saw a milder western European cities shows rates stabilising correction last year and in both activity remains at just over 10.0% of stock, with CEE levels also close to the historic average. Elsewhere, activity steady at around 16.0%. is heavily dependant on re-negotiations and lease extensions from existing tenants, with scant new Comparisons with previous recessions in Western demand. Chart 3 shows an underlying rise in CEE Europe suggest that availability is flattening off demand of only 1%, suggesting that these markets earlier this time. This largely reflects development remain 6-12 months behind the recovery in the trends. Office construction was booming until the west. onset of credit crunch in August 2007. But this meant that the supply pipeline was abruptly cut Chart 3: Central and Eastern Europe Total office take-up index well before recession brought a collapse in demand 400 in late 2008. Construction activity and office 350 completions have since dwindled to low levels 300 across many European cities. Index 2000 = 100 250 Trend line 200 Aside from a few isolated examples, notably the re- 150 activation of office schemes in the London market, 100 development activity remains at low levels and new 50 supply will be limited. European banks are stronger 0 1996a 1998a 2000a 2002a 2004a 2006a 2008a 2010a than a year ago, but finance for speculative projects Source: King Sturge remains scarce. With bank balance sheets further damaged by the Greek crisis, there is little prospect An encouraging aspect of this upturn is that of a dramatic turnaround, leaving new development European office take-up has been in line with reliant on build-to-suit schemes. the economic upturn, rather than a year or two behind as in the past. This in part reflects stronger There are wide disparities in city vacancy rates. corporate sector balance sheets emerging from The highest western rates are in Dublin and this recession, making it easier for companies to Birmingham, where more than a fifth of office take advantage of the trough in rents and the wide space is unoccupied, though these are set to fall by choice of office supply. end-2010. By contrast, vacancy is expected to rise to 18.0% this year in Frankfurt, with Amsterdam This has led to speculation about the durability of not far behind. 3 CEE centres are Belgrade, Bratislava, Bucharest, Budapest, Other markets are now seeing supply tightening. Moscow, Riga, Sofia, Tallinn, Vilnius, Warsaw, Zagreb. Note this index figure excludes Moscow market. In Central London, both the City and the West End 6
  • 8. Chart 4: European office vacancy rates 35% 2009 30% 2010 25% 20% 15% 10% 5% 0% Sofia Amsterdam Athens Belgrade Berlin Birmingham Bratislava Bristol Brussels Bucharest Budapest Cardiff Copenhagen Dublin Edinburgh Frankfurt Geneva Helsinki Leeds London City London West End Luxembourg Lyon Madrid Marseille/Aix Milan Moscow Munich Newcastle Nicosia Paris Prague Riga Stockholm Tallinn Thames Valley Vienna Vilnius Warsaw Zagreb Zurich Source: King Sturge are expected to see a decline in availability this year, Rents close to a trough with vacancy now close to the long-term average European prime office rents declined by 20% on in both markets. Paris is also expecting a decline, average during 2009, reversing the gains of the along with Lyon and Marseille. Vacancy rates in previous upturn in many markets. Falling demand Switzerland, which remain the lowest in Europe by and rising availability during the recession bolstered some margin, are also falling. the bargaining position of tenants throughout last year, pushing rents down and incentives up. But A flood of development activity in the mid-2000s there is now growing evidence that the bottom has left supply looser in CEE centres, but again there been reached in many cities. are big contrasts. After peaking at over 35% last year, the recovery of office demand in Moscow By mid-2010, prospects for rents looked healthier is expected push vacancy down to 15% in 2010. across Europe. In the west, the largest centres Rates are also set to dip in Warsaw, which, along have seen early signs of recovery, with prime levels with Zagreb, remains one of the few CEE cities to pushing ahead in Central London and Paris. There is still enjoy single-digit rates. Elsewhere, the trend also more tentative evidence of improvement in the has been upwards, albeit at a much slower rate Swiss and Nordic cites. Most other centres have than a year ago. yet to register a rise, though only a few vulnerable markets such as Dublin have continued to see A combination of improving demand and limited downward pressure. Even in these, the prospects new supply is expected to bring a more widespread are for prime rents to stabilise over the rest of 2010. reduction in European office vacancy next year. This downward movement comes earlier than CEE rents have also levelled out since the start of in previous cycles, chiefly reflecting the unusual the year, though the picture is mixed. Prime rents office development cycle and subdued speculative have increased in those centres where economic activity. 7
  • 9. King Sturge: European Office Property Markets 2010/11 Chart 5: European office rents 1,000 900 2009 800 2010 700 600 /m2 500 400 300 200 100 0 London West End Geneva Paris Zurich Moscow Milan Luxembourg Frankfurt Stockholm Dublin Istanbul Oslo Munich Athens Madrid Manchester Edinburgh Thames Valley Bristol Birmingham Leeds Glasgow Amsterdam Helsinki Warsaw Vienna Newcastle Cardiff Prague Bucharest Brussels Marseille Berlin Lyon Sofia Budapest Copenhagen Nicosia Zagreb New Belgrade Tallinn Bratislava Vilnius Belfast London City Source: King Sturge growth has rebounded, notably Istanbul and focussed on well-let offices with secure income in Moscow, though levels remain far below their the core locations. previous peeks. Elsewhere the correction has continued, albeit at a much slower rate and, in line Chart 6: European office investment transactions and yields with the west, prospects are for a stabilisation over 45 8% the rest of 2010. 40 35 7% After this year, aside from those lead markets 30 Billions 25 where prime rents are already responding, the 20 outlook in most European cities is for a subdued 15 6% upturn in prime rents. As noted, the recovery in 10 50 demand is expected to be relatively patchy across 5% 0 Europe. So with vacancy declining earlier, the most 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 likely upside for rents is from supply constraints, Volume Cap rate Source: RCA especially in cities where Grade A shortages re- emerge after the long development pause. Underlying transactions volumes have increased over the last year, though levels are still well Investment upturns spreads across Europe below their previous highs (chart 6). UK office The early signs of a recovery in investment markets market purchases led the upturn in 2009, but were were visible a year ago, most obviously in Central increasingly supported by activity in the rest of London. Since then, the recovery has gathered western Europe. momentum on the back of revived sentiment and attractive pricing, with yields starting at historic By early 2010, investors were becoming more highs and returns on other assets low. Investor adventurous. CEE acquisitions also experienced interest remains highly selective, however, a revival, albeit tentative. Despite the continued 8
  • 10. Table 3: Major office investment transactions Market Date Property Name m2 Price €m London Nov-09 HSBC HQ 109,996 862 Berlin May-10 Sony Centre 132,496 570 Paris Feb-10 HSBC France HQ 33,165 400 Paris Nov-09 Velizy Campus 139,000 382 London Jul-10 Tower 42 30,100 366 Munich Mar-10 Siemens Campus 371,251 350 Milan Oct-09 Maciachini Business Centre 86,000 300 London Jun-10 Park House 28,799 295 London Nov-09 1 Finsbury Ave 44,592 259 Paris May-10 Capital 8 – Messine 18,000 240 London Dec-09 5 Churchill Place 29,171 227 Source: RCA freeze on finance, larger deals have also been more plentiful over the last 12 months (table 3). As the market revived from mid-2009, office yields peaked and then moved inward. This reversal was initially rapid. But with levels close to their historic average in many markets, the rate of yield compression has slowed in 2010. On average, prime office yields in the west were down 50 basis points by mid-2010, with only Athens bucking the downward trend in other cities. This represents a significant unwinding of the 150 basis points outward movement seen over the previous two years. After unprecedented compression in the boom years, trends in CEE markets have been slightly different. Yields were still slightly higher on average in mid-2010 compared with a year earlier. Overall, these markets have now seen over 350 basis points of outward yield movement since 2007. While there is no prospect of a return to the doldrums of 2008-09 and recovery is expected to continue, property investment markets face a number of challenges. Sovereign debt jitters, scarcity of bank finance and a relatively slow economic upturn will not help investor sentiment. In addition, the potential for further yield compression is limited, particularly in some western centres. There will also be the impact of rising market interest rates to consider further out. As a result, the longer- term outlook for property investment will depend critically on stronger occupier markets and rental growth. 9
  • 11. King Sturge: European Office Property Markets 2010/11 Prime rents and yields - mid-2010 306 344 5.75% 6.00% 135 Glasgow Edinburgh 7.00% Belfast UNITED KINGDOM IRELAND Newcastle 257 350 6.75% Dublin 6.00% 375 Leeds Manchester 331 7.00% 6.50% 257 Birmingham 6.50% 331 300 Cardiff 6.00% 6.50% Bristol NETHERLANDS 337 Amsterdam 5.75% London City West End 624 885 Thames Valley Brussels 5.25% 4.75% 250 BELGIUM 343 6.25% 6.25% LUXEMBOURG Luxembourg Paris 420 700 6.00% Frankfurt 5.25% 390 5.25% 620 4.25% FRANCE 860 Zurich 4.25% Geneva SWITZERLAND Lyon 230 6.35% Milan 450 5.00% Aix Marseille 250 360 6.50% 5.75% Madrid SPAIN 10
  • 12. FINLAND Prime rent Rents ( /m2/annum) quoted refer to headline rents in high quality buildings situated in prime locations and are NORWAY 285 assumed to be over 500m2 362 5.90% 6.00% Helsinki Oslo 390 Prime yield 5.25% Investment yield (in%) quoted refer to a valuation of Stockholm Tallinn office property let at full market value which is of the 175 best physical quality, in the prime location, and with the SWEDEN 8.00% ESTONIA best tenant’s covenant and contemporary lease terms. Generally, a benchmark with which to compare other properties. 204 15.00% Riga LATVIA Moscow DENMARK 600 12.00% Copenhagen 208 LITHUANIA 5.00% Vilnius RUSSIA 150 8.50% 246 5.50% Berlin POLAND 276 6.35% Warsaw GERMANY 252 7.00% Prague CZECH REP. 360 5.00% 174 SLOVAKIA Munich 7.25% Vienna Bratislava 265 AUSTRIA 5.50% Budapest 216 HUNGARY 8.00% Zagreb ROMANIA 192 CROATIA 8.50% Belgrade 252 9.50% 180 9.50% Bucharest SERBIA ITALY BULGARIA Sofia 228 9.00% Istanbul 369 7.75% TURKEY GREECE Athens 360 7.25% 204 6.50% CYPRUS Nicosia 11
  • 13. King Sturge: European Office Property Markets 2010/11 12
  • 14. European City Summaries
  • 15. AUSTRIA - Vienna BELGIUM - Brussels Contact: Agency and Investment – Alfons Metzger Contact: Agency – Cédric van Zeeland MRG Metzger Realitäten Beratungs und Investment: – Jean-Philip Vroninks Bewertungsgesellschaft mbH, Gumpendorfer Strasse 72, 1060 King Sturge LLP, Bastion Tower, Place du Champ de Mars 5 box Vienna (+ 43 1 59 7 50 60) 15 (8th floor), 1050 Brussels (+32 2 286 9182) In-town Out-of-town In-town Out-of-town Prime rent (€/m²/annum) 265 120 Prime rent (€/m2/annum) 250 165 Prime yield (%) 5.50 6.00 Prime yield (%) 6.25 6.75 Vienna has an estimated 10.5 million m2 of office stock. Occupier Brussels has an estimated 13.4 million m2 of office stock across demand has been in steady decline since 2007 and is forecast its city centre and out-of-town markets, which increased in 2009 to reach its lowest point in this cycle in 2010, dropping to around due to the completion of developments started during the boom 200,000m². This would represent a reduction of around 9% from of 2007-2008. Last year, office demand declined to 413,500m² the 2009 total, a smaller drop than in previous years. Despite from a total of 475,000m² in 2008. This was the most subdued this low level of take-up, there are signs of recovery, such as annual take-up in Brussels for more than a decade and well stabilising rents and vacancy rates, and an upturn in business below the five-year average. sentiment. As a result, activity is expected to improve towards the end of this year. In the first quarter of 2010, key deals included Activity remained weak in early 2010, with just over 150,000m² Wohnen signing a new lease for 2,100m² at Guglasse 17-19 and of take-up estimated in the first half year. This year, the most SOS Kinderdorf leasing 1,950m² at Brigittenauer Lände 50-54. important deal has been the pre-let to BNP Paribas Fortis at the Boreal building (35,793m²) in the North Station district. There are Availability of office accommodation in Vienna rose slowly from a number of other important transactions close to finalisation, so 5.0% to 5.9% in 2009. It has been stable in the first half of 2010 full-year take-up is expected to rise towards 400,000m², slightly and is only forecast to edge up slightly by the end of the year, below last year’s final figure. to reach 6.1%. Construction of new office space is forecast to flatten out in 2010 at a level of around 190,000m². Availability has risen in the market downturn and was not helped by the high level (370,000m²) of office completions last year. In 2010, the office market is perceived to have reached the This has helped push the office vacancy rate from its low of bottom of the rental cycle. Rents dropped 12% from mid-2009 9.0% in 2007 to current levels of around 13.0% of stock. With to mid-2010, to reach their current level of €265/m²/annum. demand improving and development at a lower level this year, Prime rents are expected to remain stable over the second half the expectation is that this rate has peaked and will ease back to of the year. 12.0% by year-end. Investment volumes for Vienna offices in Q1 2010 were up on Prime rents in-town peaked in 2007 at €295/m²/annum and the same period a year ago. Domestic investors accounted for eased to the current level of €250/m²/annum last year, since the majority of transactions, whilst German institutions were when they have remained unchanged. Rents are projected to be also active. Prime yields have stabilised at a level of 5.50%. stable over the rest of this year One of the largest transactions in the first half of 2010 was the purchase of a 21,500m² building at Obere Donaustraße for Active office investors remain focused on core prime assets €65m by Raffaisen. across all classes. Yields in the CBD are at 6.25% for fully-let office buildings with a 3/6/9 year lease, an inward movement of 25 basis points since 2009’s peak. For properties out-of-town levels are slightly higher at an average 6.75%, but this is also a reduction on last year. We expect local institutional investors to remain active, focusing on prime product, and private investors to search for individual investment opportunities. As a result, yields are likely to move in further over the next 6 months. Vienna prime rents and yields Brussels prime rents and yields 400 6.0 400 8 300 5.5 300 200 5.0 200 6 100 4.5 100 0 4.0 0 4 2006 2007 2008 2009 Q2 2010 2006 2007 2008 2009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%) 14
  • 16. CYPRUS - Nicosia DENMARK - Copenhagen Contact: Agency and Investment – Michalis Pantazis Contact: Agency and Investment – Peter Winther AMP Andreas Pantazis Ltd, Politia Business Centre, Alkeos 23, Sadolin & Albœk A/S, Nikolaj Plads 26, 1067 Copenhagen Office 302, Egkomi 2404, 1642 Nicosia (+357 22 676 423) (+45 70 11 66 55) In-town Out-of-town In-town Out-of-town Prime rent (€/m²/annum) 204 145 Prime rent (€/m²/annum) 208 120 Prime yield (%) 6.50 7.00 Prime yield (%) 5.00 6.50 Nicosia has an estimated 520,000m2 of office stock. Following Copenhagen has an estimated 11.2 million m2 of office stock. a dramatic slowdown in 2009, recovery in the occupier market Following the global economic downturn, the office occupational has yet to materialise. Take-up in 2010 is forecast to be in the market has contracted over the past two years. Total take-up in region of 3,000m², which is 40% lower than last year and 70% 2009 fell to around 200,000m², a drop of 38% from the level lower than in 2008. This is expected to represent the bottom achieved in 2008. The forecast for 2010, however, is more of the cycle, which will be followed by a gradual recovery over positive, with take-up expected to reach 280,000m². The majority the next few years. Following the recession, many companies of demand in the first half of 2010 has been for modern buildings have been reluctant to relocate and it is widely anticipated that in good central and suburban locations. Activity is expected to new government measures to bring the deficit under control will remain strong as many occupiers will try to secure leases at undermine recovery and adversely affect investment. current low rents. The supply of new high quality office space remains limited, with Supply of office accommodation in Copenhagen has been the majority of available floor-plates between 250-350m². There steadily rising over the past few years. The vacancy rate was is a constrained development pipeline scheduled for Nicosia around 6.8% at the end of 2009 and is forecast to rise to this year, which will bring a further 5,000m² when completed. 10.0% by the end of 2010. It is expected that vacancy rates will Although lower than the average of previous years, this does stabilise, because of higher demand and slower construction. represent a significant increase when compared with the In 2010 only 50,000m2 of new construction is forecast, which exceptionally low level of 2009. Weak demand has resulted in would represent a drop of around 80% from 2009. ample availability of secondary office space. Consequently, the vacancy rate is expected to increase from its present level of Prime rents are around €208/m²/annum and should remain 6.5% to 7.0% over the course of the year. stable over the next six months. Tenant incentives, which have been substantial, should also become less generous. Rental levels for both in-town and out-of-town office accommodation declined last year, with prime rents in-town The number of investment transactions was low at the start of down to €200/m²/annum. Prime rents have subsequently edged the year, but has picked up lately. Institutional appetite for well- up to €204/m²/annum and are expected to remain stable over let office buildings in good locations has increased, driven by the second half of 2010. low interest rates. Prime yields remain stable at 5.00%. Demand for secondary properties is weaker, partly due to increased There has been only limited investment market activity over the vacancy risks and partly because of lack of financing for more past year. The most significant transaction was the purchase of a opportunistic investments. A number of major transactions are in 4,400m² office development by the Cyprus Telecommunications the pipeline, and prime activity is expected to surge, dominated Authority Pension Fund for €19million. Current yields for town by domestic institutions, well-capitalized property companies stock have remained unchanged from last year at 6.50% and and private investors. are expected to stay at this level for the remainder of 2010. The investment market appears to be on course for a protracted, but sustainable, long term recovery. Nicosia prime rents and yields Copenhagen prime rents and yields 300 10 300 8 200 200 8 6 100 100 0 6 0 4 2006 2007 2008 2009 Q2 2010 2006 2007 2008 2009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%) 15
  • 17. FINLAND - Helsinki FRANCE - Lyon Contact: Advice – Hannu Ridell Contact: Investment – Christophe Audoux Newsec - Maakanta Oy, Mannerheiminaukio 1, 00101 Helsinki King Sturge SA, 36 rue Brunel, 75017 Paris (+358 207 420 400) (+ 33 1 44 55 70 00) In-town Out-of-town In-town Out-of-town Prime rent (€/m²/annum) 285 165 Prime rent (€/m²/annum) 230 185 Prime yield (%) 5.90 7.80 Prime yield (%) 6.35 6.85 Helsinki Metropolitan Area has an estimated 5.8 million m2 of Lyon had an estimated 4.95 million m2 of office stock in 2009. It office stock. The demand for new floorspace remains weak. is a significant regional office market in France, with the centre Many companies have reduced their overall requirements and divided into specialised business districts dominated by individual sub-let existing space. Meanwhile, new tenants are taking longer sectors such as financial, technology, R&D and biotech. There to make decisions due to the wide selection of availability and is also an increasing trend for occupiers preferring out-of-town a desire to get the best possible deal from landlords. The office locations, because of the better environment and lower rents. property market is expected to follow the same trend during the second half of 2010. In 2009, take-up dipped to 164,000m², down a third on the previous year. This year, the occupational market has been more In the first half of 2010, vacancy continued to rise, even in the dynamic, with transactions in Confluence, Gerland and Part-Dieu central business district. The vacancy rate at mid-1010 was (CBD). Larger deals (over 2,000m²), where demand slowed more 12.5%, up from 11.5% at the end of 2009, and is forecast to sharply last year, have accounted for a more significant slice of increase to around 13.0% by end-2010. take-up in 2010, with an important proportion also in sales to occupiers. In the year as a whole, office take-up is projected to The development pipeline is now being restricted with projects rise to around 200,000m², not far from its long-term average. either postponed or stopped. Weaker demand over the past two years has meant that developers are hesitant to commit to new Vacancy rates climbed from a low of 4.7% to a historic high space. This has helped to ease the imbalance between supply of 8.0% of stock last year, though much of this excess is in and demand. The level of new construction has slowed in 2010, peripheral markets not the CBD. This trend has been reversed with only 59,000m² expected to be delivered, a drop of 67% on in 2010, as firmer demand and limited new supply have taken 2009. vacancy back to 7.5% by mid-year. With new completions at only 70% of last year’s level in 2010 and take-up improving, the Rental levels have declined since 2008 and at mid-2010 were prospect is for a further decline in availability over the rest of around €285/m²/annum, down from €296/m²/annum a year this year. ago. They may be subject to further downward pressure over H2 2010 due to rising availability. The market downturn has hit prime rents for city offices, which declined from their high of €260/m²/annum a year ago to their Office investment volumes in Helsinki decreased significantly in current €230/m²/annum. Out-of-town rents also dropped, albeit 2009 and have not yet recovered. Prime yields have declined less sharply, reaching €185/m²/annum by mid-2010. With an over the past year to current levels of around 5.9%. There have improving market balance, headline rents are expected to been only a few office transactions in the first half of 2010. The stabilise in the near future. most significant was the purchase by Aberdeen Investors of a 6,900m2 office building - Falcon Gentti, Vaisalantie 8, Espoo Investment demand is stronger than a year ago, with prime well- for €22million. There is still demand for high quality prime secured assets favoured by investors. At the moment, foreign offices, but there are few such properties currently available. buyers have deserted this regional market, though Lyon is still It is expected that the investment market will remain slow France’s second best performer after Paris. Prime yields have throughout 2010, though interest is improving and international fallen by around 100 basis points over the last year, but are likely investors are expected to return in the latter part of the year. to stabilise for the rest of 2010. Lyon is expected to remain a key regional market, with investor interest concentrated on prime commercial assets. Helsinki prime rents and yields Lyon prime rents and yields 400 8 300 10 200 200 5 7 100 0 2 0 4 2006 2007 2008 2009 Q2 2010 2006 2007 2008 2009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%) 16
  • 18. FRANCE - Marseille/Aix FRANCE - Paris Contact: Agency & Investment – Jean Cabrera Contact: Agency – Nicolas JeanJacques King Sturge Méditerranée SA, 14 rue Louis Astouin, 13002 Investment – Philippe Semidei Marseille (+33 4 88 66 30 30) King Sturge SA, 36 rue Brunel, 75017 Paris (+ 33 1 44 55 70 00) In-town Out-of-town In-town Out-of-town Prime rent (€/m²/annum) 250 180 Prime rent (€/m²/annum) 700 500 Prime yield (%) 6.50 7.25 Prime yield (%) 5.25 6.00 Marseille and Aix-en-Provence together had an estimated 2.8 In 2009, Ile de France had an estimated 51.2 million m2 of million m2 of office stock last year. There are many development commercial office stock, one of the largest markets in Europe. Paris and the inner suburbs – including La Défense, the Western projects planned for the near future, especially in Marseille city, Business District and peripheral markets bordering Paris like though these will not be progressed until the economic upturn Saint-Denis, Montreuil or Montrouge - account for over 70% becomes more secure. As a result, the office stock is expected of this. Most French companies remain headquartered in Paris, to remain broadly unchanged in 2010. despite increasing cost competition from other locations. Take-up slowed to 1.8 million m² during 2009, which was the The market saw demand improve in early 2010, when compared lowest annual out-turn in five years. In early 2010, activity has with the lows of 12 months ago. Most of the recent transactions slightly increased, mostly for small and medium sized floor- have been in the Euroméditerranée district of Marseille and in plates. There remains interest in new stock in peripheral and Aix-en-Provence. The upturn is forecast to be sustained for the secondary markets with cost effective rents. But established whole of this year, with take-up estimated at 110,000m2, slightly office districts are also picking up, following a steep rental correction. In 2010 as a whole, take-up is forecast to edge up to higher than last year’s out-turn. This level of activity is below the 1.9 million m², just shy of the long-term average (2 million m²) peaks of the mid-2000s, but in line with historic market averages. and in line with a sluggish economic recovery. Supply has remained relatively scarce, despite the economic There has been an increase in office availability across Paris. The downturn. Marseilles / Aix vacancy reached a new high of 7.0% vacancy rate fell to a low of less than 5.0% only two years ago. But by 2010 H1 it had climbed to 7.0%, as high as at any time last year, but reversed in early 2010. By year’s end, a vacancy since the late 1990s. With demand recovering and speculative rate of 6.5% is projected, assisted by lower levels of office development on hold, however, the prospect is for a reversal in completions and stronger demand than in 2009. This trend has this trend before this year’s end, when vacancy dips to 6.7%. supported prime market rents, which have edged higher over Moreover, with scant development pipeline, this rate will fall the last 12 months, reaching €250/m²/annum, though tenant quickly as the market returns to normal and there is a risk of space shortages re-appearing from 2012. incentives remain generous. There have been early signs of a recovery in prime rents this The first half of 2010 saw limited investment activity in the year. City rents declined by about a fifth in the downturn, though Marseille region. French investors continue to seek well-let levels held at €650/m²/annum after mid-2009. These rents office properties in the established districts, which has brought recorded their first rise for two years during Q2 2010, with the prospect of further improvement by year’s end both in and out- about a further decrease in prime office yields (down 75 basis of-town. The current imbalance between demand and supply still points on a year ago). Conditions are not expected to change favours occupiers, however, and is reflected in long negotiation radically over the rest of 2010, however, with yields set to periods and generous incentives. stabilise at their current levels. Investment markets rebounded from Q4 2009, with prime office property seeing a surge in interest. The average size of transaction has also grown, as the financing of large acquisitions has become easier. Yields have decreased by around 100 basis points over recent quarters for well-let and liquid prime assets. But investors continue to be extremely selective and the yield spread remains large. The investment outlook remains cautious. Volumes are likely to increase slightly on 2009, though the progression is expected to be moderate. Prime yields are set to fall moderately before flattening out later this year, while secondary markets will continue to lag. Marseille/Aix prime rents and yields Paris prime rents and yields 300 9 900 9 200 600 6 6 100 300 3 0 3 0 0 2006 2007 2008 2009 Q2 2010 2006 2007 2008 2009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%) 17
  • 19. GERMANY - Berlin GERMANY - Frankfurt Contact: Investment – Sascha Hettrich Contact: Investment – Sebastian Ott King Sturge Hettrich GmbH, Jaegerstrasse 34-35, D-10117 King Sturge GmbH, Kaiserstrasse 6, 60311, Frankfurt am Main Berlin (+49 30 23322 211) (+49 69 2165 9870) In-town In-town Prime rent (€/m²/annum) 246 Prime rent (€/m²/annum) 390 Prime yield (%) 5.50 Prime yield (%) 5.25 Berlin has an estimated 18.3 million m2 of office stock. Frankfurt has an estimated 10 million m2 of office stock. As Germany’s main financial centre, the city suffered badly from The office market is not experiencing a rapid recovery in the its exposure to the global banking sector last year. But there has wake of the global economic crisis. However, some encouraging been a stabilisation since mid-2009 and local economic indicators signs are emerging. Take-up volumes declined to 444,000m² in have improved. Nonetheless, activity in the city’s occupier 2009. But, after a strong start, take-up for this year as a whole is market slowed to a five-year low of 335,000m² last year, well forecast to rise to 500,000m². One of the most significant deals below the historic average of 550,000m². Office demand was of Q1 2010 was the letting of around 14,000m² in the City East maintained in early 2010, but, even with a more vigorous H2 sub-market to the telecommunication company Nokia. in prospect, take-up is expected to be flat at 330,000m² for the year as a whole. The development pipeline should see an estimated 125,000m²- 150,000m² of new product delivered to the market this year. As After a sustained decline from the mid-2000s, office vacancy a result, the vacancy rate, which has been broadly stable since has risen steadily over the last 2 years, reaching a rate of last year, is forecast to edge up to around 8.4% by the end of 17.0% last year. The development pipeline is expected to bring 2010. around 200,000m² of new space to the market in 2010, with the continued impact of corporate failures and consolidation Stable supply levels and increasing demand have led to a levelling potentially adding further to supply. With demand subdued, a off of rents. Prime rents in the city declined from €276/m²/ further rise in vacancy is in prospect in 2010 to 17.0%. annum (€23.0/m²/month) in 2008 to €252/m²/annum (€21.0/m²/ month) by the end of 2009. They were around €246/m²/annum With the market balance continuing to favour occupiers, there (€20.5/m²/month) in H1 2010 and are expected to stabilise over has been continued pressure on rents. Prime office rents peaked the rest of the year. at €438/m2/annum (€36.5/m2/month) in 2008, but fell sharply to €390/m²/annum (€32.5/m²/month) early last year. Since Investor sentiment has significantly improved in the first half then, top rents have held up, though incentives have become of 2010, as have transactions, boosted by a couple of large more generous and secondary prices continue to fall. Rents are portfolio deals. Expectations for the coming months are positive expected to stabilise at around this level for the rest of this year. and the investment market should continue this upward course in H2 2010. The largest transaction in H1 2010 was the sale Sentiment in the Frankfurt investment market has significantly of The Sony Center in Berlin to a Korean pension scheme for improved in recent months and activity has been revived. The €572million. Prime yields have remained stable on last year at sales of Park Tower (for around €130 million) and the Westpol 5.50%, but may be subject to downward pressure over the next building have been important signs of revival. Financing remains 12 months. difficult, but the outlook is for further improvement in the rest of 2010. Prime yields shifted out to 5.50% in Frankfurt last year, though this was a modest movement compared with other European markets. Since then there has been a slight inward shift to 5.25%, with the prospect of further compression as the year continues. Berlin prime rents and yields Frankfurt prime rents and yields 300 6 700 8 225 525 150 4 350 6 75 175 0 2 0 4 2006 2007 2008 2009 Q2 2010 2006 2007 2008 2009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%) 18
  • 20. GERMANY - Munich GREECE - Athens Contact: Investment – Sascha Hettrich Contact: Agency and Investment – Thomas Ziogas King Sturge Hettrich GmbH, Jaegerstrasse 34-35, D-10117 King Hellas, 7 Evinou str, Athens Tower Building C, Athens 115 Berlin (+49 30 23322 211) 27 (+ 30 210 7711 204) In-town In-town Out-of-town Prime rent (€/m²/annum) 342 Prime rent (€/m²/annum) 360 228 Prime yield (%) 5.00 Prime yield (%) 7.25 7.75 Munich has an estimated 13.3 million m2 of offices in its city 2010 is set to be another difficult year for the office property centre market. Last year, there was a marked deceleration in market in Athens. The shrinking economy has led to a slump in demand, with take-up declining to 375,000m² following six years demand. Office take-up at the end of 2009 fell to 40,000m², the of average increases in excess of 550,000m². Occupiers remain second consecutive year of decline and 36% below the five year very cautious. But activity was more encouraging at the start average. Demand will persist at low levels in 2010, with take-up of 2010. The expectation is that take-up will rise to 425,000m² forecast at just 30,000m², which would represent a fall of 25% in the year as a whole, still below the historic trend, but above on the 2009 level. 2009 levels. Supply of new and existing buildings has increased. The rise Supply has risen sharply in the downturn. The vacancy rate, consists mainly of secondary buildings, with the level of new which had hit a low of 7.0% in 2007, rose to 8.7% last year. New construction falling. Many companies are downsizing and putting completions of office space were relatively modest last year, but plans to move on hold. As a result, the vacancy rate is expected a further 250,000m² is planned for delivery during 2010. As a to rise from 5.0% at the end of 2009 to 6.0% by the end of 2010. result, the improvement in demand is not enough to prevent the vacancy rate climbing to around 9.5% this year. Rents in secondary buildings have been in decline, although prime rents have held stable over the past year and at mid- With supply rising and demand subdued, rents are expected 2010 were €360/m²/annum. Rents are expected to come under to remain under pressure in Munich. Prime office rents fell to further pressure over the next year due to weaker demand and €360/m²/annum (€30/m²/month) in 2009, a four-year low, and rising supply. Occupiers have been able to press landlords for had declined a further 5% by mid-2010 to €342/m²/annum rent reductions and incentives are expected to play an important (€28.5/m²/month). role in the year ahead. The investment market in Germany has seen a rebound in early The investment market has been quiet over the past year, with 2010, with some large transactions and renewed international the majority of transactions involving small offices taken by interest. Munich has seen a few deals, including the Eisbach domestic purchasers. There remains a shortfall of quality office Offices sold for €33 million to German fund manager KGAL in product on the market. Prime investment yields have moved out Q2 2010. Expectations are for continued transactional activity by 75 basis points since mid-2009 and further increases are in over the coming months. Prime yields for in-town offices saw prospect an outward shift of 75 basis points to 5.50% between mid-2008 and mid-2009. Since then yields have moved in by 50 basis points to 5.00% and this level is expected to be maintained over the rest of 2010. Munich prime rents and yields Athens prime rents and yields 500 8 600 8 400 250 5 6 200 0 2 0 4 2006 2007 2008 2009 Q2 2010 2006 2007 2008 2009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%) 19
  • 21. IRELAND - Dublin ITALY - Milan Contact: Agency – Declan O’Reilly Contact: Agency and Investment – Inara Jucinska / Giorgio Investment – Adrian Trueick Lazzaro HT Meagher O’Reilly Ltd, 20-21 Upper Pembroke Street, Dublin Gabetti Property Solutions Agency S.p.A, Via Bernardo Quaranta, 2 (+353 1 634 2466) 40 20139 Milan (+39 02.77.55.243) In-town Out-of-town In-town Out-of-town Prime rent (€/m²/annum) 375 215 Prime rent (€/m²/annum) 450 210 Prime yield (%) 7.00 8.00 Prime yield (%) 5.00 7.60 Dublin has an estimated 3.25 million m2 of office stock. Last year Milan has an estimated 11.7 million m2 of office stock. Office was one of the worst on record for activity in the Dublin office occupier demand was fairly muted in 2009, with total take-up market, with occupier take-up slumping to around 75,000m², the of around 190,000m². However there are encouraging signs lowest level since 1994. of a recovery in the market in 2010, with around 220,000m² of take-up forecast for the year as a whole which would represent There has been a revival during the first half of 2010, as a result an increase of 16%. Demand is predominantly for new and of increased business confidence and activity from overseas centrally-located office space between 400 and 500m², with occupiers. Office take-up for 2010 is forecast at around most occupiers preferring to lease rather than purchase. There 100,000m², which would represent an increase of 33% on is very little take-up of older offices in peripheral locations. last year. Many occupiers are looking to take advantage of the favourable rental deals that are currently available. Activity tends Availability in the Milan office market increased significantly in to be focussed on the prime districts of Dublin 2 and 4. 2009, as a result of increased levels of vacancy and delivery of around 220,000m² of new office space. Many occupiers Following the steep drop in occupier demand last year, around a have started to reduce employee numbers and space, while fifth of all office space in Dublin is now vacant. The development renegotiating more favourable terms on leases. The vacancy rate pipeline, which has been in decline since 2008, is forecast to at mid-2010 was 9.4%. It is expected to remain stable at this level halve again in 2010 to around 50,000m². This reduction, combined for the rest of 2010 owing to a slowdown of development, an with increased occupier demand, should result in a stabilisation upturn in demand and changes of use from office to residential. of the office vacancy rate at 21.0% for the remainder of 2010. Prime in-town rents were around €450/m²/annum at the end of Prime rents for premium-quality, in-town office accommodation H1 2010 and are expected to remain stable for the rest of the fell to €375/m²/annum by the end of H1 2010, and are expected year. However, rents for sub-standard space are likely to come to remain at this level for the second half of the year. Out-of- under increasing pressure. town rents declined to €215/m²/annum by mid 2010 and are also expected to hold steady for the remainder of the year. Office investment activity in early 2010 was better than the same period a year ago, although not quite as high as in Q4 The investment market remained subdued over the first half of 2009. There were several transactions of small-medium size, 2010, with restricted availability of good quality stock. Despite spread across the city. The most active players were domestic the lack of product, the number of overseas investors actively funds accounting for approximately 70% of total investments. investigating the market has increased, with a number of Over the next six months a similar level of activity is expected, European funds in discussions with Irish developers and their with domestic investors (funds in particular) disposing of and banks to secure off-market transactions. acquiring important investment opportunities. Investment turnover is likely to increase in the second half of the year, with both Irish and international banks likely to encourage borrowers to offload their income-producing assets to reduce borrowings. Prime yields for long term secure income are likely to strengthen, with a number of buyers actively looking for suitable product. Yields for short term income and heavily over-rented buildings will, however, continue to struggle as confidence in the letting market remains fragile. Dublin prime rents and yields Milan prime rents and yields 800 8 600 8 600 6 400 400 6 4 200 200 0 2 0 4 2006 2007 2008 2009 Q2 2010 2006 2007 2008 2009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%) 20
  • 22. LUXEMBOURG - NETHERLANDS - Luxembourg Amsterdam Contact: Agency and Investment – Michael Chidiac Contact: Agency and Investment – ing Merijn F. Hartog RealCorp Luxembourg SA, 22 Avenue Monterey, L-2163 DRS Makelaars, Amsteldijk 194, 1079 Amsterdam Luxembourg (+352 26 27 29) (+ 31 20 640 5252) In-town Out-of-town In-town Out-of-town Prime rent (€/m²/annum) 420 300 Prime rent (€/m²/annum) 300 190 Prime yield (%) 6.00 7.50 Prime yield (%) 6.50 7.50 Luxembourg has an estimated 3.05 million m2 of office stock. Amsterdam has an estimated 7.0 million m² of office stock. The Office occupier take-up underwent a significant reduction in Dutch economy shrank by 4% over 2009 and this had a strong 2009, only reaching 110,000m², a 57% decrease from 2008. Take- impact on both the occupier and investment markets. Annual up in the first six months of 2010 amounted to approximately take-up dropped sharply over the year to 192,000m², well below 50,000m². This reflects a slight rebound in the market, with Q1 the five year average of 327,000m². take-up at 20,000m² and Q2 take-up at 30,000m². Following the recession, occupiers remain cautious. There have Supply has trended upwards and is now at a new high. The been increased levels of lease renewals, as existing occupiers vacancy rate at mid-2010 rose to 8.0% and this is forecast postpone re-location to save costs, whilst new tenants are taking to increase again, to around 8.2% by the end of 2010. The advantage of increased incentives and lower rents. Overall, development pipeline remained at a reasonable level in 2009, occupier activity is forecast to slow to around 180,000m² during with around 140,000m² of new stock delivered to the market, 2010. the majority of which was speculative. This represented only a small drop on the previous year and an additional 125,000m² is The availability of office space in Amsterdam is increasing due forecast to come online by the end of 2010. to a rising level of tenant-released space. As a consequence, the vacancy rate has increased from 9.0% at the end of 2008 to Rents for prime locations have held stable at €420/m²/annum. 16.5% at the end of 2009. It is forecast to rise further, to around However, due to the pattern of rising supply and falling take-up, 17.0% by the end of 2010. it is expected that there may still be some downward pressure over the next six months. Prime rents have remained stable at €300/m²/annum for over a year, but remain under pressure as a result of increased A drop in demand combined with a lack of suitable investment incentives and high levels of supply. The outlook is for continued product has meant that investment in the Luxembourg office stability over the rest of the year. market has been weak over the past year. The largest office transaction of 2009 was the acquisition of 12,000m² of office Low investment volumes have been recorded over the first half space at Plateau du Kirchberg by Befimmo SCA for €85 million. of 2010, although there is evidence of improvement compared There have been no significant office transactions in the first with the same period a year ago. However, the majority of half of 2010. The market has not been able to offer the product transactions were small and dominated by private investors. of other European cities and is suffering from a lack of buyers. Foreign investment volumes were constrained, as buyers German open-ended funds, which used to account for around sought mainly long-leased properties in prime locations, which 80% of all investments, have not yet returned. have been in short supply. Key investment deals included the purchase of Het Parc by Hannover Leasing for €19million, the purchase of Lauriergracht 49 by Domus Magnus for €12million and the purchase of Herengracht 440-442 for €4.2million by Lloyds ACS Beheer. Luxembourg prime rents and yields Amsterdam prime rents and yields 500 8 400 8 250 6 200 6 0 4 0 4 2006 2007 2008 2009 Q2 2010 2006 2007 2008 2009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%) 21
  • 23. NORWAY - Oslo SPAIN - Madrid Contact: Agency and Investment – Nils Arne Gundersen Contacts: Agency & Investment – Emma Jackson Newsec AS, Kronprinsens gate 3, PO Box 1800 Vika, 0123 Oslo King Sturge LLP, 30 Warwick Street, London, W1B 5NH (+47 23 00 31 00) (+44 207 087 5518) In-town In-town Prime rent (€/m²/annum) 362 Prime rent (€/m²/annum) 360 Prime yield (%) 6.00 Prime yield (%) 5.75 The Norwegian economy is facing a weak and slow recovery in Madrid has an estimated 11.8 million m2 of office stock. 2010. The office real estate sector in Oslo is following a similar Occupier demand in the Madrid office market was extremely pattern and is showing sporadic signs of recovery. Occupier weak during 2009, falling back to 300,000m². This represented a demand in 2009 remained subdued, but has been slowly 40% decrease from 2008 and the lowest level seen since 1995. improving since. Recently deals include: Aker Solutions taking a The slowdown in demand reflected increasing occupier caution new 22,400m² building to be completed in 2012 and Deloitte AS in the face of prolonged recession and demand is set to remain who will move into a new 15,000m² building in 2013. subdued. Vacancy in the office market rose sharply last year. This increase On the supply side, office availability continued to rise, as was caused by the weak level of demand and the delivery of companies moved to more affordable locations or reduced 140,000m² of new office stock. Tenants have subsequently had occupational space to save costs. A spike in supply was a wider choice of office premises and are taking longer to sign recorded in Q1 2010, when around 80,000m² of new speculative leases. Higher levels of occupier activity are expected during the offices were delivered to the market. These projects had already second half of 2010, partly because most rental contracts are commenced before the worst of the economic and financial renewed at year-end. difficulties took hold. But the overall forecast for new supply in 2010 as a whole is below the long term average. Many projects Prime rents in the central business district fell significantly in remain on hold due to the high availability rate and weak demand. 2009, but have now stabilised at €362/m²/annum. Over the New developments are now only possible after a significant next six months rents may be subject to upward pressure, as amount of the space has been pre-let. occupiers use weak market conditions and higher levels of availability to upgrade their space. The increased quantity of available space has continued to push rents downwards. Prime rents stood at €360/m²/annum in mid- Investment activity in Oslo was positive in early 2010 and well 2010, compared with €408/m²/annum one year ago. up on the previous year. The second quarter was slower, but it is widely expected that the market will continue to recover over Investment volumes in the Madrid office market declined H2 2010. The majority of demand remains from local investors. substantially in 2009. This reflected both a lack of liquidity and However, international investors continue to buy in Norway as low availability of quality product. Aggressive domestic bidders evidenced by the largest transaction in H1 2010, a sale to NIAM. also forced foreign investors completely out of the running. Lending opportunities have improved gradually and prime office Yields for properties in the CBD were generally lower than investment yields have moved inwards by 50 basis points over required by foreign buyers. There has been evidence of prime the past 12 months, to stand at 6.00% in mid-2010. yield compression, with rates down to 5.75% by Q2 2010. Oslo prime rents and yields Madrid prime rents and yields 500 8 600 8 400 6 250 6 200 4 0 4 0 2 2006 2007 2008 2009 Q2 2010* 2006 2007 2008 2009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%) 22
  • 24. SWEDEN - Stockholm SWITZERLAND - Geneva Contact: Agency and Investment – Marie Bucht Contact: Agency and Investment – Robert Mathieson Newsec Advice, PO Box 7795, Regeringsgatan 65, SE-103 96 Key Real Estate Consultants, 8 Chemin de Blandonnet, 1214 Stockholm (+ 46 8 454 40 00) Geneva (+ 41 22 545 51 00) In-town Out-of-town In-town Out-of-town Prime rent (€/m²/annum) 390 187 Prime rent (€/m²/annum) 860 465 Prime yield (%) 5.25 6.50 Prime yield (%) 4.25 5.25 Stockholm has an estimated 11.9 million m2 of office stock. In Geneva has an estimated 4.38 million m2 of office stock. H1 2010 there was a small, but encouraging increase in activity Occupier demand in the first half of 2010 improved slightly on on the office leasing market. But, over the year ahead, take-up the same period a year ago. Total take-up for 2010 is forecast is not forecast to rise dramatically, as many companies remain at 85,000m², which would represent an upturn of around 13% cautious and cost-sensitive. from 2009 levels. Supply has steadily increased in the Stockholm market. Between Market activity began to improve in 2009 with enquiries from 2008 and 2009 the vacancy rate rose from 9.5% to 11.5% and it a broad range of tenants, many of which were converted into is forecast to rise to 12.5% by the end of 2010. The delivery of leases in 2010. Interest from finance companies for prime city new office space in 2010 is forecast at around 160,000m², which centre space has been strong, either for expansion or new is more than double the 2009 level. The increase in new office offices. Demand in the airport area has been noted from both stock, combined with relatively weak occupier demand, are the financial companies (for high quality back office facilities) and key factors driving the vacancy rate up in 2010. industrial companies looking for modern accommodation. The increasing pressure on housing, health and other services in the The Stockholm service sector started to stabilise from early city is also pushing businesses to other locations in the Lake 2010 and prime office rents are expected to remain fairly Geneva region. static at around €390/m²/annum. However, tenants are still concentrating on increasing the efficiency of their premises. In addition to the upturn in demand, the development pipeline There is increasing differentiation between modern / efficient for new offices is expected to be much stronger in 2010, with premises and older offices. an estimated 75,900m² to be delivered to the market. This construction marks a significant upturn on the past two years. Liquidity in the Swedish investment market has increased since Until this space comes on-line, the volume of good quality mid-2009, with high quality properties in good locations most in accommodation will be constrained, which is expected to demand. Stabilising rents and lower interest rates are the major increase pre-letting, as tenants are forced to plan ahead. factors behind the recovery. A further inward yield movement is expected in prime locations with strong investor interest during The increase in tenant demand expected over second half of 2010. The largest office transaction in the first half of 2010 was the year will result in a vacancy rate of around 4.0% by the end the purchase of 40,000m² of space at Frosundavik Business Park of 2010, well down from the end of 2009. Competition from for around €113 million by KLP Fastigheter AB developments in the area between Geneva and Lausanne will continue to be sufficient to keep rents generally stable. The investment market has continued to be slow, with a low level of both number of transactions and their average size. In general, lack of stock coming onto the market and the gap between buyer and seller expectations have been the major constraints. Notwithstanding this, investor interest is strong, with international buyers returning and more transactions anticipated over the rest of the year. Stockholm prime rents and yields Geneva prime rents and yields 600 8 1,400 6 300 5 700 5 0 2 0 4 2006 2007 2008 2009 Q2 2010 2006 2007 2008 2009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%) 23
  • 25. SWITZERLAND - Zurich UNITED KINGDOM - Belfast Contact: Agency and Investment – Robert Mathieson Contact: Agency and Investment – Rory McConnell Key Real Estate Consultants, 28 rue du Village, 1214 Geneva McConnell Martin, Metropole House, 95/97 Donegall Street, (+ 41 22 545 51 00) Belfast (+44 28 90 205 900) In-town Out-of-town In-town Out-of-town Prime rent (€/m²/annum) 620 270 Prime rent (€/m²/annum) 135 110 Prime yield (%) 4.25 5.25 Prime yield (%) 7.00 8.50 Zurich city has an estimated 7.5 million m2 of office stock. Belfast has an estimated 750,000m2 of office stock. The office The office market came alive again at the end of 2009 with market continues to undergo a period of stagnation with demand enquiries from a broad range of tenants, many of which have from both the public and private sectors having virtually dried been converted into leases in the first half of 2010. Interest in up over the past 12 months. Take-up for 2009 reached just prime city space has come from finance, either for expansion 7,430m², a 60% decrease on the previous year, and the outlook or the setting up of new offices. Demand in Zurich West has for 2010 is bleak with activity levels likely to be below that been noted from both financials, particularly those seeking high achieved last year. quality back office facilities, and industrial companies looking for modern accommodation. Other areas of interest include Government-led take-up usually accounts for 50-60% of occupier Oerlikon, Opfikon and Seefeld. activity in Belfast so the public sector cuts will have a devastating impact on the market with any existing requirements now on As tenant demand is good, further strong take-up is expected hold. In addition, the private sector continues to focus on cost in the second half of the year, keeping the office vacancy rate cutting and more economic use of space, further impacting stable at 3.8%. Furthermore, the number of pre-lets is expected on the already subdued take-up levels. Only one deal of any to rise as tenants are forced to plan ahead in the face of limited significance was reported during H1 2010, namely the Passport quality accommodation, and the interest in projects such as Office acquiring 2,462m² at Law Society House, Victoria Street. CSAM’s Prime Tower in Zurich West is strong. The Belfast market remains oversupplied. A number of schemes Competition from new developments will keep rents stable in have completed in the last six months including Obel Tower and Zurich, although an overhang of vacant offices in some areas The Boat on Donegal Quay and The Soloist and Lanyon Plaza on will leave some secondary locations facing downward pressure. Lanyon Place. These schemes remain vacant with substantial incentives on offer to tenants. Construction continues in the The investment market has continued its slow trajectory over Titanic Quarter where Harcourt achieved an 11,150m² letting to the first half of the year. A growing number of transactions are Citibank in 2009, which admittedly had been in the pipeline since being undertaken directly between principals, such as the sale 2007. of a building in Bahnhofstrasse by Crédit Suisse. But in general the lack of stock on the market and the gap between buyer and Prime rents have fallen dramatically, dropping from €176/m²/ seller expectations are the major constraints. Notwithstanding annum (£14/ft²/annum) to €135/m²/annum (£11/ft²/annum) in this, interest is strong, with international investors returning to the city centre over the past 12 months. Further downward the market. pressure on rents is expected over the second half of the year, with continuing generous incentives packages, in a bid to secure tenants. The investment market remains subdued in Belfast with prime yields moving out from 6.50% to 7.00% in the city centre, although there is limited evidence to support this. However, activity levels are likely to increase when banks start to offload distressed stock and there is some evidence that investment ‘vultures’ are beginning to circle Belfast. Zurich prime rents and yields Belfast prime rents and yields 800 8 200 8 600 400 6 100 6 200 0 4 2006 2007 2008 2009 Q2 2010* 0 4 2006 2007 2008 2009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%) 24
  • 26. UNITED KINGDOM - UNITED KINGDOM - Birmingham Bristol Contact: Agency Jonathan Carmalt Contact: Agency Ian Wills Investment – Oliver Paine Investment – Richard Goodall King Sturge LLP, 40 Berkeley Square, Bristol BS8 1HU King Sturge LLP, 45 Church Street, Birmingham, West Midlands, (+ 44 117 927 66 91) B3 2RT (+44 121 233 2898) In-town Out-of-town In-town Out-of-town Prime rent (€/m²/annum) 331 239 Prime rent (€/m²/annum) 337 258 Prime yield 6.00 7.50 Prime yield (%) 5.75 6.25 The Birmingham office market saw a reasonable start to 2010 Bristol’s occupier market was surprisingly resilient during the with the Office for Legal Complaints acquiring 3,775m² in the first half of 2010 with a clutch of prime deals completing in the city centre. However, demand generally remains subdued city centre during the first quarter including 2,044m² to Ernst & with central Birmingham take-up reaching 26,460m² during H1 Young at The Paragon, a further 2,230m² to NFU at Templeback 2010. Office activity in the second half of the year is likely to and 1,858m² to The College of Law at Temple Circus. In addition, remain fragile with few known larger requirements in the market a further 2,044m² was taken out-of-town at Harlequin Business coupled with the uncertainty of public sector cuts. On this basis, Park by the Police Authority. In contrast the market for second take-up for 2010 as a whole is expected to be in the region of hand space has seen limited occupier demand so far this year. 46,450m², 24% down on the level achieved in 2009. Take-up during 2010 is expected to be in line with the levels Availability rose sharply in Birmingham in 2009 following an influx achieved in 2009 when 30,380m² was transacted in the city of Grade B space returned to the market and the completion of a centre and 24,900m² out-of-town. Bristol has a broad occupier number of new-build schemes. While supply levels now appear base so is better placed than some cities but may suffer some to have plateaued, the vacancy rate for central Birmingham downturn in demand following restrictions in public sector was in the region of 22.0% at mid 2010, the highest of all the spending. major regional city centres. Not surprisingly, no new speculative schemes are expected to start on site for the foreseeable future. Bristol city centre has the lowest vacancy rate in terms of prime accommodation of any of the Big 6 regional cities, with a rate of Despite difficult market conditions, a good range of office 10.0% (down from 12.0% in 2009) expected at year-end. The supply now exists together with some highly competitive speculative start on site in Q1 2010 of the 10,500m² Bridgewater occupier terms and there are early signs that some occupiers House at Finzels Reach demonstrates confidence in the Bristol are seeking to forward agree transactions in advance of the end market in light of relatively constrained prime supply. This is the of their current lease liabilities in order to take advantage of such only new speculative development activity in any of the major terms. Prime rental levels and the incentives offered to tenants regional city centres during H1 2010 and is due for completion stabilised during H1 2010, although going forward the rental in 2011. outlook for Birmingham remains uncertain. Prime city centre rents stood at €331/m²/annum (£27/ft²/annum) at H1 2010. Prime city centre rents have seen a slight uplift over the past 12 months to €337/m²/annum (£27.50/ft²/annum) and are expected The latter half of 2009 saw increased investor activity in to remain at this level throughout 2010. Out-of-town rents Birmingham and a dramatic compression of initial yields for prime have stabilised at €258/m²/annum (£21/ft²/annum). However Grade A offices. There were a number of notable transactions occupiers are expected to continue to look at driving down costs during this period including the sale of 7, 8 & 10 Brindleyplace and obtaining rental incentives, impacting on net effective rental (25,718m²) for £101.5m (7.00%). By the end of 2009 and into levels. Q1 2010 yields had moved in significantly with No.2 St Philips Place acquired by the German fund SEB for £29m (5.85%) and The weight of money continues to fuel demand for prime Rutland House sold to Aviva Investors for £27m (6.10%). investment property in Bristol and during Q2 2010 the British Steel Pension Fund purchased 1 George’s Square at 5.75%. The However, with the continuing shortage of prime investment current cycle is likely to have peaked at this level, although the opportunities in the market place and continuing uncertainty over lack of prime supply will stabilise yields. Investor appetite for rental levels in an oversupplied occupational market, a softening secondary and tertiary space remains limited as void periods and of prime yields to the long term average for the city of between weak tenant demand are of considerable concern going forward. 6.25% and 6.50% is expected over the latter half of 2010. Birmingham prime rents and yields Bristol prime rents and yields 500 8 500 8 250 6 250 6 0 4 0 4 2006 2007 2008 2009 Q2 2010 2006 2007 2008 2009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%) 25
  • 27. UNITED KINGDOM - UNITED KINGDOM - Cardiff Edinburgh Contact: Agency – Andrew Hayes Contact: Agency John Clement Investment – Jonathan Phillips Investment – Chris MacFarlane King Sturge LLP, Haywood House, Dumfries Place, Cardiff CF10 King Sturge LLP, 7 Castle Street, Edinburgh, EH2 3AH 3UE (+44 29 2022 7666) (+ 44 131 225 4221) In-town Out-of-town In-town Out-of-town Prime rent (€/m²/annum) 257 194 Prime rent (€/m²/annum) 344 221 Prime yield (%) 6.50 7.00 Prime yield (%) 6.00 8.50 Cardiff continues to see subdued take-up levels as occupiers Edinburgh has an estimated 2 million m² of office stock. Take-up remain cautious. Take-up for 2010 is expected to be in the region held up well during 2009 and reached 46,450m², but remained of 32,000m², about 30% below the long term average. While 30% below the long-term average. This steady level of take- there are limited new enquiries some occupiers, with breaks up was achieved despite the highly unfavourable economic or lease expiries, are taking the opportunity to trade up with conditions and Edinburgh’s exposure to the banking sector. extensive rental incentives on offer, often the equivalent of 2 ½ Take-up for 2010 is expected to be similar to 2009, predominantly years’ rent. in transactions below 930m². There are very few corporate occupiers looking for space in Edinburgh at present, so demand The widely anticipated public sector cuts are an additional is expected to come from the indigenous market, typically the threat to demand for office space in Cardiff. The combination local professional sectors. of reduced public sector activity and the likely release of second hand space back to the market by this sector will further increase During 2009 a number of new schemes completed in Edinburgh, the imbalance between supply and demand. boosting the supply of Grade A space in the market. The vacancy rate stood at 12% at mid-2010, its highest level since 2003. An increase in available second hand space has pushed Cardiff’s However funding difficulties and low demand will continue vacancy rate up to 12.5% and this is expected to increase to to discourage new projects and the vacancy rate is therefore nearer 13.5% by year-end. However, available Grade A space not expected to rise further. Prominent available schemes remains relatively scarce, and limited development activity in Edinburgh city centre at mid-year include Exchange Place indicates there is likely to be a shortage going forward. The (19,500m²), Waverley Gate (18,900m²) and Tanfield (17,700m²). only speculative activity currently on site is J R Smart’s Capital Prime city centre rents stabilised at €344/m²/annum (£28/ft²/ Quarter, which will provide 3,425m² of new office space when it annum) during the first six months of 2010 but out-of-town completes in winter 2010. When developer confidence returns rents have fallen to €221/m²/annum (£18/ft²/annum). The level there are a number of ‘oven ready’ sites in the city centre of incentives is typically three months for every year of the including MEPC’s Callaghan Square and future phases of JR lease. For the rest of the year, city centre rents are expected to Smart’s Capital Quarter. remain stable while out-of-town rents are likely to face further downward pressure. At H1-2010 rents in the city centre stood at €257/m²/annum (£21/ft²/annum), whilst out-of-town office rents were €194/m²/ The city’s investment market experienced a strong start to 2010 annum (£15.75/ft²/annum). Prime headline rents remain steady with good interest from institutions in prime stock. Over the although incentives continue to come under pressure. past 12 months prime yields have moved in from 7.25% to 6.00%, as evidenced by the sale of Edinburgh Quay 2 at the Cardiff’s investment market saw a bounce in activity levels end of 2009 for £28 million. Going forward the prime market is during late 2009 and into the start of this year, resulting in a expected to stabilise although there will be limited good quality significant yield shift to 6.50% for city centre offices (7.75% 12 stock for sale. The secondary market remains poor with yield months ago) and 7.00% out-of-town (9.00% 12 months ago). differentials widening to reflect the inherent risks associated However, there are concerns that this level of activity is now with this sector. The out-of-town market remains challenging, starting to falter. There is still a weight of money chasing prime which can be attributed to the short term nature of the lease investment product but the market for secondary stock is likely periods on properties which have been offered on the market, to become increasingly polarised. and reflecting this yields have moved out to 10.00%. Cardiff prime rents and yields Edinburgh prime rents and yields 600 8 500 8 300 6 250 6 0 4 0 4 2006 2007 2008 2009 Q2 2010 2006 2007 2008 2009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%) 26
  • 28. UNITED KINGDOM - UNITED KINGDOM - Glasgow Leeds Contact: Agency - Campbell Hart Contact: Agency – Richard Thornton Investment – Chris Macfarlane Investment – Andrew Summersgill King Sturge, 6th Floor, 145 St. Vincent Street, Glasgow, G2 5JF King Sturge LLP, City Point, 29 King Street, Leeds, LS1 2HL (+44 141 204 2221) (+44 113 244 1441) In-town Out-of-town In-town Out-of-town Prime rent (€/m²/annum) 306 190 Prime rent (€/m²/annum) 331 221 Prime yield (%) 5.75 8.00 Prime yield (%) 6.50 7.25 Occupier activity in Glasgow held up well in 2009 despite difficult Following a further deceleration in activity in 2009, the Leeds market conditions. City centre take-up reached 38,100m² but market faces a subdued 2010 with take-up levels likely to be much in line with the previous year, in the region of 55,740m². was skewed by four large transactions which accounted for over The market continues to be dominated by smaller transactions 50% of total activity. Demand levels fell sharply during H1 2010 below 465m² and there are few corporate requirements in with take-up for the market as whole reaching just 11,150m². excess of 930m². During the first six months of 2010 there were With little sign of new occupiers entering the market and no transactions over 1,400m² in the city centre. uncertainty over public sector activity, take-up for the year as a The vacancy rate for Leeds stands at 13% and, while there is an whole is likely to be in the region of 37,160m². oversupply of Grade A space, the majority of this is outside the traditional core. With development on hold and no new activity At H1 2010 there was 35,300m² of new Grade A space available expected to start on site, any further rise in availability in the city for occupation in Glasgow and, given market conditions, centre will depend on second-hand space. Out-of-town supply competition for tenants is intense and incentive levels are remains plentiful, with vacancy rates likely to remain higher for longer. commensurately generous. However, a dry development pipeline through to 2011/12 and some stabilising of the economy is likely However there are tentative signs that business confidence is to lead to a shortage of Grade A space over this timeframe which returning and as occupiers adapt to market conditions there is should encourage another development cycle. likely to be some churn as they seek to exploit the incentives on offer or regear leases on more favourable terms. Headline prime city centre rents rose marginally to €331/m²/annum (£27/ The current supply of residual Grade A space is putting pressure ft²/annum) over the 12 months to end H1 2010 while out-of-town on headline rental values. Over the 12 months to end H1 2010, rents fell to €221/m²/annum (£18/ft²/annum). Both markets are city centre rents reduced from €350/m²/annum (£28.50/ft²/ expected to face downward pressure over the next six months. annum) to €306/m²/annum (£25.00/ft²/annum) but are likely to stabilise over the next six months. Out-of-town rents, skewed The first quarter of 2010 saw an improvement in investment activity and further compression in prime yields as funds re- by oversupply in developments with Enterprise Zone status, entered the Leeds city centre market. In February 2010 No have fallen to €190/m²/annum (£15.50/ft²/annum) and are likely 1 Whitehall Riverside was sold to NFU Mutual for £51.3m, to ease back further to (€153/m²/annum (£12.50/ft²/annum). reflecting a yield of 5.95%. While activity levels slowed into Q2, Incentives remain generous with tenants comfortably receiving there is evidence of increased appetite for good quality multi-let three years rent free or cash equivalent on a 10-year lease. city centre opportunities, in particular where there is potential to add value and there is a spread of risk. Prime yields are expected to remain stable in the city centre over the latter half of 2010 but Glasgow’s investment market was revived during the latter half there is likely to be some outward movement out-of-town. of 2009 and into Q1 2010 with city centre prime yields moving in from 7.25% to 5.75%. A number of city centre buildings were The first quarter of 2010 saw an improvement in investment sold for in the region of 6.00% and Broadway One was sold to activity and further compression in prime yields as funds re- entered the Leeds city centre market. In February 2010 No KanAm in January 2010 for 5.75% (£51m). Out-of-town, where 1 Whitehall Riverside was sold to NFU Mutual for £51.3 m, the concentration of prime stock is less, yields have moved reflecting a yield of 5.95%. During Q2, the BT building on in from 9.00% to 8.00%. Going forward the funds will remain Sovereign Street, which is let to BT Plc for a further 10 years, focussed on prime stock with solid fundamentals whilst the was sold at £40.175 m, reflecting an initial yield of 6.75%. While secondary market will come under pressure in terms of pricing. investment activity levels have slowed slightly over the last two quarters, there is evidence of increased appetite for good quality multi-let city centre opportunities, in particular where there is potential to add value and there is a spread of risk. Prime yields are expected to remain stable in the city centre over the latter half of 2010 but there is likely to be some outward movement out-of-town. Glasgow prime rents and yields Leeds prime rents and yields 600 8 500 8 300 6 250 6 0 4 0 4 2006 2007 2008 2009 Q2 2010 2006 2007 2008 2009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%) 27
  • 29. UNITED KINGDOM - UNITED KINGDOM - Central London Manchester Contact: Agency – Mark Bourne/Chris Watkin Contact: Agency Chris Mulcahy Investment - James Beckham/Simon Beckett Investment – Simon Merry King Sturge LLP, 7 Princes Street, London EC2R 8AQ King Sturge LLP, One Piccadilly Gardens, Manchester M1 1RG (+ 44 20 7796 5454) - City (+ 44 161 236 8793) King Sturge LLP, 30 Warwick Street, London WIB 5NH (+ 44 20 7493 4933) – West End City West End In-town Out-of-town Prime rent (€/m²/annum) 626 885 Prime rent (€/m²/annum) 350 227 Prime yield (%) 5.25 4.75-5.00 Prime yield (%) 6.00 7.50 Central London offices have seen a turnaround in fortunes over Manchester currently has an estimated 1.3 million m² of office the last 12 months. The West End occupier market performed stock. While take-up in the city centre was down 10% in 2009 the better than expected in the first half of 2010. Activity in H1 2010 wider Manchester market boosted overall take-up to 176,510m² was close to the 2009 total and a decline to sub-6% vacancy with a number of larger transactions contributing to the market’s rates has again signalled rental growth. Prime rents have risen resilience. However, occupier demand has noticeably dropped by 8% from the lows of end-2009 (in sterling terms), and there in 2010 with the level of enquiries and completed transactions are now super-prime deals signing in excess of €1,000m² / reducing. City centre take-up is expected to be in the region annum. of 51,100m² in 2010, down a third on the level achieved the previous year. In the second-half of this year, rental growth will be driven by the shortage of Grade A space, particularly in the Core. Developers The largest deal of the year so far in the city centre is Marks and are responding to this and starting new schemes, while there will Spencer acquiring 1,950m² in Spinningfields for administrative be opportunities for landlords to bring quick refurbishments to purposes. Whereas public sector demand boosted an otherwise market. Take-up may moderate in H2 2010, as the first half was subdued city centre market in 2009, cutbacks in this sector will peppered with some unusually large deals. But the 307,000m² have a negative impact on demand levels in 2010. expected is in line with the long-term market average. However, the level of supply in Manchester is reducing so the The City of London office market has also seen a marked market remains in balance. Vantage Point (4,580m²), the only recovery. Letting activity has surged, with 250,000m² signed for new space under construction in the city centre, completed in H1 2010, while vacancy has declined to 8.9% as availability at the start of the year and the supply tap is now fully turned sunk to an 18-month low. As a result, prime rents have risen off. The Grade A large floorplate market is seeing the greatest from their trough of just above €500m² to the mid-2010 level of reduction in availability. €626m²/annum. Following a decline in rents in 2009 there has been some With significant space under-offer, City take-up is expected to stabilisation in prime rents (at local currency levels) during 2010 reach a three-year high of 418,000m² in 2010. An extremely and due to shortages of new Grade A space an increase in net limited development pipeline in the years to 2012 implies further effective rental levels is expected during the latter half of 2010. strong rental growth ahead as well. In addition, with demand Headline rents in the city core remained at €350/m²/annum expected to far outstrip new supply, there is also an expectation (£28.50/ft²/annum) at mid-2010, while South Manchester out- that pre-lets will return to the market in the near future. of-town rents stabilised at €227/m²/annum (£18.50/ft²/annum). The Central London investment market has remained healthy, Investor demand for prime central Manchester offices picked building on the strong inflows of H2 2009. With buoyant demand up during the first half of 2010 following two years of limited from both overseas and domestic investors, the result has prime stock availability. The first 6 months of 2010 saw £249.9 been a competitive market for prime stock and further yield million invested in 3 transactions, compared to a total of just compression over the last six months. This has been reinforced £166.0 million for the preceding two years. The largest of these by the healthy rental growth emerging in the occupational was Aerium’s acquisition of 3 Hardman St from Allied London for market. By mid-2010, prime yields were below their long-term £182.5 million (6.30%), the City’s largest ever office investment average in both City and West End. The uncertain economic transaction. Yields for modern well let buildings are expected to climate, however, means that any further inward movement will remain in the region of 6.00% - 6.25% for the remainder of 2010 be limited in the rest of 2010. with one building under offer at 6.00% at end-Q2. London prime rents and yields 2,000 8 Manchester prime rents and yields 500 8 1,000 5 250 6 0 2 2006 2007 2008 2009 Q2 2010 0 4 2006 2007 2008 2009 Q2 2010 Prime rent - City ( /m2/annum) Prime yield - City (%) Prime rent - West End ( /m2/annum) Prime yield - West End (%) Prime rent ( /m2/annum) Prime yield (%) 28
  • 30. UNITED KINGDOM - UNITED KINGDOM - Newcastle Thames Valley Contact: Agency – Simon Taylor Contact: Agency – Piers Leigh Investment – Dickon Wood Investment – Angus Minford King Sturge LLP, 51 Grey Street, Newcastle upon Tyne, NE1 6EE King Sturge LLP, 30 Warwick Street, London W1B 5NH (+ 44 191 1279 0011) (+44 20 7493 4933) In-town Out-of-town In-town Out-of-town Prime rent (€/m²/annum) 257 193 Prime rent (€/m²/annum) 343 306 Prime yield (%) 6.75 8.00 Prime yield (%) 6.25 7.00 Newcastle has an estimated 2.6 million m² of office stock, of The Thames Valley has an estimated 5.7 million m2 of office which around 1.4 million m² is located out-of-town, much of it stock. It covers a large triangular area of the South East of within Enterprise Zones. Unlike the majority of other UK office England, spreading westwards from London, roughly bounded centres, Newcastle had a strong 2009 with demand levels up by the M40 and M3 motorways, encompassing the important 49% on the previous year. This surge in take-up was driven by office markets of Reading, Maidenhead, Bracknell, Slough and activity in the out-of-town market including Tesco Bank acquiring Heathrow. 9,476m² at Quorum. Following a challenging 2009 the Thames Valley experienced a Activity levels in Newcastle will be more restrained during 2010 relatively strong start to 2010, although take-up remains below with take-up levels expected to be in the region of 24,150m², the five-year quarterly average of 36,230m². During the first so down 64% on the exceptional level seen in 2009.The first six months of the year, 61,410m² of office space was taken- half of 2010 has seen an absence of enquiries over 930m² and up in the Thames Valley, up 42% on the same period last year. unsatisfied public sector requirements have been put on hold. Take-up has been boosted by GE acquiring 11,446m² at The Ark, Hammersmith; the largest deal in the Thames Valley since Vacancy levels are comparatively low in Newcastle when Q2 2008. Going forward, at mid 2010 the Thames Valley had compared to some other UK regional office centres. At H1-2010 56,670m² under offer, the highest level since our records began the vacancy rate stood at 8.5% and is expected to increase in 2004. The increased activity shows corporate confidence to 9.0% by year-end. The supply of second hand stock is returning to the market after a period of delayed decision making. expected to increase as break clauses are exercised and leases not renewed, in particular by public sector occupiers. There The level of available office space has continued to increase over the past 12 months and stood at 732,810m² at mid 2010, continues to be development activity in the out-of-town market up 11.0% on the same period last year. The current level of where various incentives are available, but Grade A supply in the supply equates to a vacancy rate of 12.9%. The development city centre is relatively limited. During H1 2010 Wellbar Central pipeline remains switched off with just one speculative scheme completed bringing 11,150m² to the city centre but there is remaining under construction and due to complete late this year otherwise no new development activity in the core. (Shepherd Developments’ 6,790m² in Maidenhead). No new schemes are expected to start on site this year. Prime rents for in-town office space remained stable (at local currency levels) at €257/m²/annum (£21/ft²/annum) during Headline prime rents have seen a modest decline over the past H1 2010 while prime rents in the out-of-town Enterprise Zone 12 months to stand at €343/m²/annum (£28.00/ft²/annum). The schemes saw headline rents fall from €208/m²/annum (£16.50/ level of incentives being offered to tenants is likely to have ft²/annum) to €193/m²/annum (£15.75/ft²/annum) over the peaked and with shortages of Grade A space anticipated in some course of 12 months. Downward pressure on both city centre key town centres we expect some growth in net effective rents and out-of-town rents is expected into H2 2010 as landlords in these locations, particularly West London suburbs, over the struggle to retain tenants. next 12-15 months. There has been further yield compression with city centre Yield levels for prime assets in the Thames Valley experienced prime yields moving in from 8.25% to 6.75% over the course a significant yield shift in the 12 months to mid 2010, moving of 12 months. This is evidenced by Legal & General purchasing in to 6.25%. Optimism has been fuelled by the ‘ripple effect’ Sandgate House (2,740m²) for £9.450m (6.75%) in January from Central London markets, favourable forecasted rental 2010. The out-of-town market has seen yields move in from growth rates and the limited amount of new development in the 10.00% to 8.00% over the same period. However, institutional core centres over the last five years. The strongest demand demand is very selective and while the prime investment market continues to be for in-town, modern offices in established is expected to stabilise over 2010, yields in the secondary market centres, however these assets are in short supply with investors may be harder to maintain. reluctant to sell these opportunities. Newcastle prime rents and yields Thames Valley prime rents and yields 500 10 500 8 8 250 250 6 6 0 4 0 4 2006 2007 2008 2009 Q2 2010 2006 2007 2008 2009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%) 29
  • 31. BULGARIA - Sofia CROATIA - Zagreb Contact: Agency and Investment – Andrew Peirson Contact: Agency and Investment – Jens Moller Madsen King Sturge EOOD, 5 Lege Street, 1000 Sofia, Bulgaria King Sturge d.o.o., Eurotower, Ivana Lučića 2a, 10 000 Zagreb (+359 2 980 70 08) (+ 385 1 4826 114) In-town Out-of-town In-town Out-of-town Prime rent (€/m²/annum) 228 132 Prime rent (€/m²/annum) 192 156 Prime yield (%) 9.00 10.00 Prime yield (%) 8.50 9.0 Sofia had an estimated 1.05 million m2 of modern office stock Zagreb has an estimated 804,000m2 of office stock. Take-up in at mid 2010. Bulgaria is still in the grip of recession and the 2009 was just 18,000m², which represented a sharp drop from office market remains under pressure in 2010, with very little 2008. Demand has stabilised in 2010, with take-up forecast at occupier activity. The total year take-up forecast for 2010 is 20,000m² for the year as a whole - a marginal improvement, around 60,000m², which would represent a further decline from albeit still below the five year average. the 2009 level of 65,000m². New construction of Grade A space has virtually ground to a halt In terms of delivery of new office stock, a number of buildings in Zagreb in recent years. In 2010, construction is expected to fall have recently been, or are close to being completed and this will to just 16,000m². However, the accelerated drop in demand has add further to an already over-supplied out-of-town office market. outpaced even the reduction in construction levels. Combined The development pipeline is expected to bring 234,000m² of with weak employment trends, this has resulted in an increasing new construction to the market in 2010 and this, combined with vacancy rate for office space within Zagreb, rising from around weak occupier demand, could see the vacancy rate double from 3.0% in 2008 to around 7.5% in 2010. 15.0% at the end of 2009 to around 30.0% by the end of 2010. The city centre market still has an under-supply of good quality Prime rents have fallen over the last year to €192/m²/annum. office product and this will not change during 2010. Tenants are The drop has been milder than expected, but weak occupational tending to remain in older offices or to relocate out of the centre. demand over the last three to six months and rising vacancy are likely to bring further downward pressure in the next six months. Prime office rents in Sofia have fallen over the past year, from The continuing weakness of the economy may also increase the €264/m²/annum in mid-2009 to around €228/m²/annum at need for flexible leases, shorter terms, and more breaks and mid-2010. In the short term, there are a small number of key tenant incentives. tenants looking at the market and much will depend on whether they decide to remain in their existing buildings. Landlords During H1 2010 there was a recovery in investor confidence, are becoming increasingly flexible and there is now a general though no office transactions were recorded. The weakness awareness that rents must come down in order to attract was partly attributable to a lack of suitable product. During the tenants. second half of 2010, investment demand will remain stable and confidence is likely to hold up, but demand is expected to There is virtually no activity in the Sofia office investment market. remain subdued in line with weak market fundamentals. Prime Investors are shying away from Bulgaria due to a lack of good- office yields have moved out by 25bp to 8.50% over the last 12 quality leased product and the attention of western investors months. is still on more central eastern european countries such as Poland and the Czech Republic. Historic investors in the region, including the UK and Greece, are generally inactive and there is still no real sustainable interest from the German and Austrian funds. Uncertainty over future supply levels, and an increasing vacancy rate, puts off institutional investors. Sofia prime rents and yields Zagreb prime rents and yields 300 10 300 10 200 8 200 8 100 6 100 6 0 4 0 4 2006 2007 2008 2009 Q2 2010 2006 2007 2008 2009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%) Note: Rents and yields (2006-8) from secondary sources 30
  • 32. CZECH REPUBLIC - Prague ESTONIA - Tallinn Contact: Agency and Investment – Angus Wade Contact: Agency and Investment – Vitali Kõllomets King Sturge s.r.o., Bredovský dvůr, Olivova 4, 11000 Prague 1 Re&Solution, Foorum House, Narva Road 5, Tallinn 10117 (+ 420 234 703 333) (+372 631 4533) In-town Out-of-town In-town Out-of-town Prime rent (€/m²/annum) 252 174 Prime rent (€/m²/annum) 175 105-110 Prime yield (%) 7.00 7.00 Prime yield (%) 8.00 9.00 Prague has an estimated 2.7 million m2 of office stock. Despite By the beginning of 2010, Tallinn office stock was estimated at being one of the stronger economies in emerging Europe, the 530,000m². Occupier demand has been generally weak over the Czech Republic has not escaped the global economic crisis. This past year as many companies reviewed employee numbers and was reflected in weakened demand for office space in Prague froze their expansion plans. Most of the activity has comprised of over the past year. Take-up in 2009 was 244,000m², a reduction rent renegotiations. Stronger local and international companies of around 6% from the 2008 level. Demand is also forecast to fall mostly stayed in the same office locations, but negotiated again slightly in 2010 to around 230,000m². rental discounts in the region of 25-30%. However, a number of small local companies were able to use the conditions to their Construction of new offices in Prague has spiralled downwards. advantage and move from lower grade buildings to cheaper, new The level delivered to the market in 2009 was 162,000m², offices with lower utility costs. less than half that of 2008. This sharp contraction is forecast to continue in 2010 with only 55,000m² of new stock coming There is currently a large imbalance between supply and online. Currently only projects with a secured minimum of 50% demand in the Tallinn office market. Stock in the city increased of pre-lease are making it to the construction phase. Despite this rapidly in just a few years and there is now an over-supply of reduction in new construction, the vacancy rate had increased good quality offices, with not enough tenant demand to fill the to 11.8% by the end of 2009 and is forecast to increase to space. As unemployment is expected to rise further in 2010, it is 13.5% by end-2010, as several large companies are expected unlikely that much of the oversupply will be absorbed in the year to relocate from their current premises. Looking ahead, Class ahead. The vacancy rate was 14.0% at the end of 2009 and is A schemes will not be difficult to let, but secondary stock will forecast to rise to 15.0% by the end of 2010. Development has remain hard to shift. ground to a halt with almost no planned construction in 2010. It is thought that new speculative developments will not start for Increased supply and falling demand contributed towards at least couple years due to the current oversupply and lack of declining rents over the past year. Prime rents are now around finance. Any new activity will be built-to-suit only, but even these €252/m²/annum, down from €264/m²/annum at the end of 2009. are rare in the current market. As might be expected, lease renegotiations have risen steadily. Their share in gross take-up was 58% in Q1 2010, compared Prime rents have generally stabilised at around €175/m²/annum with just 2% in Q1 2007. in-town and €105-110/m²/annum out-of-town. There may be a further decline in the second half of 2010, but it is not anticipated There is steady interest, predominantly from foreign investors, to be significant. for Czech prime offices. Local investors tend to focus on Grade A office projects in less attractive locations and Grade B properties There was only one significant investment transaction in the with low capital values. The largest transaction in the first half Tallinn office investment market in 2009. Eesti Post sold their of 2010 was the sale of 23,900m² of office space by ECM Real building in the central business district for €8.2 million to a Estate Development at City Empiria, Na Strzi 65. In the year to private Swedish investor. Since then there have been no further mid 2010, prime yields have compressed by 25 basis points to transactions. Investment activity is expected to pick up over the 7.00%. rest of the year with investors showing more interest, although demand is still likely to remain at a low level due to lack of financing and general market instability. Prague prime rents and yields Tallinn prime rents and yields 400 10 300 12 200 200 7 8 100 0 4 0 4 2006 2007 2008 2009 Q2 2010 2006 2007 2008 2009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%) 31
  • 33. HUNGARY - Budapest LATVIA - Riga Contact: Agency & Investment – James Kinnell Contact: Agency – Guntars Cauna King Sturge, Roosevelt Tér 7-8, 1054 Budapest Investment – Irina Nikolajeva (+36 14 51 10 10) Re&Solution, Vilandes 1, LV – 1010 Riga (+371 6750 8400) In-town Out-of-town In-town Prime rent (€/m²/annum) 216 144 Prime rent (€/m²/annum) 204 Prime yield (%) 8.00 10.00 Prime yield (%) 15.00 Budapest has an estimated 2.5 million m2 of office stock. There Offices in Riga are concentrated in the CBD and the Old Town, has been a significant decrease in leasing transactions over the with a growing trend to move away from the centre. The prime past year. Office take-up in 2009 was 294,000m² and is forecast development areas with the most potential are the river bank of to drop to around 200,000m² by the end of 2010. Two of the Daugava, the Kipsala area and main road leading to the Airport. most significant office transactions in early 2010 were the owner occupation by Allianz of 17,000m² at the K3 building in Non- Demand for office space has fallen significantly over the past Central Pest and Ernst & Young’s lease renewal of 5,900m² at year as companies have lowered head-counts and postponed the West End BC building in Váci Corridor. expansion. Consequently, many development projects have been halted. The office vacancy rate, which reached around Vacancy is currently at a historically high level. Around a quarter 18.0% by the end of 2009, is expected to rise to more than of all office space in Budapest stands empty and new or recently 20.0% by the end of 2010. New schemes are struggling with completed office space is not being absorbed. Occupiers are vacancy rates of 50.0% or higher. focused on cost cutting and consolidation, using lower rents to renegotiate on current space. Development has slowed Low occupier demand and high vacancy have given tenants a further, with construction down from 300,000m² in 2009 to only strong bargaining position and many rent renegotiations have 135,000m² in 2010. Many projects have either been postponed taken place. In Riga the rental decline peaked in mid-2009, but or stopped. continued at a slower pace during the latter half of the year. Due to rising vacancy, further rental decreases are expected during Prime rents were stable at around €240/m²/annum by mid 2010. 2010. However, this rate is only applicable to a few prime buildings in the central business district. Average prime rents are lower The peak of office investment volumes was achieved during at around €216/m²/annum. Overall, office rents have been 2007 and activity has fallen sharply since. There were no depressed and non-prime rents decreased by around 10% over significant transactions recorded in the first half of 2010. It is the past year. difficult to gauge investment yields due to very low transactional activity. But they were estimated at 15.00% as at mid-2010, with The investment market has not yet recovered. There has been continuing rental decline putting further upward pressure on very limited activity in 2010, with only two significant transactions yields. Long term recovery is not expected before the economy in the first half of the year - the owner occupation by Allianz at improves. K3 for around €45 million and the purchase of 9,300m² of office space at Ulloi Ut 48 by Evgyürűk Private Pension Trust for around €14.2 million. Prime yields have remained unchanged over the past 12 months, staying in the region of 8.00% at mid-2010. Budapest prime rents and yields Riga prime rents and yields 400 10 400 16 8 200 200 10 6 0 4 0 4 2006 2007 2008 2009 Q2 2010 2006 2007 2008 2009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%) 32
  • 34. LITHUANIA - Vilnius POLAND - Warsaw Contact: Agency and Investment – Neringa Rastenyte Contact: Agency – Tomasz Buras Re&Solution, Jogailos str. 4, LT-01116 Vilnius Investment – Jarosław Wnuk (+370 5 252 6444) King Sturge spółka z ograniczoną odpowiedzialnością Sp.K., Deloitte House, Al. Jana Pawła II 19, 00-854 Warsaw (+48 22 256 08 00) In-town Out-of-town In-town Out-of-town Prime rent (€/m²/annum) 150 120 Prime rent (€/m²/annum) 276 175 Prime yield (%) 8.50 9.00 Prime yield (%) 6.35 7.00 Vilnius has an estimated 335,000m2 of office stock. The current Warsaw has an estimated 3.38 million m2 of office stock. economic background remains challenging and activity in the Occupier demand fell dramatically in 2009 to around 280,700m², city’s office market has slowed further over the past year. Take- half the level of the year before. However, the first 6 months of up was 61,000m² in 2009 and is expected to fall to around 2010 have seen a recovery in occupier demand with 222,800m² 40,000m² in 2010. taken up. In the year as a whole, take-up of 450,000m² is forecast, higher than the five-year average. As in many other The majority of activity last year centred on rent renegotiations. eastern European cities, renegotiations and lease extensions are Companies generally stayed in the same offices, but renegotiated an important part of the market. Given recent market conditions, rent reductions of 25-30%. Many small local companies also landlords have been amenable to offering softer deals with moved to lower grade buildings or closed altogether. In 2010, lower rents. take-up will be driven by large companies seeking to relocate at more attractive rents, along with international entrants seeking The vacancy rate has increased sharply in recent years and more competitive labour costs (such as Barclays and Western reached 8.0% by mid-2010. Vacancy levels are expected to Union). decrease to around 7.0% by year-end in response to improved occupier demand and a lower level of new construction. Development in 2010 is expected to deliver around 25,000m² of Construction is set to fall roughly a third in 2010. This should new office space to the market, a reduction of around 74%. New help to rebalance demand and supply, though 2011 is likely to speculative projects will not start for at least 18 months due to see renewed development ahead of UEFA Euro 2012. a lack of finance, leaving only built-to-suit facilities as viable. The vacancy rate is forecast to fall from last year’s 22.0% to 15.0% Average prime rents are in the region of €276/m²/annum by the end of 2010 in part due to this lack of development. and are expected to remain stable over H2 2010. However, a combination of economic recovery and UEFA 2012 mean that Average rents have been stable over the past year and are rental rates are expected to rise over the medium term. expected to remain unchanged for the rest of 2010. Prime offices may see moderate rental growth, however, due to the There has been a significant increase in office investment limited availability of suitable stock. transactions in 2010. The largest transaction in Q1 was the sale of Trinity Park III by Ghelamco to SEB ImmoPortfolio Target There have been few office investment transactions. Business Return Fund for around €93 million. The outlook for investment sentiment has improved slightly and local investors are now volumes in the year as a whole is brighter than in 2009 due to actively exploring the market to evaluate opportunities. the positive state of the Polish economy and the revival in global Transactions of up to €20m are likely to increase over the markets. Prime yields moved in by 50 basis points from mid- remainder of 2010. 2009 to mid-2010 where they are expected to flatten off. Vilnius prime rents and yields Warsaw prime rents and yields 300 12 500 8 150 8 250 6 0 4 0 4 2006 2007 2008 2009 Q2 2010 2006 2007 2008 2009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%) 33
  • 35. ROMANIA - Bucharest RUSSIA - Moscow Contact: Agency and Investment – Ben Binns Contact: Agency – Alexey Bogdanov King Sturge SRL, 5 Gheorghe Manu Street, Sector 1, Bucharest Investment – Vladimir Avdeev 010445 (+40 21 311 54 44) S.A.Ricci, in association with King Sturge, Pyatnitskaya str., 74, bld. 2, Moscow (+ 7 495 790 71 71) In-town Out-of-town In-town Prime rent (€/m²/annum) 252 168 Prime rent (€/m²/annum) 600 Prime yield (%) 9.50 10.00 Prime yield (%) 12.00 Bucharest has an estimated 1.6 million m2 of office stock. Moscow has an estimated 12 million m2 of office stock. The Demand for office space in the city dropped to around global financial recession impacted significantly on office 100,000m² in 2009. However, at the start of 2010 there has occupier demand in Moscow, causing a reduction of around 80% been an increase in leasing activity, as occupiers started to take in leasing activity. Total take-up in 2009 was just 230,000m². advantage of favourable market conditions where lease breaks However, a market recovery started in Q1 2010, first at a very and terminations permitted. By the end of H1 2010 take-up was slow pace and then continued in Q2 with a more significant already at 70,000m² and is forecast to exceed last year’s total in upturn. Total take-up in H1 2010 was almost double the whole 2010 as a whole. of 2009, at around 450,000m² and this upward trajectory is forecast to continue to a level of around 1.2 million m² for the Occupiers are keen to cut costs and this has resulted in year. There is a shift towards owner-occupier acquisitions or renegotiation of lease agreements, relocation to better quality long-term leases of large premises with the highest demand for office space at lower costs and a push towards higher incentives. Class A offices. Since the end of Q4 2009, the market has also Tenants still hold the upper hand over landlords in the negotiation become less tenant oriented with landlords now offering fewer process this year. incentives. The vacancy rate has trended upwards since 2007. It was Increased occupier demand has led to a significant reduction in estimated at 18% by mid-2010. However, increased demand office vacancy. The vacancy rate at the end of 2009 was as high and lower levels of new construction in the first half of the year as 35.0%, but by mid-2010 was 21.0% and is forecast to fall should result in a decrease over the second half of the year, to again by the end of the year to 16.0%. There is still a good level around 16.0%. Delivery of Class A buildings in the first quarter of of new office accommodation being delivered to the market. The 2010 included: City Gate (North Tower), HQ Victoriei, EuroTower level forecast for 2010 is around 1.5 million m², which is on a par and the headquarters for Piraeus Bank. with the last three years. Prime rents at mid-2010 were €252/m²/annum, a decrease from In line with the increased volume of transactions, office rents €264/m²/annum a year ago. Rents may be subject to further have increased from €576/m²/annum in mid-2009 to €600/m²/ downward pressure over the second half of the year as new annum by mid-2010 and are expected to climb further by the office space is delivered to the market and tenants remain in the end of the year. driving seat, with landlords forced to discount to avoid vacancy. The Moscow real estate market is still considered risky by There was a low level of investment activity in the Bucharest foreign investors, although it is known to have great potential. office market in the first half of 2010, with little prospect of a Investment volumes in H1 2010 were low. This has partly pick-up by year’s end as investors remain extremely cautious. resulted from a lack of quality stock to meet the requirements Prime yields were thought to have softened to a level of 9.50% of foreign investors (central location, full occupancy, high yield). at mid-2010, an outward movement of 25 basis points from mid- However, overall, investor sentiment is improving and volumes 2009. The lack of activity could see them soften further by the are expected to increase in the second half of the year. Prime end of the year. city centre yields, which had moved out to 14.00% at the end of 2009, have moved in again to around 12.00% by mid-2010. They are expected to be subject to further downward pressure over H2 2010. Bucharest prime rents and yields Moscow prime rents and yields 400 12 2,000 15 200 8 1,000 10 0 4 0 5 2006 2007 2008 2009 Q2 2010 2006 2007 2008 2009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%) 34
  • 36. SERBIA - Belgrade SLOVAKIA - Bratislava Contact: Agency and Investment – Srdjan Vujicic Contact: Agency and Development – Miroslav Barnas King Sturge d.o.o., Usce Tower, Bulevar Mihajla Pupina 6, 11070 Investment and Professional Services – Peter Nitschneider Belgrade (+381 11 2200 101) King Sturge s.r.o., Europeum Business Center, Suche Myto 1, 81103 Bratislava (+421 259 209 911) In-town In-town Out-of-town Old Belgrade Prime rent (€/m²/annum) 168 120 Prime rent (€/m²/annum) 180 Prime yield (%) 7.25 7.75 Prime yield (%) 9.50 Belgrade has an estimated 558,000m2 of office stock. The global Bratislava has an estimated 1.35 million m² of office stock. There recession has impacted strongly on the office market with were indications of recovery in occupier demand over the first demand weakening considerably over the past two years. Take- half of 2010. Take-up at the end of H1 2010 was estimated at 44,000m², an improvement on a year ago. The estimate for 2010 up fell by 46% in 2009 to 30,000m² and continued to perform as a whole is 70,000m², which would represent a healthy rise at a low level in the first six months of this year. Although the on the 2009 level of 63,000m². This upturn in demand can be Serbian economy is expected to expand, office demand is set to attributed in part, to attractive incentives provided by developers. remain weak at around 14,000m² for the full year. These include rent-free periods from one to six months and fit- out contributions, typically from €20 - €40/m². The sharp reduction in take-up levels has in turn led to a rapid increase of supply. The vacancy rate had jumped to 21.0% by New supply of high quality office space for 2010 is forecast at the end of 2009. Nearly a quarter of all office space is expected 88,000m², the lowest level in recent years. The vacancy rate in Bratislava currently stands at around 11.5%, a slight reduction on to be vacant by the end of this year, in part a consequence of last year’s figure, reflecting both the increased level of demand the amount of Class A stock delivered to the market in 2008 and and the lower level of new product on the market. The vacancy 2009. There has been a sharp deceleration in the construction of rate in modern office schemes is expected to decrease over the new office buildings, which is set to halve in 2010. second half of 2010, in contrast to secondary properties. As in other office markets, weak economic prospects have led Prime office rents in Bratislava fell by approximately 10% over to a high degree of uncertainty and occupiers continue to be the past year and at mid-2010 were around €168/m²/annum. extremely cautious. The trend has been to stay put and focus Prime rents in the outer area of the city, which will probably become the new CBD of Bratislava, stood at around €138 – 144/ on renegotiating rents for existing premises. Average prime m²/annum. rents have held at around €180/m²/month over the past year, but could be subject to further downward pressure as landlords The office investment market in Slovakia has remained static in holding assets with high levels of vacancy are forced to offer the first half of 2010. The last significant institutional transaction larger discounts. occurred in Q3 2008. Since then only smaller office buildings have been sold to local investors. There has been one other There have been no investment transactions recorded in the first transaction, completed in December 2009 when RENO bought an office building in a secondary location (Bratislava – Raca). This half of 2010 and prime yields moved out by 25 basis points to included the sale of approximately 7,000m² of offices to strong 9.50% by the end of H1 2010. Weak interest from international tenants at a price in the region of €10-12million. investors is anticipated over the second half of the year. The focus will be distressed property sales if banks become more Over the second half of 2010 investors will be mainly interested active in foreclosures. in properties located in the capital. Property fundamentals such as location, income sustainability, building quality and covenant strength are coming under greater scrutiny, with investors placing more emphasis on reducing underlying risks. The total volume of the investment transactions is likely to remain limited. Local investors will continue to dominate the market, though activity will increase. Nevertheless, Slovakia has disappeared from the list of the target countries for many institutional investors, mostly due to the small market size and its car industry focussed economy. Prime investment yields are expected to stay at around 7.25%. Belgrade prime rents and yields Bratislava prime rents and yields 400 20 300 10 15 8 200 150 10 6 0 5 0 4 2006 2007 2008 2009 Q2 2010 2006a 2007 2008 2009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%) 35
  • 37. TURKEY - Istanbul Contact: Agency and Investment – Matthew Warner King Sturge Gayrimenkul Danişmanliği Limited Şirketi Üçgen Apt 64/2, Süleyman Seba Caddesi, Vişnezade, Maçka, 34357 Istanbul (+90 212 236 4990) In-town Prime rent (€/m²/month:annum) 369 Prime yield (%) 7.75 Like many other European markets, demand for offices in Istanbul slowed significantly in 2009. However, in the first half of 2010 there were tentative signs of recovery. Take-up has increased as business sentiment improved and a growing number of requirements were registered. Key deals in H1 included: 1,045m² to Consulate of Canada in Levent, 1,077m² to Accenture in Etiler, 450m² to Servcorp in Nisantasi and a further 500m² to Aes Energy at Metrocity in Levent. Occupiers seeking Class A space, but not wanting to pay increasing CBD rents, were increasingly tempted to the Asian side of the city, where there is more quality stock, with larger unit sizes and lower rents. The level of vacancy varies hugely between different business districts. In the modern CBD on the European side of the City, which stretches from Esentepe through Levent to Maslak, availability of prime space is limited, especially for units in excess of 1000 m2. Tenants facing lease renewals often find themselves having to accept significant rental increases, with few suitable alternatives. Prime rents in these areas may be subject to increasing upward pressure over the next two years due to a lack of product and a time lag before new stock can be brought to the market. There are, however, a number of large projects which will help redress the demand supply imbalance over the medium to longer term. The timing of these is not clear. Should they happen simultaneously it could lead to competition and rents levelling, or even falling. It is more likely however that they will be spread out over the next 5 years. The new projects are also set to raise standards of amenity and design. With the prospect of a “flight to quality” amongst occupiers and a renewed ability to acquire space offering some scale, rents will remain strong with further increases likely. There was a general lack of volume of office investment transactions in 2009, as those who held stock saw no reason to sell into a market where purchasers expected recessionary pricing. There has been a modest increase in the first half of 2010, which is expected to be sustained over the remainder of the year. The majority of deals are for lot sizes of less than €20m, as investors hold on to trophy assets. There are positive signs for recovery over the next few years, as Turkey’s banks have been cautious in their lending practices and are therefore better placed to support a credit-funded purchases. Istanbul prime rents and yields 400 14 200 10 0 6 2006 2007 2008 2009 Q2 2010 * For non Eurozone countries rental trends in Euros will be Prime rent ( /m2/annum) Prime yield (%) affected by currency movements and may therefore show a different pattern to local market trends. 36
  • 38. TAX, ACCOUNTING AND CORPORATE FINANCE ADVICE SUPPORTING YOUR REAL ESTATE INVESTMENTS WHEREVER THEY ARE. BDO is the world’s fifth largest accountancy network. We have 1,100 offices in 109 countries. For further information on our wide range of services to the real estate sector, please get in touch with the relevant country contact listed in this report or contact Stephen Herring, UK Tax Partner on +44 (0)20 7893 2437 or email stephen.herring@bdo.co.uk www.bdointernational.com BDO LLP is authorised and regulated by the Financial Services Authority to conduct investment business.
  • 39. About the BDO International Key tax issues in cross border real Real Estate Practice estate transactions BDO International is the world’s fifth largest accountancy Real estate transactions are diverse and complex and network. It has more than 44,000 people in over 1,100 invariably need to be tailored to fit both the differing offices across 109 countries. circumstances of the transacting parties as well as the particular nature of real estate assets. BDO’s international real estate team provides its clients in the real estate and construction sectors with a broad range The investor needs to consider the location of the real of tax, audit, accounting, corporate finance, business estate, the need for and advantages of structuring the recovery and investment management services. It has investment through a suitable conduit jurisdiction and the a leading presence in the property industry and uses its tax position of the investment company, real estate fund extensive international network of offices for the benefit or syndicate. of its clients and often introduces them to opportunities and key contacts in other countries. It is invariably sensible to consider firstly the particular features of the taxation of local real estate. At this level, The United Kingdom member firm of BDO International, registration taxes, capital duties, withholding taxes on has co-ordinated the preparation and collation of the rent and interest, the treatment of capital gains and tax information in the following pages which have been the calculation of taxable rental income including tax approved by the relevant BDO International member depreciation and earnings stripping or thin capitalisation firms. aspects will all be key drivers. Our clients include a wide range of real estate investors It will often, but by no means always, be appropriate to and developers ranging from listed companies and REITs, interpose a conduit entity in a separate jurisdiction which through cross-border real estate funds and infrastructure does not tax capital gains or dividends. The commercial funds to sovereign wealth funds and substantial private needs for this include the flexibility of inward investment companies and investment syndicates. and the options available for partial or total exits on the realisation of the investments. We also act as tax and corporate finance advisers and auditors to leading professional service firms in the real The structure will require an overarching entity which will estate and construction sectors. typically be resident in the country of the investors or will often be a tax transparent entity such as a partnership Local BDO International real estate tax contacts are listed enabling investors in multiple jurisdictions to invest on a under each country’s tax section. Alternatively, feel free tax efficient basis. to contact the London Office real estate tax team as follows: - Increasingly, in the present market place with more restrictive access to external bank finance, it will often be Stephen Herring fiscally efficient for investors to provide shareholder debt Tax Partner to facilitate future refinancing when debt markets return Real Estate & Construction to equilibrium. The location for any captive financing entity Telephone: +44 (0) 20 7893 2437 will have legal, accounting and taxation implications. Email: stephen.herring@bdo.co.uk Stephen Herring, Tax Partner, Real Estate & Construction, Robin Hutton London, comments “as the market continues to emerge Tax Director from the credit quake, there will be one-off opportunities Real Estate & Construction to revisit existing ownership structures and entities, Telephone: +44 (0) 20 7893 2432 enabling investors to implement more favourable cross- Email: robin.hutton@bdo.co.uk border tax strategies for real estate portfolios”. Sutharman Kanagarajah Tax Manager Real Estate & Construction Telephone: +44 (0) 20 7893 2335 Email: sutharman.kanagarajah@bdo.co.uk 38
  • 40. www.bdointernational.com Preface to individual country real Debt finance arrangements have not only become more estate tax summaries costly but a number of European jurisdictions have introduced restrictions on the level of debt interest that It will be appreciated that the taxation legislation, case may be claimed in addition to existing transfer pricing and law, tax treaties and tax authority practices in all of the thin capitalisation restrictions. New sources of finance are countries included in the following pages can only be often introduced by way of new equity and achieving a tax briefly summarised in the space available. deduction for this equity can be challenging as generally a tax deduction will only be available if interest is charged Equally it will be understood that real estate transactions to the entity that acquires the real estate. Consideration are often subject to more complex taxation arrangements will also need to be given to where the interest receipt than, typically, apply to ordinary trading ventures. will be taxed. Nevertheless, we consider that these summaries provide useful insights into the taxation of real estate rental Where an existing property owning company is being income and capital gains and provide a useful introduction acquired, the waiving of debt or conversion to equity to indirect taxes in each country. can, in some circumstances, generate adverse tax consequences and these need to be fully explored. Invariably, tax treaties give the right to tax real estate Similarly, profit participating debt or arrangements income to the country in which the real estate is located. for existing owners to retain an interest in the gain on Most countries, not surprisingly, exercise this right and eventual disposal will need careful planning to optimise often seek to protect their tax base by applying special the tax treatment. rules to tax real estate income and control the deductions available against it. Stephen Herring Tax Partner Similarly for capital gains, most countries tax the gain Real Estate & Construction where the real estate is located but there are important BDO LLP exceptions which are often a major factor in planning the 55 Baker Street acquisition approach, structure and entities. London W1U 7EU In our view it is imperative, before real estate is acquired, http://www.bdo.co.uk/realestate not only to decide upon the appropriate ownership entities and structure but also to prepare a robust financial Disclaimer projection which includes the incidence of all real estate taxes which will be payable on its acquisition, ownership BDO International is a world wide network of public and ultimate disposal. accounting firms, called BDO Member Firms, serving international clients. Each BDO Member Firm is Taxation for real estate investors and occupiers in an independent legal entity in its own country. The challenging times network is coordinated by BDO Global Coordination B.V. incorporated in the Netherlands, with an office Following the credit quake there have been a number of in Brussels, Belgium, where the Global Coordination different factors at play including a lack of prime stock Office is located. and shortage in both the quantum and pricing of debt © BDO Global Coordination B.V. 2010 finance. Banks have accidently become equity holders and there continue to be issues related to refinancing existing debt. Similarly, there are changes such as portfolio consolidation and renewed activity by sovereign wealth funds. All of these trends have tax implications and we have summarised in the paragraphs below some selected guiding principles for consideration. When considering cross-border activity for a diverse group of investors, a key guiding perspective is the need to avoid tainting the taxation position of one investment class by the taxation treatment of another investment class; often this is achieved through the use of tax transparent structures such as limited liability partnerships, partnerships or, in some cases, trusts or trust corporations. 39
  • 41. Austria between 10% and 20%, depending on the specific asset category. Contact: Reinhard Rindler rindler@bdo.at Generally, capital gains arising on the disposal of real + 43 (1) 537 37 322 estate, or the disposal of shares in an Austrian property holding company, are subject to 25% corporate income Foreign individuals or corporate investors may invest tax for corporate vendors. in Austrian property directly, through a partnership or through a local company. Speculative transactions of individuals for non-business purposes, (i.e. private purposes) are only taxable if the Currently, profits realised by companies are taxable in real estate is disposed of within ten years from the date Austria at the corporate income tax rate of 25%. of acquisition (in special cases fifteen years). Those taxable gains are taxed at the progressive income tax A minimum level of corporate income tax is due in loss- rates of up to 50%. making periods (dependent on the legal status of the corporation). Such payments can be credited against The provisions of Austria’s double tax treaties generally “real” liabilities in future periods. Losses can be carried give Austria the right to tax gains on the disposal of forward indefinitely and they can be offset against up to Austrian real estate wherever the alienator is resident. 75% of annual profits in future periods. The standard rate of VAT in Austria is 20%. In general, Profits of individuals are taxed at tax rates of up to income deriving from the disposal or the tenancy of real 50%. Generally, for individuals, taxable rental income estate is exempt from VAT. However, under certain is calculated upon a cash receipts and disbursements circumstances the option to tax can be exercised, method, as adjusted by a deduction for depreciation. In allowing the recovery of input VAT. this case losses cannot be carried forward. The transfer of real estate is subject to 3.5% property Partnerships are tax transparent in Austria, with the transfer tax (note: the rate is reduced to 2% if real estate consequence that each single partner is subject to tax is transferred between close relatives and/or spouses), in Austria. Each partner in the partnership is taxed at plus a 1% registration fee, based on the consideration progressive income tax rates of up to 50% (for individuals) paid. or 25% (for companies). The transfer of property as a result of a certain type of For companies, taxable income has to be calculated merger is also subject to property transfer tax. For the according to GAAP. transfer of all of the shares, or the unification of all of the shares in the hands of one shareholder, of a company Generally any expenses incurred for the purpose of the which owns real estate, property transfer tax is also real estate business are deductible, including maintenance levied. However, the “tax assessed value” is normally and repairs, administration expenses, financing costs, considerably less than the market value. insurance premiums, depreciation and real estate tax. Tax deductions for “substantial” repairs and maintenance Capital transfer tax is imposed at a rate of 1% on the expenditure have to be spread over a period of ten or contribution of capital to companies, both in the form of fifteen years (under certain circumstances). cash or in kind. There is no specific thin capitalisation legislation in Annual property tax of up to 1% is levied on the tax Austria. However, the tax authorities require reasonable assessed value of Austrian real estate. An additional tax debt financing arrangements, the terms of which are set of 1% of the tax assessed value of land is payable for land on an arm’s length basis. For example, where the interest without buildings, meaning that tax on undeveloped land rate is higher than an arm’s-length rate, a tax deduction is effectively up to 2% of the tax assessed value of the would be denied for the excess interest. land. Both taxes are deductible for (corporate) income tax purposes. Depreciation in respect of buildings, but not land, is tax deductible. The deductible depreciation is calculated using • The transfer of property in case of inheritance or by a the straight line method, in which the annual depreciation gift have been subject to inheritance tax and gift tax. is a fixed percentage of costs. The allowable rate varies Inheritance tax and gift tax were abolished with effect between 1.5% and 3%, depending on the legal form of from 1 August 2008. the owner and the use of the property. Plant and machinery depreciation is allowable at rates of 40
  • 42. www.bdointernational.com Belgium Corporate entities are subject to the standard rate of corporate income tax on capital gains as part of their total Contact: Marc Verbeek income. marc.verbeek@bdo.be + 32 (0) 2 778 01 28 Capital gains on shares realised by individuals are generally exempt. If realised by companies, they will be Resident and non-resident companies under corporate exempt, provided the subsidiary meets the “subject to ownership are ordinarily subject to Belgian tax at a rate of tax” requirement. 33.99% on their taxable income, including rental profits and capital gains. This rate includes an austerity surcharge If Belgian immovable property is owned by foreign of 3% which is levied on the corporate income tax rate entities the Belgian double tax treaties generally provide of 33%. Companies owned directly by individuals can that income from immovable property will be taxable in benefit from reduced rates where the taxable income is Belgium. less than €323k. Fixed assets which have been held for at least five years A 2.25 % surcharge applies to the final tax liability, unless may qualify for a form of re-investment relief on sale, adequate quarterly payments are made through the tax which allows the tax to be deferred, providing that the year. proceeds are reinvested in tangible and intangible assets. The tax due is spread over the depreciation period of the For corporate tax purposes, generally the taxable rental new asset. income and capital gains are calculated on normal accounting principles, but some special rules apply. Generally, neither the acquisition nor renting of real estate is subject to VAT, so any VAT charged on costs Generally, any expenses incurred for the purpose of the and services will be a cost to the business. However, a rental business are deductible, including, real estate tax, taxable person can opt for the application of VAT when which is calculated as a percentage of deemed net rental selling or leasing a “new” building. VAT grouping can be value. However certain specific expenses are disallowed, a valuable option. such as regional taxes. Often real estate companies are acquired rather than Interest paid to connected parties is allowable to the property, due to the perceived high rates of transfer tax extent that the interest is calculated at a commercial in Belgium. market rate and thin capitalisation restrictions are satisfied. There is no fixed safe haven debt:equity ratio The acquisition of Belgian real estate is subject to in respect of connected party debt. However, when Registration Duty at a rate of 12.5% upon the higher of the the connected party is a private individual shareholder/ purchase price and market value (except in the Flemish director, or a foreign corporate director, a 1:1 debt:equity region where the rate is generally 10%). This also applies ratio generally applies. A debt:equity ratio of 7:1 applies to the transfer of real estate to the shareholders of a real where the lender is either an individual or a company estate company being liquidated, except when it has the resident in a low tax jurisdiction. form of an “SPRL”, in which case the Registration Duty rate is 1%. There is no system of group taxation in Belgium, so where a real estate company is acquired, it can often Acquisitions of corporate real estate entities are exempt be problematic to obtain Belgian tax relief in respect of from Registration Duty but there are, of course, certain interest on acquisition borrowings. legal, commercial and other taxation issues which would arise. For example, it is not generally possible to “step- Depreciation charged under Belgian GAAP on an asset is up” the base cost to market value. tax deductible. No capital duty is payable in Belgium on the issue of For example, plant and machinery depreciation is shares. generally allowable at rates depending on the respective standardised useful life. Land itself cannot be depreciated. • Belgium has a tax ruling system whereby advance Commercial buildings will normally be depreciated at 3% assurance in respect of the tax treatment of a and industrial buildings at 5%. transaction can be sought from the tax authorities. • A notional interest deduction is now available for tax The standard depreciation method is the straight- purposes, calculated as 3.80 % of a company’s net line method. A declining-balance method is generally equity. optional, but will for most real estate companies not be • Belgium has had a REIT regime for listed companies allowed. since 1995 (Sicafi). . 41
  • 43. Bulgaria Depreciation is calculated on a straight-line basis. Tax depreciation in respect of immovable property is tax Contact: Bogdanka Sokolova deductible. Buildings are depreciated at a maximum rate bdo@datacom.bg of 4% per year for tax purposes. Land is not depreciable. + 359 2 421 06 56 The tax authorities may deny a deduction for tax depreciation where the company has not undertaken real Corporate investors may invest in Bulgarian property estate activity during the year. through local subsidiaries and branches or directly. Direct investment in land is possible for entities tax resident in On disposals of shares and immovable property belonging the EU or non-EU jurisdictions with which Bulgaria has an to a Bulgarian company, capital gains arising are included international treaty. within the income of the Bulgarian company and subject to CIT. Bulgarian resident companies are subject to Corporate Income Tax (“CIT”) at a rate of 10% on rental income The sale of a non resident company which holds shares in after the deduction of expenses and tax depreciation. a Bulgarian subsidiary which owns immovable property is not a taxable event in Bulgaria. Dividends paid by Bulgarian companies are generally subject to 5% withholding tax, unless the shareholder is Real estate tax is levied on the owners of land and resident in a country which has a favorable tax treaty with buildings. The tax base is the net book value plus the Bulgaria. Dividends paid to legal entities resident in the accumulated depreciation cost of the property. Since 1 EU or EEA member states are exempt from withholding January 2010 the tax rates are set by the municipalities, tax. with the rates varying between 0.01% and 0.25%. The tax must be paid in one payment or four quarterly Advance CIT must be paid in monthly instalments, based instalments. A 5% discount is granted if the entire on the taxable profit for the two previous years. If the amount is paid by 31 March of the year in question. result from the previous year is a loss, the prepayments are made on a quarterly basis and are based on the The sale or exchange of immovable property is subject taxable profit for the year-to-date. The fiscal year is the to transfer tax, the rate of which is fixed by the relevant calendar year. CIT returns must be filed by 31 March of municipality, the rates varying between 0.1% and 3%. the following year. The tax is levied on the assessed value of the transferred property, and in the case of exchange, of the assessed Generally the transfer of Bulgarian property and rental value of the more valuable property. The threshold for income is subject to VAT at the standard rate of 20%. non-taxable immovable property for 2010 is BGN 1,680. However, the following transfers are exempt from VAT: A Notary fee is payable on the registration of a transfer of immovable property based on a progressive scale. • The transfer and rental of land which is not a regulated The fee is BGN 1,530.50 plus 0.1% of the value of the estate (as defined under the Supplementary Provisions property for properties with a value exceeding BGN of the Spatial Development Act). 500,000. This is capped at a maximum of BGN 6.000. • The transfer of buildings which are not new (i.e. new There is a minimum fee of BGN 30 for transfers with a buildings are defined as those within sixty months of value of up to BGN 100. obtaining permission for use or buildings which are still under construction”). There are no significant stamp duties. • The renting of a building or part of it to a tenant for • There have been discussions regarding potential tax residential purposes. increases including increasing the VAT rate from 20% to 22%. Tax deductible expenses include tax depreciation and some other expenses, such as operational costs, maintenance and repair expenses. Interest, foreign exchange losses and other financial expenses incurred on capital and on loans that are regarded as “thin capital” are not tax deductible. If the ratio of the borrowings from shareholders or from persons related to the shareholders exceeds three times the shareholders’ equity in the borrower at any time within the relevant year, the excess proportion of the borrowing will be considered as thin capital, with a consequent reduction in the level of interest relief available. 42
  • 44. www.bdointernational.com Croatia Real estate transfer tax of 5% of the market value of the property is payable on the part of price which was Contact: Jeni Krsticević not a “qualifying asset” for VAT purposes for the seller jeni.krsticevic@bdo.hr (typically the value of land and utilities, or full value if the + 358 (1) 2395 741 property was built before 1998 or the seller is not VAT registered). Income from real estate realised by companies in Croatia is subject to corporate tax at a rate of 20%. VAT at 23% should be paid on the remaining part of the purchase price. If a buyer is VAT registered, it can Losses can be carried forward for utilisation in future generally reclaim any VAT suffered at the end of the next periods, up to a maximum of five tax years. The tax year VAT period (usually one month). in Croatia is generally the calendar year, but it is possible to agree a different period end with the Croatian tax No capital duties are payable in Croatia upon the issue authorities. A tax return must be submitted to the Croatian of shares. tax authorities within four months of the business year end (generally by 30 April following the relevant calendar In order to encourage reconstruction and development year). of certain areas, the Government of Croatia may issue a decree, whereby certain taxpayers are exempt from tax, Since 2005 there has been no withholding tax on or their tax rate is reduced. Benefits can include: dividends, only the so-called “crisis tax” of 4% from August 2009. • Accelerated depreciation is allowed for tax purposes • Reduced profits tax, depending on the level of local Personal income tax rates until July 2010 ranged from investment and number of employees can result in a 15% to 45%. From 1 July tax rates have reduced to a 0%, 3%, 7% or 10% tax rate range of between 12% and 40%. • Tax free zones, e.g. the Vukovar-Srijem county is fully exempt from profits tax for the period from 2005 to Value added tax in Croatia from 1 August 2009 is 23%. 2014 Taxable profit is the accounting profit adjusted for non • Other tax favoured zones benefit from the reduced deductible and non taxable items in accordance with the rates of 10% or 0% provisions of Croatian company and tax law. • Regions under special government protection enjoy reduced rates of 15%, 5% or 0% Transfer pricing rules apply in Croatia, with the effect that all payments to connected parties must be “arm’s length” in order to be deductible and all charges from abroad are subject to Foreign Currency Inspectorate scrutiny. A debt:equity ratio of 4:1 will generally be allowed in relation to interest on loans from shareholders with a shareholding of 25% or more, or at least 25% of the voting power. A third party loan which is guaranteed by a shareholder will be deemed to have been made by that shareholder for this purpose. For tax purposes, depreciation is calculated on a straight- line basis. The ordinary rate for buildings is 5%, but it may be doubled to 10% in certain circumstances. Most other relevant assets are depreciated at 20%. Capital gains on disposals of property located in Croatia are included in taxable income and subject to corporation tax at 20%.The book value of property (i.e. the tax depreciated value) is treated as the cost for the purposes of the gain calculation. The disposal of shares in a real estate company held by a non-resident with no permanent establishment in Croatia is exempt from tax. 43
  • 45. Cyprus As a general rule the renting of real estate is exempt from VAT, so any VAT charged on costs and services can Contact: Karlos Zangoulos not be reclaimed and is a cost to the business. Similarly kzangoulos@bdo.com.cy VAT incurred on the acquisition or construction of rental + 357 22 496000 property can not be reclaimed. The rate of VAT in Cyprus is 15%. Cyprus resident companies are subject to income tax at the rate of 10% on their worldwide income. Non- Transfer fees are calculated on the purchase value of the resident companies are taxed on Cyprus-source income land interest acquired. This applies to individuals and only. Interest, repairs and maintenance costs and other companies at the following rates:- expenses incurred wholly in respect of the rental business are generally allowed as deductions against income. Up to €85,430 3% €85,431-€170,860 5% Individuals are subject to income tax on their rental Over €170,860 8% income after deduction of interest, capital allowances and an amount of 20% in lieu of expenses. Personal • As a member of the EU, Cyprus has signed the three allowances are granted to non-resident individuals owning main EU tax directives. However, they are of limited real estate who pay taxation according to the normal tax application as there are no withholding taxes on bands and tax rates. Where property is jointly owned, interest or dividends under Cypriot domestic tax law. personal allowances are granted to both owners. Joint ownership of Cypriot property by non-resident couples is therefore common. A special defence tax is payable at an effective rate of 2.25% of the gross annual rental income by all commercial property owners. There are no withholding taxes on dividends paid abroad. Consequently, Cyprus entities are commonly used by non-resident persons as vehicles through which to own Cypriot (and foreign) property. Capital allowances in respect of Cypriot property are calculated at the rate of 3% of the original cost of construction of the property, except for hotels and industrial buildings where the rate is 4%. This is computed on a straight line basis. In the event that the building is sold or otherwise transferred to a new owner, the new owner is entitled to claim the unexhausted balance of the original cost over the remaining life of the building. The purchase price is therefore not relevant in the calculation of capital allowances for second and subsequent owners. Capital gains tax is payable on a disposal of Cyprus property or shares in certain Cyprus property-owning entities at the 20% rate, after deducting indexation allowance (calculated using the official rate of inflation) and adding back any writing down allowances previously claimed. Individuals are allowed a one off tax free allowance (currently €17,086) in respect of capital gains. Where the property has been the owner’s main residence for a period of more than five years then this allowance is increased (currently to €85,430). Where a company or individual engages in frequent transactions, or where the property was held for a short time, the profit may be regarded as being of “trading nature” and may be subject to income tax rather than capital gains tax. 44
  • 46. www.bdointernational.com Czech Republic The acquisition of Czech real estate is subject to Real Estate Transfer Tax (“RETT”) at a rate of 3% upon the Contact: Jaroslava Steimarova higher of the purchase price and the market value. jaroslava.steimarova@bdo.cz + 420 241 046 246 Property development companies are typically exempt from RETT, as the first transfer of real estate is always Real estate investments are most commonly made via a exempt. Czech resident company (e.g. common corporate entities or professional investment funds). They may also be Real estate tax varies from CZK 1 to CZK 10 per square made through branches of foreign companies. metre, depending on the type of building structure and its location. Profits are taxable in the Czech Republic at the general flat corporate income tax rate of 19% for 2010 applicable No capital duty is paid in the Czech Republic on the issue for common corporate entities. A rise to 20% in 2011 of shares. may be possible. For investment funds, unit funds and pension funds the corporate income tax rate is reduced • The Czech Republic has fully adopted the various to 5 %. EU Directives (e.g. the Parent Subsidiary Directive, the Interest and Royalties Directive and the Mergers Taxable income is generally computed on the basis Directive). of standard accounting principles, and generally any expenses incurred for the purpose of the property rental business are deductible. Please note that Czech accounting standards have to be used in order to determine the corporate income tax. If an entity uses IFRS or other accounting standards, it has to make adjustments to reflect Czech accounting standards in order to properly determine its corporate income tax liability. Interest paid to connected parties is allowable to the extent that the interest is calculated at a commercially supportable market rate and the thin capitalisation restrictions are satisfied. The allowable debt-to-equity ratio for loans to a property company from a related party is 4:1. Depreciation in respect of buildings, but not land, is tax deductible. The allowable rates vary between 1.02 % and 3.40 % for straight line depreciation and run for a period of either thirty or fifty years, depending on the type of real estate. The reducing balance method of calculating tax depreciation is also possible in certain circumstances. Capital gains of any corporate entity from the sale of Czech property (e.g. real estate and shares in Czech corporate entities) are included within the general tax base and liable to corporate income tax at the 19 % rate. For non-resident investors in Czech real estate a relevant double taxation treaty concluded by the Czech Republic may prohibit the Czech tax authorities from taxing such capital gains. VAT on residential buildings for social living is 10%. For other buildings the rate is 20%. It is payable on acquisition of the property, if it is acquired within three years of the date of construction. 45
  • 47. Denmark Industrial buildings and office buildings adjacent to them qualify for tax depreciation of up to 4% per annum of Contact: Hans-Henrik Nilausen the acquisition price. Residential properties cannot be hhn@bdo.dk depreciated for tax purposes. Land also may not be + 45 39 15 5320 depreciated for tax purposes. Real estate investments can be made directly by either Plant and machinery may be depreciated at up to 25% non-resident companies, individuals, or indirectly via a using the reducing balance method. Danish company. Capital gains are taxed at 25% for companies and up Companies with taxable income from letting real estate to 59% (51.5% from 2010) for individuals. All gains are taxed at the corporate tax rate of 25%. There are are taxable, but losses are only allowable if the building progressive rates of up to 51.5% for individuals. qualifies for tax depreciation (i.e. industrial buildings or adjacent office buildings). On sale, the tax depreciation There is no wealth tax in Denmark. However, an annual is “clawed back” in full up to the level of the disposal land tax has to be paid to the local administration. This proceeds. tax varies from 1% and 3% of the official valuation of the land. The provisions of Denmark’s double tax treaties generally give Denmark the right to tax gains on the disposal of Generally, taxable rental income is calculated on normal Danish real estate irrespective of where the vendor is accounting principles but certain special rules apply. resident. In most cases any expenses incurred for the purpose The acquisition of Danish real estate is not subject to of the rental business are deductible. Interest paid to stamp duty. However, a registration fee is payable. This connected parties is allowable to the extent that the registration fee is calculated as a fixed amount of DKK interest is calculated at a commercial market rate and thin 1,400 plus 0.6% of the purchase price. capitalisation (debt to equity) restrictions are satisfied. The standard rate of VAT in Denmark is 25%. As a general The allowable debt/equity ratio in respect of connected rule, neither the acquisition nor the renting of real estate party debt is generally 4:1. Where the ratio of 4:1 is is subject to VAT. However, it is possible to apply for a exceeded, an interest deduction may be denied on voluntary VAT registration which will be beneficial in some that part of the controlled debt that should have been circumstances. This is not possible for most residential converted into equity in order to observe the 4:1 debt buildings. equity ratio. However, the thin capitalisation rules do not apply if the creditor is an individual, if the connected party As a part of the recent Danish tax reforms, VAT exemption debt is DKK 10 million or less, or if the taxpayer can prove on management and sale of real estate is abolished that a similar financing could have been obtained from a in some situations. From 1 January 2011, the VAT third party lender. exemption for enterprises receiving management fees for management services on real estate is abolished, and In addition to the thin capitalisation rules, there are two the management services will be subject to VAT. Also further rules restricting interest deductions:- from 1 January 2011, the following are no longer exempt from VAT: • interest may only be deducted up to an average – sale of new buildings with or without land; interest return (5% in 2010) on the tax value of the – sale of building sides, irrespective of whether they are company’s qualified working assets (roughly fixed developed or not; and, assets other than investments, plus stock). Excess – separate sale of built-up sites. interest restricted under this rule is lost. • interest expenses can only be deducted up to a No capital duty is payable in Denmark on the issue of maximum of 80% of the company’s Earnings Before shares. Interest and Taxation (EBIT). To the extent that interest is restricted under this rule it may be carried forward to • It should be noted that although recent legislation has future periods. However, the total interest deduction introduced amendments to the corporate tax regime, is again subject to this restriction. from 1 January 2010 the withholding tax reduction from 28% to 27% on dividends will not be effective until 1 January 2012. These two rules apply to all interest and not just that on connected party debt. However, there is a de minimis limit of DKK 21.3 million of interest, below which these rules cannot reduce the allowable interest. 46
  • 48. www.bdointernational.com Estonia The standard rate of VAT in Estonia is 20%. A sale of immovable property is usually tax exempt (without Contact: Urmas Võimre the right of deduction of input VAT). There are some urmas.võimre@bdo.ee exceptions to this rule: + 372 627 5500 1) Sale of immovable property which has not been in use (new buildings) is subject to VAT; Estonia charges tax on the income of companies and permanent establishments only when their real estate 2) Renovated immovable property is also subject to VAT. income and capital gains are distributed or are deemed to Renovation means that cost of renovation is at least be distributed. The rate of withholding tax is 21%. 110% compared to purchase price of immovable property; Non-residents are taxed on income from Estonian 3) Plots of land without buildings on that where the property businesses at a flat rate of 21%. permit to erect building has been issued are also subject to VAT; No additional withholding tax is deducted on dividends paid to non-resident companies or individuals. 4) Sale of securities which give the holder thereof a right of ownership or disposal of immovable property Withholding tax of 21% is applied to interest (including mentioned in points 1 and 2, 3. interest upon debt secured on real estate) only to the extent that it exceeds an ‘arm’s length basis’. Stamp duty is payable on the acquisition of real estate at variable rates, but may not exceed EEK 40,000. Estonia has a tax treaty network by way of which the applicable withholding tax rate could be reduced. • Since the recent credit quake the proposed lowering of tax rates on a yearly basis has been abandoned. Deductions against rental income are not allowed for individuals except if the individual registers with the tax authorities as a “sole proprietor carrying on a business”. Such an individual real estate owner has to pay income tax at 21% and social security contributions at a rate of 33% on their net profit. Social security contributions are deductible for income tax purposes and no further contributions are due on income exceeding EEK 783,000. Where the individual in receipt of rental income is not a registered sole proprietor, they are taxed on their gross rental income at the rate of 21% (by way of withholding). Deductions are not relevant to Estonian companies due to the distribution basis of calculating taxable profits, as described above. There are no tax depreciation rules due to the distribution basis of taxation in Estonia. Non-residents pay income tax of 21% on capital gains made from the disposal of real estate or rights over real estate located or registered in Estonia. Where a non-resident disposes of shares in an Estonian company, more than 50% of the value of which is comprised directly or indirectly of buildings or land situated in Estonia, and, at the time of disposal, that non-resident had a shareholding of at least 10% in the company, the gain is subject to 21% income tax. Otherwise, gains on the disposal of property company shares are generally only taxable in accordance with the tax laws of the country of residence of seller 47
  • 49. Finland proportion of the VAT reclaimed on the development on a time apportioned basis. Contact: Heikki Muikku heikki.muikku@bdo.fi Property tax is charged annually at rates varying between + 358 207 432 928 0.32% and 3% (depending on the municipality where the property is located and on the nature of the property) A property company incorporated in Finland is subject to based on the value of the property which must be Finnish corporate tax on its worldwide profits and gains. determined by a fixed formula. Farming land and forests Foreign property companies that own property in Finland are exempt. These rules are the same regardless of are subject to tax on all income from that property. whether or not the taxpayer is a resident of Finland. Profits are taxable in Finland at a flat corporate tax rate of 26%. Taxable profit is determined in accordance with The purchase of Finnish land is subject to real estate generally accepted accounting principles with only minor transfer tax at 4% on the purchase price. Generally, adjustments for tax purposes. the purchase of shares in a Finnish company that holds property outside of its main trade is subject to transfer A company’s income from “non-business” activities tax at 1.6% on the share price (only if either the seller (e.g. rental income) is regarded as “personal income”. or purchaser is resident in Finland). However, if the Profits and losses from business (i.e. trade) and non- purchased shares relate to a “real estate company” business sources are treated separately for tax purposes. then transfer tax is levied, even if both parties to the Consequently, losses from one source cannot be offset transaction are non-residents. against income from the other source. • Finland introduced a REIT regime in April 2009. The The expenses incurred in acquiring or maintaining a target of the regime is to promote the supply of rental business are deductible and are accounted for on an apartments and for this reason the new rulings are accruals basis. Expenses that generate income over a applicable only to companies whose assets comprise period of at least three years are divided equally across at least 80% rented apartments. the corresponding tax years. Costs in connection with acquiring fixed assets are deductible as depreciation. The depreciation of buildings and other structures is computed on the total value of the structure using the declining balance method for each building separately, with a maximum rate varying from 4% up to 25% depending on the type of building or structure. Capital gains realised on the sale of Finnish real estate will normally be taxed at the standard corporation tax rate of 26% if the owner is a corporation, or at 28 %, if the owner is an individual. Subject to the provisions of any double tax treaty, gains realised by a non-resident company on the disposal of shares in a Finnish real estate company will, in certain cases, be subject to corporation tax in Finland. The standard rate of VAT has increased from 22% to 23% on 1 July 2010. Property rental payments are generally VAT exempt. However, a landlord or real estate company may register voluntarily for VAT, provided the lessee is using the property for VATable activities, or is the Finnish Government. Sale of real estate is VAT exempt but if real estate is sold to a non-taxable person less than ten years (in some cases five years) from the beginning of the calendar year during which new or major construction work on the property was finalised, the seller is liable to repay a 48
  • 50. www.bdointernational.com France The taxable gain on the direct disposal of a property (usually the difference between the sale price and the net Contact: Carine Duchemin book value) is taxed at the standard corporate tax rate. cduchemin@djp-avocats-bdo.fr + 33 (0)1 80 18 10 80 Subject to any double tax treaty in place, a disposal of property (or shares in a property holding company) by a Income from, and capital gains realised on the sale of, non-resident company would be subject to withholding real estate in France are taxable in France, whether or tax at a rate of 33.3%, or 50% if the non-resident not received by a French resident (subject to any relevant company is established in a non-cooperative country, double tax treaty). essentially tax havens. A French company is subject to corporate tax. The VAT and registration duty are payable on the acquisition standard rate of corporate tax is 33.33%. of real estate. A permanent establishment may give rise to branch tax, From 2010, the sale by a VAT liable person operating payable at a rate of up to 25% on the net after tax profit in a property development business that sells land and of the branch. There are some exemptions available from buildings within five years of the building’s completion are branch tax (which in any case does not apply within the subject to VAT on the sale price or, in some circumstances, EU). on the margin, at a rate of 19.6%. In general sales are also subject to registration duty at the rate of 0.715% An investment through a partnership, which has not (unless the VAT has been calculated on a margin basis). elected to be liable to corporate tax, gives rise to a tax charge at the entity level, but which is payable by the The other sales of land and buildings by a VAT liable partners. person can be subject to VAT at its option. In all cases the registration duty will be due at the rate of 5.09%. Generally, any expenses incurred for the purpose of the It is calculated on the purchase price, plus any other rental business are tax deductible - including local taxes consideration provided. and registration duty. Registration duty is tax deductible for French companies Interest paid to connected parties is allowable to the or branches. extent that the interest is calculated at a commercial market rate and thin capitalisation restrictions are The acquisition of shares in a French real estate company satisfied. is subject to the same treatment as the direct acquisition of a building. Interest payments that fail all three of the following conditions may be restricted:- A nominal duty (€375/€500) is payable in France on the issue of shares. • the debt:equity ratio exceeds 1.5:1 • the interest cover is below 4 to 1 • France has a well established Real Estate Investment Trust regime (SIIC). Under this regime, companies • interest payments by the relevant company to related whose main activity is the leasing of properties, which companies are greater than interest payments received have a share capital at least equal to €15m and are from related parties. listed on a French regulated market, can elect for the regime. Provided certain conditions are met, SIIC However, if the excessive interest payments are less companies are exempt from corporate tax on both than €150,000 then all of the interest payable should be their rental income and any capital gains that arise allowable under the thin capitalisation rules. on the sale of their properties or shares in qualifying subsidiaries. Depreciation in respect of buildings, but not land, is tax deductible. The allowable rates for real estate range from 2% to 5%. Certain specified assets may be depreciated using accelerated depreciation methods. Plant and machinery depreciation is allowable at rates depending on the respective standardised useful life. On sale, the tax depreciation is “clawed back” up to the level of the disposal proceeds. 49
  • 51. Germany Depreciation in respect of buildings, but not land, is tax deductible. The allowable rate varies between 2% and Contact: Martina Elisabeth Luetticken 3%. In the case of an exceptionally short useful life of the martinaelisabeth.luetticken@bdo.de building higher rates apply. + 49 (040) 30 29 3 - 263 Plant and machinery depreciation is allowable at rates Real estate investments are most commonly made depending on the respective standardised useful life. On by way of either non-resident companies or German sale, the tax depreciation is “clawed back” up to the level partnerships. of the disposal proceeds. Corporate entities are subject to corporate income tax Generally, neither the acquisition nor the renting of real at an effective rate of 15.825%. Individuals investing estate is subject to VAT. However, an option to tax may either directly or by way of German partnerships are be possible. In this case it is important to make sure taxed at their individual tax rate. A German company is, that the investor is entitled to input tax deductions. If the in principle, also subject to trade tax, which is a local tax property is rented out, an option to tax is possible only at rates varying from 7.00% to 17.15%. Trade tax is not if the lessee uses the property exclusively for VATable deductible for corporate income tax purposes. “Passive” activities. Thus, an option is generally not possible for rental income is, however, often exempt from trade tax. renting out residential buildings. Non-residents are not liable to trade tax providing they The acquisition of German real estate is subject to Real do not have a permanent establishment in Germany. Estate Transfer Tax (“RETT”) at a rate of 3.5% or 4.5% Accordingly, it is generally “safer” for trade tax purposes of the purchase price, depending on the location of the for investment in Germany to be structured through non- property. resident corporations that are tax resident in jurisdictions which offer treaty protection and do not charge tax on the Generally, RETT also applies on the acquisition of shares German rental income. in a company or interest in a partnership owning German property, but the tax base (the standard assessed value) Generally, taxable income is calculated on normal may often be lower than the fair market value of the accountancy principles. Until 2008, a non-German property. resident with only passive income (e.g. rental income) calculated its taxable rental income on a cash receipts and In asset deals RETT is added to the tax base of the disbursements method mainly adjusted by a deduction property and can be tax deductible as depreciation. for depreciation. From 2009 the rental income of a non- Where shares in a corporation are acquired RETT is part resident corporation is deemed for calculation purposes of the acquisition costs of the shares and not deductible to be trading income. As a result, its taxable income has as depreciation. to be determined under normal accounting principles, subject to prior notification by the tax authorities. Such • German stock corporations may elect to convert to a notice can be issued if the corporation has an annual German REIT status. Subject to meeting a number turnover in excess of €500k per calendar year or if the of conditions, qualifying rental profits in a German profit per business exceeds €50k per business year. The REIT will be exempt from corporate income tax, the requirement to calculate rental income under normal solidarity surcharge and municipal trade tax. Profit accounting principles will then have to be fulfilled from the distributions are subject to full taxation on the level beginning of the fiscal year following the notification. A of the shareholder, for corporate shareholders e.g. non-resident corporation that has determined its income participation exemptions do not apply. on a cash and disbursement basis may elect to change to • No capital duty is paid in Germany on the issue of the new method of calculating its rental income from the shares. beginning of a tax year. • From 1 January 2010, certain group reorganisations may no longer trigger a RETT charge. Generally, any expenses incurred for the purpose of a rental business are deductible. Interest paid to connected parties is allowable to the extent that the interest is calculated at a commercial market rate. Under the rules on interest deduction limitation, net interest paid is only deductible up to 30% of earnings before interest, taxes and depreciation, unless the aggregate of net interest paid is below €3 million. 50
  • 52. www.bdointernational.com Greece The acquisition of Greek real estate is subject to Real Estate Transaction Duty (“REDT”) at a rate of 1% of the Contact: Marios Eleftheriadis purchase price. The REDT is due before the sale and m.eleftheriadis@bdo.com.gr purchase is completed. + 30 6944 677 903 The aforementioned tax applies to both individuals and Companies tax resident or with a permanent establishment companies. in Greece pay corporation tax at a rate of 24% on their tax adjusted profits. The rate will be reduced by 1% each Also, real estate is subject to an annual Real Estate Tax year until it is finally set at 20% in 2014. (“ETAK”) at 0.6% Non-resident companies are also obliged to maintain An annual Local Real Estate Duty (TAP) is payable to local accounting records in Greece, if they own property authorities. The amount payable is based on the value of located in Greece. the real estate and varies between 0.025% and 0.035% on the assessed value of the property. Rental income is subject to a surtax of between 1.5% and 3%, depending on the circumstances of each case. On 1 July 2010, the standard rate of VAT was increased from 21% to 23%. Foreign companies, established in countries regarded as tax havens are subject to an annual 3% property tax A capital duty of 1.1% is due on the issue of shares. (quantified by reference to the value of the property owned). A transfer tax of 5% is due by corporate entities on the transfer of non-listed shares. Individuals are also subject to tax in Greece on their rental income in a similar fashion to companies, albeit at • The taxation of real estate in Greece and, in particular, progressive income tax rates of up to 45%. the taxes levied on the transfer of the ownership of such property is currently going through a phase of In arriving at taxable income, resident companies can transformation, the previously levied Real Estate generally deduct the costs and expenses (including Conveyance Tax being gradually replaced by Value depreciation and finance charges) accrued in generating Added Tax. Because the transitional arrangements rental income. are fairly complex, investors are advised to seek and secure competent professional advice prior to a Depreciation is tax deductible for corporate entities at transaction. rates of between 2% and 12%, depending on the type of property. However, for the first three years, newly established entities either may not deduct depreciation, or in certain circumstances they may be allowed to deduct 50% of the depreciation that would otherwise be deductible. All corporate profits and gains are treated equally and are taxed at the standard rate of 24%. For individuals, profits on the sale of real estate are subject to capital gains tax at the following rates:- • 20% if the real estate has been held for less than five years. • 10% if the real estate has been held for between five and fifteen years. • 5% if the real estate has been held for fifteen to twenty five years. • No capital gains tax is due if a real estate asset has been held for more than twenty five years. Capital gains tax due on the sale of a property must be paid to the tax authorities before the sale is completed. 51
  • 53. Hungary is currently 5% per annum. However, depreciation of long life structures, including certain buildings, is restricted to Contact: László Pásztor 2%. laszlo.pasztor@bdo.hu + 36 1 235 3010 The gain on a disposal of property by a Hungarian company is added to its taxable rental profits. Most real estate investment is structured through resident entities (whether a company or branch), as direct The gain on a disposal of shares in a property owning non-resident property investment requires permission company by a Hungarian holding company would similarly from the relevant regional authority. The most common be added to its taxable profits. entity for real estate investment is a private limited liability company. However, partnerships can also be From 1 January 2010, the capital gains of a foreign good vehicles for certain classes of investor. company from the sale of the shares of a company owning Hungarian real estate are subject to the general Companies resident in Hungary are currently subject to rate of corporate income tax of 19%. This liability applies, general corporate income tax at a rate of 19%. Prior to if the foreign company is resident in a country with which 1 July 2010, the first HUF 50 million was taxable at a Hungary has no double tax treaty, or the existing treaty rate of 10% (provided certain conditions are met – e.g. allows Hungary to tax such income. having at least one employee in the tax year). From 1 July 2010, the taxable base on which the 10% rate applies The local business tax rate levied on the net turnover has been increased to HUF 500 million per tax year, and minus modification items is capped at 2% by law, but the conditions mentioned above are cancelled. The HUF varies depending on the municipality in which the 500 million tax base shall be applied proportionally for the company/branch is located. Taxable income is based second half of 2010. (i.e. in the second half of 2010 it is on financial statements prepared in accordance with applicable for HUF 250 million) The 4% solidarity tax has Hungarian accounting standards. been cancelled from 2010. From 1 January 2010, the acquisition of property and land If the taxable profits calculated according to the general (commercial or dwelling) is subject to a transfer tax at a rules are less than 2% of total revenues minus certain general rate of 4%. Above a value of HUF 1 billion the tax costs, special tax base rules apply. rate is 2%, with the maximum tax amount at HUF 200 million. Generally, business expenses are deductible for corporate income tax purposes. Losses can now be carried forward From 1 January 2010, the acquisition of the shares of for an indefinite period. From 2010, no approval is needed a company possessing Hungarian real estate is subject from the Hungarian tax authorities for losses incurred by to the general rate of transfer tax, if the new owner commercial business activities. Tax loss carry-back is not acquires at least 75% of the shares of the company possible, except for certain agricultural activities. possessing the real estate, either directly or indirectly. The subject of the transfer tax is the value of the real From 1 January 2010, interest, royalty and service fees estate proportionate to the shares acquired. According paid to a foreign company resident in a country with to the mid-year modification of the transfer tax law, this which Hungary has no double tax treaty is subject to transfer tax liability is not applicable if the transfer is made 30% withholding tax. Services such as business and between affiliated companies. management consultancy, advertising and market research, public opinion polling, and for agency activities A preferential transfer tax rate of 2% is available if a real are subject to this WHT. estate fund or real estate leasing company (financial lessor) purchases the property. A condition for applying Transfer pricing rules apply for all affiliated party the preferential rate for a real estate developer is that the transactions and transfer pricing documentation must be property shall be sold within two years. Real estate funds prepared in order to support the applied price/interest/fee and financial leasing companies do not have any fixed as being a commercial market price. holding period limitations. If the prescribed debt: equity ratio of 3:1 is exceeded, • There is stamp duty of HUF 100k on the establishment the interest on the excess is not deductible. These thin of a limited liability company (called “Kft” in Hungary), capitalisation rules apply both to connected party debt HUF 600k for a public/private limited liability company and third party debt (but not to bank debt). by shares (called “Zrt” or “Nyrt” in Hungary) and HUF 50,000 for partnerships (called “Bt” in Hungary). Depreciation is deductible at set rates as defined in the There is a simplified registration, for which the stamp Corporate Income Tax Act. For leased real estate the rate duty is HUF 15k for all types of companies. 52
  • 54. www.bdointernational.com Ireland the sale of land or property will be subject to Irish capital gains tax at the rate of 25%. In computing the amount of Contact: Mark Hynes the gain, the original cost will be indexed to take account mhynes@bdosx.ie of inflation up to 31 December 2002. Indexation ceased + 353 1 4700 271 after that date. Irish corporate entities are subject to corporation tax Ireland always has the primary taxing rights in respect of 25% on rental income. Furthermore, closely held of income or gains on land or property situated in the companies may be liable to a 20% surcharge on rental Republic of Ireland. Where the owner is resident in a income that is not distributed to shareholders within tax treaty country, relief will generally be available in the eighteen months of the end of the accounting period. country of residence for any tax paid in Ireland. Non-resident corporate entities are similarly subject to Irish VAT law in respect of the supply of property has corporation tax of 25% on rental income from Irish real undergone fundamental changes effective from 1 July estate provided the property is owned or used by, or held 2008 (subject to certain transitional measures). by or for, a branch or agency situate in Ireland. Otherwise, a non-resident corporate entity is liable to income tax on Commercial lettings are now VAT exempt, with an option rental income at 20%. to tax available. However, subject to certain conditions, this option to tax is restricted where the landlord is The tax rates for non resident individuals depend on the connected with the tenant. level of income in Ireland. If total taxable income is less than €36,400 tax will be payable at 20%. For income in Sales of commercial property are VAT exempt if the excess of this amount, the rate is 41%. An additional property is more than five years old or, if less than income levy is payable by individuals on their taxable five years old, has been occupied for more than two income from the tax year 2009 onwards. For the tax year years. However, there is a joint option to tax available 2010 the income levy varies from 2% to 6%. between the purchaser and vendor. This option may be advantageous for the vendor where it has claimed a VAT Generally any expenses properly incurred for the purpose input credit on the original purchase/development of the of the rental business are deductible. However certain property. specific expenses are disallowed, such as tenant entertaining. There is stamp duty payable on the purchase of land or property. If acquiring commercial property, the rate of Capital expenses, such as expenditure enhancing the stamp duty will be between 0% (value less than €10k) value of the property or legal fees on the acquisition and 6% (value exceeds €80k). of the property, are not available for deduction against rental income. Instead, these costs are allowable when The rate of stamp duty can often be reduced to 1% by calculating any capital gains tax on the eventual disposal acquiring shares in a company owning the land. of the property. No capital duty is payable in Ireland on the issue of shares. For commercial property, the interest on borrowings With the exception of a nominal €200 annual levy on is deductible against rental income. There are no thin investment properties, there are no annual or other capitalisation rules in Ireland. wealth taxes if a non-resident owns land in Ireland. Tax depreciation in respect of freehold buildings is • A number of double tax treaties have been agreed allowed on certain property assets. These include in recent months (including revisions to existing investment in childcare facilities, private hospitals and agreements) which may facilitate certain cross-border private nursing homes. However, a number of these real estate transactions. measures terminated as of 31 December 2009. New industrial buildings qualify for allowances calculated at 4% per annum on a straight line basis. Second hand buildings are generally depreciated over their deemed remaining tax life. The tax life of a new industrial building is generally treated as twenty five years. Capital allowances on plant & machinery are calculated at a rate of 12.5% per annum. Any gain (including those by non Irish residents) arising on 53
  • 55. Italy For individuals, capital gains arising from the disposal of real estate investments (with the exclusion of building Contact: Attilio Torracca land) are subject to income tax only if the sale takes place a.torracca@studiosala.com within five years from the purchase or construction of the + 39 02 76018118 real-estate. This rule is applicable both to resident and non resident individuals. Italian resident companies and permanent establishments are subject to corporate income tax (IRES) at a rate of The Budget law for 2010 allows individuals to step up 27.5%. the basis of land owned on 1 January 2010, by payment of a substitutive tax at the rate of 4%; the updated value They are also subject to a regional tax (IRAP) at a fixed will have had to have been certified by an expert’s sworn rate of 3.9% (or for some regions of Italy 4.82%) on appraisal by 31 October 2010. rental income. Neither interest paid nor payroll costs are deductible for IRAP purposes. Sales of commercial buildings by local companies or permanent establishments are subject to VAT at 20% Losses can normally be carried forward for five years and (10% in the case of renovated properties) only if (i) the deducted from future profits for IRES purposes. seller is a construction company or (ii) the buyer is subject to VAT with a limited right to reclaim VAT, the percentage For individuals, income derived from real property situated reclaimable being 25% or less (e.g. banks and insurance in Italy is included in taxable income and is subject to companies) or (iii) the seller expressly opts in the public personal income tax (IRPEF). Resident and non resident deed of sale for the VAT regime to apply. individuals are taxed on their Italian source income at progressive rates from 23% to 43%. If VAT does not apply sales are subject to registration tax (at a rate ranging from 3% to 15%), mortgage tax (2%) Italy’s regions and the local authorities within each region and cadastral tax (1%). have the power to raise additional revenue by charging persons liable to IRPEF and living in their particular area A local tax on real estate (ICI) is charged on an annual basis an additional regional or local income tax. The regional at 0.4% to 0.7% of the cadastral value of the property. tax is typically 0.9% and the local tax 0.5%. The rate is set by the relevant local authority. Typically, the cadastral value is below, and sometimes substantially Taxable income for IRES purposes is the net revenue below, the property’s market value. Property tax (ICI) is after the deduction of costs, as shown in the annual not deductible for the purposes of IRES or IRAP. profit and loss account. With some minor exceptions, all costs relating to the activities of a company can be • Plans for tax simplification are unlikely to be introduced deducted, including net interest payable up to an amount in 2010. equal to 30% of EBITDA (not including depreciation and finance lease payments). It is possible to carry forward excess interest or surplus EBITDA. There is scope within a domestic group of companies for excess interest or EBITDA to be exchanged between companies. For individuals, the rental received, less an arbitrary 15% deduction, constitutes the taxable amount. No deduction is allowed for actual expenditure, including loan interest. All fixed assets (except land and residential buildings) are depreciable for tax purposes. The depreciation rate for buildings is typically 3%. The value of the land must be segregated from the value of the buildings and it is not depreciable. A specific rule applies to calculate the land value (if it is not separately recognised in the financial statements of the owner) being 20% of the total value (increased to 30% for industrial buildings). For companies, if real estate (other than residential buildings) has been held for more than three years, the taxation of any capital gain arising on sale can be deferred over a maximum period of five years. 54
  • 56. www.bdointernational.com Latvia activities, including real estate letting businesses, for a maximum of three years. Individuals cannot carry forward Contact: Vita Liberte losses, which have arisen from the alienation of capital vita.liberte@z-l.lv assets. + 371 2 646 9918 Tax depreciation is available at various rates, using the reducing balance method. Buildings, structures and If the real estate investment vehicle is a Latvian company, perennial plantations may be depreciated at 10%. Most that company will pay corporate income tax at 15%. types of plant and machinery are tax-depreciable at 40%. Individuals investing via a Latvian partnership will pay Capital gains on the disposal of Latvian real estate are personal income tax at a flat rate of 26%. If individuals taxable for corporate income tax purposes. Capital gains invest directly and there is no business activity are computed by subtracting the book value of real undertaken, a 15% capital gains tax will apply. Where estate from the sale proceeds. There is no allowance the individuals also undertake a business activity a 26% for retail price inflation. A non-resident company with no personal income tax will apply. Corporate partners in a permanent establishment in Latvia, however, is subject Latvian partnership will be liable to corporate income tax to a 2% withholding tax on the sale proceeds. at 15% on their profit share. Capital gains made by resident individuals on the disposal It is also possible to invest in Latvian real estate via a of private real property are taxed at a rate of 15%. A foreign or offshore entity, but income remittances may withholding tax at a 2% rate of the sale proceeds applies be subject to higher withholding tax. to non-resident individuals selling their property to a resident of Latvia. The standard rate of income tax of 26% There is no withholding tax on rents paid to a non-resident will apply, if it is considered that an individual performs an individual of a tax treaty country but tax is payable at a economic activity. rate of 26% on the net income upon filing a tax return. However, any remittances of income (including rents) Individual income tax law provides criteria in order to paid to a legal entity located in a deemed tax haven identify, if an individual performs an economic activity (at country are prima facie subject to withholding tax of 15%. least one criteria to be observed): If an individual is located in a tax haven country, then their income is subject to a withholding tax at a rate of 26%. 1) systematic and regular transactions (3 and more during The tax authorities will, however, waive the requirement taxation period or 5 and more during three taxation to withhold tax if it is satisfied that the transaction did not periods); have a tax-avoidance motive. 2) amount of transaction exceeds LVL 10 000, except income from personal belongings; Withholding taxes are also imposed at 5% on rental 3) Economic substance. payments to a non-resident company without a permanent establishment in Latvia. It must also be The disposal of shares in a company where more than noted that non-resident companies that are members of 50% of its value directly or indirectly relates to Latvian Latvian partnerships face a withholding tax of 15% on real property is treated as if it were a disposal of the any remitted profit share, except where there is provision underlying real property, unless the shares are publicly for a lower rate in a double tax treaty quoted on an EEA stock exchange. In computing income for both corporate income tax In general, sale proceeds from real estate are not subject and personal income tax purposes (if an individual is to VAT, except the first sale of unoccupied (unutilised) real registered as self-employed), all expenses reasonably estate which is subject to the standard VAT rate of 21%. connected with the real estate investment may be Rental income is subject to the standard VAT rate. deducted including mortgage and other loan interest. For corporate income tax purposes only, thin capitalisation Real estate tax of 1.5% per annum is levied on the rules apply to limit deductible interest in certain cases. registered (cadastral) value of land, buildings and Interest paid at rates above market rates may also be engineering structures used for business purposes. Real restricted, but neither rule generally applies to interest estate tax of 3% applies on uncultivated agricultural land. paid to Latvian or other EU credit institutions. Payments to related parties are only allowed to the extent they are There is no capital duty upon the issue of shares in Latvia. at an arm’s length. • Special economic zones give companies entitlement to Companies can carry forward losses for eight years. significant (up to 80 percent) corporate income tax and Where control of a company (>50% of shares) changes, real estate tax reliefs. The effective tax rate in special losses brought forward remain available, provided that economic zones is 5% upon specific conditions. the business carried on in the prior two years continues for at least five years after the change. • Withholding tax on qualifying interest payments will be abolished by 1 July 2013 in line with the terms of Individuals may carry forward losses from business the EU Interest and Royalties Directive. 55
  • 57. Lithuania However, it is possible to file a tax return and be taxed at the same rate applicable to net rent (i.e. 15%). Gains on Contact: Živilė Veličkienė the disposal of shares by companies are generally taxable, zivile.velickiene@bdo.lt but gains on disposals of holdings of 25% or more may + 370 37 32 03 90 be exempt under certain conditions. For example, if the entity transferring the shares had more than 25% of the Companies are charged to corporate income tax at a voting shares of the entity for at least two years without standard rate of 15%. A permanent establishment of a a break. foreign company is subject to the same rate of tax as a resident company. For non-resident individuals, similar rules apply. Disposal proceeds will be subject to withholding tax of 15%, but Personal income tax (income tax on individuals) is the net gain will be taxable at the same rate if a tax return currently charged at 15% on most types of income and is filed. The exemption for property held for three years or at 20% (charged by withholding) on certain income, such more does not currently apply to non-residents. Having as dividends (for residents and non-residents). retained the property for more than three years, the sales income of that real estate is non-taxable. The same Non-resident companies without a permanent rule is applied to non-residents. Gains on the disposal of establishment in Lithuania are liable to a 15% withholding shares in Lithuanian companies by non-residents are not tax on rental income from Lithuanian immovable property. generally taxable in Lithuania. A 15% withholding tax applies to dividend payments Neither the acquisition of nor rental of real estate is and a 10% rate applies to interest, subject to lower rates generally subject to VAT. An option to apply VAT may be required by tax treaties or EU Directives. advantageous but once the option is exercised, it must remain in place for twenty four months. The option to Generally all expenses incurred in the usual course of apply VAT is available only for VAT payers, and choosing business are deductible, subject to some exceptions. this option, all rental transactions with VAT payers will have to be taxed with VAT. However, rental income of individuals is subject to tax at 15% on the gross rents, without any deductions. The Owners of real property, regardless of their residence only exception is if the rental is part of a business, in status, are liable to land tax at rates of between 1.5% which case the landlord, if registered as a sole proprietor and 4% on the acquisition price (the actual rates are set carrying on a business, may opt for taxation at 15% on by local authorities). net rents. Corporate entities also pay an annual real property tax at Losses generally may be carried forward. Transferred rates of between 0.3% and 1% on the cadastral value of tax losses incurred due to disposal of securities and (or) the property. The precise rate varies between one local derivative financial instruments may be reduced at taxable authority and another. Reliefs and reductions may be income amount calculated only on disposal activities of available. The tax is deductible in computing income for securities and (or) derivative financial instruments. There corporate tax purposes. is a possibility to carry forward tax losses among group companies. No capital duty is paid in Lithuania on the issue of shares. There is also no stamp duty on the transfer of real Land is not depreciable, but exceptionally, an impairment property. write-down to market value may be made if the land has fallen below acquisition cost. • Certain reliefs are available for investment in Lithuania’s free economic zones. Depreciation on buildings and other fixed assets is allowed on either a straight-line or declining-balance method. The straight-line method is the norm for commercial buildings. Dwelling houses may be depreciated at 5% per annum and other buildings at 6.67% per annum; some new buildings qualify for depreciation at 12.5% per annum (all on a straight-line basis). Capital gains in Lithuania are taxable as ordinary income at a 15% rate. For non-resident companies without a permanent establishment, there is a withholding tax of 15% on the disposal proceeds of immovable property. 56
  • 58. www.bdointernational.com Luxembourg less deductible expenses. These expenses include repairs and maintenance, interest and finance charges, Contact: Guy Hornick property tax, insurance premiums, tax depreciation or, if guy.hornick@bdo.lu certain conditions are fulfilled (notably the property was +352 45 123 221 completed at least fifteen years ago) an allowable “lump sum” expense. The “lump sum” expense is calculated Real estate investments can be made directly by non- as the lower of €2,700 per year or 35% of gross annual resident individuals, companies or indirectly via an rentals (but not exceeding €2,700). Interest costs can be investment in a Luxembourg property company. considered additionally. Personal income tax is levied on an individual’s income The allowable debt:equity ratio in respect of connected arising from property located in Luxembourg. The tax party debt is 6:1. Interest payments are deductible within rate is progressive, ranging between 0% and 38% plus a these thin capitalisation rules provided that the interest 2.5% surcharge on the income tax amount. It should be rate is set at a supportable market rate. noted that tax losses on rental income are not available for future offset. From 1 January 2011, the maximum Tax depreciation is allowed (on a straight line basis) on tax rate for individuals will be 39%. There will also be the capital cost of buildings (but not land). The allowable an increase in the unemployment surcharge to 4% and rate varies from 2% to 6%. The capital cost includes 6% for the part of the taxpayer’s incomes exceeding any registration duties, notary and architect fees. In the €300,000. An additional 0.8% special crisis contribution absence of a supportable specified allocation, land is will also be charged. assumed to be 20% of the total purchase price. Real estate income arising within a Luxembourg The transfer of property is within the scope of VAT but tax resident company is taxed on the same basis as is VAT exempt, unless an application (option) has been commercial profits. made to apply VAT. Real estate owning companies which are taxed on Similarly, the letting of property is a VAT exempt service, commercial activities are subject to corporate income unless the real estate lessor opts for it to be taxable tax at progressive rates to a top rate of 21% for profits which may, in certain circumstances, be beneficial. (including capital gains) greater than €15,000, plus a 4% surcharge on the corporate income tax amount (5% from Leases without VAT are subject to a registration duty 1 January 2011) resulting in a maximum effective tax rate of 0.6% (calculated on the sum of all rental payments of 21.84%. (22.05% from 1 January 2011). provided for the contract). In addition, a local municipal business tax of 3% of the From 1 January 2009 contributions of Luxembourg real adjusted business profit plus a multiplier of between estate to corporations and partnerships are subject to a 200% and 300% depending on that local authority is new registration duty as follows: applied. For example, in Luxembourg City, this gives an effective rate of 6.75%. Accordingly, the maximum The transfer of property located in Luxembourg is subject effective corporate tax rate is 28.59% in Luxembourg to a registration duty of 6% and a mortgage duty of 1%. In City (28.8% in 2011). addition, in Luxembourg City itself, a municipal surcharge of 50% is applied to registration duties, so that the overall Revenues arising from a commercial activity through a transfer charge can amount to 10% for properties located permanent establishment of a non-resident company in Luxembourg City. are also taxed as commercial profits. This only applies to non-resident companies that build properties with the The registration duty is calculated on the higher of the sole intention of resale. In this case, losses are available purchase price (inclusive of VAT) and the market value. for future offset. • Luxembourg has a range of fund entities (i.e., UCIs, SIF Rental income realised by a non-resident company does included) that are not subject to tax on their income but not qualify as a commercial profit if the company has built instead on their equity (“taxe d’abonnement”). Fund or bought properties without the sole intention of resale. entities are supervised by the Luxembourg Banking Such companies are only subject to corporate income Supervisory Authority (CSSF). tax at the rate of 21.84% (22.05% in 2011). Tax losses on rental income in this case are not available for future offset. Taxable rental income is calculated as gross rental income 57
  • 59. The Netherlands Anti-abuse rules have been introduced to counter perceived tax avoidance relating to real estate Contacts: Norbert Rosmalen depreciation. Where it can be demonstrated that the fair market value of a building lies below the WOZ-value, then norbert.rosmalen@bdo.nl depreciation to write the asset down to its fair market + 31 10 24 24 830 value is still possible. A transitional rule applies for real estate that has not been depreciated for a period of three The net rental income of both resident and non-resident years from 1 January 2007. companies is subject to corporate tax at 20% for the first €200,000 of profit and 25.5% for the excess. Plant and machinery within commercial real estate is generally depreciated at a rate of between 5% and 10%, A structure with a hybrid entity (e.g. CV or cooperative) again using the straight-line method. For other assets is often considered to optimise debt financing / interest generally a minimum depreciation period of five years deductions. Certain conditions have to be taken into applies. account. By decree (dated 10 December 2008) the rules for Tax losses can be carried back to be offset against the accelerated (discretionary) depreciation have been taxable profits of the previous year and can be carried relaxed in order to provide businesses with additional forward for a period of nine years. A recent set of liquidity. These changes have effect as per 1 January temporary fiscal incentive policies entail that, amongst 2009 and apply to ‘investments’ made during the others, Dutch companies that have suffered losses in calendar year 2009 and 2010. The depreciation could be 2009 and 2010 could choose to carry back these losses as high as 50% in the year of investment (i.e. 2009 or for a period of three years and to carry forward these 2010) of the acquisition/ production costs. The remaining losses for a period of six years. amount could be depreciated in one or more following years. The rule does apply to most business assets, with Generally, taxable income is calculated upon normal some exceptions such as real estate, cars and intangible accounting principles and any expenses incurred for the assets. purpose of the rental business are deductible, although certain expenses such as penalties and fines are not Both resident and non-resident companies are subject deductible. Interest and capital gains (unless they can be to tax on capital gains realised upon the sale of Dutch deferred) are included in taxable income. property, at the corporate tax rates. The gain equals the difference between the sales proceeds and the fiscal (i.e. Interest payable on loans from related parties is allowable tax depreciated) book value. to the extent that the thin capitalisation rules are satisfied. The allowable debt: equity ratio is 3:1. The interest on If the property is replaced by another asset in the year of any excess is not tax deductible insofar as the excess sale or within three years of the sale and has the same debt exceeds €500,000. If an interest deduction is economic purpose as the one sold, the capital gain could limited under these rules, companies may also choose be deferred by the creation of a reinvestment reserve. to apply a group debt: equity ratio. This may provide an The amount of this reserve is deducted from the purchase escape route. In certain structures, other limitations of price of the new property for tax base cost purposes. interest deduction may apply. As a general rule, neither the acquisition nor renting of real In the following circumstances debt may be re- estate are subject to VAT. However, an option to apply as characterised as equity for fiscal purposes: a VAT entrepreneur may be possible and advantageous. • some types of loss financing; Certain conditions have to be met, and it is important that • “sham” transactions (i.e. parties only used the loan as the user of the real estate is entitled to a VAT deduction. legal form but intended something else); The acquisition of Dutch real estate attracts real estate • profit-participating loans. transfer tax (RETT) at a rate of 6% based upon its fair market value. RETT also applies to the acquisition of An annual depreciation charge from 1% to 3% on legal or economic title of at least 1/3 of the shares in a buildings, but not land, is deductible for Dutch corporation company, where 70% or more of its assets are Dutch tax purposes. Higher rates may be allowable subject property. to proof that the useful economic life of the building is shorter. The straight-line method is usually applied and is Real estate tax is levied annually by the municipalities based upon the original acquisition cost. upon the owners of immovable property. The tax rate differs for each municipality. Real estate tax is deductible The depreciation of real estate, however, is limited. for corporate income tax purposes. Real estate held for investment purposes cannot be depreciated below the so-called “WOZ-value”. This is a No capital duty is due in the Netherlands upon the issue value that is determined by the municipal tax authorities of shares. and is used for tax purposes. • Structuring foreign real estate via a Dutch limited If real estate is occupied within the group, depreciation liability company could offer attractive tax planning can take place up to 50% of the WOZ-value. opportunities by using the extensive Dutch tax treaty network. 58
  • 60. www.bdointernational.com Norway holds Norwegian real estate. Accordingly, holding shares in a real estate company will not of itself create a taxable Contact: Anne Taran Tjølsen permanent establishment in Norway. However, if an anne.taran.tjolsen@bdo.no individual is undertaking a trading business in Norway +47 23 11 92 37 (including the buying and selling of shares) this could, in principle, lead to a permanent establishment being It is common to hold real estate through a limited created and the profits would be taxed in Norway. Capital company with the arising rental profit assessed at a flat gains relating to the disposal of Norwegian real estate are Corporate Income Tax (‘CIT’) rate of 28%. Taxable profits taxable in Norway regardless of residence. are computed on an accruals basis and ‘CIT’ is reportable to the tax authorities based on the company’s fiscal year. VAT is payable at a standard rate of 25% with reduced rates for certain goods and services. The sale and rental Losses can be offset against gains and 20% of the of real estate is exempt from VAT. It is, however, possible resulting balance will become either taxable or deductible to register for VAT on a voluntarily basis for the rental of annually on a reducing balance basis. Companies are real estate. assessed for corporate tax individually. However, where common direct or indirect (including foreign) ownership A non-resident individual foreign property owner is liable is greater than 90% a group is formed. Loss relief is to pay 0.7% to 1.1% in wealth taxes on the value of his possible within such a group. property Rental profits attributable to resident or non-resident Real estate located in Norway is subject to real estate individuals are taxed at a flat rate of 28%. Higher rates tax (“eiendomsskatt”) payable at a local level, and the may apply when an individual rents out property to such amount can vary significantly depending on the location an extent that the activities are considered as business of the property. This tax is deductible in determining income. The rental of at least five flats or business taxable income. property exceeding 500 m2, are normally considered as business income. Stamp duty is levied at 2.5% on the consideration paid for the real estate. This tax is calculated when the deed Deductions are allowed for operating costs and income that transfers the ownership has been registered in the generating expenses. property register. This is a national tax and does not vary based on area or the size or type of property. Maximum tax depreciation rates apply to fixed assets, on a reducing balance basis, depending on the deprecation • Norway currently does not have specific REIT category. Commercial office buildings have a depreciation legislation. rate of 2%. Other buildings, for example hotels, have a depreciation rate of 4%. Technical installations in such buildings, such as air conditioning, refrigeration plants and sanitary installations are separated from the building, and depreciated with a rate of 10%. However once the depreciated asset is valued below NOK 15,000 it becomes fully deductible from taxable profits. These rules apply both to Norwegian companies and foreign companies that hold property in Norway. Realised capital gains on the sale of Norwegian real estate are subject to tax at the same rate as rental income for both Norwegian and foreign companies. A Norwegian limited company is generally exempt from taxation of capital gains related to shares in other Norwegian companies/companies within the EEA Area. However, since 7 October 2008, Norwegian limited companies, having realised capital gains related to shares in other Norwegian companies/companies within the EEA Area, must declare 3% of these capital gains as taxable income. This income is assessed at a flat rate of 28%. Norway does not tax foreign resident shareholders which sell shares in a Norwegian or a foreign company which 59
  • 61. Poland tax is payable on land, buildings and structures. The structures are subject to real estate tax, only if they are Contact: Andrzej Dmowski used for carrying out business activity. The government andrzej.dmowski@bdo.pl determines the maximum rate but each local authority is + 48 600 092 622 authorised to establish the annual rate of this tax in its area. Polish resident companies are liable to pay corporate income tax at 19%. • Poland has indicated that it is planning to change the basis of calculation of the local tax on property. Instead Non-resident companies may also be liable to pay of the surface area basis for a building/land, the basis corporate income tax at 19%. In general if a non-resident would be the value of the real estate. However, no company has a seat or management office outside date for the introduction of this change has been Poland, it is subject to tax liability imposed only on the determined. income earned in Poland. The profits of non-resident companies are taxable in Poland if the company carries out a business in Poland through a permanent establishment as will typically be the case for a real estate business. The general rule is that non-residents require a permit from the Minister of Internal Affairs and Administration to buy real estate. Generally, the acquisition of real estate is invalid if a foreigner does not have the required permit. However, subject to certain exceptions, the citizens, entrepreneurs and companies from EU countries and Switzerland do not require such a permit. Generally any expenses incurred for the purposes of the rental business are tax deductible. Interest is allowable to the extent that it is paid. Related party interest is, however, subject to thin capitalisation restrictions. The allowable debt to equity ratio in respect of connected party debt is 3:1. As a result, interest paid on that part of the loan that exceeds three times the value of the share capital is not tax-deductible. Depreciation is allowable as a deduction for tax purposes. The allowable rate varies from 1.5% to 10% for buildings and other structures on a straight-line basis. If certain conditions are met, building can be depreciated at a multiplied standard straight line rate. Land cannot be depreciated. No separate tax on capital gains applies. Any gains or losses of a capital nature are combined with all other income or losses and charged to tax at a rate of 19%. Capital losses are tax deductible against all income but only 50% of the loss can be utilised each year. VAT is applicable for the sale of real estate between VAT payers. VAT rates of either 22% or 7%, as well as an exemption, may apply, depending upon the real estate category. Entities which are not liable to VAT may be obliged to pay a tax on sale of real estate (stamp duty). Real estate is subject to local real estate taxes. The 60
  • 62. www.bdointernational.com Romania An individual may become a taxable person for VAT purposes if they undertake the supply of new buildings or Contact: Andrei Antimia building land. An individual may become a taxable person andrei.antimia@bdo.ro even for a single supply of a new building if it is proven + 40 21 319 9476 that they started the construction of the building for a business purpose. A plot of land qualifies as building land The Romanian Constitution does not generally allow if it is described as such within the planning certificate foreign individuals and entities to own land in Romania. (issued by the relevant City Hall) at the date of supply. However, after five to seven years from the date of EU accession (1 January 2007), individuals and companies Building tax is generally chargeable upon entities at resident within an EU member state will gain full rights to 0.25% to 1.50% of the gross book value of the building. own real estate in Romania. There is also a penalty tax, set by local authorities, at rates between 8% and 10% which is imposed in relation Given the above limitation on land ownership, the to buildings which have not been re-valued in the last most common way of structuring foreign investments three years. in Romanian real estate is through a Romanian limited liability company (“SRL”). Land tax is chargeable on the owners of the freehold land at a fixed amount per square metre, depending on the The income derived from real estate property owned by location and use of the land. an SRL is subject to corporate tax at a rate of 16%. A withholding tax at a rate of 16% applies to most taxable Stamp duty is no longer payable on the acquisition of revenues paid to non-resident companies, including real estate. Instead, transfer (notary) taxes and fees are capital gains. payable (usually by the seller) on real estate transactions, although these do not generally represent a significant Taxable income from the rental or sale of property is cost. calculated on normal accounting principles. In general, expenses incurred for the purpose of generating taxable No capital duty is paid in Romania on the issue of shares. rental income are deductible. There are special rules in relation to the deductibility of interest costs, tax • Following EU accession, Romania has implemented depreciation and service charges. most of the EU Directives. The Parent-Subsidiary Directive has applied from the accession date, whilst Interest is generally deductible for corporate tax purposes. the Interest and Royalties Directive provides for a The allowable debt/equity ratio in respect of connected transitional period until 1 January 2011. party debt is 3:1. This limitation does not apply where the loan is granted by Romanian, or most foreign, banks or other financing institutions. Romanian companies are subject to corporate tax on capital gains at a rate of 16%. Non-resident companies are generally taxed at a rate of 16% on gains from the disposal of Romanian real estate or shares in a Romanian company. However, this is subject to the provisions of Romania’s double taxation treaties which may provide an exemption from Romanian capital gains tax. As a general rule, the rental and sale of real estate is VAT exempt, except for new buildings and building land. However, an option for entering the taxation regime is available. With effect from 1 July 2010 the standard VAT rate has been increased from 19% to 24%. However, a reduced VAT rate of 5% is applicable in case of social housing programme, mainly targeted at first-time buyers of houses with less than 120 sqm built area and a value below LEI 380,000 (approx. €90,000). 61
  • 63. Russia property constitutes more than 50% of its assets) is subject to withholding tax at a rate of 20%. Contact: Dmitry Strelnikov d.strelnikov@bdo.ru It should be noted that certain double taxation treaties + 7 495 797 5665 may provide protection from the withholding tax described above. Real estate investments are most commonly made either via a Russian company, or a branch of a non-resident Generally, rental income is subject to Russian VAT at the company. Inbound investment is often structured via rate of 18%. entities of other foreign countries (e.g. Cyprus) where the relevant double tax treaty provides a degree of protection There are no significant taxes or duties applicable upon the from Russian taxation. acquisition of the real estate. However, the acquisition of real estate in Russia is subject to state registration duty Rental profits are generally taxable at a rate of 20%, which of approximately €375 (RUB 15,000). is applicable both for Russian entities and permanent establishments of foreign entities. In certain regions, this There is no capital duty payable upon the issue of rate may be reduced to 15.5%. share capital in Russia. Although there is a minor state registration duty of up to €5,000 (RUB 200,000) upon the If a foreign entity owns Russian real estate, its Russian- issue of shares. source income from renting the property is taxable (via a withholding mechanism) at a rate of 20%. • There are no expected significant changes in Russian direct taxation relevant for real estate property Procedures for the calculation of the tax base are investors. generally the same for Russian entities and permanent • However, the Russian Government has stated its establishments of foreign entities. intention to replace property taxes (both individual and entity) and land tax with a unified real estate tax. Such Depreciation in respect of immovable property is tax intention was also indicated in the Message of the deductible. It is calculated in line with the classification President of the Russian Federation on 1 July 2010 of fixed assets approved by the Russian Government. regarding Russian tax policy for the years 2011- 2013. Different types of real estate are subject to different • Additionally, investors should be aware that immovable depreciation rates – e.g. office buildings may have an property is subject to Russian property tax at the expected tax life of thirty years, whereas warehouses may general rate of 2.2% per annum charged on the net have an expected tax life of fifteen years. Depreciation is book value of assets. calculated based on the historical cost of the immovable property. No revaluation of historical cost for profits tax purposes is generally allowed (except in the case of, for example, reconstruction and modernisation). Fixed assets may have an initial depreciation deduction of 30% historical costs for the assets of the so called 3rd-7th amortisation groups and 10% historical costs for other groups of fixed assets. An initial deduction at these rates may also be applied in the case of reconstruction or modernisation. Land itself is not depreciated. However, expenses in connection with the purchase of land rights may be deductible in certain circumstances. A direct disposal of Russian immovable property by a Russian company or a foreign company with a permanent establishment in Russia is taxable at the normal profits tax rate of 20%. Where a foreign entity does not have a permanent establishment in Russia, proceeds from the sale of immovable property located in Russia or sale of shares in a Russian real estate entity (if Russian immovable 62
  • 64. www.bdointernational.com Serbia No capital duty is paid in Serbia upon the issue of shares. Contact: Jelena Radovic Real estate owned by legal entities is subject to an annual jelena.radovic@bdo.co.rs property tax of 0.4% based upon its book value. + 381 11 3281 288 Several changes to property tax took place with effect Serbian corporate income tax is charged at a rate of from 31 January 2009:- 10% with taxable profits determined by adjusting the • property tax on “usufruct” rights is repealed, taxpayer’s accounting profit, as stated in its income statement, in accordance with the Corporate Income Tax • there is no property tax on real estate that is recognised Law. in a company’s financial statements as property intended for onward sale. Generally, any expenses incurred for the purpose of a • there is no gift or inheritance tax on transfer of shares property rental business are deductible. without compensation Under Serbian thin capitalisation rules, interest and related costs paid in respect of connected party debt are recognised as an expense provided that the amount of the debt does not exceed four times the value of the company’s share capital. For banks which borrow from a related party, this limit is increased to ten times the value of the bank’s share capital. Depreciation of real estate is tax deductible at a fixed rate of 2.5% calculated on a straight line basis. Plant and machinery depreciation is allowable as a tax deduction at different rates, ranging from between 10% and 30% on a reducing balance basis, depending upon the asset category. A tax credit for investment in fixed assets may be available for medium sized and large companies in the current tax year for 20% of the value of the investment made. The tax credit may not exceed 50% of the tax liability in the current tax year. The unused tax credit may be carried forward against taxable profits arising in future accounting periods, but not for longer than ten years. Serbian companies are chargeable to tax on capital gains at a tax rate of 10%. For non-residents withholding tax on capital gains is charged at 20%, unless otherwise prescribed by a double taxation treaty. Capital losses incurred in one tax year can be offset against capital gains realised in the same year. The remaining capital loss can be carried forward and offset only against capital gains in the future, but cannot be carried forward for longer than five years. The first transfer of the right of disposal related to newly constructed structures and the first transfer of the owner’s share in newly constructed structures are subject to VAT at rate of 18%. As of 31 January 2009 transfer tax on share transfers is repealed although there remains a transfer tax in relation to “absolute rights” (including leases of development land) payable at a rate of 2.5%. 63
  • 65. Slovak Republic or similar taxes are payable on share or other property transfers, although small administrative fees are payable Contact: Dagmar Emilova to register such transactions. emilova@bdo.sk + 421 2 4341 5070 Property tax is divided into: land tax, building tax (and a tax on apartments), and is calculated based on the area of the The rate of corporate income tax in Slovakia is 19% real estate, its location and its type. The basic rate of land with taxable profit generally being the accounting profit, tax is usually 0.25% of the cadastral value (depending on as determined under Slovak statutory accounting rules, the type of land) and is generally payable by the owner adjusted for tax purposes. of the land, or custodian of land if owned by the state, or the lessee for leases over five years. If ownership cannot Generally, necessary expenses incurred to generate and be determined, it is payable by the occupier of the land. maintain rental income are allowable in arriving at taxable Building tax and the tax on apartments are calculated at a income. Deductions can include depreciation, interest and rate per square metre occupied by the finished building/ finance charges, real estate taxes, repairs, maintenance apartment, generally payable by the registered owner of and other types of rental expenses. Alternatively, the the building/apartment. taxpayer can make a general expense claim of up to 40% of the rental income instead of itemising deductions. The municipal authorities levy rates on the ownership/ occupation of real property. These rates are deductible Tax depreciation is calculated on an asset-by-asset basis, for corporate income tax purposes. on a straight-line or reducing-balance basis, at statutory rates, and is generally available for expenditure incurred on No capital duty is paid in the Slovak Republic upon the commercial buildings (but not on the land itself). Tangible issue of shares. fixed assets are classified into depreciation groups to which different depreciation periods apply, generally • Tax incentives can include discounts on the price of between twelve and twenty years. Taxpayers do not publicly-owned real estate. This is treated as state aid. have to depreciate an asset every year. Tax depreciation Various conditions must be met in order for a company may be interrupted in any year and continued in a later to qualify for state aid. These include a minimum year without a loss of the total tax depreciation available. amount of investment in qualifying fixed assets, the amount depending mainly on the type of project and A lessee can depreciate a tangible fixed asset held under where it is located. a financial lease. For tax purposes, the depreciation period equals the leasing period. The depreciation base comprises the acquisition value of the leased asset without VAT, plus expenses related to acquisition of the leased asset that the lessee incurred before the asset was put into use. The value to be used as the basis for tax depreciation depends on how the asset is acquired and its acquisition cost; or the taxpayer’s own costs incurred, if the asset is acquired or developed internally. Gains derived from the alienation of property are generally part of the taxable profit for the year of disposal. The tax treatment of capital losses depends on the type of asset on which they arose. As such, capital gains on Slovak real estate are chargeable to tax at the standard rate of 19%. In some cases, capital losses are non-deductible. An entity can carry forward a tax loss for a period of up to five years after the year in which the loss arose. VAT applies to all taxable supplies at a rate of 19%. However the transfer and leasing of real estate (with some exceptions) generally represents an exempt supply. There is no real estate transfer tax and no stamp duties 64
  • 66. www.bdointernational.com Spain increased rate of depreciation may also be permitted when sale proceeds from one investment property are Contact: Carlos Lopez reinvested in a new investment property. carlos.lopez@bdo.es + 34 91 436 4195 Capital gains obtained by Spanish resident companies and permanent establishments of overseas companies Investment in Spanish commercial property can be carried are taxed as income. Accordingly, these are subject to out using a local company, a non-Spanish company, or corporation tax at a rate of 30%. as an individual. If the investment is carried out using an overseas company with a permanent establishment in When a property which has been held for at least one Spain, this will be taxed on the same basis as Spanish- year is sold, and the proceeds reinvested in a new resident companies. property which is to be held for at least five years, a 12% tax credit may be available in respect of the disposal of Rental income of local companies is subject to Spanish the old property. corporation tax at a rate of 30%. For companies with a turnover below €8 million, the tax rate is 25% for profits Non-resident companies and individuals are subject to up to and including €120,202. Over that limit the tax rate capital gains tax at a flat rate of 19%. is 30%. Deductions are generally available for certain expenses and depreciation (see below). Where Spanish property is sold by a non-resident without a permanent establishment in Spain, the purchaser is Non-resident companies and individuals are subject to tax required to withhold 3% of the consideration, on account on their gross rental income at a flat tax rate of 24% (i.e. of the vendor’s capital gains tax liability. no deduction is available for expenses and depreciation). Property held in individual names will be subject to The historical cost of any property is usually adjusted Spanish inheritance tax. for inflation in ascertaining the liability to Spanish capital gains tax. Since January 2008, wealth tax has been abolished in Spain. VAT on commercial property is usually charged at a rate of 16% (18% for commercial property sold from 1 July In general, expenses incurred for the purposes of the 2010). rental business are deductible for Spanish resident companies and entrepreneurs, as well as Spanish Stamp duty is generally levied at a rate of between 0.5% permanent establishments of overseas companies. and 1.5% on the purchase price of commercial property. This rate may vary depending on the location of the Interest paid to related parties is generally allowable property. provided that the interest charged represents a market rate and that the debt-to-equity ratio is not considered to Transfer tax on the acquisition of property applies at a tax be unreasonable for transfer pricing purposes. rate of between 6% and 7% depending on the location of the property. The allowable debt:equity ratio - in respect of non-EU or tax haven connected party - is 3:1. Where property is held through a Spanish company, the purchase of shares in that company does not generally Non-resident companies and individuals are not entitled give rise to stamp duty, although transfer taxes at a rate to any deductions when computing the taxable profits of of between 6% and 7% may be payable where the assets their rental business. of the company primarily consist of real estate. As noted above, resident companies and individuals can Capital duty is normally charged at a rate of 1%. claim a deduction for depreciation on buildings when calculating their rental profits. No deduction is available Capital duty may also be payable on the share capital of for depreciation in respect of land. branches or permanent establishments of companies resident in certain overseas jurisdictions. For commercial properties, the permissible rate of tax depreciation is limited to 2%, and for warehouses, 3%. • Following a recent European Court of Justice’s judgment, it is anticipated that Spain’s withholding Companies with a turnover below €8 million are able tax rules for dividends will be amended to remove an to increase the tax depreciation rates for commercial inconsistency between the treatment of dividends properties and warehouses to 4% and 6% respectively paid to Spanish resident companies and dividends paid where investment is made on a new property. An to EU parents. 65
  • 67. Sweden possible to set the loss off against a capital gain one year, the loss is carried forward to the next year. Contact: Daniel Bruhn daniel.bruhn@bdo.se Companies are not normally taxed on any capital gains + 46 (8) 459 57 96 realised on the sale of shares, provided the shares are deemed to be held for business reasons. As a general Investments in real estate can be made through the use rule, unquoted shares are considered to be held for of a local company (Sw “Aktiebolag - AB”), a non-resident business reasons. company, or via a partnership. Net rental income is taxed in Sweden at the corporate income tax rate of 26.3%. The direct acquisition of legal title to Swedish real estate is subject to 3% real estate transfer tax. A reduced rate Swedish tax legislation allows for 25% of pre-tax profit of 1.5% applies to purchases by individuals. For intra- to be allocated to an untaxed reserve for a period of up group restructuring an exemption is generally granted as to six years. This gives companies the option of carrying long as the buyer and seller are within the same group back losses to offset the previous years’ profits. Taxable when the transfer of the real-estate is executed. interest is deemed to accrue on the untaxed reserve, calculated at 73.7% of the “Statslåneränta” (the average The sale of shares in a real estate company does not give market interest rate on Swedish government bonds with rise to any transfer tax liabilities. a remaining maturity of at least five years) from the end of November two years before the year of assessment. For An annual property tax must be paid by the owner of the 2010 tax year, the applicable interest rate is 2.08%. the real estate on 1 January, based upon the taxation value of the property (typically approximately 75% of the Non-resident companies and partnerships owning estimated market value). This is a deductible expense for Swedish property are allowed to deduct interest on business taxation purposes. borrowings, the annual property tax (see below) and all property related expenses from their taxable income. There is no capital duty payable in Sweden on the issue Swedish resident companies are also allowed to deduct of shares. all other allowable business costs. Costs relating to the acquisition of real estate, refurbishment costs, and • Because of the participation exemption on the interest accrued during construction, must be added to disposal of unlisted shares, it is common for a seller the acquisition cost of the property. of real estate to transfer the real property into a limited company and sell the shares rather than the real Whilst there are no thin capitalisation rules in Sweden, loan property. interest paid at a rate that is significantly above a market • New legislation has been imposed on the taxation of rate may result in the excess interest being treated as a disposals of participations in partnerships. If the seller deemed distribution for tax purposes. There are rules on is a company which is entitled to the participation the deductibility of interest deriving from the acquisition exemption on shares, the disposal of a participation in of shares from a group company in other jurisdictions a partnership is now also exempted. which were implemented on 1 January 2009. In general, • The rate for direct acquisitions of the legal title to there is a requirement that the receiving country taxes Swedish real estate will be increased from 3% to the interest income or the country is included on the so- 4.25% as of 1 January 2011. called “white list” of countries that are not considered to be tax havens. It is important to comply with the rules concerning transfer pricing documentation for cross- border lending in order to demonstrate that the interest has been charged according to Swedish tax law. Depreciation in respect of buildings, but not the land itself, is tax deductible. The allowable rate varies between 2% and 5%. The depreciation rate for tax purposes for buildings does not necessarily correspond with the depreciation according to the accounting. Capital gains realised on the sale of real estate are subject to Swedish corporate income tax at the standard rate of 26.3%, for both resident and non-resident companies. A loss on the sale of real estate is only deductible against capital gains arising from the sale of real estate. If it is not 66
  • 68. www.bdointernational.com Switzerland depreciated over their useful economic life or sometimes even in one year. Contact: Hans-Peter Mark hans-peter.mark@bdo.ch Capital gains on the sale of real estate are regarded as + 41 (0) 44 444 36 20 taxable profits and are subject to income tax for both Federal Tax purposes and in the majority of Cantons. Despite recent relaxations, Swiss law makes it complex Some Cantons apply a special real estate capital gains for non-Swiss entities and individuals to acquire real tax. Costs in connection with the disposal of real estate estate in Switzerland. Federal legislation (the “Lex Koller”) will be deductible from sale proceeds. restricts the acquisition of real estate in Switzerland by non-residents. Acquiring real estate typically requires The sale of shares in a “real estate company” by an permission from the appropriate Cantonal authority. individual or a corporate is also subject to Swiss capital gains tax. Companies tax resident in Switzerland pay Swiss income tax at the Federal, Cantonal and Communal level. The The acquisition of Swiss real estate is subject to effective total tax rate varies from between 12% and registration duty set by each Canton and which varies 26%. from 0.5% to 5% of the market value of the real estate. Normally the purchaser has to pay this duty, unless Expenses in Switzerland are generally tax deductible if otherwise agreed in the purchase contract. they are directly related to the rental business. Certain Cantons also apply real estate transfer tax (RETT) Costs which relate to the acquisition of real estate with the rates varying from 1% to 3.3% of the market (including the purchase price for property acquisitions) value of the real estate. must be capitalised and will only be tax deductible by way of depreciation. A transfer of the majority of shares in a real estate company may also trigger the RETT and capital gains tax. Interest payable is usually tax deductible, unless thin Certain double tax treaties may protect against taxation capitalisation rules apply or the interest rate is considered arising in these circumstances. excessive. Generally, the Swiss tax authorities only apply thin capitalisation rules to related party funding. Capital duty of 1% is due on any capital contribution However, the presence of intra-group guarantees may (cash or the market value of contributions in kind) made taint the arm’s length treatment of the funding. The upon incorporation (as well as on any subsequent capital Swiss tax authorities will deem a Swiss company to be increase) of a Swiss company. The first SFR 1 million is thinly capitalised if the related party debt increases the exempt from capital duty. company’s debt:equity ratio to greater than 2.3:1 or if loan finance represents greater than 70% of the market • The restrictions under the “Lex Koller” law are under value of the company’s assets. discussion by the Swiss Government and Parliament. It is not expected that any decisions will be made The rates of interest that are acceptable to the Swiss tax before the end of 2011. authorities depend on the denominated currency of the • REITS are still in discussion but their early introduction loan. The maximum rates as at July 2010 are SFR 3.5%; seems unlikely because of the different Cantonal tax Euro 3.5%; UK£ 4%; and US$ 3.5%. Higher interest regimes. rates than the above require justification as to their arm’s length nature in order to secure a tax deduction. Depreciation is tax deductible at rates guided (but not prescribed) by law on buildings and assets contained within buildings. The land itself cannot be depreciated. In general the allowable rate for buildings is 4% per annum on a reducing balance basis or 2% on a straight line basis. The allowable rates are doubled for industrial buildings. Swiss tax law provides different rates of depreciation for fixtures and fittings within the building, varying from 20% to 45% per annum on a reducing balance basis. The rates of depreciation on a straight line basis are half those applied on a reducing balance basis. However, as the rates of depreciation are only guidelines, items can be 67
  • 69. Turkey of the capital gains realised on the sale of the subsidiary or immovable property is exempt from CIT. Where the Contact: Haluk Kaptanoglu exemption applies, the seller is also exempt from VAT haluk.kaptanoglu@bdodenet.com.tr and stamp tax. + 90 212 275 96 90 The sale of a non resident company which holds shares Corporate investors may only invest in Turkish property in a Turkish subsidiary that owns immovable property is through local subsidiaries. Turkish resident companies not taxable in Turkey. are subject to Corporate Income Tax (“CIT”) at a rate of 20% on rental income net of allowable costs and tax Generally under Article 13 of Turkey’s double tax treaties, depreciation. capital gains derived from the sale of shares in Turkish real estate companies by non resident and treaty domiciled Provisional CIT is paid at the end of every quarter. The companies are not taxable in Turkey. fiscal year is generally the calendar year, although this can be changed. Assuming a calendar year end, the final CIT Rental income and capital gains derived from the sale of return is required to be filed by 15 April. properties by real estate investment companies (“REICs” which are a form of a real estate investment trust) are Dividends paid by Turkish companies are generally not taxable. Furthermore, no dividend withholding tax is subject to 15% withholding tax, unless the shareholder applicable on dividends paid to non-resident corporate is resident in a country which has a favourable tax treaty investors in REICs. with Turkey. Rental income and the transfer of commercial property Tax deductible expenses include land registry duty paid are subject to Turkish VAT at the rate of 18%. on acquisition, annual real estate tax, interest on loans used to buy the property, taxes relating to construction The buyer and seller of property each have to pay a and land development, operational costs, repairs and property sale-and-acquisition levy of 1.65%, based on the maintenance costs and depreciation. sale value of the asset. The levy is paid on registration of the transfer by the Land Registry. Interest, foreign exchange losses and related financial expenses incurred on excess loans where a company is Stamp duty is generally due on property transfers at a rate considered to be thinly capitalised are not tax deductible. of 0.825% of the amount stated in the contract. Stamp If the ratio of borrowings from shareholders, or from duty is also payable on lease agreements, generally at persons related to the shareholders, exceeds three times 0.165% of the annual rent. the shareholders’ equity in the borrower at any time within the relevant year, the excess proportion of the borrowing A fee of 0.04% is payable on the formation, or increase in will be considered as “thin capital”, with a consequent share capital, of a company. reduction in the level of interest relief available. • An optional appraisal of the sales/rent value upon Depreciation may be calculated by applying either a transfer or lease of real estate is being considered in straight-line or reducing-balance method, at the discretion Turkey. of the taxpayer. Depreciation in respect of immovable • One strategy for optimising the taxation treatment of property is tax deductible. Buildings are depreciated at a Turkish real estate would be the sale of a non-resident rate of between 2% and 10% per year depending on the holding company which holds the shares of a property type of building. Different depreciation rates are used for owning subsidiary to another non-resident. tangible assets within the building. The land itself is not • Investment in Turkish real estate in the form of a depreciable. REIC is the most tax efficient method for non-resident individuals and corporate investors. On disposals of shares and immovable property, capital gains arising are included within income and subject to CIT. An exemption from tax is available if certain conditions are met. However, this exemption is not available for property investment companies or companies trading in property (or shares). For other companies, where the shares or real estate assets have been held for a period of over two years and 75% of the profit on sale is booked to a special reserve account for at least five years, 75% 68
  • 70. www.bdointernational.com United Kingdom balance basis. From 1 April 2012 the annual rate drops from 20% to 18%. For expenditure on items considered Contact: Stephen Herring to be integral to the “shell and core” of the building, relief stephen.herring@bdo.co.uk is available at 10% per annum on a reducing balance + 44 (0) 20 7893 2437 basis. From 1 April 2012 this rate drops from 10% to 8%. UK resident companies are subject to UK corporation tax From 1 April 2010, an annual investment allowance (‘AIA’) at a current rate of 28%.This rate will be reduced by 1% gives taxpayers a 100% deduction on £100k of qualifying each year until it is set at 24% in April 2014. A lower rate expenditure per company, group of companies and of 21% currently applies to smaller companies. From April unincorporated business. From 1 April 2012, the AIA cap 2011 this rate will be reduced to 20%. However resident is reduced from £100K to £25K of qualifying expenditure. corporate entities are seldom used by inbound real estate investors. Non-resident entities (and individuals) Depreciation is, in principle, “clawed back” on disposal are generally subject to income tax at the basic rate of but the relevant disposal value is normally fixed by a joint 20%; although it should be noted that individuals may be election made by the purchaser and vendor. taxable at higher rates (up to 50% from 6 April 2010). Inbound investment in UK property is often structured The standard rate of VAT in the UK is currently 17.5%, but through Channel Islands entities or other non-UK resident is due to increase to 20% on 4 January 2011. Where the entities which may have double tax treaties with the UK property owner has unusually not exercised the option to providing certain treaty protection. tax the property, the rental and sale of the property will be exempt from VAT. HM Revenue & Customs require non-UK resident owners to register under the “Non-resident Landlords Scheme” if A UK corporate vehicle is liable to tax on capital gains as they wish to avoid tenants (or property agents) deducting part of its total income at (up to) the current 28% rate but basic rate income tax from their rental payments. an allowance is given for increases solely attributable to retail price inflation. No “roll-over relief” is available even Taxable rental income is generally calculated on normal if the proceeds of sale of investment properties are fully accounting principles but special rules typically apply re-invested. to interest costs and tax depreciation. Generally any expenses incurred for the purpose of the rental business Non residents are not liable to tax on capital gains on are deductible. However, certain specific expenses are disposals of UK investment properties despite the disallowed, such as tenant entertaining. provisions of most tax treaties which would give the right to the UK to tax these gains. An important exception is that non-resident investors subject to income tax are generally unable to obtain The acquisition of UK real estate is subject to Stamp Duty relief for losses on foreign currency loans. Interest to Land Tax (“SDLT”) at a rate of 4% for land transactions connected parties is allowable to the extent that both over £500k. Lower rates apply below this threshold. the loan principal and loan interest represent normal commercial arrangements. There is no “hard and fast” Acquisitions of corporate real estate entities are exempt debt:equity ratio for connected party real estate debt but from SDLT but there are, of course, certain legal, a debt:equity ratio of 3:1 is often accepted. commercial and other taxation issues which would arise. For example, it is not generally possible to “step-up” Accounting depreciation in respect of freehold land and the base cost of the asset to market value. Otherwise buildings is not allowed as a tax deduction. No allowances mitigation of SDLT liabilities is increasingly problematic are available for office buildings or retail shops except to but certain planning approaches may be available in the extent that the expenditure represents eligible plant suitable circumstances. and machinery. No capital duty is paid in the United Kingdom on the issue The industrial buildings and hotels allowances regime of shares. has been amended so that balancing adjustments and the recalculation of writing-down allowances in respect • Non-residents trading, as opposed to investing, in UK of balancing events occurring after 21 March 2007 has property are liable to UK taxation on the surpluses been withdrawn with only minor exceptions. On 1 April obtained from the disposal of real estate. The 2010 the annual writing down allowance was reduced to difference between property investing and trading 1%. From 1 April 2011 industrial buildings and hotels in the UK is both critical and complex. Physical allowances will be withdrawn. development activity may be either for a trading or investment purpose and, accordingly, is not the main For expenditure incurred on or after 1 April 2008, plant criteria. and machinery, including fixtures and fittings, not • The UK introduced a UK-REIT regime for listed considered to be integral to the “shell and core” of the companies effective from 1 January 2007. building qualify for relief at 20% per annum on a reducing 69
  • 71. LIKE TO IMPROVE LEVELS OF CLIENT SERVICE AND TENANT SATISFACTION? BDO’s integrated solution to the independent review of service charge expenditure will help you streamline reporting processes, achieve key performance objectives and become more efficient. Your client facing teams will be left free to deliver improved levels of service to your clients. For further information on our market leading service charge accounting proposition, please contact Duncan Ashman, UK Head of Service Charge Accounting on +44 (0)117 930 1507 or email duncan.ashman@bdo.co.uk www.bdointernational.com BDO LLP is authorised and regulated by the Financial Services Authority to conduct investment business.
  • 72. www.bdointernational.com Notes 71
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  • 74. King Sturge Contacts INTERNATIONAL ASSOCIATEd & AFFILIATEd Office Agency Jeremy Richards (Regional Offices) +44 117 930 5745 Austria Mark Bourne (London Offices) +44 20 7796 5461 MRG Metzger Realitaten Beratungs Rupert Perkins (International) +44 20 7796 5462 und Bewertungsgesellschaft mbH +43 1 597 50 60 Investment Alfons Metzger Philip Marsden +44 20 7087 5390 Cyprus Penny Hacking +44 20 7087 5332 AMP Andreas Pantazis Ltd Valuation Michalis Pantazis +357 22 676 423 Richard Batten +44 20 7087 5757 Jonathan Manley +44 20 7087 5750 denmark Financial Services Sadolin & Albaek A/S Chris Pratt +44 20 7087 5220 Peter Winther +45 70 11 66 55 Research Estonia Angus McIntosh +44 20 7087 5500 Re&Solution Andrew Burrell +44 20 7087 5510 Vitali Kollomets +372 6314 533 Emma Jackson +44 20 7087 5518 Finland BELgIum Newsec Maakanta Oy Cedric van Zeeland/Jean-Philip Vroninks +32 2 286 9182 Hannu Ridell +358 207 420 400 greece BuLgARIA King Hellas Andrew Peirson +359 2 980 70 08 Thomas Ziogas +30 210 7711 204 CROATIA Italy Jens Moller Madsen +385 1 48 26 114 Gabetti Property Solutions Agency S.p.A. Inara Jucinska +39 02 77 55 243 CzECh REpuBLIC Ireland Angus Wade +420 234 703 333 HT Meagher O’Reilly Ltd Declan O’Reilly/Adrian Trueick +353 1634 2466 FRANCE Paul Betts +33 1 44 55 70 00 Latvia Philippe Semidei Re&Solution Guntars Cauna/Irina Nikolajeva +371 67 50 8400 gERmANy Lithuania Sascha Hettrich +49 30 23 322 211 Re&Solution Neringa Rastenyte +370 5 252 6444 huNgARy James Kinnell +36 14 51 10 10 Luxembourg RealCorp Luxembourg SA pOLANd Michael Chidiac +352 26 27 29 Jason Sharman +48 22 256 08 00 Netherlands DRS Makelaars ROmANIA Merijn F. Hartog +31 20 640 5252 Radu Boitan +40 21 311 5444 Northern Ireland SERBIA McConnell Martin Srdjan Vujicic +381 11 2200 101 Rory McConnell +44 28 90 205 900 Norway SLOVAkIA Newsec AS Peter Nitschneider/Miroslav Barnas +421 259 209 911 Nils Arne Gundersen +47 23 00 31 00 TuRkEy Russia Matthew Warner +90 212 236 4990 SA Ricci Vladimir Avdeev/Alexey Bogdanov +7495 790 7171 Sweden Newsec Advice Marie Bucht +46 8 454 40 00 Switzerland Key Real Estate Consultants Robert Mathieson +41 22 545 51 00 united States of America Corfac International - John Payne +44 117 930 57 16 All data contained in this report has been compiled by King Sturge LLP and is published for general information purposes only. While every effort has been made to ensure the accuracy of the data and other material contained in this report, King Sturge LLP does not accept any liability (whether in contract, tort or otherwise) to any person for any loss or damage suffered as a result of any errors or omissions. The information, opinions and forecasts set out in the report should not be relied upon to replace professional advice on specific matters, and no responsibility for loss occasioned to any person acting, or refraining from acting, as a result of any material in this publication can be accepted by King Sturge LLP. © King Sturge LLP September 2010 This publication is printed on recycled, post-consumer fibre, totally chlorine free paper produced from sustainable stock. FSC certification.
  • 75. LOCATIONS UK England • Scotland • Wales THROUGHOUT EUROPE including: Belgium • Bulgaria • Croatia • Czech Republic • France • Germany • Greece Hungary • Ireland • Italy • Luxembourg • Netherlands • Poland • Romania Russia • Serbia • Slovakia • Switzerland • Turkey THE MIDDLE EAST THE AMERICAS A member of ASIA PACIFIC www.kingsturge.com +44 20 7493 4933

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