Bulgaria 2011 Real Estate Review

COLLIERS INTERNATIONAL2011 BULGARIA REAL ESTATE REVIEWAlbania Bulgaria Croatia Czech Republic Greece Hungary Poland Romania Russia Serbia Slovakia UkraineAccelerating success.

Bulgaria Dear Friends and Partners, Another year has passed, and we have a fresh, new year ahead of us – providing a much-needed cause for reflection. Conventionally, a past year is always labelled significant because it has taught us something. i would dare to challenge this convention, by labelling the year of 2010 primarily as a stepping stone for — or a prelude Atanas Garov to — 2011. to most markets, segments and businesses, 2010 was a bit of managing director everything. it was definitely more profitable (and fun) than 2009, and colliers international bulgaria certainly not as prosperous as we expect 2011 to become. So maybe theAddress Business Park Sofia greatest thing about 2010 was what it promised for 2011 and beyond; the Building 7B, 2th floor 1766 Sofia, Bulgaria possibility of a fresh start.Phone +359 2 976 9 976 We take great confidence in the future from the events and experiences ofEmail Atanas.Garov@Colliers.com 2010. A new spirit of collaboration is emerging between different players in the market, aimed at making Bulgaria more competitive. Across sectors, enterprising business people are working together in a manner that hasn’t been seen before. in the real estate sector, we have already seen new players entering the market, and i believe that this year we will see investors and developers that are coming to our market for the first time. one thing doesn’t change though, Colliers is delighted to accelerate the success of our clients and partners. Best regards, Atanas Garov CollieRS inteRnAtionAl | P. 21

2011 CoLLIeRs ReAL estAte RevIew » BULGARIA ECONOMIC OVERVIEW KEY ECONOMIC FIGURES SUMMARY FORECAST Metric % Change Over the course of 2010, GDP growth The economic outlook for Bulgaria is GDP Growth 0.7% in Bulgaria was largely neutral but generally positive, particularly for the Unemployment 0.1% improving towards year-end. At the end second half of 2011. On the basis of Inflation 4.5% of the first quarter of 2010 GDP posted increasing levels of business acivity, real Source: National Statistics Institute, Bulgarian National Bank negative growth of 4.0%, but grew by estate demand is likely to grow. 0.5% and 0.7% respectively in Q2 and Q3, mostly driven by an increase in Importantly, bank financing and credit exports. Better news for the Bulgarian terms are expected to improve – at least GDP & INFLATION 8.00% economy is the latest forecast showing in terms of retail finance – which will be Source: Bulgarian National Bank 6.00% that GDP is expected to increase to 2.8% of most benefit to boosting consumer 4.00% in 2011. spending and the retail sector as well as 2.00% helping to drive residential demand 0.00% Foreign Direct Investments in through tha availability of affordable-2.00% Bulgaria for the first nine months of mortage finance.-4.00%-6.00% 2010 amounted to €1.427 Mln (4.0% of-8.00% | | | | | | | | GDP), ca. 30% down on the €2.112 Mln Although domestic consumption saw Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 (6.3% of GDP) invested over the same negative growth in 2009 and 2010 ▬ GDP (real annual % change) ▬ Inﬂation period in 2009. As with GDP growth, (falling 3.6% and 2.8% respectively), the however, FDI into Bulgaria is expected to forecast for 2011 is one of modest pick up moderately in 2011, reaching in growth of 1.3% on average over the year. excess of €2,000 Mln. This is supported by growth of the UNEMPLOYMENT 11% consumer confidence indicator which 10% Source: Bulgarian National Bank In line with the overall neutral has started to increase since Q1 2010 economic trends, unemployment and thus retail sales are expected to be 9% increased marginally to 9.2% in influenced positively. 8% December 2010 — a slight increase of 7% 0.1% compared to the same period in On a structural level, the use of EU 6% | | | | | | | | 2009. Unemployment is forecasted to funds for regional development will Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2009 2009 2009 2009 2010 2010 2010 2010 fall by 0.5% in 2011. gradually improve the transport and ▬ Unemployment (%) communications infrastructure of A more worrying sign for the Bulgaria, helping to create the Bulgarian economyc was the sharp rise fundamentals for a viable logistics in inflation, which surged to 4.5% yoy, market. INDUSTRIAL PRODUCTION 15.0% although this remains under the eastern 10.0% European average inflation rate of 6.3%. 5.0% Only a slight increase in inflation is 0.0% -5.0% expected in 2011, below the average for -10.0% eastern Europe. -15.0% Source: Focus Economics-20.0% On a more positive note, exports | | | | | | | 2006 2007 2008 2009 2010 2011F 2012F ▄ Industrial Production (annual variation, %) grew from January – September 2010 registering a 12.2% increase compared to the same period in 2009, but with differences in terms of the trading countries to which these exports were heading. The largest rise in exports were those aimed towards the European Union EU27, rising by 23.9%. The major markets for consumption of these goods were Germany, Italy, Romania and Greece, which absorb two-thirds of Bulgarian exports.P. 22 | CollieRS inteRnAtionAl Research: Adriana.Toncheva@Colliers.com

2011 CoLLIeRs ReAL estAte RevIew » BULGARIA OFFICE MARKET KEY OFFICE FIGURES GENERAL OVERVIEW The total active pipeline fell to the Metric Measure lowest level in years at just below The contemporary office inventory in Total Stock 1,318,000 Sqm Sofia reached a new peak, with another 500,000 Sqm. The size of the latent Take-Up 111,200 Sqm pipeline (comprising office project under 256,000 Sqm added to the stock during Vacancy 25.4% construction, but currently frozen) is the year. Prime Headline Rent €9.8/Sqm/month app. 250,000 Sqm. Source: Colliers International The net absorption for the year was 111,200 Sqm. DEMAND Net absorption in 2010 was 111,200 The overall vacancy on the Sofia Sqm almost half of which were STOCK OFFICES CLASS A&B IN SOFIA (SQM,000) 1,400 office market reached 25.4% of the total preleases in the office buildings that 1,200 Source: Colliers International existing stock, equivalent to 335,000 came to the market in the latter half of 1,000 Sqm office area. the year. The major transactions in the 800 600 period included the expansion of Hewlett 400 Total office occupancy reached close Packard in Kambanite Business Center; 200 to 1 Mln Sqm by the end of the year. Cisco in Crystal Business Center; Call 0 | | | | | | | | Point New Europe and Pfizer in H1 H2 H1 H2 H1 H2 H1 H2 2007 2007 2008 2008 2009 2009 2010 2010 SUPPLY European Trade Center. On an annual base, the contemporary office inventory increased by 256,000 The majority of the demand was Sqm. This means that a fifth of the total driven by relocation needs. Many INVENTORY STRUCTURE office stock is actually completed in occupiers took advantage of the 8% CBD 2010. This massive increase is driven by attractive rental rate level for high quality the completion of a few, large projects office space in communicative locations. 20% that were initiated mid-2007, in a more Broad Center 72% optimistic market. Incremental demand was driven Suburban primarily by the outsourcing sector and Among the new additions to the pharmaceutical companies which are market in this period are European Trade already present on the market. Center, Mega Park, Sofia Airport Center, Transactions were mainly closed for Doverie Business Center and Galaxy premises in the range 500 – 1500 Sqm. Business Center which all together The preferred contract length was for 3KEY OFFICE LEASE TRANSACTIONS added 135,000 Sqm to the Suburban years or longer, but then with an optionTenant Size (Sqm) Project Submarket for renegotiation after a certain time. As stock. Serdika Offices (28,000 Sqm) andHewlett Packard 3,500 Kambanite BC Suburban in previous periods, genuine Class A GRAWE Office Building on Blvd. TotlebenCisco 3,000 Crystal BC CBD premises attracted mostly large, (5,800 Sqm) were the major newCall Point New European TradeEurope 2,500 Center Suburban additions to the Broad Centre submarket. international companies with more thanStrabag 2,300 Megapark Suburban Perform Business Centre on Pozitano 50 employees, while Class B offices are European Trade Square, Crystal Business Center and the occupied by smaller, local companies.Pfizer 1,800 Suburban Center new head office of DSK Bank increasedSource: Colliers International the stock in CBD (Central Business District) with more than 33,000 Sqm, equivalent to 30% of the entire inventory in CBD, which hasn’t seen new deliveries for a number of years. The total inventory of modern office space in Sofia reached 1,318,000 Sqm with almost even split between Class A and B. The pipeline continues to empty as few new major projects were initiated in 2010. Exceptions were Fort Nox (Suburban area) and TAO (Broad Center).Research: Adriana.Toncheva@Colliers.com CollieRS inteRnAtionAl | P. 23

2011 CoLLIeRs ReAL estAte RevIew » BULGARIA OFFICE MARKET NET ABSORPTION / VACANCY 140 Over the past four years, there has FORECAST Source: Colliers International 120 30% been a distinct change in the The Inventory of stock is expected to 100 25% concentration of business premises. In increase by ca. 150,000 Sqm in H1 2011. 80 20% 2006, Suburban office space accounted 60 15% for 43% of total occupancy on the The general positive outlook for 40 10% market. Four years later, the number has businesses in 2011, is likely to lead to 20 5% reached 63% of overall occupancy which expansions of office premises. 0 | | | | | | | | 0% is Suburban. H1 2007 H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010 H2 2010 As a significant number of lease ▄ Net Absorption ▬ Vacancy VACANCY contracts expire in 2011, we expect a Vacancy in Sofia grew by 145,000 large volume number of transactions Sqm in 2010 — significantly more than in over the year. any previous period. In percentage terms AVERAGE ASKING RENTS CLASS A (€/SQM/MONTH) 20.00 the vacancy rate at the end of the year Net absorption is expected to amounted to 25.4% increase in 2011, as the economy starts 15.00 recovering, but overall vacancy will By sub-market, vacancy in the Broad continue to grow, pushing rental levels 10.00 Centre increased by 50,000 Sqm, further down. reaching 66,000 Sqm. The Central Source: Colliers International 5.00 | | | | | | | | Business District and Broad Center Average rental rates in the CBD and H1 H2 H1 H2 H1 H2 H1 H2 2007 2007 2008 2008 2009 2009 2010 2010 experienced negative absorption over Broad Center will have to adjust further ▬ CBD ▬ Broad Center ▬ Suburban 2010 as large-scale projects entered the to avoid a steep increase in vacancy market — these two factors significantly levels. pushed up vacancy levels. PIPELINE SOFIA OFFICE MARKET 1,000 In Suburban areas vacant space 900 800 reached 242,000 Sqm. Although the 700 Suburban part of the office market 600 500 retained a high level of vacancy, almost 400 300 half of the new supply in H2 was 200 absorbed within the same 6-month 100 0 | | | | | | | | period. H1 H2 H1 H2 H1 H2 H1 H2 2007 2007 2008 2008 2009 2009 2010 2010 ▬ Pipeline in ‘000 sqm RENTS In H2 2010 the average asking rents continued to fall; Class A levels fell on average by €1/Sqm/month compared to the first half of the year, while Class B office space decreased more than €1.5/ Sqm/month. On an annual base average asking Class A rents fell in the CBD by 15%, the Broad Centre by 23% and by 26% in the Suburban area. The reduction was most meek for Class A space in the CBD and most significant for Class B space in the Suburban area, where average asking rents fell below €7/Sqm/month.P. 24 | CollieRS inteRnAtionAl Research: Adriana.Toncheva@Colliers.com

2011 CoLLIeRs ReAL estAte RevIew » BULGARIA INDUSTRIAL MARKETKEY INDUSTRIAL FIGURES OF SOFIA OVERVIEW OUTSIDE ThE CAPITALMetric Measure The total stock of contemporary, The supply of good-quality spaceTotal Stock 441,200 Sqm speculative logistics and industrial space outside Sofia is limited. Plovdiv hasTake-Up 19,000 Sqm in Sofia grew by 29,300 Sqm on a numerous build-to-suit and owner-Vacancy 15% year-on-year basis and now amounts to occupied projects, but despite thePrime Headline Rent €4.5/Sqm/month 441,200 Sqm. attractive, geographic position,Source: Colliers International developers are yet to endeavour with Net absorption increased slightly in larger, speculative projects. 2010, but most transactions were driven by relocation and consolidation rather The speculative market in Varna is than expansion. the most developed after Sofia. There are a few projects with specifications of Lidl opened its own distribution an international level such as Logitics facility of 36,000 Sqm in Ravno Pole Park Varna (9,600 Sqm) and Alpha near Sofia, the major deal of the year. Logistics (6,600 Sqm). The existingpipeline in Varna comprises SUPPLY building A06 of Logistics Park Varna CAPITAL which will add 10,000 Sqm of new stock The total inventory of speculative to the market. logistics and industrial space in the capital, Sofia was 441,200 Sqm by the Despite the strategic location on the end of 2010. Included in the figure are all Danube and close proximity to the speculative projects as well as premises Romanian capital, Bucharest, Rousse still offered for rent by third-party logistics hasn’t developed into a logistics hub. An providers (3PL). area less than 1 km from the Danube Bridge, has, however, been designated as Though some owner-occupied a modern industrial zone in Rousse. spaces, became vacant due to decreased Logistics Park Rousse (13,850 Sqm) is activity and were offered for rent, this planned within the zone, providing easy doesn’t seriously impact the overall access and contemporary specifications. genuine market. These premises are often in a poor condition, and thus don’t FMCG DISTRIBUTION constitute a real alternative or Major players on the logistics market competition to established, contemporary for the second, consequtive year are the logistics facilities. large, international food chains. FMCG retailers (Fast Moving Consumer Goods) The pipeline of industrial stock increasingly prefer to build their own remained stable over the year driven central distribution facilities rather than only by a few, new projects. Under applying the model of decentralized construction at year-end were bERS distribution incorporating potential sales (7,400 Sqm), Administrative Logistics areas for storage. This model provides Complex in Obelia (13,000 Sqm) and cost saving as goods are delivered Univeg (8,000 Sqm). directly to the central distribution facility and from here distributed to super/ There are several key zones in Sofia hypermarkets and retail stores. comprising clusters of speculative and 3PL projects. Naturally, the key logistics and industrial areas in Sofia are situated close to major roads, highways and transport hubs. The largest is the Airport area which represents 17% of the total stock, followed by Gorublyane (14%), the area along Botevgradsko Shousse (12%) and Kazichene (7%).Research: Adriana.Toncheva@Colliers.com CollieRS inteRnAtionAl | P. 25

2011 CoLLIeRs ReAL estAte RevIew » BULGARIA INDUSTRIAL MARKETSELECTED INDUSTRIAL LEASE TRANSACTIONS The area around Elin Pelin is the VACANCYTenant Size (Sqm) Project Area preferred location for establishing central The upward trend in vacancy levelsStandart 17 3,000 BLCS Hadji Dimitar distribution facilities because of its continued in 2010. Relocations fromNational Distributors 2,500 Universal Gorublyne proximity to the two highways in older projects to contemporary onesTimeLine 2,500 Universal Gorublyane Bulgaria. In Elin Pelin, the central explain why there is almost no change inSecond hand 2,200 ZMM Ilianzi logistics facilities of Penny Market, Billa terms of vacancy levels in existing stock,Mercurius 2,000 Universal Gorublyane and Lidl (which opened in the second but new projects that have entered theBullog 2,000 SAC Airport half of 2010) are now established. stock in Sofia in 2010 are completelyAntalis Bulgaria 2,000 SAC Airport unoccupied with the exception of BuldingSource: Colliers International Only Kaufland preferred to build its 15 of Trade Center Europa which is central distribution facility in Plovdiv. The partly preleased. Usually it takes time for facility is 67,000 Sqm, the largest in the new projects to adapt to the market and country. Alternatively, Carrefour has adjust their offer accordingly, after that PRIME RENTS BY CITY (€/SQM) 6.00 chosen to outsource distribution for their they start to be absorbed by the market. 5.50 Source: Colliers International hypermarkets to a 3PL. 5.00 Net absorption on the logistics market 4.50 DEMAND for speculative space was 34,000 Sqm 4.00 The outsourcing of logistics services in 2010. The majority of this net take-up 3.50 continues to define demand trends in the happened in ZMM, Universal, 3.00 market as more and more companies are Transcapital BLCS, Sofia Airport Center | | | | | | H1 2008 H2 2008 H1 2009 H2 2009 H1 2010 H2 2010 ▬ So�a ▬ Plovdiv ▬ Varna inclined to outsource part of their and Trade Center Europa. activities to be able to focus on their core business. As a result there has Overall, this has put vacancy at ca. been a slight increase in 3PL activity. 15% by year-end. Companies, which choose to outsource activities, are often from the food, health RENTS & beauty, consumer electronics and Overall, rental levels continued to automotive sector. decrease slightly throughout 2010. The prime asking rents in Sofia decreased by Also active on the market are a moderate 6% on an annual basis while international companies from the logistics premises in Plovdiv saw an beverage sector. The main reasons for average reduction of 13% in asking rents. their demand are contract expiration or consolidation of their office and Varna kept prime rental levels steady, warehouse space, cost optimization or benefitting from a slightly undersupplied renegotiation of the current contract market. conditions. FORECAST The average size of a logistics inquiry Univeg will be completed in Q1 2011 in Sofia remains 1,000 Sqm for adding 8,000 Sqm to the current stock. warehouse space, which is the typical size of a lease contract. Logistics Park Varna building A06 and Logistics Park Rousse will open in Q1 2011. No major boost in demand activity on the logistics market is expected in the coming six months. Rental rates are expected to stabilize.P. 26 | CollieRS inteRnAtionAl Research: Adriana.Toncheva@Colliers.com

2011 CoLLIeRs ReAL estAte RevIew » BULGARIA RETAIL MARKET KEY NATIONAL RETAIL FIGURES GENERAL OVERVIEW The market has proved ready to adopt Metric Measure With the opening of nine shopping new, innovative concepts developed by Prime High Street Rents €65/Sqm/month malls in 2010, the total inventory of local retailers. In the future shoppers are Prime SC Rents €37/Sqm/month contemporary shopping mall space in likely to experience new, niche/hybrid SC Stock 560,000 Sqm Bulgaria increased to 560,000 Sqm concept stores (e.g. combining fashion & SC Vacancy 3% equal to 74 Sqm/1,000 inhabitants. art, books & café or interior & fashion), Source: Colliers International many of which will include an Demand for High Street space in the entertainment component. four largest cities remained stable. Future demand is expected to come SHOPPING SPACE/1,000 INHABITANTS (SQM) 600 Rental levels in shopping malls and from three main segments; soft cash & 500 across the High Street continued to carry, convenience stores and lower end 400 decrease slowly. fashion retailers. Particularly non-food 300 hypermarkets are expected to expand in 200 SUPPLY the years ahead. 100 2010 marked the largest annual 0 | | | | | | | | | increase in terms of shopping mall VACANCY supply with a further 327,000 Sqm new Shopping malls in Sofia enjoy low �a v a ra o as o se ria di rn ov ov go rg Ru So ga ov Va rn br Bu Za ul Pl Ga Ta lB a stock completed and thus total stock levels of vacancy, and aparently have ar o ta lik St To Ve ▄ 2010 ▄ 2011F reached 560,000 Sqm. absorbed the massive hike in stock in the spring 2010. As a result of intensive There are two projects in the pipeline expansion and fall in consumer demand, for 2011: Markovo Tepe (16,000 Sqm) in some retailers are facing dwindling ANNUAL CHANGE IN PRIVATE CONSUMPTION 10% Plovdiv and Danube Mall (23,300 Sqm) turnovers, and thus are pressed 8% Source: Focus Economics in Ruse, which will add another 39,300 financially. With no new centers opening 6% 4% Sqm to the total inventory. in 2011 in Sofia, existing malls have a 2% chance to position themselves, and thus 0% -2% Two very large shopping mall projects strengthen their competitive offer. -4% are in the pipeline for Sofia; Sofia Ring -6% (70,000 Sqm) with the first IKEA in The shopping malls that have opened | | | | | | 2006 2007 2008 2009 2010 2011F Bulgaria and Paradise Center (75,000 in the second half of 2010 are Sqm). With these two additional characterized by significantly higher shopping malls, the Southern and vacancy than most existing malls. A few Eastern parts of Sofia will be well projects in secondary cities are serviced, while the Northern and struggling to secure suitable tenants, and Western areas of the Sofia will continue have opened with less than half of all to be undersupplied. retail units operating. This is particularly the case in cities that are already DEMAND oversupplied with shopping mall space Despite the economic slump, distinct measured relative to the population. optimism amongst retailers is appearing. While 2009 and 2010 saw a negative development in consumption (3.6% and 2.8% falls respectively), the forecast for 2011 is for modest growth of 1.3%. Large international players kept to their expansion plans and continue to require space for opening of shops in 2011. The local and smaller operators however, are more cautious, focusing on optimizing costs.Research: Adriana.Toncheva@Colliers.com CollieRS inteRnAtionAl | P. 27

2011 CoLLIeRs ReAL estAte RevIew » BULGARIA RETAIL MARKETSELECTED 2010 MARKET ENTRANTS hIGh STREET The graph shows the penetration ofName the various FMCG (Fast Moving The High Street in Sofia is notZara Humanic Marc O’Polo Next unaffected by the opening of two large Consumer Goods) formats in Bulgaria.Pull and Bear Peek & Clopenburg Koton Columbia The proliferation of the supermarket shopping malls. In the first half of theStradivarius Gap Collin’s New Balance format in Bulgaria is primarily driven by year overall vacancy was pushed to 10%Bershka Sephora Karen Miller Jennyfer local chains such as Piccadilly, Fantastico and remainedat this level in the secondMassimo Dutti Mac LC Waikiki Frey Wille half of 2010. and 345, while the remaining formatsSource: Colliers International are dominated by international chains. There were insignificant changes on the High Street in Plovdiv, Varna and RENTS Burgas, despite some movement among High Street space continues to be existing occupiers. As a whole, however, more accessible with decreasing rents. the level of vacancy and replacements The average annual decrease on asking remained the same as in previous High Street rents is 28% in Sofia and periods. 30% in Plovdiv, 38% in Varna and 35% in Burgas. Rental levels are clearly BIG-BOXES / RETAIL WAREhOUSE affected by the increasing supply of Discount retailers continued to be the shopping mall space. most active within the big-box format. The second half of 2010 was marked by Due to soft demand, average rental the market entry of the hard discounter, rates in shopping malls across the Lidl, with a simultaneous opening of 14 submarkets have fallen with 13% in 2010. stores. Their acquisition of the Plus chain from German retail giant FORECAST Tengelmann concluded and the 24 Sofia Ring Mall (70,000 Sqm GLA) is Bulgarian Plus stores are waiting expected to start construction in the first rebranding. Lidl is part of the Schwartz half of 2011. group, which also operates Kaufland. Discounters will continue to be active. FMCG SPACE BY FORMATS IN BULGARIA 70 In the second half of 2010 the big box 60 In Sqm/1,000 Inhabitants market saw the introduction of the soft The convenience format of the Food 50 cash & carry hypermarket format. and DIY (Do It Yourself) sector is likely to 40 30 Serbian Delta Holding, which acquired grow. 20 Piccadilly in 2008, opened their first 10 ‘TEMPO’ store in Retail Park Sredetz in Fashion retailers in the lower price 0 Sofia. segment will enter the market or expand. | | | | Cash & Carry Hypermarkets Supermarkets Discount ▄ 2008 ▄ 2009 ▄ 2010 The big boxes started to clearly define The High Street is expected to make a the retail market in Sofia. The area at the come-back in the coming period. junction of Botevgradsko Shosse and the RENTAL RATES, SHOPING MALLS/HIGH STREET €70 Ring Road has already started to shape New local retail concepts will be €60 up as the big box hub of the city. Jumbo introduced. €50 opened their 2nd hypermarket in Sofia €40 €30 as part of Black Gold Park, next to which €20 the G Park Sofia project is planning €10 another 50,000 Sqm of retail park €0 space. | | | | So�a Plovdiv Varna Burgas ▄ Shopping Malls ▄ High StreetP. 28 | CollieRS inteRnAtionAl Research: Adriana.Toncheva@Colliers.com

2011 CoLLIeRs ReAL estAte RevIew » BULGARIA RESIDENTIAL MARKET GENERAL OVERVIEW No new large-scale projects have No new large-scale projects have entered the mid-plus and high-end entered the mid-plus and high-end residential pipeline in 2010, and as the residential pipeline in 2010. current stock is gradually absorbed, available supply is becoming scarcer. The offered price range in the Having in mind that a medium-size mid-plus and high-end segment of the residential project takes up to 3 years market is quite wide, and is typically from initiation to completion, it is likely €1,000 – 1,600/Sqm (without VAT). that this segment of the market becomes qualitatively undersupplied in the coming There is a clear expectation that the years. Thus, potential buyers might residential market has reached the experience that the selection of bottom in terms of sales prices. appropriate properties gets smaller. There is little doubt also that developers SUPPLY will take advantage of the gap between The amount of residential units in the supply and demand, and adjust prices to mid-plus and high-end of the market is new market conditions. estimated at 3,000 – 4,000 in the greater Sofia area. This includes projects with As most residential properties are predominantly more than 50 units bought for personal usage, only a few (apartments/row houses/houses) units are currently resold. located in prime and emerging neighborhoods in Sofia — both finished DEMAND and in final stages of construction. Demand for residential real estate is growing in maturity with increasing By Colliers definition, the mid-plus segmentation of the market. Buyers of and high end market includes residential mid-plus and high-end properties have projects characterized by a clear concept high expectations and requirements and at an attractive location, good quality of prefer new projects offering an attractive the construction, convenient access, standard of living. green areas, effective layouts, ample parking, good surrounding infrastructure, Research points to safety as the most property management services, and important driver when selecting a home availability of amenities within the project in a compound. Safety is followed by or in close proximity. quality of the property and the maintenance of common areas as the In terms of location, the majority of demand factors. Large, green areas and the mid-plus and high-end residential the availability of parking solutions units (when referring to projects) are complete the list of priorities for buyers situated in the southern neighborhoods in this segment. This is hardly surprising and in Iztok. The genuine new supply of as these elements are conspicuously mid-plus and high-end projects is small missing in the vast majority of the Sofia compared with the overall stock on the residential inventory. Buyers are often market, and must hence be considered a attracted by neighbors with a similar niche. Many of the projects are lifestyle, and thus communities are being developed as so-called gated formed within these new developments. communities (compounds).Research: Adriana.Toncheva@Colliers.com CollieRS inteRnAtionAl | P. 29

2011 CoLLIeRs ReAL estAte RevIew » BULGARIA RESIDENTIAL MARKET In the mid-plus and high-end segment Flexibility remains the key to closing a most transacted units are 3 – 5 bedroom deal. Besides pure price discounts, apartments as well as single family developer’s concessions are made on houses. finishing works, second parking space or notary/transfer fees. The typical profile of a buyer in the mid-plus and high-end segment is a ‘Lease-to-buy’ remains a viable option person in a key professional position, in the market, but the success highly often self-employed. These buyers are depends on the details of the various less dependent on the availability of project schemes. mortgages, since most purchases have a high degree of self financing. The buyer FORECAST is often selecting a home for the family, Demand of mid-plus and high-end and has quite specific (and high) residential real estate will continue to expectations. The growing number of grow as the Bulgarian economy Bulgarian managers in both local and gradually improves. international companies further drives demand in this segment, as their Supply is dwindling and with remuneration enables purchase of increasing absorption, there is a genuine properties in this segment. risk of the market becoming qualitatively undersupplied. The institutional buyer has all but disappeared from the market, though Prices will stabilize or even increase sporadic bulk buying is observed. A slightly in 2011. substantial majority of buyers are Bulgarian nationals (in a few cases diaspora), reflecting the diminishing role of expatriate management across most businesses. SALES PRICES There is a clear expectation that the residential market has reached the bottom in terms of sales prices. Some developers are even considering adjusting prices in 2011, reflecting the steady demand and what is seen as a potential lack of supply as the pipeline empties. The offered price range in the mid-plus and high-end segment of the market is quite wide, and is typically €1,000 – 1,600/Sqm (without VAT). Numerous factors influence the price including location, quality, scope of finishes, type of property etc. The upper end of the scale is typically reached for apartments with exceptional view/ location as well as houses.P. 30 | CollieRS inteRnAtionAl Research: Adriana.Toncheva@Colliers.com

2011 CoLLIeRs ReAL estAte RevIew » BULGARIA INVESTMENT MARKET KEY INVESTMENT FIGURES SUMMARY With stabilization and growth in the Metric Measure Economic stability and positive GDP economy forecast in 2011, and with Prime Office Yield 9.00% growth as of year-end 2010 will exert a yields on prime product offered at fair, if Prime Retail Yield 9.25% positive influence over investor not discounted, prices to neighbouring Prime Industrial Yield 11.00% confidence in Bulgaria which remained markets. We expect to see a return of Source: Colliers International largely muted in 2010. This is not institutional investors to the Bulgarian particularly suprising given the low market in the second half of the year. volume of transactions which occurred Not least as a result of strong potential outside of the core eastern European returns, relative to other markets. OVERALL INVESTMENT VOLUMES (€ MLN) 600 markets of Warsaw/Poland, Prague in Source: Colliers International 500 the Czech Repuiblic and Moscow. Banks, however, will remain 400 conservative in their lending approach 300 There has been, however, increased and are unlikely to exceed 60 – 65% 200 100 activity in the market in terms of enquiry loan-to-values for prime transactions, 0 | | | | | levels as of Q3 onwards, although mainly whilst loans on secondary product will 2006 2007 2008 2009 2010 from investors that have been focusing become very difficult to come by. on the country for the previous year. Whilst the pricing and retun The result is that the conclusion of opportunity exits, however, the lack of INVESTMENT VOLUMES BY SEGMENTS (€ MLN) 300 some deals which started negotiations institutional-grade investment product 250 during the end of 2010, have been will continue throughout 2011 and reduce 200 pushed back to Q1 of 2011. any significant increase in transaction 150 volumes. 100 In terms of product, as with more 50 CEE markets, big-box retail and prime 0 offices remain the focus of the majority | | | | | 2006 2007 2008 2009 2010 ▄ Retail ▄ Oﬃce ▄ Industrial of investors looking at the Bulgarian market. Interest in the office market of interest is confined to the capital city, Sofia, while the big-box segment has PRIME YIELDS12.00% drawn attention to secondary locations10.00% across the country.8.00%6.00% In terms of pricing, ther were signs of4.00% yield compression over the year in the2.00% prime office and big-box retail sectors,0.00% moving from double to single-digit yield | | | | | | 2005 2006 2007 2008 2009 2010 ▄ Retail ▄ Oﬃce ▄ Logistics levels by year-end. FORECAST A minor continuation of yield compression is likely throughout 2011 with prime office yields expected to approach 9%. Big-box and retail-park yields should remain at between 9.00% and 9.25% over the year.Research: Adriana.Toncheva@Colliers.com CollieRS inteRnAtionAl | P. 31

2011 CoLLIeRs ReAL estAte RevIew » BULGARIABULGARIA TAX SUMMARY GENERAL The Bulgarian CITA provides for maximum Please note that dividends and liquidation Several changes to the Bulgarian tax tax depreciation rates depending on the type quotas distributed by local tax residents tolegislation have come into effect from 1 of the depreciable asset. The maximum tax shareholders local entities, as well as foreignJanuary 2011. The most significant ones depreciation rate for buildings including those entities that are tax resident in an EU/EEAconcern withholding tax (WHT) and local held as investment properties is 4%. Land is member state are exempt of WHT taxation.taxes and fees. not depreciated for tax purposes. The WHT rates could be reduced under an CIT AND CAPITAL GAINS TAX LOSSES effective Double Tax Treaty signed between The Bulgarian Corporate Income Tax Act A tax loss can be carried forward for five Bulgaria and the country of residence of the(CITA) specifies that Bulgarian entities are years. It can be offset against a positive tax foreign income recipient following a specificsubject to 10% corporate income tax (CIT) on result for a subsequent tax year. pre-approval procedure.their worldwide income. Foreign entities aresubject to tax only on the profits derived from ThIN CAPITALIZATION The WHT is generally calculated on aBulgarian permanent establishments (incl. Thin capitalization rules apply in Bulgaria gross basis. CITA includes provisions underbranches) and/or profits related to disposal if the company’s liabilities exceed three times which foreign recipients of income subject toof property of such a permanent the amount of its equity. Interest expenses WHT, tax residents of an EU/EEA memberestablishment. are deductible up to an amount equal to the state, are entitled to annual recalculation of entity’s interest income plus 75% of the the WHT which has been levied and paid on a The CIT is calculated on the basis of the profits before interest and tax. Interest gross basis following a specific procedure.annual financial result (as per the Income expenses on bank loans are not subject to The recalculation is aimed at equaling the taxStatement of the entity) adjusted with certain thin capitalization, except in some specific treatment between local entities and foreignpermanent and temporary tax differences. cases. entities, tax residents of an EU/EEA members states. The income from real estate derived by TRANSFER PRICINGBulgarian entities is included in their annual Transfer pricing rules allow the revenue As of 1 January 2011 the WHT due onfinancial result. The annual accounting authorities to adjust tax bases where income realized by foreign entities from rent/financial result is subject to further transactions are not carried out on an arm’s right of use of immovable properties, locatedadjustments for tax purposes. length basis. in the country, should be deducted and paid by the local payer of the income, provided The annual CIT liability is determined with Under the transfer pricing provisions the that the latter is a tax liable person under thethe annual CIT return. Any outstanding tax base for CIT purposes may be adjusted as CITA. So far the foreign income recipient hadliability (off-set with any advance installments well as tax bases for calculating other taxes the obligation for deduction and remittance ofmade) should be remitted to the state budget such as WHT. the WHT.within 31 March 2011. The same term appliesfor the submission of the annual CIT return. WIThhOLDING TAX INTEREST AND ROYALTY PAYMENTS Specific types of income with Bulgarian Under the EU Interest and Royalties There is no tax grouping provisions in source accrued by local tax resident entities Directive, qualifying interest payments andBulgaria. in favor of non-resident taxpayers is subject royalty payments between associated to withholding tax (WHT) provided that the enterprises, tax residents in EU member TAX DEPRECIATION income is not derived through a permanent states may be exempt from any taxes Bulgarian tax liable persons should establishment of the non-resident entities in imposed on those payments in that state,maintain Tax Depreciation Schedule (TDS) Bulgaria. Such income includes capital gains, provided that the beneficial owner of thewhere they report all tax depreciable assets. rental payments, interests, dividends and interest or royalties is a company of anotherThe tax depreciation as per the TDS is to be liquidation quotas, royalties, technical EU member state or a permanentreported as a downward adjustment to the services (including consultancy services), establishment of an EU member statefinancial result for tax purposes while the management fees, etc. situated in another EU member state.accounting depreciation expenses accruedduring the year are disallowed for tax The standard WHT rate is 10% WHT, withpurposes and are reported as an upward 5% WHT applied on dividends and liquidationadjustment to the financial result. quotas.P. 32 | CollieRS inteRnAtionAl Contact: khadjidimov@kpmg.com

2011 CoLLIeRs ReAL estAte RevIew » BULGARIABULGARIA TAX SUMMARY However, a transitional period for the GARBAGE COLLECTION FEE According to the provisions of theapplication of the Interest and Royalties Generally, garbage collection fee is levied Bulgarian VAT Act the lease of buildings forDirective was agreed whereby Bulgaria has on the book value/cost of the immovable residential purposes and the sale ofreserved its right to tax interest and royalty property at a rate determined annually by the unregulated land plots and old buildings (i.e.income arising in the country by applying the respective municipality where the property is buildings for which more than 60 monthsmaximum withholding tax rates as follows: located. The rates for the garbage fee may from the issuance of the exploitation permit10% for the period until 31 December 2010, vary significantly between the municipalities. have expired) are considered a VAT exemptand 5% for the period 1 January 2011 – 31 supply. However, the seller/lessor has theDecember 2014. TRANSFER TAX option to choose the sale of the land plot or Transfer tax is levied when transferring the old building/the lease of building for As of 1 January 2011 the CITA is amended real estate property or limited property right residential purposes to be treated as a VATaccordingly and the WHT rate on such type of over real estate. The tax rate is in the range taxable transaction and charge VAT at theincome may be reduced from 10% to 5% of 0.1% – 3% levied on the tax base of the rate of 20%.provided that certain conditions specified in property in cases of acquisition againstthe law are simultaneously fulfilled. consideration. When immovable property is Sale of new buildings, plant, machinery, gratuitously transferred the tax rate is in the equipment and structures immovably fixed to LOCAL TAXES AND FEES range 3.3% – 6.6%. The applicable transfer tax the land is a VAT taxable supply, subject to The main local taxes and fees in relation rate is determined by the respective 20% VAT.to the ownership or acquisition of real estate municipality.in Bulgaria include real estate tax, garbage There is no VAT grouping in Bulgaria.collection fee and transfer tax. The tax base upon transfer of real estate property or limited property rights over it is REAL ESTATE TAX the higher of the following values: (i) the Owners of buildings and land plots purchase price/a price defined by state orsituated in Bulgaria as well as acquirers of municipal authorities and (ii) the tax valuationlimited ownership right over real estate of the property.property are subject to annual charges forreal estate tax. The tax rate of real estate tax The transfer tax is generally paid by thevaries in the range of 0.01% – 0.45%. It is transferee of the property, unless the partiesdetermined at a municipal level and may vary have agreed differently. In case the transfereefrom year to year. As of 1 January 2011 the is not in the country, the tax is payable by thetaxable base for real estate tax of non- transferor.residential property owned by companies isthe higher amount of the tax valuation and VALUE ADDED TAXthe book value of the property. The taxable The changes of the Bulgarian VAT Act asbase for real estate tax of property owned by of 1 January 2011 do not significantly affectindividuals or residential property owned by the real estate.companies is the tax valuation of theproperty.Contact: khadjidimov@kpmg.com CollieRS inteRnAtionAl | P. 33

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Bulgaria 2011 Real Estate Review

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