The Baltic investment funds were the most active in 2017

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1 Photo credit: VGP Baltic Investment, H The Baltic investment funds were the most active in 2017 Commercial Investment: % Investment Volume meur Investment Volume H meur Overall Cap Rate 7.5% *Arrows indicate change from the corresponding period of previous year Figure 1: Investment Volume per Country with Annual Changes, YoY, % Latvia Estonia Lithuania Growth, % y/y (rh scale) 3.4% 500% % 300% % 100% 0% 100% % HIGHLIGHTS The leading position in 2017 was held by Lithuania (44%), whilst 33% of all investment was generated in Estonia, leaving Latvia in third position with 23%; Investment activity in the CEE region was stable. The leading position in 2017 was held by Poland, generating a total investment volume slightly above 5 billion; In 2017 the largest investment of 127 m was completed by CPA:17 Global, acquiring a 70 % stake in the real estate investment vehicle UAB Baltic Retail Properties,followed by the Nehatu logistics park transaction in Tallinn; CBRE figures show CRE investment of more than 838 million in the Baltic region countries for 2017, representing a 3.4% decrease year on year; In 2017 the most attractive asset type in the proved to be the retail sector (39%), leaving the office sector in second place with 31% of all investment volume; interest in logistics has increased; Ca. 70% of all investments were made in the capital cities. The remaining investments were completed in regional cities (Klaipeda, Narva, Tartu Daugavpils, Kaunas, Palanga, Liepaja and others), mainly as portfolio transactions in the retail and DIY sectors; In 2017 the industrial sector, with a share of 20.4%, showed the strongest increase (by 27.5%), when compared with H CBRE Research 2018 CPB Real Estate Services, Affiliate of CBRE

2 Figure 2: Average real GDP annual growth %+ growth 2.1% 4.0% growth 0.1% 2% growth 0% growth Source: Oxford Economics, (forecast), February 2018 TW O M OR E GOOD YEAR S FOR ECONOM IC GR OW TH IN 2018 A ND 2019 Most European economies, including the Baltic states, finished 2017 strongly. EUwide economic confidence is within a whisker of a 30year high so there is no reason why the positive economic environment should not continue into 2018 helped, for the time being anyway, by a continuation of the ECB accommodative monetary policy. In GDP growth terms, the countries leading the recovery will be Spain (despite uncertainty over Catalonia), Sweden, the Netherlands, Ireland and practically all of Central Europe and the. Estonian GDP growth in 2017 was estimated to have increased to 4.3%, Latvian 4.5%, Lithuanian 3.7%. Affirmative changes were noticed in the household sector. The unemployment rate has decreased and reached 6.2% (forecasted) in Estonia, 8.5% in Latvia, and 7.2% in Lithuania. Unemployment rates are at the lowest levels in 8 years. Low unemployment has resulted in rapid wage growth and also increased consumer spending. As a result, retail growth increased by 1.4% in Estonia, 4.2% in Latvia, and 4.6% in Lithuania. The level of retail spending was also supported by growth of tourists from abroad. Economic growth in the is supported by the currently improving the international economic environment. Due to their small size, all three Baltic countries are strongly dependent on international trade and global processes, especially the ones in the EU. The are climbing the ladder of value added within the global supply chain; purchasing power is increasing and standards for the working environment are rising simultaneously. While still being relatively lowcost countries they have already passed the stage when it was a major advantage. The added value created in the Baltic is increasing as a result of the obtained knowhow, trust in its institutions and people, and accomplished investments. Figure 3: Share of Total CEE Investment Volume by countries in H (excluding Russia) 1% 0% 1% Poland* 3% 2% 0% Czech Republic* Hungary* 4% 6% Romania* Slovakia* 7% 38% Bulgaria Lithuania 12% Estonia Latvia Serbia 26% Ukraine Croatia *CORE CEE countries Source: CPB Real Estate Services, part of the CBRE Affiliate Network, January 2017 Figure 4: Investment Volume by Sector in the CEE region (excluding Russia) in % Office 6% 4% 17% Retail 79% 37% 72 % Industrial Hotel Other 41% Source: CBRE Research, H H CBRE Research 2018 CPB Real Estate Services, Affiliate of CBRE

3 Figure 5: Investment Volume per Country H H and Annual Changes of Total Investment, YoY, % H H H H H H H H H Source: Source: CPB Real Estate Services, part of the CBRE Affiliate Network, Q Latvia Estonia Lithuania I NV ESTM ENT IN H In the second half of 2017, the Baltic investment market was less active compared to the first six months. In 2017 H2, the total investment activity amounted to ca. 364 million or 24% less than in H A less active market was caused by scarcity of large investments, also a number of larger transactions were still subject to the sales process and would be completed in Q A reduced volume was observed in all major sectors, i.e. offices, retail, and industrial, which constitute ca. 90% of the investment market. Retail properties constituted the largest investment share (34%), followed by offices (28%), and industrial (22%). Among the more notable transactions above 30 mln were Postimaja shopping centre in Tallinn acquired by Baltic Horizon Fund ( 34.4 mln), GO9 shopping centre in Vilnius acquired by Lords LB and Olaine Logistic Park in Latvia bought by United Partners Property (Estonia). Also Latvian fund New Hanza Capital was active in H and invested more than 13 mln in the Riga office and industrial sectors. A relatively high industrial investment share marks an increasing interest in warehouse and logistics properties. This is a consequence of the above mentioned increasing trade volumes throughout the region, combined with completed development projects. In H1 of 2017, the geographical distribution of investors was relatively tame. The absolute majority of the investments origin were the Baltic states (77%), followed up by the Nordic countries (20%). COM P R ESSI ON OF YI ELDS A good economic situation, the low cost of debt financing, and relatively low returns on other asset classes continue to press investment yields of almost all property types in the. The average yields for prime office properties in the range from 6.25 to 6.75%, for prime retail properties from 6.00 to 7.00%, and for prime industrial properties from 7.75 to 8.00%. While yields are at a relatively low level in the and there is little room for them to be compressed, a marginal reduction could occur due to market participants expecting some rental increases and as a result of the more effective cost management of properties. Figure 6: Total Investment Distribution by Sector in the in Latvia Estonia Lithuania Office Retail Industrial Hotel MixedUse, Other Figure 7: Total Investment Distribution by Sector in the in % 5% Office 31% Retail 20% Industrial Hotels Mixeduse, other 39% Figure 8: Total Investment Distribution by Sector in the, H Office Retail Industrial Hotel MixedUse, Other Latvia Estonia Lithuania H CBRE Research 2018 CPB Real Estate Services, Affiliate of CBRE

4 Share, % Figure 9: Investment Volume by Sector , 1, Source: Source: CPB Real Estate Services, part of the CBRE Affiliate Network, Q Office Retail Industrial Hotel MixedUse, Other I NV ESTM ENT A CTI V I TY IN CEE R EGI ON: 2017 Investment into Central and Eastern European (CEE) countries (excluding Russia) for 2017 reached 13.3 billion, representing a 26% decrease year on year. Core Central Europe as a region proved to be more attractive to international investors than 2016, with Poland and the Czech Republic strengthening their leading positions and accounting for 38% and 26% respectively of the overall investment volume in the CEE region during 2017 (excluding Russia). Hungary also showed very high activity, increasing its investment share up to 12%. The retail sector took the lead with a 41% share in 2017, whilst both offices and industrial generated shares of 32% and 17%, respectively (Figure 4). I NV ESTM ENT A CTI V I TY IN THE BALTI CS : 2017 In terms of investors activity in the Baltic region, it has been high in the last three years. In 2017 the share in the total CEE investment market (excluding Russia) was 6.3%. The total investment volume for 2017 was recorded at EUR mln showing a 3.4% decrease compared to Foreign and local investors were active across all sectors with the largest transactions completed by CPA:17Global, East Capital, Northern Horizon Capital, United Partners, Colonna Capital, Capitalica, Technopolis Plc amongst others. French asset management company Corum also entered the Baltic markets with a Prisma hypermarket transaction in Estonia. The largest transaction in 2017 concerned the acquisition of a 70 % share of UAB Baltic Retail Properties. The main investor was US originated fund CPA:17Global managed by affiliates of W. P. Carey Inc. The second single largest transaction in terms of investment volume was the Nehatu logistics park in Tallin concluded between East Capital and VGP. In 2017 the retail sector dominated (39.0%), leaving the office and industrial sectors with 31% and 20% of all investment volume, respectively. Hotels and other sectors accounted for 5% each (Figure 7). In 2017 the industrial sector, with a share of 20.4%, showed the strongest increase by 27.5%, when compared with Figure 10: CEE Prime Yields Q4 2017, % City Retail SC Office Industrial Prague Tallinn Budapest Riga Vilnius Bratislava Warsaw Bucharest Belgrade Kyiv Source: CBRE Research, January 2018 Figure 11: Investment Volume by Country of Origin in % 80% 60% 40% 20% 0% Nordics USA Western Europe Other (Russia, Asia) Source: CPB Real Estate Services, part of the CBRE Affiliate Network, January 2017 Figure 12: Investment Volume by Country of Origin in %3% 15% Nordics 54% USA 25% Western Europe Other (Russia, Asia) Source: CPB Real Estate Services, part of the CBRE Affiliate Network, Q H CBRE Research 2018 CPB Real Estate Services, Affiliate of CBRE

5 I NV ESTM ENT IN THE BALTI CS: OUTLOOK 2018 The investment market has become very active in the both in terms of investment volume and new players entering the market especially after The first institutional investors, which entered the market back in 4 7, exited their first funds. Furthermore, because of the continuing lowinterest rate era, investors are actively searching for more attractive yields. The CEE region has become a hot spot for investors who are looking for suitable properties providing more attractive returns. All three Baltic countries are developing in a very similar fashion. It is noticeable that each country is doing slightly better in a particular sector, which could lead to different prospects for the respective property type. However, looking from the European perspective and even more from the global one, the differences are relatively minor. Regarding international investor expectations, the three Baltic countries are within a comparable risk premium bracket. It should also be mentioned that the Baltic investment market is being compared with the opportunities, liquidity and returns in other Central and Eastern Europe countries. Opportunities to invest in the are limited due to its size, and if the Baltic yield compression continues then investors could look more to the prime and secondary CEE markets. Even some of the domestic Baltic investors are already exploring this route. Finally, cross border investment looking for opportunities outside a domestic region is increasingly taking place in the global arena. Foreign investments are also considered attractive in order to diversify risk premiums in real estate portfolios. When foreign investors enter/exit a market, they could have different motives and therefore can affect commercial property yields differently to domestic investors. In this regard the is not an exception. In the years ca. 80% of the investment volume was of Baltic and Nordic origin, as opposed to years when more than 45% of the investments were from the US, Western Europe or elsewhere in the world (Figure 11). We are seeing increasing interest from Western Europe, which may result in transactions this year. Figure 13: Largest Investment Transactions in the, 2017 Q Investor Origin Country Seller Property Sector Country Q2 CPA :17 Global USA Baltic Retail Properties JV KeskoSenukai retail portfolio (70%) Q2 East Capital Sweden VGP park NEHATU Logistic Park Industrial Estonia Q4 Northern Horizon Capital Denmark Claesson & Anderzén AB (Letona Properties) Retail Postimaja Shopping Centre Retail Estonia Q3 Lords LB Lithuania East Capital GO9 Retail Lithuania Q2 Technopolis Plc Finland ICOR Group/REALCO Penta BC Office Lithuania Q4 United Partners Property Estonia SIRIN Olaine Logistics building Industrial Latvia Q2 Eastnine AB Sweden Laurus (NHC and Partners Group) VERTAS Business Center Office Lithuania Q4 Northern Horizon Capital Denmark SIA NULE 4 and SIA NM 2 Vainodes 1 Office Latvia Q3 AMG Property Norway Modus Group Modus Group car saloons Retail Lithuania Q2 LORDS LB Asset Management Lithuania Latvian Shipping Company Preses nams Office Latvia Q2 CORUM Asset Management France Eften Capital Prisma hypermarket Retail Estonia Q3 Sportland LT Estonia GR Real estate Pte Gedimino 20 Mixed_Use Lithuania Q3 Capitalica Lithuania EIKA BC 135 Office Lithuania Q3 Eften Capital Estonia Genesta A class logistics buildings at Kaunas FEZ Industrial Lithuania Q1 Northern Horizon Capital Denmark YIT Kausta Duetto I Office Lithuania Q2 Colonna Capital Estonia Partners Group Hobujaama 4 Office Estonia Q2 United Partners Estonia Girteka RIMI central logistics center Industrial Lithuania H CBRE Research 2018 CPB Real Estate Services, Affiliate of CBRE

6 RESEARCH DEFINITIONS BALTICS INVESTMENT Central and Eastern Europe (CEE) includes the following countries: Bulgaria, Croatia, Estonia, Latvia, Lithuania, the Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia, Ukraine and Russia. Investment Transactions transactions of income producing assets and forward purchases of real estate only, starting from 1 meur. Properties acquired for redevelopment purposes (on a casebycase basis, especially if a part of the property is still cash generating) also could be considered as investment transactions, but only the value of the existing property should be included. Transactions involving owneroccupiers, retailers or corporates buying for the purpose of owneroccupation are generally not seen as investments deals. The only exception to include an owneroccupier deal is where occupiers compete in the investment market to acquire a building which was also available to investors. We do not include pure land deals (empty sites) in our investment volumes. Prime Yield represents the net yield that an investor would receive when acquiring a class A building in a prime location (for office in the CBD, for example), which is fully let at current market value rents. Prime Yield should reflect the level at which relevant transactions are being completed in the market at the time but need not be exactly identical to any of them, particularly if deal flow is very limited or made up of unusual oneoff deals. If there are no relevant transactions during the survey period, a hypothetical yield should be quoted, and is not a calculation based on particular transactions, but it is an expert opinion formed in the light of market conditions, but the same criteria on building location and specification still apply. Cap Rate (%) represents the projected net pretax return (net operating income) on the capital employed from ownership of a property without consideration of the cost of financing or purchase costs. In terms of calculation, it is the rate at which net operating income is discounted to determine the value of a property. ABOUT CPB R EAL ESTATE SER V I CES: Part of the CBRE Affiliate Network Headquartered in Riga, Latvia from 2011 Representative offices in Vilnius and Tallinn Headcount 32 people Providing services in: Valuation, Consulting & Research, Property Sales, Property & Asset Management, Tenant Representation, Agency Services Retail, Offices, Industrial & Logistics, Financial Services, Accountancy CONTACTS Santa Rozenkopfa Paulius Stulgaitis Vineta Vigupe Managing Director Senior Consultant Investment Head of Research & Consulting M M M santa.rozenkopfa@cbre.lv paulius.stulgaitis@cbre.lt vineta.vigupe@cbre.lv OFFI CES Riga Plaza QUADRUM Baltic Business Centre METRO Plaza Mukusalas street 71, Konstitucijos pr.21a, 3.korrus, Viru valjak 2, Riga, Latvia, LV1004 Vilnius, Lithuania, LT08130 Tallinn, Estonia, EE10111 To learn more about CBRE Research, or to access the additional research reports, please visit the Global Research Gateway at: Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CPB Real Estate Services.