2012 Eastern Europe Real Estate Review ALBANIA. Accelerating success.

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1 212 Eastern Europe Real Estate Review ALBANIA Accelerating success.

2 Fluent in Real Estate Representative Transactions in 211 Almaty Baku Barcelona Beijing Berlin Bratislava Brussels Bucharest Budapest Frankfurt Hong Kong Istanbul Kyiv London Madrid Moscow New York Paris Prague Shanghai St Petersburg Warsaw Northwood Investors EuR 3,, Acquisition and financing of a 3, sq.m. office building located in La Défense France Accession Fund Sicav EuR 38,, Refinancing of Accession Fund sub-portfolio of 9 office buildings and 1 logistics park located in Central and Eastern Europe Poland, Czech Republic, Hungary, Romania Unibail-Rodamco EuR 475,, Acquisition of GTC s 5% stake in the Galeria Mokotow shopping centre located in Warsaw Poland Tristan Capital Partners AEW Europe EuR 3,, Acquisition from VGP N.V. of an 8% stake in 6 industrial parks located in the Prague region Czech Republic UFG Real Estate Value Confidential Acquisition of two office buildings and one shopping centre located in Moscow Russia Sahaviriya Steel Group Plc usd 68,, Acquisition of Tata Steel s steelmaking plant located in Redcar, Teesside United Kingdom Heitman European Property Partners IV Value Confidential Acquisition of an office building in Capital Partner s Metropolis mixed-use project located in Moscow Russia Panattoni Germany Management GmbH Value Confidential Development and lease of a 16, sq.m. logistics centre located in Schwäbisch Gmünd, Germany Germany Li & Fung Limited Value Confidential Approximately 5, square foot office lease for LF USA s new US headquarters in the Empire State Building USA AIRE GmbH & Co. KGaA Value Confidential Sale of the 118, sq.m. APP logistics park located in Bratislava Slovakia

3 ALBANIA EXECUTIVE SUMMARY 4 ECONOMIC OVERVIEW 5 OFFICE MARKET 6 RETAIL MARKET 7 ALBANIA TAX SUMMARY 9 3 COLLIERS INTERNATIONAL

4 RESEARCH & FORECAST REPORT 212 ALBANIA EXECUTIVE SUMMARY EXECUTIVE SUMMARY RECENT TRENDS MARKET PROGNOSIS TRENDS 212 GDP GROWTH PRIME YIELDS TRANSACTION VOLUMES PRIME OFFICE RENTS PRIME SC RETAIL RENTS Economy: The Albanian economy grew at a slower pace in 211 than forecast by the government and the banks. According to INSTAT, by the end of 211, the inflation rate reached its lowest point in the last decade, a reflection of the economy s adjustment to lower levels of demand. Office: The vacancy rate decreased slightly to 1% in H2 211, in comparison to the first half of the year. Rental rates remained high but stable especially in the main business towers. Office demand stayed strong, but high rental prices pushed businesses to look for alternative solutions such as relocating to more affordable premise. Retail: Activity prevailed in the retail sector in H In November, 41,2 m 2 were added to the traditional shopping centre stock with the opening of Tiran East Gate, the largest shopping centre in Albania. On the other hand, the well known DIY German chain, Praktiker, closed its only presence in Albania thereby decreasing the specialized shopping centre stock by 11, m 2. The retail market experienced a slight decrease in the vacancy rate (in Q2 211) which reached 1.7%. Rental prices remained constant and decreased in secondary locations. High street and secondary stores reported a drop in retail sales and high turnover of shops. Economy: Based on the latest IMF forecast, Albania s economy is expected to grow faster than its neighbouring countries in 212. The expected 3.5% growth rate is healthy taking into consideration the crisis and problems in the European economy. Office: The delay of the construction of Tirana Business Park will postpone the pre-announced increase in office stock which will eventually impact office rental prices that are expected to remain stable or slightly decrease in the business centres. Retail: New demand was absorbed by the opening of TEG in Q Thus, no significant increase in demand is foreseen in 212, with activity driven by renewals and one-off transactions. Due to the significant increase of retail stock, we expect a slight decrease in both shopping centre and high street rental prices. Increasing Stable Decreasing 4 COLLIERS INTERNATIONAL

5 RESEARCH & FORECAST REPORT 212 ALBANIA ECONOMIC OVERVIEW ECONOMIC OVERVIEW Key Economic Figures GDP % CPI % Unemployment % Source: IMF/CIA World Fact Book/FocusEconomics Population Top 3 Cities % Tirana % Duress % Vlore % Source: IMF/CIA World Fact Book/FocusEconomics Economic Make-up Sector GDP Labour Agriculture 21.% 58.% Industry 19.% 23.% Services 6.% 19.% Source: IMF/CIA World Fact Book/FocusEconomics CPI, GDP & UNEMPLOYMENT CPI 29 Unemployment Real GDP Source: INSTAT, IMF`s WEO, October FDI ANNUALLY (IN MILLION EURO) SUMMARY According to the latest IMF World Economic Outlook, Albanians economic real growth slowed down while reaching an estimated 2.5% in 211 compared to 3.5% registered in 21, meaning Albania ranks highly among SEE countries, sharing second position with Bulgaria. In terms of quarterly figures, there was a 1.8% increase in Q3 211 in comparison to Q Based on the latest data (Q3 211) from the national statistical office (INSTAT), the industries that experienced higher growth rates in comparison to Q3 21 included: Transport (19.7%), trade (6.2%), industry (4.8%) and construction (.3%). On the other hand, industries with negative growth included: other services (-3.3%), postal and communication (-.5 %). According to INSTAT, the 211 inflation rate was 1.7% compared to a 1.9% rate in 21. The prices of goods and services followed the decline of overall national economic activities. The index group of goods titled transport registered the highest price increase at 5.4%, followed by health (4.2%) and alcoholic beverages and tobacco (3.4%). Albania s modest economic growth had a positive impact on the country s unemployment rate, which has continuously decreased since 29. According to the IMF s estimation, in 211 the unemployment rate was 11.5% which is 1% lower than 21 and 1.6% lower than 29 s unemployment rate. Investments as a percentage of GDP continued trending downward, but at lower rates of decline witnessed between 29 and 21. In 211, the investment/gdp ratio was estimated at 25% versus 25.9% (21) and 29% (29). It should be mentioned here that the peak in investments was mainly caused by the public investment that resulted from the general election in 29. The latest data on foreign direct investment (FDI), published by the Bank of Albania, showed that by the end of Q3 211, FDI accounted for 43 million, or 52% of the 21 FDI total. No major investments or privatisation occurred in Q On a quarterly basis, Q1 211 registered the lowest FDI levels at 42 million in comparison to FDI levels in Q2 and Q PROGNOSIS According to the IMF, Albania s economic growth is expected to grow at a projected rate of 3.5%. The IMF predicts a stronger ratio of investments to GDP at an increase of.7% which will bring the total investments to a GDP ratio of 25.7%. The unemployment rate is expected to decrease again in * Source: Bank of Albania, INSTAT 5 COLLIERS INTERNATIONAL

6 RESEARCH & FORECAST REPORT 212 ALBANIA OFFICE MARKET OFFICE MARKET Key Office Figures - Tirana Total Stock 63,4 m 2 Take-up 1,26 m 2 Vacancy 1% Prime Headline Rent 24.5 m 2 / pcm Average Headline Rent 15.5 m 2 / pcm Source: Colliers International CHANGE IN STOCK OVER TIME (THOUSAND) TOTAL STOCK/ NEW COMPLETIONS BY LOCATION (THOUSAND) Source: Colliers International Research H1 Stock CIty Center Completions City Center 29 H2 Source: Colliers International Research H H2 H H1 Stock Inner City H H2 Completions Inner City SUPPLY The Tirana office market is composed of 13 Grade A, B+ and B office buildings which were developed over the past 15 years. Several businesses have taken to renting space in converted offices housed in residential buildings as there is a lack of office space with quality amenities at affordable rental rates in the Tirana market. Despite the expectation of new office developments, the total office stock in Tirana remains unchanged at 63,4 m 2 GLA. No new supply was added to the office inventory in H The most recent office development occurred back in H2 29. Approximately 54% of total office stock (34,3 m 2 ) was classified as Grade A office space, while the remainder (29,1 m 2 ) was a mix of both, Grade B+ and Grade B. The development pipeline totaled 26,6 m 2, out of which only 9, m 2 of office space was actively under construction. DEMAND In 211, several businesses considered relocation. These tenants were looking for alternative office space in built-to-suit developments or in converted office space in residential buildings with lower rents. Interest for office space from foreign companies focused on outer city locations due to the area s affordable rental rates and ample parking space. In H2 211, the quantity of subleased office space increased, particularly in prime locations that had vacancy rates close to %. VACANCY/AVAILABILITY Office vacancy rates decreased to 1% (6,3 m 2 ) in H2 211, down from 11% (7, m 2 ) in H The decrease was attributed to the take-up of Grade A office space down to 4,83 m 2 in H2 211 compared to 5,43 m 2 in the previous half of 211. Vacancy rates in the city centre registered at 1% during H2 211 whereas vacancy rates in the inner city equalled 7.8%. RENTS In H2 211, the rental rates in most Tirana office buildings remained constant at H1 211 levels and saw only minimal fluctuations. Prime headline rents in the city centre and inner city registered 24.5 m 2 / pcm and 17 m 2 /pcm respectively. Rents for buildings in prime locations experienced a slight increase in 211. PROGNOSIS No Grade A or Grade B office buildings will come to market in 212. Thus, it is expected that the vacancy rates will decrease slightly mirroring natural office demand. Monthly average rental rates will remain unchanged in 212, but may experience a slight decrease in business centres that have higher vacancy rates given the trend to occupy office space in outer city locations. For lower quality offices located at the Tirana-Durres highway, prices are expected to decrease due to renewals and new stock entering that area. 6 COLLIERS INTERNATIONAL

7 RESEARCH & FORECAST REPORT 212 ALBANIA RETAIL MARKET RETAIL MARKET Key Retail Figures Tirana Total Shopping Centre Stock Prime Headline SC Rent Prime Headline High Street Rent Source: Colliers International CHANGE IN STOCK/ NEW SUPPLY OVER TIME (THOUSAND) H1 29 H2 21 H1 21 H2 New Development Completion Stock Total Traditional Stock Source: Colliers International Research 211 H1 TOTAL SHOPPING CENTRE STOCK - TIRANA (THOUSAND) Specialized SC Traditional SC Source: Colliers International Research 21 H1 211 H2 12 H2 211 TOTAL TRADITIONAL STOCK/ VACANCY RATE (THOUSAND) ,9m 33 m 2 /pcm 45 m 2 /pcm 16% 14% 12% 1% 8% 6% 4% 2% % OVERVIEW The retail market saw the addition of the largest shopping centre, Tirana East Gate (TEG), increasing the traditional shopping centre stock to 158, m 2 in H The new supply was rapidly occupied by new brands entering the market such as Carrefour, the second largest retail chain in the world, Greece s largest toy retailer Jumbo Kids and Sprider that used the opening to enter the Albanian market. SUPPLY During H2 211, with the opening of Tirana s East Gate, 41,2 m 2 was added to the retail inventory in Tirana thereby increasing the total traditional shopping centre stock to 158, m 2. Additionally during H2 211, the German DIY chain, Praktiker, closed its business in Albania, thus decreasing the specialised shopping centre stock by 11, m 2, leaving the GLA of specialised retail space to 28,9 m 2. 6,3 m 2 of retail space was under construction in the country. DEMAND Limited consumer purchasing power, coupled with the opening of Tirana East Gate shopping centre had a direct impact on street retailers, resulting in a sales decrease of 2% to 3% in comparison to retail sales in H2 21 and thereby moved the demand from high streets towards shopping centres. Nevertheless tenant s still prefer high streets as a target location although they are now actively demanding space in traditional shopping centres. RENTS/VACANCY In H2 211, rental rates in the retail sector decreased, particularly in secondary retail locations with higher vacancy rates. Prime headline rents in traditional shopping centres were 33 m 2 /pcm and 45 m 2 /pcm in high street locations. The total vacancy rate in traditional shopping centre stock remained low, between.1% in premium locations and 1.7% in secondary retail streets as of H PROGNOSIS The opening of Tirana East Gate will affect the vacancy rates of retail properties in the city which are expected to increase slightly in the upcoming year especially in secondary locations. New demand has already been absorbed by the opening of TEG in Q Thus, no significant increase in demand is foreseen in 212 and will only be driven by renewals or one-off transactions tenants. Rental rates in both high street and shopping centres are expected to remain stable with minor fluctuations for selective deals. H1 29 H2 29 H1 21 H2 21 H1 211 H2 211 Total SC Vacancy Source: Colliers International Research 7 COLLIERS INTERNATIONAL

8 RESEARCH & FORECAST REPORT 212 ALBANIA 512 offices in 61 countries on 6 continents United States: 125 Canada: 38 Latin America: 18 Asia Pacific: 214 EMEA: 117 $1.5 billion in annual revenue million square feet under management Over 12,5 professionals ALBANIA: Lira Mura Colliers International Sky Tower, Suite 141 Rr, Deshmoret e 4 Shkurtit Tirana Albania TEL albania@colliers.com The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. COLLIERS RESEARCH Colliers Research Services Group is recognised as a knowledge leader in the commercial real estate industry, providing clients with valuable market intelligence to support business decisions. Colliers research analysts provide multi-level support across all property types, ranging from data collection to comprehensive market analysis. Across the CEE-SEE-Russia region of EMEA, Colliers researchers regularly collect and update data on key real estate metrics, set to consistent definitions. This information is constantly managed using databases, enabling staff to readily produce analysis on key regional markets including supply, demand, absorption, pricing and transaction data on capital markets and the office, industrial and retail sector. In most CEE-SEE-Russian markets, the office definitions used are consistent with those set out by the CEE Research Forum an umbrella group, of which Colliers is a founding member - established to ensure consistent research methodologies are used, bringing greater transparency and reliability to the analysis of real estate markets in the region. Definitions of the key metrics used in our regular reports are highlighted below. KEY METRIC DEFINITIONS Prime Headline Capital Value (derived): This is a calculation of market value derived from the annual prime headline rent divided by the prime (net initial) yield. Prime Net Initial Yield: The yield an investor is prepared to pay to buy a Grade A building, fully-let to high quality tenants at an open market rental value in a prime location. Lease terms should be commensurate with the market. As a calculation Net Initial Yield = first years net income/purchase price (prior to deducting fees and taxes). Prime Headline Rent: Represents the top open-market tier of rent that could be expected for a unit of standard size commensurate with demand, of the highest quality and specification in the best location in the market at the survey date. This should reflect the level at which relevant transactions are being completed 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 one-off deals. If there are no relevant transactions during the survey period, the quoted figure will be more hypothetical, based on expert opinion of market conditions, but the same criteria on building size and specification will apply. Prime Net Effective Rent: Prime Net Effective Rent is the lowest rent payable, based on a calculation of the Prime Headline Rent, less the monetary equivalent of the highest of either the rent-free period or fit-out contribution available at the time of the survey date. Average Headline Rent: Average Headline Rent represents the average open-market tier of rent that could be expected for a unit of standard size commensurate with demand, based on a blend of Grade A and B space across a range of locations in the market at the survey date. Total Competitive Stock: Includes the gross leasable floor space in all A and B class buildings. Space Under Active Construction: Represents the total amount of gross leasable floor space of properties where construction has commenced on a new development or in existing properties where a major refurbishment/renovation is ongoing at the survey date. Space Under Construction Inactive: Represents the total amount of gross leasable floor space of properties where construction had started/where a major refurbishment/renovation was ongoing, but activity has since stopped for a period of three months or longer. Vacant Space: The total gross leasable floor space in existing properties that meet the Competitive Stock definition, which is physically vacant and being actively marketed at the survey date. Space should be available for immediate occupation. Take-up: In our calculation of take-up, gross take-up accounts for all occupational market activity including renegotiations, renewals and sale-and-leasebacks. Net takeup includes new leases and pre-leases only, although it will often include relocations. 8 COLLIERS INTERNATIONAL

9 RESEARCH & FORECAST REPORT 212 ALBANIA TAX SUMMARY ALBANIA TAX SUMMARY CORPORATE INCOME TAX AND CAPITAL GAINS From 1 January 28, corporations conducting business in Albania are subject to corporate income tax at a flat rate at 1%. Corporate income tax is applied to the accounting profit after adjustments for tax purposes. Capital gains from the sale of real estate are included in the taxable income of the entity and taxed at the 1% rate. The sale of real estate by individuals is subject to personal income tax at a 1% rate on the capital gain generated (.5% over the sale price in case of sale of agricultural land). Since 1992, Albania has entered into agreements with several countries for avoidance of double taxation. As at 1 January 212, 32 double tax treaties with different countries are in force. A general rule imposed by the tax treaties is that the right to tax the capital gains is conferred to the state of residence of the seller. However, a number of double tax treaties provide a special regime for capital gains if the shares being sold derive more than 5% of their value directly or indirectly from real estate. In addition, capital gains are taxed in Albania in case a foreign entity or a foreign individual transfers the direct ownership over real estate situated in Albania. Tax Depreciation Entities may set depreciation rates for assets in accordance with their accounting policies, while under the provisions of the Law on Income Tax, maximum annual rates allowed for tax purposes are specified according to a separate tax depreciation schedule. Land is not depreciated for tax purposes. The solid buildings, including investment properties, facilities, transmitting devices, machinery and production equipment which are fixed at the building site are depreciated according to the declining balance method at a depreciation rate of 5%. Certain assets incorporated to a building can be treated as separate movable assets for tax purposes and therefore can be depreciated over a shorter period. Tax Losses Tax losses can be carried forward over three tax periods. They can be offset against the positive financial result after tax adjustment for the respective tax period according to the first loss before the last one principle. A tax loss cannot be carried forward if the ownership of stock capital or voting rights of a person changes more than 25% in number or value. Thin Capitalisation The thin capitalisation rules apply in Albania if a company s liabilities exceed four times the amount of its equity (excluding short-term loans). In such a case, the interest paid on the exceeded amount is not tax deductible. The thin capitalisation restrictions do not apply to banks, insurance and leasing companies. In addition, the interest paid exceeding the average annual interest rate of loans published by the Bank of Albania is not tax deductible. WITHHOLDING TAX The standard Albanian withholding tax rate is 1%. The withholding tax rate can be reduced by double tax treaties to which Albania is party. Dividends Withholding tax on dividends at 1% rate applies on all dividends paid by Albanian companies unless a respective double tax treaty states otherwise. No withholding tax applies if dividends are paid to a tax resident company or partnership subject to corporate income tax in Albania. In addition, the income generated from dividends is not included in the taxable income of the tax resident company or partnership. Interest and Royalties Withholding tax at 1% rate applies to interest and royalties paid by Albanian companies unless a respective double tax treaty states otherwise. REAL ESTATE TAX Individuals and legal entities that own real estate property in Albania are subject to tax on real estate. Local taxes on real estate consist of the real estate tax on buildings and real estate tax on agricultural land. For real estate tax on buildings, the tax base is the area of the buildings measured in a square metres for each floor of the building owned (for real estate tax on agricultural land, the tax base is the area of agricultural land measured in hectares) and it varies depending on the district where the building is located. Buildings owned by the state and local governmental authorities as well as by religious institutions are exempt from this tax. REAL ESTATE TRANSFER TAX The tax is applicable in case of transfer of ownership right on buildings and other real estate properties. The tax is payable by the entity that transfers the ownership of the real estate. The tax on ownership transfer of buildings is levied on each square metre and varies from ALL 1 to ALL 2,, depending on the district where the real estate is located. The tax on ownership transfer of real estate other than buildings is 2% of the sale price. The tax is not applicable to individuals subject to personal income tax in Albania. Donors of real estate property to governmental authorities, religious institutions or not-for-profit organizations are exempt from this tax. The tax should be paid by the seller of immovable property before the transfer of the real estate is registered with the Real Estate Register. VALUE ADDED TAX (VAT) A supply of land and a lease of land are considered VAT exempt supply in Albania. The supply of buildings (except the supply of construction works) is an exempt supply. The lease of a building is an exempt supply except for these cases: renting for not longer than two months staying in hotels or vacation resorts. In addition, based on the by-laws issued by the Minister of Finance, entities or individuals may opt (upon the fulfilment of certain conditions) to categorise their lease supply of buildings as a taxable supply. FOR MORE INFORMATION ON REAL ESTATE SERVICES IN ALBANIA, PLEASE CONTACT: Arkadiusz Mierzejewski Partner KPMG in Albania Blvd. Deshmoret e Kombit, Twin towers Buildings, Tower 1, Floor 13, Ap A1-A4 Tirana, Albania T: E: arekmierzejewski@kpmg.com kpmg.al 9 COLLIERS INTERNATIONAL

10 kpmg.pl 212 KPMG Sp. z o.o., a Polish limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. KPMG in Poland Warszawa Poznań Katowice Gdańsk Kraków Wrocław

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