Belgrade || 1H 2011 2H 2010 Belgrade 1H 2010

Real Estate

Market & Trends

Outlook

For further market information, please contact

Zana Sipovac Head of Valuation and Investment Advisory zana.sipovac@leroy.rs

Mitar Bulatovic Head of Commercial Brokerage Services mitar.bulatovic@leroy.rs

T + 381 11 26 32 300 F + 381 11 32 84 647 17, Cara Urosa Street - Belgrade office@leroy.rs www.leroy.rs

DISCLAIMER This report gives general information based mainly on published data and it is intended for general guidance on matters of interest and informative purposes only. We believe that material presented in this report is reliable. However, no warranty is given as to the accuracy or completeness of the information contained in this report and we cannot accept any liability for consequences that may arise in reliance on the information presented in this report or for any decision based on it. COPYRIGHT LEROY REALTY CONSULTANTS 2011. All rights reserved. No part of this report must not be copied or transmitted without written permission of LeRoy.

Table of Contents
ECONOMY OUTLOOK OFFICE MARKET & TRENDS Supply Demand Vacancy Rents Pipeline Forecast RETAIL MARKET & TRENDS Supply Demand Vacancy Rents Pipeline & Announced Forecast INDUSTRIAL MARKET & TRENDS Supply Demand Vacancy Rents Pipeline & Forecast RESIDENTIAL MARKET & TRENDS Supply Demand Pricing Developed & Under construction Announced Forecast 2 4 5 5 5 6 6 6 7 7 9 9 9 11 10 12 10 12 11 12 11 13 13 15 13 15 14 16 14 16 14 16 15 17 18 19 18 19 19 20 19 20 19 21 22 19 22 Chart Structure of retail sale in Serbia Chart Shopping center stock in Belgrade Chart Big-box stock in Serbia & Belgrade Table New retail deliveries Table New high street tenants Chart Prime rents in Belgrade Chart Shopping center rents in Belgrade Chart Indicative retail yields Table Projects under construction Chart Modern industrial & logistics stock in Serbia Chart Modern logistics stock in Serbia Chart Industrial & logistics construction permits issued in Serbia Chart Industrial & logistics construction permits issued in Belgrade 16 Chart Modern warehouse rents in Belgrade&wider area 16 Chart Number of constructed apartments in Serbia & Belgrade Chart Number of constructed apartments in Belgrade municipalities Chart Structure of new apartments in Belgrade Belgrade municipalities Table New residential deliveries & under construction Chart Average asking rents in Belgrade municipalities 19 19 20 20 21 21 19 16 9 10 10 11 11 12 12 12 13 15 15 Table Economy indicators Chart Belgrade office stock Chart Belgrade office delivery, semiannual Chart Belgrade office vacancy rates Chart Average rent levels Chart Office yields Table New office deliveries & pipeline projects 3 5 5 6 7 7 7

Chart Residential construction permits issued in Serbia & Chart Residential construction permits issued in Belgrade

Chart Average asking prices in Belgrade municipalities 21

Real Estate Market & Trends Outlook | 1

Economy

Outlook
Since the beginning of the year, the Serbian government and the has budget faced deficit. significant The structural unsuccessful problems related to a rising inflation, unemployment privatization of the national telecommunication company Telecom Serbia has increased the problem of the budget deficit. Serbias rating according to Dun&Bradstreet has maintained its moderate risk DB4d, where the potential medium-term threat is the budget issue.
The strict austerity measures necessary for structural reforms of the budget system are not likely in pre-election year. Therefore, the rising budget deficit is planned to be overcome by the issuance of euro bonds (EUR 500 millions) and through the commercial loan with the guarantee of the World Bank (USD 400 millions).

Since the start of recession, the biggest challenge has been to stop negative trends in the labor market. Labor force survey from April indicates the unemployment rate of 22.2%, which is a 3% increase since October. Stabilization of the labor market has not been reached yet, and this problem will continue to be the biggest challenge through 2011. The inflation in June 2011 amounted to -0.3%, while the year-on-year growth amounted to 12.7%. Decrease of inflation pressures can be explained by slowdown of food prices growth. However, the inflation in 2011 is expected to reach a double digit level (10.3%), which is well above the projected level (6%). Meanwhile, as a response to rising inflationary pressures, the National Bank of Serbia tightened monetary policy and the reference rate in June amounted to 12%. Retail prices of goods and services in June decreased by 0.3%, compared to the previous month. In June 2011, the retail prices were higher by 12.7% than in the same period in 2010. Retail turnover in June 2011 decreased by 16% in constant prices compared to June 2010. The average net salary in Serbia in June 2011 was RSD 39,322, which

According to the Statistical office of the Republic of Serbia, GDP growth in the first quarter of 2011 was 3.4% compared to the same period last year. The highest growth has been recorded in the following sectors: transport (9.8%), electricity and gas supply (7.5%), manufacturing (6.2%), financial and insurance (6.2%), while the largest decline has been in the construction sector (2.9%). Industrial production continued with growth and in June recorded 3.3% increase compared to the same period last year. In January-June 2011 industrial production rose by 4.8% compared to the same period in 2010. In June 2011 the highest growth was recorded in the mining sector (17.8%), then the sector of energy and gas (13.3%) and manufacturing (0.5%). Decline in the construction industry recorded in the Q1 2011 (2.9%) has been reduced compared to 2010. Recovery in the construction industry depends greatly on the government initiative to start major infrastructural developments.

is an increase of 2.1% in real terms compared to June 2010. Considering the period January-June 2011, the average net salary decreased by 2.2% in real terms compared to the same period last year. In the field of European integration, despite certain issues regarding the Kosovo question, the EU candidate status will probably be granted to Serbia by the end of current year. This improvement in the field of European integration will certainly affect the economic prospects of the country. New estimates for net FDI in 2011 are USD 2 billion, which is far from the projected level of USD 4 billion. The reduced level of net FDI can be explained by the unsuccessful privatization of majority stakes of the national telecommunication company Telekom Serbia. In the first six months of 2011, the largest investment was the acquisition of the local retail chain Maxi by the Belgian Delhaize Group for the amount of EUR 930 million. The largest FDI inflow in 2011 is expected in the retail and manufacturing sectors.

Real Estate Market & Trends Outlook | 2

1H 2011

Indicators
GDP (EUR bn) GDP per capita (EUR) GDP (constant prices yoy %) CPI (average, yoy %) Central bank reference rate Monthly wage, nominal (EUR) Unenmployment rate (%) Budget balance/GDP (%) Current account balance (EUR bn) Current account balance (% of GDP) Net FDI (EUR bn) FDI (% of GDP) Gross foreign debt (EUR bn) Gross foreign debt (% of GDP) Exchange rate to EUR avg Source: UniCredit Research

2008
32.7 4,443 3.8 11.7 17.80 560 13.7 -2.6 -7.1 -21.6 1.8 5.6 21.8 66.7 81.49

2009
28.9 3,943 -3.5 8.4 9.50 470 16.1 -4.5 -2.1 -7.2 1.4 4.8 22.8 78.9 94.05

2010
28.6 3,917 1.8 6.3 11.50 462 20.0 -4.7 -2.1 -7.3 0.9 3.0 23.8 83.3 103.12

2011F
33.5 4,607 2.7 12.5 9.50 526 19.5 -4.5 -2.8 -8.3 2.0 6.0 26.0 77.7 101.00

2012F
37.3 5,150 3.5 7.9 8.50 574 18.8 -3.9 -2.9 -7.8 2.0 5.4 29.0 77.8 101.50

Forecast
Inflation will continue to be the biggest challenge in 2011. The estimated inflation of 4.5% with deviation of exceeded. According to "Dun & Bradstreet, the increase of food prices and unfreezing of salaries and pensions in the public sector will increase inflationary pressure in 2011; the increase of the budget deficit is a potential medium-term threat for the country rating. The projected GDP growth in 2011 is 3%. According to the IMF forecast, a strong GDP growth is expected from 2012, indicating 4.5% growth in 2012 and 5.5% in 2013. However, estimated growth is likely to be lower than expected. Considering the real estate industry in Serbia in the light of current economy, the industry will continue to downsize in 2011. Despite negative tendencies, retail takes the lead in the sector rankings. The reduction in the lending capacity of banks in real estate continues to put a limit on the number of potential investors. 1.5% has already

Real Estate Market & Trends Outlook | 3

Real Estate Market & Trends Outlook | 4

Office

Market & Trends

After a large increase in vacancy rates in the first half of 2010 coupled with substantially depressed tenant demand, performances of the office market remained subdued. Occupier activity and rent levels are fairly stable compared to year-end. Slow growth prospects and instability in the labor market together with rising unemployment, question the time of office market recovery. The postponed new supply brought certain stabilization, but we are cautious as demand is still low as well as predictability of the economic environment. In the last 12 months the market has experienced zero
Sq m of GLA

new developments are located in the area of New Belgrade (CBD 57% and Wider Center 43%). After a period of intensive supply, the last 12 months have brought a reversal. The supply pipeline has been postponed while new speculative construction is almost suspended. Therefore, in the last 12 months the market has experienced zero delivery. The postponed projects, currently under construction, will bring additionally 53,000 sq m of GLA of speculative space. However, it is still uncertain when these buildings will be introduced to the market. Development completions are expected to be low over the next two years. With limited new supply and moderate demand we will see slow but steady absorption of the vacant space in the next period.
Belgrade office stock
600,000 500,000 400,000 300,000 200,000 100,000 0
2004 2005 2006 2007 2008 2009 2010 1H 2011

delivery.
Supply
As relatively immature, the office market in Belgrade was characterized by average delivery of 60,000 sq m of GLA, which affected a comparably low vacancy levels during the period of 20032009. Many speculative developments were commenced during the economic expansion in 2007-2008. The highest delivery of 70,000 sq m of GLA was recorded in the second half of 2008 causing, for the first time, a double digit vacancy level for the new class A developments.

Total Source: LeRoy Research

Class A

Class B

Belgrade office delivery, semiannual

50,000 40,000
Sq m of GLA

The first half of 2010 saw a record level of 80,000 sq m of GLA of contemporary office space with the delivery of a few large scale developments both in the class A and class B segment, bringing the total office inventory (class A&B) to 610,000 sq m of GLA, which is 15% growth in total stock. Office deliveries scheduled for the second half of 2010 have been postponed. The new class A developments delivered in 2010 amounted to 50,000 sq m of GLA, while the class B amounted to 30,000 sq m of GLA. All

30,000 20,000 10,000 0

2H 2007 1H 2008 2H 2008 1H 2009 2H 2009 1H 2010 2H 2010 1H 2011

Total Source: LeRoy Research

Class A

Class B

Real Estate Market & Trends Outlook | 5

1H 2011

Demand
Belgrade office market saw a significant saturation caused by reduction in take-up. The past 6 months have not been easy, following a similar trend to the previous year with continued occupier uncertainty and limited market activity. The fundamentals in the occupier market are weak, particularly because of the high unemployment rate. The market activity was mainly supported by small to medium size transactions, but unlike previous 12 months we noticed increase in expansionary led requirements. Relocation requirements and lease renegotiations are still an active segment of demand. In the first six months of 2011 we noticed stable demand compared to year-end. Recorded take-up in 1H 2011 is between 18,000 and 21,000 sq m. The banking sector particularly registered a positive demand and appeared among larger occupiers in 2010. In the first six months there has been a change in the structure of demand. Unlike banking sector that dominated throughout 2010, communication/media, IT and pharmaceutical/medical sector were the main occupiers in the first six months of 2011. A typical demand is oriented to smaller and medium size premises between 100 and 300 sq m. Almost 70% of all transactions referred to the surface up to 500 sq m, while only 30% of transactions referred to the larger space (above 500 sq m). The demand is predominantly focused on the New Belgrade area, while only 15% of lease transactions relate to offices in the downtown area.

increased vacancy is recorded also within lower quality class B and C buildings and secondary locations, since many tenants have decided to relocate. The new supply of 80,000 sq m of the contemporary class A & B office space in the first half of 2010, substantially raised the overall vacancy which amounted to 25% at the year-end. The postponed delivery of a few projects resulted in slow absorption of the available office space and the overall vacancy rate decreased by 2% during the first half of 2011 to 23% (22% class A and 25% class B). Vacancy rate is still very high and taking into account the current demand, a considerable drop in the vacancy is not likely during 2011. On the other hand, we do not expect a further increase in vacancy rate, since the announced office deliveries for 2011 will probably be delayed.

Office vacancy rates

30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 2005 2006 Class A 2007 2008 Class B 2009 2010 1H 2011

average

The recovery in demand will be slow, and rising economy uncertainty does not contribute to strengthening business environment. Economic sentiment within the country is still low, while a potential deepening recession in EU doubts the pace of recovery. At the local level, the flexibility of landlords, offering more favorable lease terms, rent free periods or space fit-out, is aimed at stimulating the demand. Although without the increase in number of expansionary led requirements, the office market recovery cannot be expected. Despite the increase of expansionary demand in the last 6 months, the demand level is still historically low and as a result there still remains unpredictability of the short term trends in the market. During 2011 companies will continue to look for relocation and this will generate a larger amount of gross take-up.

Source: LeRoy Research

Rents
The rents seem to have been mainly stabilized during 2010, with only slight downward correction of approximately 2%. The headline office rents for the prime stock have remained stable, while corrections have occurred for space in the non prime areas. The landlords are generally reluctant to reduce the rental levels and they are providing increased tenant incentives to safeguard the rent levels, such as fitout contributions and rent free periods. The largest incentives have been available for large tenants. The prime class A rents stabilized to EUR 14-15.5 per sq m/month, while the prime class B rents are EUR 11-12 per sq m/month. The rental levels in CBD area for the class A space is EUR 13.5-14 per sq m/month on average, while for the class B premises it is EUR 10.5-11 per sq m/month. The rents in the Wide Center area for the class A ranges from EUR 12.5-13 per sq/month and for the class B from EUR 10-10.5 per sq m/month.

Vacancy
A strong pace of new developments delivered in 2010 together with a decrease in demand and the relatively high ratio of lease renewals, increased the vacancy to the highest recorded level since 2000. The majority of vacant space remains within new developments and the

Real Estate Market & Trends Outlook | 6

The average achieved rents are at a slightly lower level.

Average rent levels
19.0
EUR/sq m/month

The most prominent class A developments expected on the market in 2012/2013 are Tri Lista Duvana (8,000 sq m of GLA) located in the downtown of Belgrade and B23 (35,000 sq m of GLA) located in the CBD area of New Belgrade. Another office development due for completion is Atlas building (4,000 sq m of GLA) located in the downtown area (Takovska Street). Raiffeisen Bank started with construction of its office building in Djordja Stanojevica Street in New Belgrade. Total GLA will be 15,000 sq m. Expected time of delivery is 1H 2012.

17.0 15.0 13.0 11.0 9.0 7.0 5.0

1H 2007 2H 2007 1H 2008 2H 2008 1H 2009 2H 2009 1H 2010 2H 2010 1H 2011

The International Falkensteiner Michaeler Group started the construction of a hotel and office complex in block 11a in New Belgrade. The four-star hotel (4*) will have 171 rooms and will occupy the area of 24,000 sq m. The office building will be connected

Class A Source: LeRoy Research

Class B

Office yields
14.0% 12.0%

with hotel and the total GLA will be 6,000 sq m. The expected time of delivery is the end of 2012 or beginning of 2013. Intesa Bank announced construction of its office building at the

10.0% 8.0% 6.0% 4.0% 2004 2005 2006 2007 2008 Class B 2009 2010 1H 2011

corner of Mihajla Pupina Boulevard and Tresnjinog cveta Street in New Belgrade (block 11a). The construction works should be commenced during 2H 2011 and expected time of completion is the end of 2013.

Forecast
The lack of new supply together with a weak economic recovery will stabilize the office market in 2011, but a return to a significant growth and expansion is unlikely to happen before 2013. Foreign Direct Investments (FDI) is still relatively quiet, so the demand expansion is likely to be limited during 2011. Rents are expected to remain under pressure throughout 2011, but further rent corrections are not likely. The trend of high ratio of lease renewals is expected to continue in 2011. Growing uncertainty in the European market will certainly be transferred to Serbia, further slowing the recovery. Therefore, expansionary demand will be limited in the second half of 2011. The reduced office development pipeline during 2012/2013 (30,00053,000 sq m of GLA) with improved occupier outlook, would suggest better absorption of todays stock and decline in the overall vacancy rate. This slow recovery combined with the supply slowdown could set the scene for a slight increase in rents, starting from 2012. The overall impression is that Belgrade office market shows a good outlook in the medium run.
Pipeline projects

Class A Source: LeRoy Research

Office yields seem to have bottomed out in 2010, and we noticed slight downward movement in the first six months of 2011. If the existing stock remains stable, average rents are not expected to decline further, especially in the prime office segment. Otherwise, the prime rents will come under further pressure. The same applies to yield.

Pipeline
Regarding new deliveries, the current year will indicate the slowdown of the office market. Two large scale CBD projects, scheduled for delivery in 2010, have been postponed with the unknown delivery date. Also, a few smaller projects are close to completion, but the time of opening is still unknown. About 53,000 sq m of GLA (speculative space) is under construction and expected for delivery during 2012/13. Pipeline projects:
Project Tri Lista Duvana Atlas B 23 Raiffeisen bank Intesa Bank Falkensteiner building Source: LeRoy Research
*GBA

Location Downtown Downtown New Belgrade New Belgrade New Belgrade New Belgrade

Size (Sqm of GLA) 8,000 4,000 35,000 15,000 30,000* 6,000

Investor MPC Atlas Group Verano Group Raiffeisen bank Intesa Bank Falkensteiner Group

Delivery date 2012 2011/2012 Unknown 2012 2013 2012/2013

Real Estate Market & Trends Outlook | 7

Real Estate Market & Trends Outlook | 8

Retail

Market & Trends

The second half of 2010 marked the entrance of a few new brands in high street locations which slowly reabsorbed vacant premises and indicated on a healthy increase of occupier activity. However, the beginning of 2011 brought the stabilization of demand. Vacancy in the prime locations remains scarce. In contrast, vacancy in secondary locations is rising. Downward pressure on rents continued in the first half of 2011 and overall rental growth remained negative. Supermarket chains are still dominant players in the retail segment.
Growth of unemployment has continued in the first six months of 2011 and together with consumer price growth led to a further decrease of consumer expenditure. According to the data published by the Statistical Office of the Republic of Serbia, the retail trade turnover in Serbia in June 2011, declined by 16% in constant prices compared to the same period in 2010. For the period January-June 2011, the retail trade turnover declined by 13% in constant prices, compared to the same period last year. Unemployment rate increased 3% in six month period and amounted to a total of 22.2% in April 2011.
Structure of retail sales in Serbia, 1Q 2011
Food & non-alcoholic beverages Tobacco & alcoholic beverages Clothing & footwear 42.3% Furniture & household equipment Health care Transport & Communications Recreation & Culture 4.2% 4.6% 4.4% Education Household utilities & Fuels

The structure of retail sales indicates the changing structure of personal consumption in Serbia. The share of basic food items and overheads within the structure has increased, while the share of other items has mainly been reduced (compared to data from December 2010). These changes can be explained by the continuous weakening of the purchasing power. All these negative tendencies will keep consumer spending restricted, until real economy prospects recover. The most active segment will be retail warehouses dominated by supermarket developments.

Supply
After a visible slowdown in 2010, Serbian market has seen a slow supply recovery in 1H 2011. A dominant market segment throughout 2010 was retail warehousing (big-box developments), while new shopping center developments were mainly postponed. After a period of delay, 1H 2011 witnessed several new deliveries in Serbia and Belgrade. With only 100 sq m of modern shopping center space per 1,000 inhabitants, Belgrade is still an attractive market for various retailers looking for expansion within the region. The overall new supply (all retail segments) in Belgrade in 1H 2011 was app. 30,000 sq m of GLA which is an increase of cca 20% compared to 2H 2010; while in other cities in Serbia it was app. 45,000 sq m of GLA which is a similar level as 2H 2010. Supermarket chains are still the most common developments and significant transactions have taken place in this segment in 1H 2011. The largest transaction occurred in the first quarter of 2011 when Belgian supermarket chain Delhaize Group took over the local chain Maxi. The current market share of this chain is 22% in Serbia and 37% in Belgrade. The total value of transaction is cca EUR 930 million. In April 2011, Croatian chain Idea took over Slovenian chain Tus with 7 supermarkets. Also, Slovenian Mercator announced a possible takeover of the local supermarket chains: Familija and Jabuka.

10.7% 16.4%

0.9% 3.5%

9.1%

3.9%

Source: Statistical Office of the Republic of Serbia

Real Estate Market & Trends Outlook | 9

1H 2011

Apart from Delhaize, in the first quarter 2011, German discount retailer Lidl announced its market entry. Considering all these recent changes, we can conclude that Serbian retail market is preparing for another stage of market competition and going toward
Sq m of GLA

Shopping center stock in Belgrade

160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0
2002 2003 2004 2005 2006 2007 2008 2009 2010 1H 2011

more open and mature phase. Expansion of supermarket chains was similar to the previous year. The Slovenian Mercator had the largest expansion. They opened two Roda Cash & Carry in Mladenovac and Smederevo, Roda Center in Vrbas and two Roda supermarkets in Smederevska Palanka and Velika Plana. With acquisition of the business system Coka in August 2010 they received 22 buildings and cca 12.000 sq m. In 2011 Mercator announced opening of Roda Center in Jagodina and Krusevac. The market share of Mercator is cca 10%. The German chain Metro Cash & Carry opened their seventh

Source: LeRoy Research

Big-box stock in Serbia & Belgrade

500,000

Sq m of GBA

overall, but the third hypermarket in Belgrade. The hypermarket is located in Vidikovac area Ibarska Road and the opening was in June 2011. The Croatian chain Idea opened supermarkets Idea Super in Belgrade, Novi Sad, Jagodina and Kragujevac. They opened small format markets (200-600 sq m) in Belgrade, Zemun, Novi Sad, Topola, Cacak, Svilajnac. The Greek chain Veropoulos opened a hypermarket in Vojvode Stepe Street, Belgrade, in April 2011.

400,000 300,000 200,000 100,000 0

2004 2005 2006 2007 2008 2009 2010 1H 2011

Serbia*

Belgrade

Source: LeRoy Research

*without Belgrade

Belgrade
Shopping center developments were more active in 2011. In March, the shopping center Forum was opened in Nis pedestrian zone. A month later, the shopping center Mladenovac, known as TCM, was opened in Mladenovac. In June, Roda center was opened in Vrbas. The second stage of the retail park AVIV was opened in Pancevo in June 2011. The only shopping center delivered in 1Q 2011 in Belgrade is the neighborhood center in Vozdovac area called Pasino brdo center. Danish chain JYSK, which sells everything for the home, entered the market in 2011. The first store they opened in Subotica in April, while in June they opened its second store in the retail park AVIV in Pancevo. After a period of stagnation, newcomers started to appear on the market, which can be a good example to other retailers. 1H 2011 was characterized by the entry of new supermarket chains: Delhaize and Lidl and a slow revival of shopping center developments. A lot of announced projects are still waiting for commencement of construction. The developers are faced with a problem of securing project financing, which will further reduce the market activity. The German chain Metro Cash & Carry opened the third hypermarket in Belgrade in June. The building is located along Ibarska Road in Vidikovac area and consists of 13,500 sq m of GLA. The French DIY chain Mr. Bricolage continued expansion and the opening of their first store in Belgrade in the shopping center Pasino brdo (3,000 sq m) is expected soon. The Croatian chain Idea continued its expansion in Belgrade and Serbia by acquisition of Tus supermarket chain. In April 2011 they opened a renovated supermarket (ex Tus supermarket) in block 62, New Belgrade and small markets in New Belgrade, Zemun, Cukarica, Zvezdara (350 650 sq m). The modern shopping center stock is being supplemented with a new development bringing total stock to 160,000 sq m of GLA. Neighborhood shopping center Pasino Brdo in Vozdovac was opened in the first quarter of 2011 bringing 6,500 sq m of GLA. The tenants are: Roda supermarket, Chacarel perfumery, XXL Design, caf, etc. The investor is the local company Novi Dom. In April 2011, the Greek chain Veropoulos opened its fourth hypermarket in Belgrade with 7,000 sq m of GLA. The market Vero is located in Vojvode Stepe Street, in Vozdovac municipality.

Real Estate Market & Trends Outlook | 10

Serbia
The Croatian chain Idea continued expansion in 1H 2011. They opened the supermarkets Idea Super in Jagodina (1,500 sq m), Kragujevac (1,500 sq m) and Novi Sad (1,500 sq m) in April, and small markets (200-600 sq m) in Novi Sad, Topola, Cacak, Svilajnac. The Slovenian Mercator opened Roda Cash & Carry in Mladenovac (4,500 sq m) in April and Smederevo (2,500 sq m) in May 2011. They opened Roda supermarket in Smederevska Palanka (1,400 sq m) in March. In June, Roda center (5,000 sq m) was opened in Vrbas. A new store concept, a super market and technique center was introduced in January in Velika Plana and Smederevo. The shopping center Forum (10,000 sq m of GLA) in Nis pedestrian zone was opened in March 2011. The entire property consists of 17,000 sq m which is structured as a retail and office space. The retail space occupies the ground floor and two floors. Another two floors are designed as office space (7,000 sq m of GLA). The tenants are: New Yorker, Peacocks, Deichmann, Replay, Guess, Camper, Timberland, Liu Jo, etc. The investor is the local - Fashion Company. In April, the shopping center TCM was opened in Mladenovac, (8,800 sq m of GLA). The tenants are: Roda supermarket, New Yorker, Takko, Deichmann, Sport Vision, Dexi Co kids, etc. The investor is the Croatian company RIMC. The second stage of the retail park AVIV (8,000 sq m of GLA) in Pancevo was opened in June. The tenants are: New Yorker, Takko, Peacocks, Tref sport, Deichmann, etc. The investor is the Israeli company Aviv Arlon. Danish chain JYSK, which sells everything for the home, opened the first store (800-1,200 sq m on average) in Subotica in April, while in June they opened their second store (800-1,200 sq m on average) in the retail park AVIV in Pancevo.
New retail deliveries Project
Pasino Brdo Forum TCM Roda Center AVIV retail park JYSK JYSK Metro Cash & Carry Vero Idea Super Idea Super Idea Super Idea Super Roda Cash & Carry Roda Cash & Carry Roda Mr. Bricolage Source: LeRoy Research
* 7,000 sq m is office space ** the second stage ***typical size of JYSK retail space

Demand
The first half of 2011 continued the slow pace of recovery. The retailers are still very cautious regarding expansion and many of them have adopted more feasible and reasonable investment strategies. Many new retailers started to think strategically and seize good opportunities under favorable terms. Anchor retailers are active in the market, but they continue to ask for incentives from the investors to enter new projects, such as rent free period, space fit-out, etc. Despite the reduced demand, vacancy is low since the market is still far from saturation. The shopping center stock of only 100 sq m per 1,000 inhabitants indicates that Belgrade retail market is substantially undersupplied compared to the region, which is an explanation of certain market stability. A demand for shopping centers & high street begins to reappear slowly and is mainly driven by international fashion operators. Vacancy in the prime locations remained moderate, but secondary locations have experienced increase of vacant units. Also, a demand for large units is more constrained, usually leading to their long vacancy. A trend of changing tenants continued through 2011 influencing the increase of vacant units that had been unoccupied for more than 4 months. High Street locations witnessed slight slowdown with opening of a few new stores as well as relocation of the few existing tenants. New brands such as Sephora, Lush and Evro Giunti opened in Knez Mihajlova Street and Laguna reopened in Kralja Milana Street. New openings are expected in Knez Mihajlova Street soon, such as the first GAP store.
New high street openings
Size (Sqm of GLA)
6,500 10,000* 8,800 5,000 8,000** 800-1,200*** 800-1,200*** 13,500 7,000 1,500 1,500 1,500 1,500 4,500 2,500 1,400 3,000

Location
Vozdovac Nis Mladenovac Vrbas Pancevo Subotica Pancevo Vidikovac Vozdovac New Belgrade Jagodina Kragujevac Novi Sad Mladenovac Smederevo Sm. Palanka Vozdovac

Type
Shopping center Shopping center Shopping center Shopping center Retail park Everything for the home Everything for the home Hypermarket Hypermarket Supermarket Supermarket Supermarket Supermarket Supermarket Supermarket Supermarket DIY

Delivery date
1Q 2011 Mar-11 Apr-11 Jun-11 Jun-11 Apr-11 Jun-11 Jun-11 Apr-11 Apr-11 Apr-11 Apr-11 Apr-11 Apr-11 May-11 Mar-11 Pipeline

Tenant
Sephora Lush Evro Giunti Laguna GAP

Type
Perfumery Perfumery Bookstore Bookstore Fashion

Location/Street
Knez Mihajlova St. Knez Mihajlova St. Knez Mihajlova St. Kralja Milana St. Knez Mihajlova St.

Opening date
May-11 June-11 June-11 2011 Announced

Source: LeRoy Research

The demand in the retail warehousing segment is rather stable, but more focused on Belgrade. Retailers in the food segment are the most active. A few international as well as local chains have recognized the market moment and started further expansion, such as the Greek Veropulos, the German Metro Cash & Carry, the Croatian Idea, the Slovenian Mercator and the French Interex.

Real Estate Market & Trends Outlook | 11

Many new retailers have announced their market entry during 20112013, such as the French chain Carrefour, the Swedish Ikea and the German DIY chain OBI. Demand is dominantly focused on Belgrade market, while expansion to secondary cities is still cautious. However, expected improvement in the economic outlook is encouraging healthy retailers to continue with their strategic expansion plans. The demand for retail space and number of transactions are expected to increase in 2011. We can expect a healthy level of demand in the prime locations, while the demand for secondary locations will fall further. However, the retail market recovery cannot be expected until

Kralja Milana and Knez Mihajlova Street) have dropped to average EUR 40 to EUR 90 per sq m, depending mainly on the size and position of the unit (smaller units maintain higher range of average rents). Secondary locations rents move between EUR 15 to EUR 40 per sq m on average. Due to slow economy recovery in 2011, general rental growth is unlikely. We can expect a gradual rental market recovery from the second half of 2012, helped by lower vacancy levels.
Prime rents in Belgrade
150
EUR/sq m/month

the living standard and overall economy has been genuinely improved, which is not expected in 2011.

100
85.0

Vacancy
The vacancy rate is rather stable and a very low number of unoccupied units was recorded in prime locations. Secondary locations recorded rising vacancy. Considerably depressed rents encouraged new retailers to enter the market pushing the vacancy rate lower. The overall vacancy (primary and secondary locations) is approximately 7%.

50

50.0 35.0

0 Knez Mihajlova St. Terazije & Kralja Milana St. Kralja Aleksandra Blvd.

min
Source: LeRoy Research

max

average

Shopping center rents in Belgrade

70 60

EUR/sq m/month

The main shopping centers serving as dominant retail destination continue to sustain high occupancy levels. The prime shopping center vacancy is almost zero, but we noticed the trend of changing tenants that continued in 2011. Secondary properties recorded an increase of vacant units. However, this zero vacancy in the prime properties can be explained by more flexible landlords approach, as well as by the low level of development that has been started over recent years. Despite the positive movements, we can conclude that the market has still not done with contraction.

50 40 30 20 10 0
Hypermarket Anchor tenants

50.0 40.0 32.5 27.5 17.5 8.5

Mini anchors Inline tenants Small inline (100-200 sq m) tenants Services

55.0

32.5

Cafes

Food court

min

max

average

Source: LeRoy Research

Indicative retail yields, 1H 2011

9.00% 9.75%

Rents
The retail market continued to experience declining rental rates and now seem to have bottomed out. Depending on the location, lease rates dropped 30-55% from the 2008 peak level or 3-5% compared to the end of 2010. The prime rent in shopping centers has been following a stabile path, while high street rents experienced certain corrections. This downward pressure on lease rates will remain, while the rent relief and renegotiated leases will continue in the third quarter of 2011. Landlords are forced to offer better commercial conditions such as contribution on their fit out, length of lease, turnover rent, etc. Shopping centers rents maintained mostly the similar levels from EUR 30 to EUR 60 per sq m. Downtown prime street rents (Terazije,

10.00%

8.00%

5.00%

0.00% High street Shopping center Retail warehouse

Source: LeRoy Research

Pipeline & Announced

New deliveries announced for 2011/2012 indicate a slow market activity. Many large scale projects announced in Belgrade and other cities have been postponed with uncertain beginning of construction.

Real Estate Market & Trends Outlook | 12

The company Plaza Centers reactivated construction of a shopping mall in Kragujevac which initially started in autumn 2008. The shopping mall will offer 28,000 sq m of GLA and will contain more than 100 stores and an entertainment center. The expected time of completion is 2012. In 2010, Delta Holding Company commenced the construction of Retail Park in Kragujevac. The development will comprise 23,000 sq m of GLA and the first stage holding Tempo hypermarket (9,500 sq m of GLA) was opened in November. The second stage of construction will be completed during 2011.

Forecast
Despite the ongoing obstacles, Serbian retail market takes the lead over other real estate segments. Therefore, we anticipate a slow but steady improvement in the period to come. In the short term the market will experience a slowdown, since many proposed developments cannot secure financing and tenants. The development pipeline is progressing in 2011/2012 after a period of stagnation. The main focus of retailers is still Belgrade where the spending

Belgrade Outlet Center is currently under construction in Indjija with 30,000 sq m of GLA. The investor is the company Black Oak Development and the expected time of delivery of the first stage holding 15,000 sq m is postponed for March 2012. The Israeli company BIG CEE commenced in June the preparation works for development of a shopping center in Novi Sad. The shopping mall will consist of 30,000 sq m of GLA and will be located in the industrial zone of Novi Sad. The expected time of completion is the second half of 2012. The AVIV Retail Park in Pancevo announced construction of the third stage that will have approximately 10,000 sq m of GLA and the start of construction is scheduled for the end of 2011. The expected time of delivery is May 2012. The overall development will contain 30,000 sq m of GLA. The investor of the project is the company Aviv Arlon. German DIY chain Bauhaus announced its entry into the Serbian market. They signed a contract with the local company Delta Real Estate to build the first retail outlet in Serbia as a part of a future retail park with the total area of 70,000 sq m of GLA. The construction start is scheduled for the beginning of 2012. The building will have 20,000 sq m of GLA and will be located in Block 53 in New Belgrade. The expected time of completion is the second half of 2012.

power is stronger, but there is a re-emerging demand for other cities. Total retail sales will remain weak in 2011 as the primary catalysis of spending stays weak, especially job creation. Retailers will lack the confidence to expand aggressively due to considerable uncertainty attaching to the short term outlook. However, we expect an increase in tenant demand for top-quality retail assets, while the difference between prime and secondary properties will continue to widen. Very soon we can expect limited opportunities for many new retailers to secure good units, especially in Belgrade and the problem could become even higher if the supply of new shopping centers or other retail formats remains restricted in the future. As a result, the supply side will be a key driver of rental recovery.

Projects under construction Project

Plaza Centers Delta Park Belgrade Outlet center BIG CEE AVIV retail park Bauhaus Source: LeRoy Research
* The first stage (hypermatket) was opened in November 2010 ** The first stage (15,000 sq m of GLA) will be completed during 2012 *** The third stage (cca 10,000 sq m of GLA) will be completed in 1H 2012

Location
Kragujevac Kragujevac Indjija Novi Sad Pancevo Belgrade

Type
Shopping mall Retail park Outlet center Shopping mall Retail park DIY

Size (Sqm of GLA)

28,000 23,000* 30,000** 30,000 30,000*** 20,000

Delivery date
2012 1H 2011 1H 2012 2H 2012 Announced Announced

Real Estate Market & Trends Outlook | 13

Real Estate Market & Trends Outlook | 14

Industrial

Market & Trends

The logistics market in the first six months of 2011 has not seen improvement despite the modest supply of new space and stabile vacancy. A slow economic improvement and a scarce expansion leave little room for recovery even in 2011. Positive developments in the segment of industrial production have yet to translate into a heightened tenant demand for the industrial and logistics space. However, widespread movement in the industrial market will likely not occur until 2012.
The industrial production in Serbia marks a positive development during 2010-2011 periods. The industrial production recorded the 3.3% increase in June 2011 compared to the same period last year. Compared to the period January-June 2011/2010, the industrial
Sq m
500,000 400,000 300,000 200,000

During 2009, a new supply in the wider Belgrade area contracted to app. 30,000 sq m compared to the previous annual average of 60,000 sq m. Similar level of construction continued through 2010. New development still remains subdued at less than 50% of peak levels. The overall new logistic/industrial stock in Serbia increased by 350,000 sq m or 23% in 2010. Persistently tight financing conditions, a mediocre demand and a fragile outlook, as well as falling rents and high yields, are making new developments difficult to justify. The estimated stock of contemporary logistic/industrial space in Belgrade wider area is 360,000-390,000 sq m, which indicates a relatively low development level of this market segment. Developers were faced with difficulties in obtaining finance and unsecured leasing prospects, which kept new completions low during 2010. However, growth prospects are already visible in industrial sector especially in central and southern region.
Modern logistics stock in Serbia

production increased by 4.8%. Future high prospects for industrial/logistics developments can be explained with a favorable country position on strategic corridors 10 and 7 that connect Western Europe with the Middle East. The industrial/logistics zones with the highest development potential are along the highway E-75 and E-70 (Vojvodina Region) and Central and Southern Serbia (Kragujevac and Nis).

100,000 0
2005 2006 2007 2008 2009

Total

Central Serbia

Vojvodina

Source: Statistical Office of the Republic of Serbia

Supply
1,800,000

Modern industrial & logistics stock in Serbia

A new supply of industrial & logistics space continued weak industrial segment in the first 6 months of 2011. The number of issued construction permits in Serbia for industrial & logistics developments in 2010 decreased by 31% compared to 2009. Therefore, the overall stock will remain relatively stable in 2010/2011 and speculative developments are still missing from the market. The total stock of the modern logistics space in Serbia is 640,000 sq m, while the stock of the modern industrial space is 1,200,000 sq m.
Sq m

1,500,000 1,200,000 900,000 600,000 300,000 0

2005 2006 2007 2008 2009 2010

performance during 2010-2011, with improved prospects in

Total

Industrial

Logistics

Source: Statistical Office of the Republic of Serbia

Real Estate Market & Trends Outlook | 15

1H 2011

Industrial & logistics construction permts issued in Serbia

400

Demand
After a considerable decrease in occupier demand, we noticed certain market stabilization, but the ratio of new leases is still low. Occupiers are mainly focusing on modern space offering the adequate ceiling height, a wide manipulation area, a flexible layout and a good road connection. The demand is mainly generated by automotive, distribution, pharmaceutical and FMCG companies and average space requirements are between 1,000 and 3,000 sq m. The highest

Number of permits

300 200 100 0

2006 2007 2008 2009 2010

demand is still focused on locations along the highway E-70 and E75. The slow economic recovery and rising industrial production

Total

Logistics

Industrial

Source: Statistical Office of the Republic of Serbia

Industrial & logistics construction permts issued in Belgrade

30

stabilized property performance in the first half of 2011 but positive effect on the market is yet to be witnessed.

Number of permits

25 20 15 10 5 0
2006 2007 2008 2009 2010

Vacancy
Despite the decline in development activity and scarce speculative completions in 2009-2011 period, the lower demand created an increase in vacancy. Since the occupier demand is focused primarily on the modern stock, the majority of vacant space is concentrated in old buildings. The estimated vacancy in wider Belgrade area is between 10-12%. Due to the low level of new supply, the vacancy rate is expected to decline.
Total Logistics Industrial

Source: Statistical Office of the Republic of Serbia

Car installation manufacturer, Korean company Yura Corporation, opened its second factory (20,000 sq m) in June in Nis. The total investment is EUR 15 million. The Japanese company Panasonic opened its factory (18,000 sq m) in January in Svilajnac. The factory will produce energy efficient electronic components. The total investment is EUR 15 million. New infrastructural developments, such as the construction of the new part of Corridor 10 (Horgos Novi Sad); the highway Batocina

Rents
Asking rental rates decreased 20% to 30% on average compared to the peak level (2008). The rents have stabilized in 2011 and we do not expect further rental pressures especially if we consider the reduced new supply.
Modern warehouse rents in Belgrade & wider area
5.0

EUR/sq m/month

Kragujevac; the construction of the Ring road in Belgrade and the construction of a new Bridge over the Sava River will provide better conditions for logistic developments. Many new developments can be expected along the highway E-75 and E-70 (Zemun, Surcin, Dobanovci, Simanovci, Krnjesevci area) and Belgrade Ring Road. Local and international developers have already acquired large land plots along the main corridors, and within industrial locations in Belgrade and other Serbian cities. Most of these (announced) developments have been postponed for a while and we can expect a strong pipeline in years to come.

4.0 3.0 2.0 1.0 0.0

4.1 3.5 3.0 2.5 2.5 3.0 3.3

Zemun

Dobanovci

Pecinci

St. Pazova

Krnjaca

Lestane Downtown

min Source: LeRoy Research

max

average

The rental levels for contemporary warehouses depend on location and the highest rents are recorded in New Belgrade and Zemun area between EUR 4 and EUR 4.5 per sq m per month. The modern logistics space in the wider area (Dobanovci, Pecinci, Stara Pazova) is

Residential Market & Trends Outlook | 16

in the range from EUR 2 to EUR 3 per sq m per month. Along Pancevo Road new warehouses achieve rents from EUR 3 to EUR 4 per sq m per month. The rental levels for old warehousing facilities also depend on location, but are generally in the range between EUR 1 and EUR 2.5 per sq m per month. The highest rental range is recorded in the downtown area (old facilities) from EUR 2 to EUR 4 per sq m per month, while newer and better maintained facilities range from EUR 4 to UR 4.5 per sq m per month. Due to the constrained new supply, we will see further balancing of supply and demand levels, and therefore a possibility for a moderate rent increase in 2012.

It is important to note that existing companies in the market have announced new investments in 2011, such as US Steel Serbia (EUR 51 million), Gazprom Neft (EUR 450 million), Fiat (EUR 600 million), etc. Also, many new foreign companies showed interest for investing in Serbia. Potential investors are mainly from the automotive and textile industry. If these announced investments realized in the announced amount in 2011-2012, the industrial & logistics market will witness a significant improvement. However, following the previous path of development we are not expecting considerable changes on the market in the next 6 months. The announced new investments will set the stage for economic and employment growth, which will drive the development of industrial & logistics sector in 2012-2013.

Pipeline & Forecast

The north section of corridor 10 that will connect Novi Sad and Horgos (Hungarian border) and Beska Bridge will be opened by the end of September 2011. The deadline for completion of the southern part of the corridor 10 is 2014. The highway that will connect Kragujevac and Batocina will be developed by June 2012. With strategic infrastructure developments, especially the corridor 10, Serbia will strengthen its position on European logistic map. Many proposed developments have been postponed with uncertain time of commencement. Improving macroeconomics will support occupier demand over the medium term. The investment of the Italian company Fiat into automotive industry generated more demand for industrial premises in central and southern Serbia. Mass production is announced for spring 2012 and will reinforce development of Kragujevac region. In June 2011 Fiats cooperator companies Jonson control, Promo magnietto, Sigit and HTL started construction of production halls. They will produce seats, plastic parts and tires and the total investment is estimated to more than EUR 100 millions. Expected completion is 1H 2012. The largest Fiat cooperator, the company Magneti Marelli from Italy announced development of its factory in Kragujevac for 2011. The investment is estimated to EUR 60 million. The other announced Magneti Marelli factory will start in cooperation with Jonson control. In May 2011, Italian Benetton bought the textile factory Nitex in Nis for EUR 3 million. Benetton announced expansion of its activities in the next four years and plans to invest EUE 43 million.

Residential Market & Trends Outlook | 17

Residential Market & Trends Outlook | 18

Residential

Market & Trends

Following modest activity during 2010, weak economic and household conditions depress further the already volatile housing market in the first half of 2011. The number of housing loans issued in the first six months was reduced by 18% over the same period last year. New measure of the National Bank of Serbia to increase the mandatory deposits for housing loans to 20% will adversely affect the demand in the second half of the year. In the short term, the demand and transaction volumes are not expected to recover leading the way to another price correction.
Supply
Residential development completions in Belgrade decreased for 12%, falling from 5,759 apartments in 2009 to 5,048 in 2010. Compared to previous two years, many new projects are announced and presented to the public, with expected completion in 2012-2013. However, development of the economic situation during the year will certainly determine whether such projects will be implemented within the prescribed deadlines. A visible decline in number of completions in 2010 and reduced number of issued building permits in 2009-2010 period, indicate that the overall annual delivery in 2011 will be similar with possibility of lower growth.
38% 26% 11% 26%

Number of constructed apartments in Serbia & Belgrade

20,000 16,000 12,000 8,000 4,000 0 2004 2005 2006 Serbia 2007 Belgrade 2008 2009 2010
7,292 4,977 7,379 7,601 7,306 5,759 18,162 16,388 16,417 19,049 19,815 19,103 18,648

Number of apartments

5,048

Source: Statistical Office of the Republic of Serbia

Number of constructed apartments in Belgrade municipalities

2,000
Number of apartments
1,966

1,600 1,200 800 400 0

1,011 935 558 600 364 276 659 432 293 313 504 214 237 171 152 77196 55 121 959 714

2009

2010

Source: Statistical Office of the Republic of Serbia

Structure of new apartments in Serbia, June 2011

Studio & 1 bdr 2 bdr 3 bdr 4 bdr & larger

As in the past few years, the largest development dynamic in 2011 within the immediate metropolitan area was recorded in Zvezdara, Vozdovac and Vracar municipalities. The most significant
Source: Statistical Office of the Republic of Serbia

construction slowdown was noted in New Belgrade (72% decrease) and Savski Venac (29% decrease).

Residential Market & Trends Outlook | 19

1H 2011

Many new developments are predominantly small in size with 10-20 apartments on average, lower to mid quality and smaller structure (30-45 sq m). The structure of new apartments remained almost unchanged.

seen during 2011 and we expect that many announced projects will be delayed as a consequence of unstable demand. The expected supply in Belgrade is estimated at app. 5,500 units in 2011. Despite a slight recovery of demand during 2010, the increase in

2010 statistics confirm a decline in number of issued building permits of 24% in Belgrade and 25% in Serbia, as a consequence of reduced demand as well as the introduction of the new Law on Urban Planning and Development in September 2009. Slower decline continued in 2011 with 600 permits issued in Serbia in the period January-April, which is a drop of 9% compared to the same period last year. It is expected that the number of issued building permits and building starts will be slightly higher in Q3 2011.
Residential construction permits issued in Serbia & Belgrade
4,000
Number of permits
3,113 2,129

unemployment registered in Q4 2010 and Q1 2011, and the increased number of people with the problem of servicing their borrowing liabilities will keep the demand restricted. A new measure of the National Bank of Serbia to increase the mandatory deposits for housing loans to 20% will negatively impact the majority of potential buyers.

Demand
Economy instability and rising unemployment have an effect on delaying home purchases, further depressing the medium term confidence of potential homebuyers. Lower affordability of

3,281 2,901 2,184

mortgages together with the new measures of the National Bank will further hinder transactions.

2,000
566 649 741 620 471 600

Positive market signs recorded through 2010 were short-lived. According to the statistics, the number of housing loans approved by the banks in Serbia in the first half of 2011 was reduced by 18% compared to the same period last year. The total number of approved loans in 1H 2011 is 3,986. The number of residential transactions in Belgrade is reduced again,

0 2006 2007 2008 Serbia 2009 Belgrade 2010 I-IV 2011

Source: Statistical Office of the Republic of Serbia

Residential construction permits issued in Belgrade municipalities

150
Number of permits
134 110

despite more favorable prices. Most of the active demand was focused on smaller, mid-end apartments, while the demand for larger and more luxurious units was significantly reduced. The similar situation can be also reflected on rental market. The demand

100

78 60 32

for affordable housing is likely to rise slowly especially for the government financed program of residential construction.
24 18 21 5 17 7 9 3 4 7 23 27 20 21 23

50

Economy instability and pressure on limited disposable income continue to dissuade potential buyers from entering the market. Pending any significant macroeconomic developments prices can

2009

2010

still decline. Any potential growth is expected to be highly location and asset specific. Residential segment of the market is heavily sentiment driven, so improvement can be expected when economic fundamentals improve. However, in the period to come, the demand will depend greatly on the government initiatives and buyers confidence, while prices increase still cannot be expected.

Source: Statistical Office of the Republic of Serbia

During the first half of 2011 several large scale developments were delivered. The second stage of the project Maxima in New Belgrade was completed bringing another 6,000 sq m. In April, the project Metropolitan in Palilula was delivered with 80 apartments. In Zvezdara area, two projects were completed during the first 6 months. The Prestige and Exclusive projects delivered new 18,000 sq m of residential space. We expect further market adjustments in 2011 in terms of supply and prices. However, the real impact of the crisis on the supply will be

Pricing
Following a considerable fall, housing prices show relative stability. The average price decline in the last 30 months is between 25-35%. The price decline is slowed in 2H 2010, but continued in the first six months of 2011 with an average correction of 3-4%.

Real Estate Market & Trends Outlook | 20

The highest price correction has occurred in the case of low to mid quality apartments in suburban locations, but a visible correction is obvious for the apartments in central locations, as well as high-end projects. In the mid-market segment the highest recorded decrease was in New Belgrade. Asking prices for mid quality projects depend mainly on municipality and micro location, and vary between EUR 1,300 1,900 per sq m. High quality development prices are on average EUR 2,200 3,000 per sq m. It should be noted that these price levels rely on the existing offer. Most of developers/sellers still prefer to keep higher asking prices, but are more flexible when negotiating with clients. Therefore, the effective price for a closed transaction can be up to 10-15% lower. Rental market has also experienced downward trend of demand and prices. The rent levels have decreased for approximately 30-35% since the beginning of the crisis. A considerable rent reduction is especially noted in the mid-market segment and in the segment of luxury rental homes. Rental decline continued in 1H 2011 and the average price decrease is 7-8%.
Average asking prices in Belgrade municipalities
3,500 3,000
EUR/sq m

Developed & Under Construction

Several larger projects currently under construction are expected to be delivered during 2012-2013 period. Most of the developments are designed for mid-market buyers. The government strategy for reviving the residential market and boosting the construction sector includes development of government financed residential complexes that will meet demand for the affordable housing. The location is in the area of Vozdovac (ex military base 4. July) with the development potential of 4,578 units. The construction of the first phase commenced in February 2011. The first stage is due for completion in spring 2012 and will bring 1,800 apartments, while 2,235 apartments will have been developed by the end of 2012. The announced price for the first time buyers are EUR 1,200 per sq m and shall be exempt from VAT, while for other buyers the price will be EUR 1,290 per sq m plus VAT. The preparation works for another large project (mixed use) in block 65, New Belgrade started in March 2011. West 65 complex will have an area of 150,000 sq m and will contain 514 apartments and 100 retail units. The first stage of construction should begin soon, while the entire residential part should have been developed by 2014. The apartments will be offered to mid-market buyers and the investor of this project is the company PSP Farman. Construction of the residential project Marmil Land in Vracar area

2,500 2,000 1,500 1,000 500

2,250 2,200

2,300 1,900 1,500 1,525 1,400 1,400

started in March 2011. The complex will have 3 lamellas with the total area of 18,000 sq m and will contain 159 apartments and 16 retail units. The investor of this project is the local company Marmil Inzenjering. The residential complex Alpha City started with construction in

min

max

average

May 2011 in Zivka Davidovica Street, Zvezdara. The complex will contain 7 lamellas with 299 apartments. The ground floor is intended for business units. The investor of this project is the company International Alpha Construction and the expected date of completion is the end of 2012 or the beginning of 2013.
Project Location
New Belgrade New Belgrade Palilula Zvezdara Zvezdara Dedinje New Belgrade Vracar New Belgrade Zvezdara Banovo Brdo

Source: LeRoy Research

Average asking rents in Belgrade municipalities

15.0 12.0
EUR/sq m
10.0

Size (Sqm of GBA)

16,000 6,000 15,000 9,000 44,000 11,500 20,000 18,000 150,000 32,000 19,000

No of Deadline units
130 80 99 550 73 84 159 514 299 153 2H 2010 1H 2011 1H 2011 1H 2011 2011-2013 2012 2012 2012-2013 2014 2012-2013 2013

9.0 6.0 3.0

8.3

8.3 7.3 6.5

Downtown

Vracar

Dedinje

New Belgrade

Zvezdara

min

max

average

Source: LeRoy Research

Maxima Center - I stage Maxima Center - II stage Metropolitan Exclusive Prestige* Koling Zeland Maxima Center - III stage*** Marmil Land West 65 Alpha City Golf 8** Source: LeRoy Research

* Fist stage of 9,000 is delivered in 1H 2011 ** Fist stage (50 apartments) should be delivered in 1Q 2012 *** III stage contains commercial part

Real Estate Market & Trends Outlook | 21

Announced
Another possible location for the government financed residential development is in the settlement Dr. Ivan Ribar in New Belgrade. The preparation of the site and documentation for the construction is announced for autumn 2011. The complex will bring new 768 apartments in 6 buildings. The announced price is EUR 1,300 per sq m. Expected time for completion is 2013.

Forecast
Performance of the housing market in 2011 will mainly depend on the stability of economic outlook, employment and government measures. There is a modest, visible revival of the residential investment activity in 2011 despite the low property fundamentals. Housing market will remain limited, and an excessive construction activity in 2011 cannot be expected since many developers still have the wait-and-see attitude. However, developers will be ready to introduce new products once the demand shows stability and steady revival. While there are question marks surrounding the short term outlook, we believe that Belgrade residential market has a strong medium and long-term perspective for further development. A visible fall in completions in 2009 and 2010 will continue in 2011 (expected delivery is app. 5,500 residential units). Despite a significantly smaller number of construction permits issued in 2009/2010 period, the construction of the government financed low cost apartments in Vozdovac will maintain the stability of supply and prices. If the announced construction of apartments in New Belgrade Dr. Ivan Ribar starts, that is likely to lead to postponement of some projects that are in the initial stage.

Real Estate Market & Trends Outlook | 22

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Real Estate Market & Trends Outlook | 23