Q2 2014 | INDUSTRIAL MARKET LATVIA, RIGA RESEARCH & FORECAST REPORT Supply In Q2 2014, industrial real estate stock was supplemented by an existing G31 industrial complex on Ganibu Dambis Street 31 (GLA approx 11,500). Development activity, which resumed from 2013, has continued. In 2014, we expect commissioning of Balt Cargo Solutions industrial property, consisting of approx 24,000 sqm of GLA with completion expected in Q3 2014. A number of projects with total GLA close to 66,800 sqm which are currently at the construction stage are planned for commissioning in 2015. Among them are a BLS industrial complex totalling approx 32,000 sqm of GLA, which was postponed from Q4 2014 to Q1-Q2 2015. Moreover, a project with 17,000 sqm of GLA is currently under construction by Merks for Polipaks, as well as industrial property on Plienciema 16 (GLA 3,000 sqm), Veju Roze 2nd phase in Vecmilgravis (GLA 4,800 sqm) and a built-to-suit project of Lexel Fabrika (GLA 10,000 sqm). Apart from that, 76,000 sqm are at the planning stage in a number of potential projects, among which the largest is VGP Phase 1 in Kekava parish (GLA 33,000 sqm). Moreover, Uralvagonzavod decided to implement the 2nd and 3rd expansion stages. 1 700 600 500 400 300 200 100 Existing Stock Additions to Stock 6M 2014 2013 2012 2011 2010 2009 2008 0 2007 Still, the development pipeline is quite impressive and development momentum continues. Activity in industrial real estate has been happening not only across Riga and Riga Region but also throughout Latvia, focusing on local regional centers. 900 800 2006 During Q2 2014, the Latvian industrial real estate sector was cautious in terms of demand as a result of ongoing political tensions between East and West. In terms of current global economic developments, the Latvian industrial sector is facing most of the challenges compared to other real estate sectors. The market worries that the most recent trade embargos will have a negative impact on transport and logistics companies, especially refrigeration traffic. Dynamics of Industrial Stock in Riga* 2005 Overview Thousand, sqm Q2 2014 Notable support for development has come from the Latvian Investment and Development Agency (LIAA), which issued approx EUR 8 mln co-funding to a number of industrial projects, including NP Jelgavas Parks, Plienciema 16 and others. Expected Construction * - dynamics of industrial stock at the end of the period Source: Colliers International Rent Rates* for Q2 2014 in Riga and Trends for 2014 CLASS 2013 Q2 2014 TRENDS FOR 2014 A B 3.8 - 4.5 3.0 - 3.6 3.8 - 4.5 3.0 - 3.6   * - asking rent rates (EUR/sqm/month) excluding VAT and operating expenses  - stable Source: Colliers International Vacancy Rates for Q2 2014 in Riga and Trends for 2014 CLASS 2013 Q2 2014 TRENDS FOR 2014 A B TOTAL 3.6 % 1.4 % 2.7 % 9.1% 1.5% 5.8%     - slight increase Source: Colliers International Research & Forecast Report | Q2 2014 | Latvia | Colliers International Vacancy By the end of Q2 2014, the total vacancy rate of industrial stock stood at 5.8 per cent compared to 3.3 per cent in spring 2014. An increase in vacancy is associated with the situation around UA Investor industrial property, which is still fully vacant since its commissioning in spring 2014, and NPD logistic park, which became vacant in Q2 2014. These two properties together generate approx 2 per cent of total industrial vacancy. Similarly to the situation in previous periods, some tenants occupying industrial premises are offering sublease opportunities. Rent rates During Q2 2014, rent rates for Latvian A and B class industrial premises remained at the level of spring 2014. Rent rates for A class industrial premises stood at 3.8-4.5 EUR/sqm per month with rent rates for B class industrial premises at 3.0-3.6 EUR/ sqm per month. 4 3 2 1 > Projects currently under construction are approaching completion and are leased out. > The current vast development pipeline will begin to materialize as soon as tenants ready to engage in prelease contracts are found. 6M 2014 2013 2012 B Class Distribution of Industrial Space by Size 100% 14 80% 60% 8 60% 40% >20,000 sqm 26 15% 20% 4,000 - 10,000 sqm <4,000 sqm 3% 0% Number of Industrial Objects 10,000 - 20,000 sqm 22% 9 % of Total Industrial GLA Source: Colliers International Distribution of Industrial Space by Type 12% 14% 43% Spec. Basis A Spec. Basis B 31% Built-to-Suit A Built-to-Suit B Source: Colliers International > In the present situation, rent rates are expected to remain stable; however, any additional trade embargos may trigger increase in vacancy, thus putting pressure on rent rates. 2 A Class * - asking rent rates (EUR/sqm/month) excluding VAT and operating expenses Source: Colliers International Trends > The most recent trade embargos will have a negative effect on some segments of the logistics business (e.g. transit business and refrigeration transport), creating additional competition. 2011 0 2010 Such low demand activity can be explained by the fact that Q2 has been a typical busy season for logistics companies, representing a significant part of demand. Therefore companies focused on their core business rather than acquisition or relocation of new warehouses. 5 2009 Potential tenants continued the tendency of searching for optimal value-for-money leasing offers and were tending to negotiate prices, even though actual deals were not concluded. 6 2008 During Q2 2014 demand was low, with the single biggest leasing transaction of 5,300 sqm. One of the major market highlights was the decision by a leading e-commerce platform from Russia – Wikimart – to establish part of their logistics activities in Latvia. Dynamcs of Rent Rates* in Riga EUR/sqm/month Demand Research & Forecast Report | Q2 2014 | Latvia | Colliers International 485 offices in 63 countries on 6 continents United States: 146 Canada: 44 Latin America: 25 Asia Pacific: 186 EMEA: 84 Authors: Eriks Bergmans | Partner Director, Brokerage Department Colliers International Advisors | Latvia Office Dmitrijs Kacalovs | Senior Analyst Research & Advisory Department Colliers International Advisors | Latvia Office K. Valdemara Street 21 Riga | Latvia Phone +371 6778 3333 Fax +371 6778 3334 E-mail [email protected] www.colliers.com $2.1 billion in annual revenue 1.46 billion square feet under management 15,800 professionals and staff About Colliers International Colliers International is a global leader in commercial real estate services, with over 15,800 professionals operating out of more than 485 offices in 63 countries. A subsidiary of FirstService Corporation, Colliers International delivers a full range of services to real estate users, owners and investors worldwide, including global corporate solutions, brokerage, property and asset management, hotel investment sales and consulting, valuation, consulting and appraisal services, mortgage banking and insightful research. The latest annual survey by the Lipsey Company ranked Colliers International as the second-most recognized commercial real estate firm in the world. colliers.com Copyright © 2014 Colliers International. 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. Accelerating success.