Property Times Retail property market in Ukraine Citius altius fortius

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1 Property Times Retail property market in Ukraine Citius altius fortius 7 November 211 Contents Executive summary Economic overview Retail property market in Ukraine general trends Kyiv Dnipropetrovsk Odessa Kharkiv Donetsk Lviv Simferopol Definitions Contacts Authors Marta Kostiuk Associate Director, Head of Research and Consulting +38 () marta.kostiuk@dtz.kiev.ua Contacts Magali Marton Head of CEMEA Research magali.marton@dtz.com Hans Vrensen Global Head of Research +44 () hans.vrensen@dtz.com Total population of Ukraine amounts to over 45.5 million inhabitants, making it the world s 28th most populous country. Out of 25 major regional centres, there are 5 cities with official population of around or over 1 million (Kyiv, Kharkiv, Dnipropetrovsk, Donetsk and Odessa), as well as 2 cities with populations over 7, inhabitants (Zaporizhzhya and Lviv). The first three quarters of 211 were marked by Ukraine s preparation for the EURO 212 Football Championship and generally positive economic dynamics in the country, including increasing household incomes and retail sales. Kyiv, Dnipropetrovsk, Odessa, Kharkiv, Donetsk and Lviv are considered major cities of Ukraine and have been attracting particular interest from major retailers, developers and investors. In November 211, total existing modern retail stock in these six cities exceeded 2.6 million, on average amounting to 325 per 1, inhabitants. The retail segment proved to be the most resilient to the effects of economic crisis in 28/9 compared to other property sectors in Ukraine, and demonstrated growth dynamics in Though new retail supply during 211 has remained generally low both in Kyiv and the regional cities of Ukraine, the years 212 and 213 are likely to see significant augmentation in new delivery in the sector, reflecting the strengthening confidence of the market players. Despite the remaining signs of the economic crisis and comparatively low incomes of the population, the potential of the retail property market in Ukraine undoubtedly remains high because of its immaturity in terms of quality and formats of existing retail schemes, large country size, high population density, perceived high brand awareness and propensity to spend. Figure 1 Modern retail stock in major cities of Ukraine Present stock Potential total stock in late 213** Note: All figures are year-end, covering both multi-tenant retail centres and big boxes *The figure for Donetsk includes total stock in the satellite city Makiivka **Based on existing and pipeline stock as of November

2 Economic overview The retail property market in Ukraine is tightly linked to general economic dynamics in the country and worldwide. Looking back Ukraine s economy has grown rapidly since 2. From 25 economic growth in the country was driven by strengthening domestic demand supported by credit boom and significant capital inflows. Though by mid-28 the economy in Ukraine was overheating with consumer price inflation at around 3% (to corresponding month in the previous year) and high exposure of banks to foreign funding, in the first three quarters of 28 it showed remarkable resilience to the global credit squeeze, mainly as a result of strong domestic demand. Since early October 28, deteriorating conditions on the international financial markets with resultant slowdown in capital inflows in Ukraine combined with political instability in the country, surging inflation, weakening of the hryvnya against the US dollar on the background of the dollarised economy and high imports, increasing interest rates, falling export prices for steel and poorly diversified Ukrainian economy with overreliance on exports of raw materials and metallurgical sector, resulted in a reduction in private consumption in the country. In late 28, the Ukrainian economy was plunged into a deep downturn with the first signs of stabilisation only witnessed in autumn 29, caused by seasonal dynamics. The economy of Ukraine was hit hard by the global financial turmoil. The decrease in real GDP at 14.8% in 29 was the deepest since 1996, when the national currency hryvnya was launched. The Ukrainian economy demonstrated clear signs of recovery in 21 with economic growth in the country registered at 4.2%. In 21, international and domestic confidence in the country gradually improved. Among the main reasons for this were the obtaining of a new Stand- By Arrangement from the International Monetary Fund (IMF) and completion of the Presidential elections. The first three quarters of 211 were marked by Ukraine s preparation for the EURO 212 Football Championship and generally positive economic dynamics in the country. Nevertheless, the international ratings of Ukraine worsened owing to the country s failure to comply with the requirements of the International Monetary Fund (IMF), as well as political risks accentuated by legal proceedings against former Prime Minister Yulia Tymoshenko. Figure 2 Major macroeconomic indicators in Ukraine % Source: Oxford Economics Figure 3 GDP growth Inflation Annual growth dynamics of the selected economic sectors in Ukraine in January-September 211 % year-on-year Retail Agriculture Industrial production Mining Machine building Metallurgy Light industry Food processing Processing industry Source: State Statistics Committee of Ukraine Economic growth -2,2% 6,7% 8,6% 9,3% 9,6% Unemployment Industrial production 11,7% 15,2% 13,7% 2,4% -5% % 5% 1% 15% 2% 25% According to the State Statistics Committee of Ukraine, real GDP increased by 6.6% year-on-year in the third quarter of 211 compared to the economic growth of 5.3% and 3.8% in the first and the second quarters of the year respectively, and 4.2% in 21. Economic growth was mainly driven by growth in industrial production, particularly its export-oriented industries, as well as retail sector and agriculture. As stipulated in the 211 State Budget of Ukraine, an increase in real GDP is forecast for 211 at 4.5%. Oxford Economics projects economic growth in Ukraine at 4.8% year-on-year in 211. According to the draft 212 State Budget of Ukraine, an increase in real GDP is forecast at 5%, while Oxford Economics project the 5.9% economic growth for

3 Economic overview Inflation In September 211 consumer price inflation reached 4.2% compared to December 21. In January-September 211 consumer prices grew by 9% year-on-year with the significant price escalation registered for food products and soft drinks, as well as housing and utility services, which together account for over 6% of total household expenditures in Ukraine. The 211 State Budget of Ukraine was based on the projection that consumer price inflation will reach 8.9% at the end of the year. Major Ukrainian and international experts forecast year-end inflation in the range of % compared to the actual 9.1% in 21 and 12.3% in 29. According to Oxford Economics, inflation in Ukraine will amount to 8.8% in 212 and 6.7% in 213, and is projected to be around 5.5% every year during the period from 214 to 22. National currency In accordance with the official US Dollar exchange rate determined by the National Bank of Ukraine, the Ukrainian Hryvnia depreciated insignificantly, from UAH/US$ in early January 211 to UAH/US$ in late September 211. The Ukrainian currency also weakened against the Euro from UAH/EUR in January 211 to UAH/EUR in March 211, but strengthened by late September 211 to UAH/EUR. According to the decree issued by the National Bank of Ukraine, from 23 September 211 the new rules of foreign currency exchange by individuals in Ukraine were introduced to accommodate the requirement to present identity documents prior to each currency exchange transaction, while the limitation to exchange maximum UAH 15, per day (instead of UAH 8,) was set. Foreign trade and foreign direct investment According to the State Statistics Committee of Ukraine, exports and imports of goods in Ukraine increased during the period January-July 211 by 4% and 46.7% year-onyear respectively. The exports to imports ratio during the period was around.85. The National Bank of Ukraine reported that net inflow of foreign direct investment (FDI) into Ukraine amounted to around $4,52 million in January-August 211, almost 49% higher the figure registered during the same period in 21. The most attractive sectors for foreign investment into Ukraine are the financial sector, industrial production, real estate, retail sector, construction, transportation and communication. Figure 4 Consumer price index in Ukraine by categories* Source: State Statistics Committee of Ukraine *The figure provided for January-September 211 compared to the same period in 21 International cooperation In 28, Ukraine joined World Trade Organisation. Since May 28 Ukraine has been in negotiations with the EU for a free trade agreement as part of a future Association Agreement. The 18 th round of negotiations between the parties started in September 211. EURO 212 In late 29, the UEFA Executive Committee confirmed Donetsk, Lviv and Kharkiv as host cities for group matches of UEFA EURO 212, while Kyiv was appointed the venue of the final match of the tournament. Despite existing obstacles such as the after-effects of the financial crisis, high borrowing costs and imperfect legislation, Ukraine has been undertaking a wide spectrum of preparation works for the event. These include construction of new stadiums, and upgrade and extension of the airports in the host cities, improvement of the motorways of international importance across Ukraine, as well as enhancement of hospitality sector development in the country. Unemployment Consumer price index Restaurants and hotels Education Leisure and culture Communications Transport and ancillary goods Health care Furniture and home appliances Housing and utility services Apparel and footwear Alcoholic drinks Food and non-alcoholic drinks 99,7 13,7 12,6 11, ,9 11,1 16,8 17, ,2 118,5 In accordance with the ILO methodology (that defines unemployment based on the population 15-7 years of age), unemployment rate in Ukraine amounted to 8.2% in January-June 211 compared to 8.1% in 21, 8.8% in 29 and 6.4% in 28. Oxford Economics projects unemployment in Ukraine to decrease gradually from 7.8% at the end of 211 to 6.4% in 22. The unemployment rate varied significantly throughout Ukraine: from 11.5% in Rivne oblast to 5.9% in Kyiv City. 3

4 Economic overview Demographic situation Ukraine comprises 24 administrative regions (oblasts) and the Autonomous Republic of Crimea. Total population of Ukraine amounts to over 45.5 million inhabitants, making it the 28th largest country worldwide. Over 68% of total Ukrainian population reside in cities and towns, while remaining 32% - in rural settlements. Females account for around 54% in total population in the country. Out of 25 major regional centres, there are 5 cities with official population of around or over 1 million (Kyiv, Kharkiv, Dnipropetrovsk, Donetsk and Odessa), as well as 2 cities with populations over 7, inhabitants (Zaporizhzhya and Lviv). In addition, there are 4 cities with population of around or over 5, inhabitants (Kryvyi Rih, Mariupol, Mykolayiv and Luhansk), while the population in 22 cities exceeds 2, inhabitants. Figure 5 Official total population in major cities of Ukraine vs. other major cities in CEE thousand inhabitants Kyiv Kharkiv Dnipropetrovsk Odessa Donetsk Lviv Warsaw Kraków Łódź Wrocław Poznań Prague Brno Bratislava Budapest Source: State Statistics Committee of Ukraine, Eurostat

5 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Economic overview Household income and spending According to the State Statistics Committee of Ukraine, the average nominal monthly salary in Ukraine in January-September 211 was UAH 2,571 (equivalent to US$322) increasing by 18.2% year-on-year. During the period, real salaries grew by 8% year-on-year. It is worth noting however, that the analysis of household income in Ukraine solely on the basis of the official salary statistics may be misleading because of a considerable unregistered grey salary segment across the country. The customised research of the Ukrainian cities with population over 1 thousand inhabitants conducted by the international sociological company GfK in revealed that the estimated average income per capita was the highest in the cities with total population around 1 million inhabitants (i.e. Odessa, Kyiv, Kharkiv, Donetsk and Dnipropetrovsk), which are classified as big and wealthy. Consumer sentiment GfK Ukraine reported that in 211 consumer sentiment index in the country is generally lower compared to 21. Due to uncertain future economic conditions in Ukraine and worldwide, consumers tend to be more rational and cautious in terms of their shopping habits and preferences. Retail sales Retail sales in Ukraine grew by 15.2% year-on-year in January-September 211 compared to the 5.1% annual increase in 21 and the 16.2% annual decrease in 29. Earlier, retail sales in Ukraine were steadily increasing, reaching 24.4% in 26 and 28.2% in 27. In January-September 211, the growth dynamics of retail sales was registered across all the regions in Ukraine. Outlook In the first three quarters of 211, the Ukraine economy demonstrated generally positive dynamics. The areas of concern include public debt augmentation, high unemployment and inflation combined with high risks of external shocks and political instability in Ukraine. According to the Global Competitiveness Report, competitive strengths of the country include a well-educated population, flexible and efficient labour markets and a large market size, which set a strong base for the country s future growth. Figure 6 Real monthly salary, retail sales and consumer spending in Ukraine % Real monthly salary growth Source: State Statistics Committee of Ukraine, Oxford Economics, *For January-September 211, consumer spending growth provided as a year-end projection of Oxford Economics Figure 7 Consumer spending growth* Consumer sentiment index in Ukraine Source: GfK Ukraine Retail sales growth Consumer sentiment index Present condition index Economic expectations index Propensity to major purchases The free trade agreement between the EU and Ukraine is expected to be signed in 211 and implemented in 213. However, the position of Ukraine in negotiations with the EU has been threatened by legal proceedings against former Prime Minister Yulia Tymoshenko and adjudication announced in October 211. Institutional reforms and the improvement of inefficient markets for goods and services are recognised as being the priority tasks for Ukraine to secure long-term economic development in the country. 5

6 Retail Property Market in Ukraine General Trends Supply Despite the recognized high retail potential of the country and strengthening demand for retail space, the retail property market throughout Ukraine remains largely underdeveloped in terms of its saturation (Fig.8) and variety of formats in the existing properties (Fig.9). Kyiv, Dnipropetrovsk, Odessa, Kharkiv, Donetsk and Lviv are considered to be major cities of Ukraine and have been attracting a particular interest from major retailers, developers and investors. As of early November 211, total existing modern retail stock in these six cities exceeded 2.6 million, on average amounting to 325 per 1, inhabitants (based on official demographics statistics). This figure accounts for all major retail developments in the cities of or over 5, gross lettable area (including multi-tenant retail centres and big box single-occupied developments). Kyiv benefited from the largest stock of modern retail space, presently amounting to 1,1,4 (GLA), while the smallest retail stock was registered in Lviv at 26,54 (GLA). Taking into account official statistics on total population in each of major Ukrainian cities, the highest saturation was in Odessa at 379 (GLA), while the lowest figure registered in Kharkiv at 215 GLA). In terms of quality in Kyiv and other major cities of Ukraine, the existing retail stock is mostly formed by first generation retail developments with true end-destination properties remaining in shortage. Formats such as retail parks and fashion (factory) outlets are yet to appear in the country. The opportunities within the retail property sector, over other sectors, remain of priority interest for most developers and investors active in Ukraine, particularly in the cities with total population over 75, inhabitants. Around 75,8 (GLA) of new retail supply was delivered in Kyiv in the first three quarters of 211, comprised of the second phase of Dream Town in Obolon anchored by an aqua park, the hypermarket Novus on Brovarskyi Avenue, as well as four relatively small neighbourhood retail centres ( insilver, Victorio, Livoberezhnyi and Kvadrat on Onore de Balzaka Street). Major retail schemes delivered in regional cities of Ukraine in January-November 211 included the retail centre Passage located in the core city centre of Dnipropetrovsk, the second phases of the retail and leisure centres City Mall in Zaporizhzhya and Donetsk City in Donetsk, the retail and leisure centre Ukraine in Mariupol and the retail centre Galaktyka in Kremenchuh. During the analysis period, the DIY-stores within the national chain Epicentre were opened in Kirovohrad, Chernihiv, Mukachevo (Zakarpattya Oblast) and Kamyanets-Podilskyi (Khmelnytska Oblast). In addition, the wholesale centres in the format METRO Baza were delivered by Metro Cash&Carry in Ternopil and Lutsk. Figure 8 Modern retail stock per 1, inhabitants in major cities of Ukraine vs. other major cities in CEE per 1, inhabitants Note: All figures are year-end, covering both multi-tenant retail centres and big boxes *The figure for Donetsk includes total stock in the satellite city Makiivka **Based on existing and pipeline stock as of November 211 Figure 9 Modern retail space type in major cities of Ukraine* 1% 8% 6% 4% 2% % Present stock per 1, inhabitants Potential total stock per 1, inhabitants in late 213** Fashion outlets Shopping malls Retail parks * Based on existing stock as of November 211 **The figure for Donetsk includes total stock in the satellite city Makiivka Stand-alone retail warehouses The fourth quarter of 211 may see delivery of Ave Plaza and Magellan (phase 1) in Kharkiv, as well as the first phase of Fabrika in Kherson. The opening of the retail and leisure centre Gulliver, presently under construction in the central part of Kyiv and earlier known as Esplanada and Continental, will be postponed until 212 at the earliest. Delivery of the retail centre Mega-City (phase 1), which has been scheduled for completion in Ukraine s capital in the fourth quarter of 211, will also most likely be delayed. 6

7 Retail Property Market in Ukraine General Trends In 21, investors and developers both local and international undertook numerous market analyses concerning the demand, competitiveness and financial efficiency of their projects. Such activity continued during the first three quarters of 211 and indicated positive retail property market prospects in Ukraine. Though new retail supply during 211 has been rather low both in Kyiv and the regional cities of Ukraine, the years 212 and 213 are likely to see significant augmentation in new delivery in the sector. Table 1 Major multi-tenant retail schemes scheduled for delivery in Ukraine in November Period Project City Size () Developer Developer s nationality Q3, 212 Ocean Plaza (phase 1) Kyiv 72,2 KAN Development / UDP UA Q4, Fabrika (in phases) Kherson 65,5 BUD HOUSE GROUP UA Q4, Magellan (in phases) Kharkiv 62,5 Kray Property UA Q1, 213 Retail and leisure centre Odessa 55, Amstor UA Q1-Q3, 213 Aquapark Kyiv 49,7 Vilna Ukrayina UA Q3-Q4, 212 Marmalade Kyiv 38,7 VKF Mava UA Q4, 212 Domosfera (phase 3) Kyiv 38, DeVision UA 212 French Boulevard Kharkiv 35, Aksioma UA Q3-Q4, 213 Forum Lviv Lviv 36, Multi Development NTL Q1, 212 City Centre Odessa 33, Venford / GMG Development UA Q2, 212 Gulliver (Continental) Kyiv 32, Tri O UA 212 Auchan City Park (phase 2) Donetsk 26, Immochan Ukraine UA / FRA Q4, 212 RayON (M26) Kyiv 23, Arricano Development UA Q3-Q4, 212 Yuzhnaya Galereya (phase 2) Simferopol 19,7 Arricano Development UA Q3-Q4, 212 Silver Breeze Kyiv 16, Svitland Limited UA / ISL Q4, 212 Kiev E95 Outlet Centre Kyiv 15, 25 EVO Land Development UA Q4, Cascade Plaza Dnipropetrovsk 12, Alef Estate UA 212 Fashion Factory Kyiv 7,7 Aladdin Group UA Q4, 211 Ave Plaza Kharkiv 7,1 UNIQA Real Estate AUT Table 2 Lease terms and conditions in the quality multi-tenant retail centres in Ukraine Lease duration Rent payment Indexation Rent Service charge Marketing charge Fit-out of retail units Guarantee Source: DTZ 3-5 years for standard retail units of 5-25 ; 7-1 years for semi-anchors (5-1, ) and 1-15 years for anchor tenants plus a priority right to renew the lease. Usually pegged to the US dollar or Euro, but paid in the Ukrainian hryvnya. Annually, by change in CPI in the United States published by the US Department of Labour, by change of Euro CPI published by Eurostat or by change in CPI in Ukraine published by the State Statistics Committee. Fixed, an additional turnover rent has now become a common practice applied in the new high-quality retail developments (e.g. Riviera Shopping City, Sky Mall, Yuzhnaya Galereya, King Cross Leopolis and others). $2-8 per per month in addition to utility costs, depending on quality of a retail development. $2-5 per per month, depending on quality of a retail development. Shell & core. Cost contribution for partial fit-out or turn-key condition in sometimes provided to anchor tenants. The form of cash deposit or bank guarantee in the amount from 2 to 6 months of lease period has been common. Parent company guarantee is rarely applied. 7

8 Retail Property Market in Ukraine General Trends Demand During 29, due to adverse economic conditions, local and international retailers in Ukraine revised their strategies. Some of them left the Ukrainian retail market or stopped operations, while others seized the moment and continued expansion in the country. As a result, in the Ukrainian cities with total population in the range of 2,-7, inhabitants demand for retail space almost evaporated, while the cities such as Zaporizhzhya, Kryvyi Rih and Mariupol with poorly diversified economic bases and overreliance on a single industrial sector suffered a higher degree of slowdown in retail demand. Conversely, the retail sectors in Kyiv and Odessa have shown relative resilience to the deterioration in general economic conditions. Despite the most negative expectations, however the year 29 turned out to be positive for many retailers operating in Ukraine, particularly those in food retail, as well as low and middle price categories of fashion retail. During the period from early 21 until September 211, DTZ has witnessed a noticeable improvement in general dynamics on the demand side of the retail market across Ukraine with many retailers increasingly seeking for opportunities to expand. The deficit of quality retail properties has remained one of major obstacles for these plans being realised. Despite slightly deteriorating retailers perceptions of the Ukraine s short-term retail potential, triggered by general dynamics on global markets and political uncertainty in Ukraine, major retailers continued seeking opportunities to expand in the country during the third quarter of the year. Regardless improved performance of the retail market in Ukraine, the country was not even listed in A. T. Kearney s Global Retail Development Index in 21 and 211, after being ranked the fifth most attractive retail market in 27 and the seventeenth in Global Retail Development Index (GRDI), produced by A.T. Kearney, defines the top 3 emerging countries for retail expansion, based on 25 macroeconomic and retail-specific variables. Several new market entries were registered in January- November 211. GAP, through the franchise-holder Fiba Retail, opened its flagship store on the central Khreshchatyk Street in Kyiv. New Yorker and Oysho stores were opened in both Sky Mall in Kyiv and Rivera Shopping City in Odessa. The first stores FiNN FLARE and Centro opened in Kyiv. The crisis triggered an increase in M&A activities on the retail market in Ukraine. In early 211, the Russian retail group L Etoile reported the acquisition of 1% of shares in the chain Brocard, wellestablished on the Ukrainian retail market, as well as purchased the chain Bonjour, already owned by Brocard. In Ukraine the first store L Etoile opened in the second phase of Dream Town in Kyiv, followed by the store in Passage in Dnipropetrovsk. The international A.S. Watson Group, which in 26 acquired 65% of shares in the retail chain DЦ from the Ukrainian company Asnova Holding, gained 1% ownership in 21. In March 211, the stores of the retail chain previously known as DЦ were rebranded into Watsons. In August 211, the Central and Eastern European company PPF Group completed the acquisition of 1% shares in the Russian retail chain Eldorado, which also operates the stores in Ukraine. The deal was initiated in 29, when PPF Group purchased 5%+1 shares of the chain Eldorado. It was also reported in early November 211, that the Dnipropetrovsk-based retail chain ATB-market has been offered for sale 51% or 1% of its shares. Following the trend established in 21, several retail chains launched new formats in Ukraine in 211. The second phase of Dream Town in Kyiv accommodated the first in the city supermarket Kosmos of the Odessabased retail chain Tavria-V. In late October 211, the retail chain Budynok Ihrashok specialised in goods for children opened the first store Dytyachyi Svit in Riviera Shopping City in Odessa. In the high-fashion segment, the single-brand store Christian Dior was opened in the downtown Kyiv in late October 211. The lack of critical mass of quality retail space throughout Ukraine prevents a number of major international retailers from entering the market. DTZ believes that the opening of stores by such brands as H&M, C&A, Debenhams, Deichmann and Peek&Cloppenburg remains unlikely before late 212 early 213. Big box retail operators with reliable sourcing of financing continued to demonstrate high activity in the first three quarters of 211, driven by their development strategies combined with the widely recognised, largely unexploited potential of the Ukrainian market and the availability of development land at comparatively affordable prices. Thus, Metro Cash&Carry, Epicentre and Nova Liniya further expanded across Ukraine. A number of food hypermarket operators including Fozzy Group, Auchan, Novus and Amstor, as well as electronics and home appliance chains Comfy and Technopolis actively considered occupation in retail developments not only in major cities of the country with populations over 75, inhabitants, but also in smaller cities. Quality retail operators in Ukraine remain very selective in terms of retail space quality and occupational terms. 8

9 Retail Property Market in Ukraine General Trends Rents With increasing retailer activity in the country and their improved perception of market potential, 21 and the first three quarters of 211 witnessed an increase in prime base rents in quality multi-tenant retail developments in Kyiv, as well as in the few western-standard retail schemes already well-established in other major cities of Ukraine. Similar dynamics was also observed in relation to high street retail rents in Kyiv and other major cities of Ukraine with total population over 75, inhabitants. Despite the positive dynamics of an increasing number of new retailers entering the market and the improvement in activity of companies already operating in Ukraine, combined with nominal new supply of quality retail stock, DTZ does not anticipate any major upswing in base rental rates in the fourth quarter of 211 and during 212. This is due to the lack of critical mass of new market entries, as well as uncertain further economic dynamics both globally and in Ukraine. Nevertheless, DTZ anticipates that in the short term, due to the gradually strengthening demand of retail operators and the present lack of quality retail space, base prime rents in well-conceived multi-tenant retail schemes and high street locations in Kyiv and other major cities of Ukraine will be subject to further upward pressure. At the same time, the longer term sustainability of current retail rents will depend on the actual commissioning and quality of new sizeable pipeline retail schemes scheduled for completion in 212/13, particularly in Kyiv. Quality remains a crucial factor for the success of all existing and new retail developments in Ukraine. Today the majority of developers in Ukraine accept that a wellconsidered approach to selecting an appropriate location, efficient concept and thoughtful phasing of retail schemes with due regard to the number and mix of quality retailers and their planned expansion into the country, will secure long-term financial viability and investment exit. Secondary investment market DTZ witnessed a stabilisation of property investor sentiment in Ukraine during the first three quarters of 211, reflected by a slight decrease in yields still considered to be at high levels compared to other European countries. Quality retail properties together with office schemes remain the most sought-after investment assets in Ukraine. Out of ten investment deals reported to be concluded on the commercial property market in Ukraine during the first three quarters of 211, five transactions involved purchase of retail schemes or projects. The acquisition of a city centre mixed-use development project with a significant retail component in central Kyiv by a private European developer was the largest deal in the Ukraine commercial property market since 28. Figure 1 Prime retail rents in major cities of Ukraine* $ / /month * The figures are provided as of November 211, quoted for retail units of area of 1-3 Prime net initial yield for high-quality retail properties in Kyiv is estimated by DTZ at around 13.5%, while in major regional cities prime retail yields amount to %. Outlook Prime shopping centre rent Prime high street rent The retail segment proved to be the most resilient to the effects of economic crisis in 28/9 compared to other property sectors in Ukraine. DTZ believes that the retail property market will show further growth in the medium term after global and domestic economic conditions further improve. Despite the remaining signs of the economic crisis and comparatively low incomes of the population, the potential of the retail property market in Ukraine undoubtedly remains high because of its immaturity in terms of quality and formats of existing retail schemes, large country size, high population density, perceived high brand awareness and propensity to spend. The opportunities within the retail property sector, over other sectors, are of priority interest for most developers and investors active in Ukraine, particularly in the cities with total population over 75, inhabitants. Works on several sizeable retail projects in Kyiv and the regional cities of Ukraine were recently recommenced, which, if delivered to current schedules, will lead to a considerable increase in retail stock in the country by the end of 213. As a result, the Ukrainian market will offer more opportunities for expansion of retail chains, but localised retail rents will be subject to downward pressure, particularly in some poorly conceived first generation retail schemes in light of the strengthening competition within the sector. 9

10 Kyiv Supply & Demand Total modern retail stock in Kyiv was estimated at around 1,1,4 in November 211, or 359 of modern retail stock per 1, inhabitants (based on official demographics statistics). This figure reflects a significant undersupply of retail space in the Ukrainian capital, particularly when considering the official versus unofficial population imbalance and grey incomes. Approximately 71% of the total modern retail stock in Kyiv, or around 72,8 (GLA), has been formed by multi-tenant retail centres and shopping malls. Big box retail developments account for the remaining 29% of total retail stock in the city. Such formats as retail parks and fashion outlets are yet to be delivered in the city. Figure 11 Modern retail stock in Kyiv Around 75,8 (GLA) of new retail supply was delivered in Kyiv in the first three quarters of 211, comprised of the second phase of Dream Town in Obolon, the hypermarket Novus on Brovarskyi Avenue, as well as four neighbourhood retail centres: insilver on Sribnokilska Street, Kvadrat on Onore de Balzaka Street, Livoberezhnyi on Maryny Raskovoyi Street and Victorio on Lvivska Square. The 25, Mega-City (phase 1) is the only sizeable retail development scheduled for completion in the fourth quarter of 211 in Kyiv. Quality of the scheme is generally sub-standard, with individual retail units offered for sale. DTZ projects that delivery of the scheme is likely to be delayed until 212. Though new retail supply during 211 has been rather low in Kyiv, the years 212 and 213 are likely to see significant augmentation in new delivery in the sector. As of November 211, there were over 345, (GLA) under construction in Kyiv with delivery scheduled in between 212 and 213. These include the first phase of Ocean Plaza developed by UDP and KAN Development, Gulliver by Tri O, the extension Domosfera by DeVision, RayON by Arricano Development, Marmalade by VKF Mava, Silver Breeze by Svitland Limited, Fashion Factory by Aladdin Group, and the retail and leisure centre known as Aquapark by Vilna Ukrayina. The first fashion outlet development in Ukraine, Kiev E95 Outlet Centre (phase 1), is also scheduled for completion in late 212. In new retail supply in the Ukrainian capital may amount to around 316,9 (GLA), an increase on current retail stock of almost 32%. Being the capital city of Ukraine, Kyiv remains the most attractive destination for all retailers operating and considering entry into the country. Due to increased demand, the availability of premises in high street locations and successful retail centres in Kyiv has been very scarce. * Projection Note: All figures are year-end Figure 12 New annul retail delivery by formats in Kyiv 1% 8% 6% 4% 2% % * Projection Note: All figures are year-end Rents Fashion outlets Shopping malls Annual supply Cumulative supply Retail parks Stand-alone retail warehouses In the first three quarters of 211 average monthly rents in Kyiv retail schemes remained generally stable at around $7-9 per for premises of 1-3, reaching highs of $16-2 per per month in the most soughtafter retail properties in the city. Since the second quarter of 21, strengthened demand for high street premises in Kyiv led to an upward correction of base rental rates for this category of real estate. The first half of 211 witnessed further upward pressure on prime high street rents in Kyiv. As of November 211, average high street retail rents in Kyiv were registered amounting to $18-23 per per month, with asking rents randomly reaching the highs of $35-4 per per month. 1

11 Dnipropetrovsk Supply & Demand Total modern retail stock in Dnipropetrovsk, the third largest city in Ukraine, was estimated at over 37,56 in November 211, or 366 of modern retail stock per 1, inhabitants. The modern retail stock in Dnipropetrovsk has been dominated by multi-tenant retail centres and shopping malls, which account for approximately 79% of total stock in the sector. Big box retail developments account for the remaining 21% of total retail stock in the city. There are no retail parks or fashion outlets in the city. Around 49,35 (GLA) of new retail supply was delivered in Dnipropetrovsk in January-October 211. Figure 13 Modern retail stock in Dnipropetrovsk The most notable was opening of the retail centre Passage, The property is located in the prime central area of Dnipropetrovsk, and it became the trigger for some new market entries in the city: along with its delivery, such brands as Marks&Spencer, GAP and L Etoile opened their first stores in Dnipropetrovsk. In addition, three sub-quality neighbourhood retail centres were delivered in the city, including Pryozernyi on the crossroads of Shmidta and Bobrova Streets, Nautilus on Kalynova Street and Slavyanka on Kurchatova Street. Additional 31,95 (GLA) of retail stock are scheduled for delivery in Dnipropetrovsk in 211. These include the DIY-store by Epicentre, as well as the retail centre Library in downtown Dnipropetrovsk. In November 211, there were around 278, (GLA) in delivery pipeline in Dnipropetrovsk, with even more retail projects being announced in the city. DTZ projects however, that the new retail supply in the city in will be very small with minor influence on the local retail property market. Dnipropetrovsk is considered a first-tier city to enter for a majority of retailers, which are either present or considering expansion to Ukraine. Demand remains strong for quality retail space both in high street locations and multi-tenant retail centres of the city. In DTZ s opinion, the high attractiveness of Dnipropetrovsk is related to a combination of such factors as large population, relatively stable and diversified economic base, availability of critical mass of the retail schemes of decent quality in the city and developed high street retailing. DTZ believes that the highest potential for retailers in Dnipropetrovsk exists in low, lower middle and premium price segments. * Projection Note: All figures are year-end Table 3 Major existing multi-tenant retail centres in Dnipropetrovsk Project GLA () Delivery Developer Karavan 76,2 28/9 Karavan Group Most City Centre 25,29 26 Alef Estate Apollo 2, 29 UMK Babylon 17,67 27 Logos-Invest Dafi 13,5 25 Dafi Materyk 13,5 26 Rainford Passage 12, Akselrod Estate Rents Annual supply Cumulative supply In Dnipropetrovsk high street retail rents currently tend to exceed average rents in multi-tenant retail centres, mostly due to the developed nature of street retailing along Karl Marx Avenue within the boundaries of the administrative centre, shopping habits of local inhabitants and lack of quality retail schemes in the non-central areas of the city. Prime high street monthly rents in Dnipropetrovsk presently vary in the range of $7-95 per, with the highest rents achieved for properties along Karl Marx Avenue and Lenin Square. In the retail centres in the city, prime net monthly retail rents vary in the range of $6-8 per for standard units of area

12 Odessa Supply & Demand With total population over 1 million inhabitants, Odessa is one of the largest cities of Ukraine located in its southern part. The city is an important trade sea port on the Black Sea and a popular tourist destination. Total modern retail stock in Odessa was estimated at around 382,25 in November 211, or 379 of modern retail stock per 1, inhabitants. Only around 5, (GLA) of new retail stock was delivered in Odessa in 211, comprised of the neighborhood retail centre 5 Element. Figure 14 Modern retail stock in Odessa The modern retail stock in Odessa has been dominated by multi-tenant retail centres and shopping malls, which account for approximately 62% of total stock in the sector. Big box retail developments account for the remaining 38% of total retail stock in the city. There are no retail parks or fashion outlets in the city. The 65, (GLA) retail and leisure centre Riviera Shopping City is the largest and most notable retail scheme in Odessa, which was developed by the LSE-listed company Argo Real Estate Opportunities Fund during 29. The scheme is anchored by real,- and OBI, while its gallery benefits from the presence of majority of quality retail brands operating in the city. Furthermore, despite after-effects of economic crisis, the opening of Riviera Shopping City triggered many new market entries in Odessa, including (but not limited to) real,-, OBI, IMAX, Inditex Group, Marks&Spencer, New Yorker, LPP (House, Cropp Town, Reserved). As of November 211, there was over 199,2 (GLA) retail space planned for delivery in DTZ projects that in 212 new supply in the retail property sector in Odessa will amount to around 33, (GLA) formed by the retail and leisure centre City Centre (phase 1). Major schemes planned for delivery in in Odessa include the retail and leisure centre on Generala Petrova Street developed by Amstor, Europort Retail Park by the Israeli company Europort, as well as the retail centre planned by the Russian Group of companies BFG. High street retailing is well-developed in Odessa due to the urban structure of the city and its high popularity among the tourists. Odessa, together with Donetsk, is considered to be the second after Kyiv most attractive destination to enter for majority of retailers in all pricing categories. Demand remains very strong for quality retail space both in high street locations and multi-tenant retail centres in the city. * Projection Note: All figures are year-end Table 4 Major existing multi-tenant retail centres in Odessa Project GLA () Delivery Developer/Owner Riviera Shopping City 65, 29 Argo Real Estate Opportunities Fund 6 Element 23,6 29/1 local developer Novyi Privoz 23, 26 local developer Platan Plaza 19,53 25 local developer Athena Gallery 19, 24 Michaniki Ukraine Panorama 17, 26 local / Redstone Sady Pobedy 16, 27 Tavria-V Europe 8,6 25 Forent 5 Element 5, 211 local developer Rents Annual supply Cumulative supply In Odessa high street retail rents are higher than average rents in multi-tenant retail centres, mostly due to the urban structure of the city with many tourist attractions in its central part, developed nature of street retailing, shopping habits of local inhabitants and high tourist flows, as well as lack of quality retail schemes in the non-central areas of the city. Prime high street retail rents in Odessa amount to $7-95 per per month, with the highest rents typically achieved for quality retail premises with the frontage to Derybasivska, Rishelyevska and Yekaterynynska Streets. In the prime multi-tenant retail centres in Odessa, net monthly retail rents vary in the range of $65-85 per for standard units of area

13 Kharkiv Supply & Demand Kharkiv is the second largest city in Ukraine with over 1.4 million total population plus thousands more commuting to the city due to many higher educational establishments located here. In terms of economic base, Kharkiv used to rely heavily on industrial sector, particularly machine building, and is presently in transition. The city will host matches of EURO 212 Football Championship. Total modern retail stock in Kharkiv was estimated at around 31,65 in November 211, or 215 of modern retail stock per 1, inhabitants, which reflects the lowest retail saturation compared to other major cities of Ukraine. The modern retail stock in Kharkiv has been dominated by multi-tenant retail centres and shopping malls, which account for approximately 61% of total stock in the sector. Big box retail developments account for the remaining 39% of total retail stock in the city. There are no true retail parks or fashion outlets in the city. Only around 5, (GLA) of new retail stock was delivered in Kharkiv in 211, comprised of the neighborhood retail centre Joker. The fourth quarter of 211 may also see delivery of Ave Plaza and Magellan (phase 1) with cumulative area amounting to around 23,13 (GLA). As of November 211, there was over 14,5 (GLA) retail space planned for delivery during the period from December 211 to late 212. This new supply will increase current retail stock by almost 34%, and will bring some dynamics to the local market, remaining generally static since 28 (despite the significant number of large-scale development projects in pipeline). Major schemes planned for delivery in 212 in Kharkiv include the extensions of Magellan and Francuzskyi Boulevard. Though not being a priority destination for expansion, Kharkiv is considered a first-tier city to enter for majority of retailers in Ukraine. Occupier demand remains significant for quality retail space both in high street locations and quality multi-tenant retail developments in Kharkiv. DTZ believes that, due to the city s economic base, the highest potential for retailers in Kharkiv exists in low, lower middle and middle price segments. Figure 15 Modern retail stock in Kharkiv * Projection Note: All figures are year-end Table 5 Major existing multi-tenant retail centres in Kharkiv Project GLA () Delivery Developer/Owner Karavan 57,5 26/7/8 Karavan Group Dafi Retail Park 56,7 28 Dafi Ukrayina 17, 25 local developer Rents Annual supply In Kharkiv high street retail rents currently tend to exceed average rents in multi-tenant retail centres in the city, mostly due to the developed nature of street retailing in Sumska Street within the boundaries of the administrative centre, and lack of quality retail supply in the densely-populated peripheral neighbourhoods of the city. Prime high street monthly rents in Kharkiv presently vary in the range of $6-75 per, with the highest rents achieved for properties located on Rozy Luxembourg and Konstytutsiyi Squares, and those having frontage to Sumska Street. In the prime multi-tenant retail centres in the city, net monthly retail rents vary in the range of $45-65 per for standard units of area 1-3. Cumulative supply The retail market in Kharkiv is strongly influenced by the large-scale covered market Barabashovo, which extends to around 75 hectare and is a popular retail destination not only among local population, but also visitors from Kharkiv region and other regions of Ukraine. 13

14 Donetsk Supply & Demand Donetsk with an official population around 1 million inhabitants is one of the major coal-mining and industrial centres of Ukraine, as well as the regional and administrative centre of the Donbas river basin, forming the heavy industrial heartland of the country. Donetsk was selected as one of four Ukrainian cities to host matches of EURO 212 Football Championship, and this already led to significant improvements in the city infrastructure and general attractiveness. Cumulative modern retail stock in Donetsk and its satellite city Makiivka was estimated at around 34,4 in November 211, or 34 of modern retail stock per 1, inhabitants. This includes the new supply delivered in 211 and comprised of the 9,46 extension of the retail and leisure centre Donetsk City. The modern retail stock in Donetsk has been evenly split between multi-tenant retail centres and shopping malls, which account for over 49% of total stock, and big box retail developments. Alike elsewhere in Ukraine, retail parks and fashion outlets are absent in Donetsk. As of November 211, there was only around 39, (GLA) retail space planned for delivery in , an increase on current stock of approximately 11%. Major schemes planned for delivery in in Donetsk include the extension of Auchan City Park in Makiivka developed by Immochan, as well as the neighbourhood retail centre Yuzhnye Sklony by local Depot Development Group affiliated with Foxtrot Group. High street retailing is developed in Donetsk, primarily because of the lack of quality multi-tenant retail centres in the city. Donetsk, as one of the most affluent cities in Ukraine, is regarded to share with Odessa the position of the second after Kyiv most attractive destination to enter for majority of retailers, operating in all pricing categories. However, the severe deficit of quality retail properties in Donetsk remains one of major obstacles for retailers penetration of the market. Many quality retailers entered the local market together with the delivery of the retail and leisure centre Donetsk City. Figure 16 Modern retail stock in Donetsk * Projection Note: All figures are year-end, and include total stock in the satellite city Makiivka Table 6 Major existing multi-tenant retail centres in Donetsk Project GLA () Delivery Donetsk City 34,46 26/11 Domus Developer/Owner Amstor in Makiivka 27,29 26/7 Amstor Ltd. Decor Donbas 23,5 28 Decor-Service Auchan City Park (phase 1) 22,5 28 Immochan Belyi Lebed 2, 24 local developer Green Plaza 7,1 21 Domus Rents Annual supply Cumulative supply Out of 6 major cities covered by this research, Donetsk is the only city with average rents in prime multi-tenant retail centres exceeding high street retail rents. Prime high street retail rents in Donetsk amount to $55-7 per per month, with the highest rents typically achieved for quality retail premises located around Lenina Square and along Artema Street. In the multi-tenant retail centres in Donetsk, prime net monthly retail rents vary in the range of $65-85 per for standard units of area 1-3. Notably, all major big box retailers, including Praktiker, Metro Cash&Carry, Auchan and Epicentre, opened their stores in the satellite city Makiivka. Demand remains very strong for quality retail space both in high street locations and retail centres in the city. 14

15 Lviv Supply & Demand Lviv is an important economic, cultural, academic and transportation centre of Ukraine with total official population of over 76 thousand inhabitants. It is the largest city in western Ukraine and, its historic and architectural heritage makes it a popular tourist destination. Lviv was also selected to host matches of EURO 212 Football Championship together with Kyiv, Donetsk and Kharkiv, as well as four Polish cities. The retail market in Lviv remains very immature and is still strongly influenced by the existing covered market Pivdennyi. Figure 17 Modern retail stock in Lviv Total modern retail stock in Lviv was estimated at over 26,5 in November 211, or 272 of modern retail stock per 1, inhabitants. The year 211 will not see delivery of any new retail scheme in Lviv. DTZ projects that total retail stock in the city will remain stable until mid-late 213, when the retail and leisure centre Forum Lviv is scheduled for delivery by Multi Development. The modern retail stock in Lviv has been dominated by multi-tenant retail centres and shopping malls, which account for almost 73% of total stock in the sector. Big box retail developments, comprised of the DIY-stores Epicentre and Nova Liniya, and two outlets Metro Cash&Carry, account for the remaining 27% of total retail stock. There are no retail parks or fashion outlets in Lviv. The 52,7 (GLA) retail and leisure centre King Cross Leopolis is the largest and most notable retail scheme in Lviv, which was developed by King Cross Leopolis in partnership with the local firm Comfort Invest in phases in 28 and 21. The scheme is anchored by Auchan and Praktiker, and its opening triggered numerous new market entries in Lviv, including IMAX, Inditex Group, Marks&Spencer, Mothercare and many others. High street retailing is well-developed in Lviv due to the urban structure of the city and high tourist flows in its central part. DTZ believes that the highest potential for retailers in Lviv exists in low, lower middle and middle price segments. Demand remains considerable for quality retail space both in high street locations and retail centres in the city, the latter remaining in particularly scarce supply. * Projection Note: All figures are year-end Table 7 Major existing multi-tenant retail centres in Lviv Project GLA () Delivery Developer/Owner King Cross Leopolis 52,7 28/1 King Cross Group / Comfort Invest Sriblyastyi 1, 27 Intermarket / Eurotek VAM-2 6,95 24/6 local developer Skrynya (phase 1) 6,5 26 local developer Magnus 4,5 23 local developer Opera Passage 1,83 29 HT Property Development Rents Annual supply Cumulative supply In Lviv high street retail rents are higher than average rents in multi-tenant retail centres, mostly due to the urban structure of the city with many tourist attractions in its central part, developed nature of street retailing, shopping habits of local inhabitants and high tourist flows, as well as lack of quality retail schemes in the non-central areas of the city. Prime high street retail rents in Lviv amount to $85-1 per per month, with the highest rents typically achieved for quality retail premises located along Tarasa Shevchenka and Svobody Avenues, and on Rynok Square. In the multi-tenant retail centres in Lviv, prime net monthly retail rents vary in the range of $6-8 per for standard units of area