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May 2013

Romania
Too large to be ignored

2 Romania. Too large to be ignored

Dear Readers,

Romania is one the most developed countries in the region when compared with its SEE peers, though it still has some way to go in order to reduce the economic gap when compared with the more mature CEE economies. Maybe this is both the curse and the advantage of the country? Which is the most similar and most relevant country to compare Romania with? In this report we will look into Romania's opportunities from various angles. Regardless of how we approach the issue, please bear in mind that Romania has been an EU member state for many years, obtaining membership on 1 January 2007 following years of implementation of necessary reforms. Its EU membership as well as its NATO membership (since 2004) are Romania's wild cards, placing the country into the larger EU trade zone and into the pool of countries with a stable political and social environment. This report is meant to offer a fresh, updated overview of the country's key macroeconomic indicators, investment opportunities, real estate markets and to be an easy tool to be used by any multinational corporation interested in placing investments into Romania. We would like to thank our partners, FiNEXPERT and Lugera - The People Republic, for their valuable input and interest in supporting the initiative in highlighting Romania as an attractive business and investment location.

Gijs Klomp, MRICS Managing Director Jones Lang LaSalle Romania

3 Romania. Too large to be ignored

About Romania
With a population of some 20 million inhabitants (October 2011 Census), Romania is simply too large to be ignored. In the European Union, Romania ranks 9th largest in terms of area and 7th largest by population. These factors make Romania one of the largest consumer markets in the EU, as well as an attractive manufacturing hub. The country is divided into 42 counties, with its capital and largest city being Bucharest (and Ilfov) with almost 2 million inhabitants. The metropolitan area of surrounding Ilfov County increases the capital's population by additional 320,000 inhabitants.

Macroeconomics

The modern economy began in the year 1990. After two decades of privatization, there are currently only a few companies that remain in the hands of the Romanian state. The banking sector is almost entirely privately managed, with a couple of the commercial banks being largely owned by the Romanian State (i.e. Saving Bank/ CEC). Historically, the first 10 years after the collapse of communism were the most fragile. The following years, featuring a more stable economy, are considered to have preparation years for European Union accession. At present, the country is seeking to join the Schengen area and in 5-7 years, to be part of the monetary union and adopt the Euro. Romania's economy is however highly dependent on its Western European partners. With a weak recovery in consumer demand, a

Romanian Athenaeum, Bucharest

low level of activity in the construction sector, a large agricultural sector with its inherent unpredictable results, the country's GDP growth is supported heavily by export. The country's 5-year average forecast (2013-2017), places its economic performance at a level of 2.9%, which is well above the EU average.

The second tier cities are mostly selected by economic importance rather than population and include: Cluj Napoca, Constanta, Timisoara and Iasi each having a population of some 300,000 inhabitants. The third tier cities include, but are not limited to: Brasov, Sibiu, Targu Mures, Craiova and Galati. As in other CEE & SEE Countries, the capital city Bucharest, is the most developed and represents the economic, social and cultural center of Romania.
Key economic indicators 2009 Real GDP (% change) Nominal GDP Per Capita (USD) Consumer Price Index (% change) Policy Interest Rate (%) Unemployment Rate (%) Current Account Balance (% of GDP) Exchange Rate (LCU/USD, end of period) -7.1 7,631 5.6 8 6.3 -4.2 2.94 2010 -1.3 7,670 6.1 6.25 7.6 -4.4 3.2 2011 2.5 8,519 5.8 6 5.4 -4.7 3.34

2012 0.7* 8,000 3.3 5.25 5.1 -3.9 3.36

2013 1.2 8,662 4.8 5 5.2 -3 3.32

2014 2.7 9,228 3.1 3.75 4.6 -3.5 3.35

2015 3.5 10,153 3 3.75 4.5 -3.6 3.1

2016 3.2 11,386 3.1 3.75 4.3 -3.3 3

2017 3.6 13,081 2.9 3.75 4.2 -3.1 2.95

Source: IHS Global Insight, Country Report April 2013, 2013-2017 Forecast, * - INS data

4 Romania. Too large to be ignored

Infrastructure
Romania benefits from an excellent geographic location in South Eastern Europe. The country is crossed by 3 Pan European Corridors (IV, VII, and IX). Corridors IV and IX are for both road and rail, while Corridor VII is only partially serviced by road and rail. Roads The length of the road infrastructure is estimated at 198,000 km, out of which ca. 16,000 km are represented by national roads. Sections of these national roads are incorporated in the 7 main European Roads and a further 10 secondary European Roads spread throughout the country. The country started its highway construction efforts only relatively recently, but made significant progress in recent years. In December 2012, Romania had ca. 530 km of highways (including city ring-roads) out of which, only the Bucharest-Constanta A2 highway of 203 km is currently fully completed. Other highway sections were delivered between Bucharest Pitesti (109 km), between Bucharest Ploiesti (62 km), between Arad-Timisoara (32 km) and Gilau Campia Turzii (52 km). At the beginning of 2013, it was announced that one of the major priorities of the current ruling coalition is the upgrade of infrastructure and mainly of the road infrastructure by attracting partners in undertaking the highway development and exploitation. Freight rail transportation is ensured by the state owned company, The National Freight Railway Company - CFR Marfa S.A. - which was set-up in 1998 from the Romanian National Railway Holding (CFR) following the institutional reform. Today, it remains the biggest rail freight operator in Romania. Airports Romania is well connected by air with all major European cities. The country offers a network of 15 airports out of which 12 are international airports. The busiest airport is Henri Coanda International Airport (Otopeni, 15 km from Bucharest city center). It is worth noting that in November 2012 a new terminal was opened (19,600 sqm) with 14 boarding bridges that are in line with the EU regulations to access the Schengen Area, providing a secure flow of Schengen passengers. With these upgrades, the airport's annual capacity increased to 6 million passengers. Ports The country has direct access to the Black Sea with the Constanta port (both maritime and river port) being the largest and also the only deep sea port in the Black Sea area. The country offers 3 maritime ports, and over 10 ports along the Danube River. The Constanta Port has a handling capacity of over 100 million tons per year and 156 berths, of which 140 berths are operational. The total quay length is 29.83 km and the depths range between 8 and 19 meters. These characteristics are comparable with those offered by the most important European and international ports, allowing the A1 Bucharest Nadlac at the Hungarian Border Pan European Corridor IV, partially completed A2 Bucharest Constanta fully completed A3 Bucharest Bors/Transylvania Highway partially completed accommodation of tankers with a capacity of 165,000 dwt and bulk carriers of 220,000 dwt. Rail The rail network has a length of approximately 10,700 km out of which, 4,000 km operates electrified lines. Currently, ca. 3,000 km are part of the TEN-T network, part of the Pan European Corridors IV and IX. (Source:
2012) Ministry of Transportation, Romania your Business Partner

A2 Highway, section Cernavoda - Medgidia, cnadnr.ro

The three main highways proposed to be completed are as follows:

5 Romania. Too large to be ignored

Pan- European Corridors crossing Romania

Source: Jones Lang LaSalle

6 Romania. Too large to be ignored

State Aid Schemes

with the support of FiNEXPERT II. Investment > 100 million - State aid scheme supporting regional development by means of investment stimulation (under Decision no. 753/2008). Beneficiaries are the big enterprises meeting the following three conditions:
? initial investment > 100 million (RON equivalent); ? investment eligible costs > 50 million (RON equivalent); ? minimum of 500 newly created jobs as a result of the initial

investment. Duration of the scheme: 2008 - 2012 with the possibility of extending this period in 2013. III. Investment using new technology and creating new jobs State aid scheme supporting investment promoting regional development by new technology use and new job creation (under Decision no. 797/2012). Application field: ? manufacturing (exception: beverages and tobacco products) ? electricity, gas, steam and air conditioning supply ? software publishing
? telecommunications ? computer programming, consultancy and related activities ? information service activities ? scientific research and development

Duration of the scheme: ? period of financing agreements issuing: 2 years, 2012 - 2013
CEC Bank, Bucharest

? period for aid payments: 2013 - 2018, within the limits of the annual allocated budget

The information presented in this section represents a synthesis of the most important aspects regulated by the state aid schemes that foreign investors showed interest in. The selected state aid schemes will be ending in December 2013, with no additional clarification on the potential prolongation of the duration beyond the end of this year. I. Investment of more than 5 million (inclusive) - State aid scheme ensuring sustainable development (under Decision no. 1680/2008). Applies to the following 4 investment categories: ? initial investment between 5 and 10 million and creating a minimum of 50 new jobs; ? initial investment between 10 and 20 million and creating a minimum of 100 new jobs; ? initial investment between 20 and 30 million and creating a minimum of 200 new jobs; ? initial investment >30 million and creating a minimum of 300 new jobs. Duration of the scheme: 2009 - 2013 IV. Investment in research & development and innovation Regional state aid scheme Financing initial investment in R&D (Order no. 1293/2008). Beneficiaries are the following: ? enterprises with R&D activities mentioned in their statutes, implementing initial investments according to operation 2.3.2 Development of business R&D infrastructure and creation of new research jobs; ? productive enterprises not having R&D as main activity, implementing initial investments according to operation 2.3.3 Promoting innovation in enterprises. Duration of the scheme: 2008 - 31st December 2013

7 Romania. Too large to be ignored

Labor Pool
with the support of Lugera - The People Republic Romania's human capital is one of the most educated in the CEE & SEE Region due to the country's long university tradition. In the academic year 2011-2012, the student population of 540,000 was enrolled in 108 universities with 614 faculties, out of which 57 universities and 410 faculties were state owned higher education institutions. The largest university hubs are Bucharest, Iasi, Cluj Napoca and Timisoara.
County Bucharest Iasi Cluj Timis City Bucharest Iasi Cluj-Napoca Timisoara Universities Faculties (state&private) (state&private) 34 11 10 8 170 50 48 41

A second foreign language, compulsory for all, is introduced when students are 10. The obligation to learn two languages lasts until students are 18 years old. All schools, for students aged between 6 and 18, therefore have some flexibility in designing the school element of the core curriculum. The same report shows that English, French, German, Spanish and Italian are the most common foreign languages learnt in most European Countries, including Romania. We are of the opinion that proficiency in foreign languages in higher education is highly dependent on achievements secured during high school. This represents a major competitive advantage of Romania in attracting larger FDI's in BPO/SSC/ITOs. However, proficiency in a foreign language other than English can bring employees better financial arrangements. Below is a selection of salaries in SSCs/BPOs in Bucharest by spoken foreign language. The same market research shows that on average salaries are slightly lower in regional cities by 10-20%, compared with Bucharest.
Positions Operations Manager Project Manager Team Leader Customer Support English (0-2 years) Customer Support French (0 - 2 years) Net 5,000 3,000 2,000 412 412 Gross 6,600 3,900 2,600 493 493 522 522 522 956 666 666 703 703 703 1,362

Source: National Institute of Statistics

The most popular fields of education were the following: technical (28.3%), teacher training (26.3%), economics (21.2%) and law (12.5%). Top Universities in Romania The 2011 evaluation of universities was based on criteria such as: teaching and learning, scientific research, assessed university relations with the external environment and institutional capacity. The evaluation of universities is conducted every four years and the ranking results are valid until the next institutional assessment. The top Romanian universities were classified in four main categories: ? Advanced research and education universities 12 universities identified under this category
? Education and scientific research universities

Customer Support German (0 - 2 years) 436 Customer Support Italian (0 - 2 years) 436

Customer Support Spanish (0 - 2 years) 436 Customer Support Dutch (0 - 2 years) Customer Support English (2 - 4 years) Customer Support French (2 - 4 years) 799 557 557

22 universities identified under this category

? Education and artistic creation universities

8 universities identified under this category

? Universities centered on education

Customer Support German (2 - 4 years) 587 Customer Support Italian (2 - 4 years) 587

53 universities identified under this category Foreign Languages Romania can be considered one of the countries in the CEE & SEE region where language skills are most proficient. The Key Data on Teaching Languages at School in Europe 2012 Report, issued by Eurostat, shows that in Romania, all students start learning a foreign language as a compulsory subject from the age of 8.

Customer Support Spanish (2 - 4 years) 587 Customer Support Dutch (2 - 4 years)

Source: Lugera - The People Republic

1,138

8 Romania. Too large to be ignored

Business Environment
by IHS Global Insight, Country Report April 2013 Romania has one of the lowest fiscal burdens in the European Union - a flat tax of 16% for both personal income and corporate profit. Foreign individuals and legal entities can establish a company in Romania. All companies must be registered with the National Trade Register Office, organised by the Romanian Chamber of Commerce and Industry. On average, it takes about 14 days to establish a business in Romania. The most common types of businesses in Romania are: Joint Stock Company (SA): The minimum capital requirement for establishing an SA is RON90,000 . This requires at least two shareholders (reduced from five in 2007), with no maximum. Amendments effective from 2007 also reduced quorum and votingmajority requirements, and lowered the share capital required to call a general meeting from 15% to 10%, in a bid to improve shareholder rights. The management system was opened up to allow a choice between unitary and dualist systems (such as the choice of instituting a supervisory board). Limited Liability Company (SRL): SRLs are the most popular form for investors, requiring a minimum share capital of RON200, with share values of at least RON10. SRLs can be formed by one shareholder and may include up to 50 (persons or legal entities). However, one person may be the sole shareholder in only one SRL. There are restrictions on third-party share transfer. An SRL is managed by one or more foreign or Romanian administrators with full or limited powers. Branch: Foreign companies are allowed to establish a branch office in Romania. Branches can operate in the same activities as their parent companies, and must have a foreign or Romanian general manager. Corporate Income Tax
Bulgaria Serbia Romania Czech Republic Hungary Poland Croatia Slovakia 0% 5% 10% 15% 20% 25% 16%

The basic rate for value-added tax (VAT) is 24%. There are preferential rates of 9% for certain basic commodities, such as some food products, books, newspapers, and medicines; and 5% for the supply of buildings. Corporate Income Tax: Corporate income tax is levied at 16%. Small businesses with a turnover of less than 100,000 and fewer than nine employees may opt to pay a much lower tax on revenue earned, instead of profits, although the rate was raised from 1.5% when the flat tax was introduced. Resident companies are taxed on their worldwide income, whereas non-resident companies are taxed on Romaniansource income only. A company is resident in Romania if it is incorporated as per the relevant legislation or, if Romania is its place of effective management. From January 2010, residents also include legal entities that have headquarters in Romania but, are incorporated under EU rules. Withholding Taxes: Withholding tax on dividends is levied at a rate of 16%, unless otherwise stated by a tax treaty. Dividends paid by a Romanian legal entity to an EU resident are subject to a 10% tax, unless otherwise specified. Similar rules also apply for interest and royalties. Capital Gains: Capital gains are only charged for gains made from the sale of Romanian securities for individuals, but for companies it is deducted as tax on earnings. Profits are taxed at a flat tax rate of 16%. Branch Tax: The tax treatment of a branch is similar to that of other Romanian business forms.

Source: IHS Global Insight Country Reports

9 Romania. Too large to be ignored

Real Estate Market

The Romanian real state market provides plenty of opportunities in all market segments. The opportunities lie mainly on the development side, where to date, the market has attracted only a few institutional developers. In each market sector there is a blend of both local and international developers with the predominance of local developers. A non exclusive overview of international office developers include: GTC, AFI Europe, Portland Trust, Skanska, Nusco Group, Anchor Group and Bluehouse. In the retail sector, Sonae Sierra, GTC and AFI Europe are active. The industrial sector is much more complex but, is still not comparable with other CEE countries. The main industrial developers currently shaping the Romanian industrial market are: Prologis, Portland Trust, WDP, Alinso Group and Graells & Llonch. Following the boom and bust cycle of 2005-2010, developers have While industrial developers are placing projects throughout the country, office developers are much more in favour of developing projects in Bucharest or top secondary cities with a long university tradition. Retail developers are present in all cities with a high population density, and a lower modern retail stock. acknowledged the need to deliver high quality developments in accordance with specifications required by international tenants. In addition, developers have started targeting green certification from early stages of design, with very few of them ignoring the need to implement sustainable technical features in newer projects. The trend is relatively new, with the first green building pre-certified in early 2008-2009. EU legislation and an increased view on importance from developers, means that only a limited number of pipeline office projects, are not targeting green certification. Furthermore, iconic office buildings are retroactively in the process of obtaining green certification for building operations and maintenance. The most common sustainability rating system used is BREEAM followed by LEED. The increased interest in sustainability is proven by the variety of certified buildings: administrative, libraries, big box retail units,
Bucharest Financial Plaza, view from Dambovita River City Gate, Bucharest

office buildings, shopping centers and production facilities. Geographically, certified developments are being completed throughout the country.

The real estate market however features a number of influential local developers. Their projects range from the small to some of the largest schemes completed in Romania to-date. On the one hand, local developers ensure development continuity but, have lower appetite in exiting/selling their projects. Consequently, this represents an important barrier in the progress of the investment market in Romania. A list of the noteworthy local developers includes, but is not limited to: Genesis Development, Baneasa Development, Primavera Development, Iulius Group and Modatim.

10 Romania. Too large to be ignored

Office Market in Romania

Modern Office Stock in CEE & SEE Capitals
Warsaw Budapest Prague Bucharest Bratislava Zagreb Belgrade 0 1,000 2,000 3,000 4,000
'000 m
2

preference of developers due to existing connections to utilities, relatively central locations and good access to public transportation. With the exception of Bucharest, which features an extensive metro network (consisting of 4 main lines, 69.25 km of double track and 51 stops) the rest of Romania's public transportation system is limited to above ground transportation (bus, tram, trolley-bus and shuttle bus). Today, we can only speak about office development clusters or location preferences in Bucharest. In the regional cities, the majority of projects with a high probability of completion, are scattered throughout the central areas.

SEE or CEE? Bucharest has the lowest office stock in the CEE...

5,000

Source: Jones Lang LaSalle

The history of the Romanian office market starts in the early 1990's. In the 20 years of modern, post communist development, only 2 million m2 of offices were completed in Bucharest. By local market standards, 50% is considered Class A. By international standards (new development, over 5,000 m2 GLA) we can probably discount the Class A office stock to closer to 30%. The story repeats in major secondary cities, in which only a very limited number of speculative developments can be graded at international standards (except owner occupied buildings, mainly developed as bank headquarters). In the category of major secondary cities, we include cities with a population of over 150,000 inhabitants with a long university tradition, served by an airport connected either directly or, via Bucharest, with Western European capitals. The list of secondary cities comprises: Cluj Napoca, Timisoara, Iasi, Brasov and Targu Mures. The largest modern office stock can be identified in Cluj and Iasi (est. 120-150,000 m2), followed by Timisoara (est. 90-110,000 m2), Brasov (est. 80-90,000 m2) and Targu Mures (est. 50-70,000 m2). Between 2004 and 2006, the strong presence of multinational companies in Bucharest and our selection of secondary cities, encouraged reputable local and international developers to invest in larger office projects. The increased number of outsourcing operations in Romania, which generate the majority of new demand, shifted the development pattern from business center type developments, to multi-phased business parks. In Bucharest, projects located within close proximity to a metro station and university hubs, drive the development pipeline. In regional cities, former industrial areas (brownfields) take top
2013-2015: Business parks pipeline in Romania (selection)
Project Green Court Ph I Hermes Business Campus Green Gate AFI Park 2 Liberty Technology Park Ph I Cluj Business Center United Business Center United Business Center 4 City Business Centre 5 Coresi Business Park The Science City City Bucharest Bucharest Bucharest Bucharest Cluj Cluj Cluj Iasi Timisoara Brasov Tg Mures GLA 2 (m ) 19,000 18,000 30,000 15,000 5,600 19,800 9,800 6,400 9,000 15,000 2 buildings Green Certification Yes Yes Yes Yes Yes N/A Yes N/A N/A N/A N/A

Liberty Technology Park, Cluj Napoca

Source: Jones Lang LaSalle

11 Romania. Too large to be ignored

The modern office stock in the capital city is graded in line with location and technical specifications. While location is of high importance in Bucharest, this is less important in the smaller regional cities. For example, in Bucharest the highest vacancy is recorded in the northern peripheral locations poorly served by public transportation, though in these locations, which emerged as office submarkets in the last 5 years, some of the top quality office buildings/business parks have been developed in Romania to date. The modern, Class A developments by technical specifications offer larger and open floor plates (of over 1,000 m2/floor), 4-pipe HVAC system, raised floors, glazed faade, minimum 2.7 m floor to suspended ceiling height, incorporated lighting system (LED's for green certified buildings), CCTV, 24/7 security, BMS, heavy traffic resistant carpeting in the office areas and prestigious main lobby areas. These features are applicable to Class A buildings completed in Bucharest, as well as projects recently completed or, in the pipeline in secondary cities. The trend emerged due to occupiers' interest in selecting good quality office accommodation for their Romanian operations as real estate plays an important role in achieving and maintaining a good attrition rate of the qualified workforce. Given the stock difference between Bucharest and the secondary cities, indisputably the real estate offer is more diverse in the capital city, both in existing and pipeline offer. However, the cost gap is not that wide considering that the comparison should be made between average rent in Bucharest and the prime rent in secondary cities.
Market Practice Prime Rent Average Rent Class A Lease Length Indexation Service Charge Bucharest 18.5 14-16 3-5 years Annually, with Euro CPI 2.5-4/m /month All costs recovered by the Landlord Triple A leases Incentives Fit-out contribution Rent free period Free parking Add-on Factor
Charles de Gaulle Plaza, Bucharest
2

America House, Bucharest

Recent market assessments show that average rents for non-CBD locations in Bucharest are in the region of 14-16/m2/month while decentralized locations for similar Class A accommodation command headline rents of 10-12/m2/month with net effective rent decreasing to 1 digit rental price. Secondary city offices are currently marketed at 13-15/m2/month, with the net effective rent depending on the leased area, lease length, expansion opportunities and covenant of the occupier. Service charges and parking space rent are additional to the office rent. For the vast majority of modern buildings, leases are triple A, with all costs included in the service charges, which are reconciled annually.
Secondary cities 15 13-15

Typically 6-8% Rarely, more common in case of expansion within the same park In case of lease renewals

Rent Reviews

The reason behind this rationality is that occupiers interested in regional cities are also assessing non-CBD locations in Bucharest.
Source: Jones Lang LaSalle

12 Romania. Too large to be ignored

Emerging Outsourcing Location

These cities are mainly established manufacturing hubs with sufficient tertiary populations to accommodate outsourcing operations. The gap is also explained by the size of operations. Very few operations outside of Bucharest exceed 1,500 or 2,000 m2. Therefore, an increase in demand is expected in the medium term, due to an increase in larger space enquiries for various cities in Romania. These active searches are encouraging developers to assess potential development sites and enlarge the market beyond Bucharest.

The increased presence of international companies with their BPOs/SSCs/ITOs (Outsourcing and Shared Service Centres) has greatly influenced real estate development activity in Romania. In early 2005, only a few companies were present in Romania with such operations. Over the following 3-5 years, the number of new openings increased the annual take-up from a level of 119,000 m2 in 2009 to the highest take-up ever recorded in Romania of 270,000 m2, in 2010. In this time frame, real estate developers, whether established or opportunistic (local and international), have tapped into the Romanian market and secured land for further development. Larger projects were completed between 2009 and 2010 and increased annual stock by 370,000 m2 and 275,000 m2 respectively. As new supply outstripped take up, the market also witnessed an increase in the vacancy level from 1-2% in Q4 2008 to 15-16% in Q4 2009. Vacancy, however, is concentrated in the peripheral areas of Bucharest such as Pipera North and Baneasa. This is reflective of the market activity in Bucharest, however, developers were more cautions in secondary cities, with smaller scale office developments completed speculatively. These developments sufficiently accommodated the real estate demand, due to the smaller scale of operations opened in these cities. Today, secondary cities are competing with Bucharest in attracting existing or newer requirements, by offering highly competitive office accommodation, both financially and technically. Although there is still a gap in demand between Bucharest and the secondary cities, we do expect a further increase in demand for secondary cities as well as interest in other cities than those identified in this report. We expect the rise of cities such as: Craiova, Galati, Oradea, Constanta and Ploiesti, to list just a few.

There still remains limited cross county development activity with Iulius Group and Modatim being the two main developers with activity outside of their city of origin.

13 Romania. Too large to be ignored

Retail Market
The modern retail market began in 1996, which corresponds with the opening of the first cash and carry store of Metro in Bucharest. Soon after, the German retailer was followed by Selgros which opened its first store in Brasov. The next stage of the retail market was marked by the opening of the first shopping center by Turkish Group - Anchor, with Bucuresti Mall. The same group completed the second mall in Bucharest, in 2004, Plaza Romania. This also represented an important milestone as Inditex opened its first Romanian Zara store in Plaza Romania and was considered for a few years as the best performing store in the network. In 2001, Carrefour opened its first hypermarket in Romania. In 2003, it was shortly followed by the second unit, in an unusual central location in Bucharest. Anecdotal sources, place this centrally located Carrefour Orhideea among the best performing stores in its global network. Anecdotal or not, the need for modern retail was tremendous at that time in both Bucharest and Romania. Any modern retail scheme performed very well and delivered the best financial results. In just 10 years, the retail market has witnessed an incredible path of development. Many developers have even secured adjacent lands in secondary cities. The demand for modern retail has increased the pipeline to unsustainable density levels especially in the context of the drop in consumer spending in 2009 caused by the economic slowdown. With very few exceptions, most of the pipeline shopping center projects remain on hold in their planning stages. During this decade, a few concepts have emerged as being highly successful in Romania. Retail parks can be considered the most successful retail format in Romania. Shopping centers over 1-2
Selection of completed shopping centers in Romania Crt 1 2 3 4 5 6 7 8 9 10 Shopping Center AFI Palace Cotroceni Baneasa Shopping City Sun Plaza Iulius Mall Polus Center Electroputere Ploiesti Shopping City Palas Iasi Maritimo Shopping City Iulius Mall GLA 80,000 80,000 80,000 67,000 63,000 55,000 55,000 54,100 51,000 49,800 Completion City 2009 2007 2010 2005/2009 2007 2011 2012 2012 2011 2008 Bucharest Bucharest Bucharest Timisoara Cluj Craiova Ploiesti Iasi Constanta Suceava Major Retailers - Selection Real, Inditex Group, H&M, Humanic, Cinema City, Imax, C&A, Deichman Carrefour, Peek&Cloppenburg, Inditex Group, Sport Couture, Collective, H&M Cora, H&M, Douglas, Zara Auchan, Zara, World Class Health, Camaieu Carrefour, C&A, Zara, H&M, Takko, Decathlon Auchan, Zara, LC Waikiki, H&M, Intersport Carrefour, Zara, H&M, Cinema City Auchan, Zara, H&M, Cinema City Auchan, Peek&Cloppenburg, Domo, Altex, Humanic, H&M, C&A Auchan, Zara, H&M, Cinema City

floors, with a GLA of between 20-30,000 m2 in secondary cities, have also been very successful. Bucharest has again a different development path with the largest projects proving to attract the highest traffic and generating the highest turnovers. After a hectic development decade, the market finally settled. Although the pipeline is constantly revised, the market still witnesses a few important openings each year. Though the retail market can be considered as almost saturated, on a nationwide basis, case by case opportunities can be identified, even in Bucharest or in certain larger secondary cities which still lack modern retail supply. For example, Galati, one of the top 5 regional cities by population, still has no modern shopping center. The pattern of modern retail stock varies from region to region: in
Shopping Centers Stock Density per Capita in CEE & SEE
Serbia Romania Hungary Croatia Slovakia Poland Czech Republic

Romania shows retail development potential

50

100

150

200

250

Source: Jones Lang LaSalle

Total GLA in sq m / 1,000 inhabitants

some locations, retail parks are in demand, in other cities retail galleries attached to hyper- or supermarkets are sought after and in several cities, medium sized shopping centers have been completed. Apart from this, the development pattern has changed in the last couple of years, from a strong shopping center pipeline, to a current pipeline consisting of either retail parks or retail agglomerations.

Source: Jones Lang LaSalle

14 Romania. Too large to be ignored

High Street Romania's cities mainly because of historical reasons suffer from a lack of high street retailing. High street retail supply presents numerous opportunities in any major city of the country, but street fashion is one of the most under developed market sectors. Pre90's state-owned companies were responsible for managing the high street portfolio. Once privatized, the new owners were interested in maximizing the rent roll. The results were translated into a lack of high street fashion retail, and a high occupancy rate generated by the banking sector, during the peak of retail banking between 2005 and 2009, and by the pharmaceutical industry, with numerous privately owned pharmacies generating active demand.
Source: ?????

Big Box Big Box supply is well represented and diversified throughout the country. Relatively recent market entrants IKEA and Leroy Merlin are the exceptions with each having only 1 box in Romania, respectively in Bucharest. The rest of the major players have at least 1 box in each of the larger regional cities. In the last 3-5 years, a number of consolidations were recorded, the latest major one being the purchase of the real hypermarket stores by Auchan (20 out of 24 stores existing in Romania), while the Bricostore network was acquired by UK-based company, Kingfisher.
List of Major Big Box Occupiers in Romania Type Cash&Carry Big Box Retailer Metro Selgros DIY Praktiker Bricostore Leroy Merlin Hypermarkets Carrefour hypermarkets Auchan+ real No of Boxes 32 19 27 15 1 24 10+20 10 83 72 158 136 151 1 2 10

High street retail is still patchy today with very few success stories recorded in Romania. In Bucharest, the main reason is that high

street retailers opted for shopping galleries attached to luxury 5-star hotels instead. In the secondary cities, Sibiu is one of the few exceptions, having an attractive pedestrian retail location, due to intensive refurbishment works of the city center prior to 2007 when it was designated as a European Capital of Culture.
Selection of luxury retailers and their locations in Bucharest (listed in alphabetical order) Retailer Burberry Boss Hugo Boss Emporio Armani Ermenegildo Zegna Escada Gucci La Perla Louis Vuitton Max Mara Moschino Paul & Shark Roberto Cavalli Valentino
Source: Jones Lang LaSalle

Cora Supermarkets Kaufland Billa Discounters Lidl Penny Profi Furniture Ikea Kika Sportswear
Source: companies websites

Location Radisson Hotel Calea Victoriei street unit Calea Victoriei street unit Radisson Hotel JW Marriott Hotel Athenee Hilton Calea Victoriei street unit JW Marriott Hotel Calea Victoriei street unit Calea Dorobantilor street unit Calea Victoriei street unit JW Marriott Hotel JW Marriott Hotel

Decathlon

Factory Outlet Centers In 2008, the first factory outlet center was opened in Romania. Fashion House Outlet Center Bucharest, is a 16,000 m2 scheme developed by Belgian company - Liebrecht & wooD. Despite the project opening with a high occupancy rate of close to 80%, the decline of the retail market also influenced the performance of the center and placed other outlet projects on hold.

15 Romania. Too large to be ignored

Retailers Romania's long history of limited modern retail, helped international retailers, especially fashion retailers, to achieve high turnovers per store, once they entered the market. Mass market fashion retailers opened their first stores in 2004 in the Plaza Romania shopping center. Zara, Mango, Promod and Marks & Spencer all opened their first units in Romania almost 10 years ago. The next milestone is set by retailers that committed to the Romanian market in the late 2000's, in the so called third generation shopping centers completed in Bucharest: Baneasa Shopping City and AFI Palace Cotroceni. In these centers, the retail market witnessed the opening of the first Peek & Cloppenburg multibrand store, Douglas, Reserved, Max Mara Weekend and Massimo Dutti units. H&M entered the market in March 2011 with their flagship store in AFI Palace Cotroceni. Today, the H&M network has 22 stores and plans to open up to 50 further stores throughout Romania, compared with the 106 currently trading in Poland. The vibrant activity of new retailers entering the market slowed down in 2012, when only 2-3 new mass market retailers opened stores in Romania. Among these Subway has already opened 13 units in the country and is targeting a network of 40 stores by 2016. Luxury retailers have also opened flagship stores in Bucharest, with Max Mara being one of the first luxury retailers with a constant presence since 1999, while La Perla, Valentino and Escada are some of the latest entrants in Romania. expansion opportunities to those international retailers with a solid financial background, proven results and that have the ability to negotiate excellent, long term financial packages with shopping center owners and developers. These packages may include: discounted rents, step rents, turnover rents, fit-out contributions and for the some of the highly desired retailers, turn-key retail units. In these market conditions, with retailers eager to take advantage of the favorable leasing conditions, we do not forecast an increase of the vacancy rate. Furthermore, rents for shopping centers and street units have stabilized to a sustainable level and no further softening is expected for 2013.
Prime Rents 2 (/m /month) Shopping centers Prime retail street Bucharest 55-65 55-65 Regional Cities 20-35 20-40

Source : Jones Lang LaSalle, Q1 2013

Prime rent definition: Represents the top open market rent that could be expected for a notional prime position shop situated in a specified shopping centre or for a notional prime position unit in a prime retail location in the market, as at the survey date. Standard unit area: 100 m2.

With a limited pipeline, both in Bucharest and the regional cities, the active retailers are re-leasing the units either recently vacated or, those that are to become vacant by local retailers due to their weak financial performance. In addition to the local retailers, some international retailers have stepped out of Romania, creating

16 Romania. Too large to be ignored

Logistics
Compared with other real estate sectors, the industrial and logistics market is the least developed, considering the country's potential. The current modern industrial stock is estimated at almost 1.8 million m2, with close to 1 million m2 located in the surrounding industrial hubs of Bucharest. Other modern industrial hubs have been established in Ploiesti, Timisoara, Arad, Brasov, Oradea, Constanta and Cluj-Napoca. With a country level vacancy rate estimated at between 12-14%, the market is mainly developed on a built-to-suit (BTS) basis, with fewer speculative projects in the pipeline. The most common leasing market drivers are the following: 1. lease of an existing vacant unit, or 2. secure a BTS unit through a prelease in an existing logisti park. 1. Leasing space in an existing warehouse park This scenario applies to distribution and logistics companies. It is rare that existing units can be easily converted into production facilities. However, some of the existing units, with lower clear height (up to 4m), an inner-city location and access to existing public transportation, could be converted into production facilities. The process is straightforward as in any lease agreement: ? standard lease length of 3 years ? use of space in line with existing technical specification ? fit-out of the space in line with occupiers requirements ? leasing space in special industrial parks might offer lower occupation costs Who are the occupiers?
? Companies that need to lease space immediately / relocate ? Companies which are comfortable with the existing industrial

Representative BTS units were recently completed in Bucharest West, WDP Oarja and Ploiesti West Park. The main market standards are as follows: ? Longer lease terms of 5-7 years or longer ? Longer negotiation periods ? Handover of the space: between 6-9 months after concluding the lease agreement ? Selection of the site is subject to the agreed site plan of the park Who are the occupiers? ? New entrants, looking to establish production facilities in Romania with regional distribution
? Existing companies looking to upgrade their production facilities

or strating up a new project It is also possible for occupiers to purchase BTS units in some of the existing logistics parks. The development process could be undertaken either by the park owner or, by any other third party. The decrease in land prices for logistics development has increased the interest of some industrial occupiers to purchase well located industrial plots and to move into owner occupied premises. This mainly applies to larger production companies such as, Saint Gobain or, major 3PL companies such as: Gebruder Weiss and FM Logistic.
Prime Rents 2 (/m /month)
Distribution centers Distribution centers 2 (exceeding 20,000 m ) Light industrial Other costs Service charges
Source: Jones Lang LaSalle

Bucharest

Regional Cities
3.5-3.75 3.25-3.5

3.8-4.0 3.5-3.7

3.5-4.25

3.5-3.75

stock
? Logistics operators, distribution companies, e-commerce ? Companies requiring smaller light industrial facilities

0.7-1.0

0.7-1.0

2. Built-to-suit in an existing logistics park Romanian industrial developers that can accommodate such requirements usually own larger plot of lands, often with infrastructure and utilities in place. BTS units can either be leased or, at hand over, they will enter into the possession (freehold) of the occupier.

17 Romania. Too large to be ignored

Manufacturing
The manufacturing sector is well diversified but, with fewer companies under each category when compared with Poland for example (see report - Made in Poland). As in other CEE countries, with former centralized economies and industry driven by the state, we identified a mix of greenfield and brownfield investments (production units formerly owned by the Romanian state). Automotive Industry With over 50 years of automotive tradition, Romania is an important automotive hub in the CEE and SEE region. Through privatization, 2 major car producers are present in Romania. Renault has a 10 year presence in Romania through the successful privatization of the former Dacia plant. The second car producer is Ford, who took over the Daewoo factory in 2007. Initially Daewoo took over through privatization the former Romanian car production plant of Oltcit, a joint venture of the Romanian state and French car producer Citroen.
Car Manufacturer Renault Main Figures Present since 1999 18,000 employees 4 million cars 80% of the cars exported R&D Center in Titu, investment value est. at 450 million Car production capacity: max 330,000 units / year FORD Presence since 2007 3,500 employees 90% of the cars exported Romanian made Ford BMax since 2012 Car production capacity: max 350,000 units / year
Source: Romania Your Business Partner 2012

In particular, the spare parts and car system production facilities have developed around the main car production locations. Another criteria that was considered in establishing such facilities, was the ease of access to Western Europe, due to the more developed highway infrastructure and shorter commuting time from Romania to Western Europe. Spare parts and car systems are high up the value chain of car brands and the country is currently producing components for: Volkswagen, Audi, BMW, Porsche, Mercedes-Benz, Ford, Renault and Nissan, amongst others.
Selection of automotive components producers Type of components Companies

Electric & Electronic Systems

Lisa Draxlmayer Delphi Packard Alcatel Lear Corporation Leoni Wiring System Yazaki Corporation Siemens Automotive

HVAC Systems Exhaust Systems Seating Plastic & Rubber Components

Continental Valeo Borla Honeywell Garett Johnson Controls Faurecia Dow Automotives AD Plastik BOS Automotive Hutchinson

Gear Boxes

Renault Daimler Chrysler DCI Wallbridge Star Transmission

Tires

Continental Michelin Pirelli

Romania's long tradition in car manufacturing played a major role in establishing various automotive related industries. The majority of these automotive related production facilities are located in the western half of Romania where larger manufacturing plants of tires, car seating, steering wheels, electrics and electronic systems, plastic components and exhaust systems can be found for example.

Steering Wheels

Takata Corporation Magneto Wheel Ina Schaffers Thyssen Krupp Koyo Seiko Auto Chassis International Dura Automotive System

Source: Romania Your Business Partner 2012

18 Romania. Too large to be ignored

Other manufacturing industries such as petrochemical, pharmaceutical, heavy industry and machinery are also present in Romania due to the countries long tradition over the last 30-40 years in the afore-listed manufacturing industries. FMCG companies A number of large multinationals have opened brand new production facilities in Romania or, have converted existing brownfield sites into modern production units. These companies entered Romania in the early 1990s and through privatization, entered via the possession of former state owned production sites related to their businesses. Representative examples are Pepsi, Coca Cola, P&G, Kraft Jacobs Suchard and Colgate Palmolive. Today, some FMCG companies are controlling their SEE and Republic of Moldova operations from Romania, while a few of them have even relocated their production facilities from Romania in the past 3-5 years, into countries with cheaper labour costs, such as Moldova and Bulgaria. As 35-50% of Romanian's household expenditures go towards food and beverages, this industry has a wide presence in Romania. A balanced mix of local and international companies cover milk and meat processing, fruits and vegetables, sugar and oil production. The beverage industry is well represented by local and international companies for both non-alcoholic and alcoholic beverages. Furthermore, international tobacco brands have opened production facilities, mainly in Bucharest and surrounding industrial hubs of the capital city. The industry is well organized and represented in relation to the local authorities. The industry was subject to major tax increases over the past 10 years as Romania was producing the cheapest cigarettes when compared with Western European countries. The producers present in Romania include: Japanese Tobacco International (JTI), British American Tobacco (BAT) and Philip Morris. Domestic Appliances & Electronics Sectors Very few domestic appliances and electronics companies have established production facilities in Romania. Those that are present in Romania include the following companies: Arctic former state owned production unit, now owned by Turkish group Arcelik, since 2002.

Selection of FMCG Manufacturing Companies FMCG

Food

Producers
Danone LaDorna Napolact Albalact Hochland Bunge Cargill Dr Oetker Agrana Nestle Supreme Chocolat Boromir Hutton Orkla Foods

Non -alcoholic Beverages

PepsiCo Coca Cola HBC RioBucovina European Drinks Romaqua

Alcoholic Beverages

Domeniile Halewood Ursus Breweries / SABMiller Heineken Romania URBB (Tuborg, Carlsberg) Bergenbier / StarBev Romaqua

Detergents

Unilever P&G Henkel

Tobacco

JTI BAT Philip Morris

Source: Jones Lang LaSalle

Electrolux privatization of a former state owned production unit, privatized in 1995. Philips started the production of coffee machines in 2011, in the production unit previously owned by Saeco. DeLonghi undertook the former Nokia plant in Jucu, near Cluj Napoca. Production started in early 2013.

19 Romania. Too large to be ignored

Major Automotive Companies in Romania

Bihor Autoflex SRL (Bosal) Ficamt (JV Ficosa) Arad Takata-Petri Romania SRL Leoni Wiring Systems Arad SRL EKR-Elektrokontakt Romania SRL Bos Automotive Products Romania Nexans Romania SRL Yazaki Component Technology SRL Valvetek SRL Coindu Romania SRL ERT Group Automotive SRL Satu Mare DRM Draxlmaier Romania Sisteme Electrice SRL Phoenix Romania SRL [Phoenix Automotive AG] Schlemmer Romania SRL Salaj Silvania [Michelin] SA Michelin Romsteel Cord SA Cluj Automobile Componente Electrice SRL Eckerle Romania SRL Trelleborg Romania SA Bistrita-Nasaud Leoni Wiring Systems Ro SRL Mures Parat Ro SRL Brasov Autoliv Romania SA Ina Schaeffler Brasov SRL Rolem SRL Stabilus Romania SA
IAI

SATU MARE

BAIA-MARE

BOTOANI SUCEAVA

Timis Continental Automotive Products SRL Delphi Packard Romania SRL Kromberg & Schubert Romania SRL Eybl Automotive Romania SRL Siemens Vdo Automotive Romania SRL DPR Draxlmaier Procese de Productie Romania SRL Eybl-Automotive-Components SRL DSR Draxlmaier Serviceleistungen Romania SRL Hella Lighting Romania SRL Dura Automotive Romania SRL Hella Electronics Romania SRL Mahle Componente de Motor SRL Hunedoara Sews Romania SRL Key Safety Systems SRL

ORADEA ZALU BISTRIA PIATRA NEAM

CLUJ-NAPOCA

TRGU-MURE BACU MIERCUREA CIUC VASLUI

ARAD TIMIOARA

ALBA-IULIA

DEVA SIBIU BRAOV

SFNTU GHEORGHE FOCANI GALAI

Prahova SC Victoria [Michelin] SA Yazaki Romania SRL Freudenberg Flexibile de Frana SRL Calsonic Kansey Romania SRL Bucharest Honeywell Garrett SRL

REIA TRGU-JIU RMNICU VLCEA BUZU

BRILA TULCEA

DROBETA TURNU SEVERIN

TRGOVITE PITETI

PLOIETI
Urziceni

BUCURETI SLOBOZIA

CRAIOVA

SLATINA CLRAI GIURGIU CONSTANA

ALEXANDRIA
Turnu Mgurele Zimnicea

Alba Star Transmission Cugir SRL Valcea Magnetto Wheels Romania SA Cord Romania SA Pirelli Tires Romania SRL

Source: Central Europe Trust Company

Sibiu Thyssenkrupp Bilstein Compa SA Thyssenkrupp Compa Arcuri SA Kuhnke Production Romania SRL Faurecia Seating Talmaciu SRL Brandl Ro SRL SNR Rulmenti SRL Takata Petri Sibiu SRL Continental Automotive Systems SRL Marquardt Schaltsysteme SCS Caucho Metal Productos SRL Kromberg & Schubert Romania Me SRL

Arges Lisa Draxlmaier Autopart Romania SRL Johnson Controls Romania SRL Lear Corporation Romania SRL Auto Chassis International Romania SRL Valeo Cablaje SRL Euro Auto Plastic Systems SRL Borla Romcat SA Ronera Rubber Dow Automotive SA Automotive Complete Systems SA Valeo Electrical Connective Systems SRL

Competitive Wages in the Manufacturing Sector in Romania (except Bucharest) Position Production Manager Quality Manager Technical Manager Finance Manager HR Manager Logistic Manager Quality Manager Buyer HR Officer Payroll Specialist Receptionist Operator - Skilled Forklift Operator Operator - Unskilled Monthly Costs () Net Salary 2,619 2,024 1,667 2,381 1,667 810 1,071 905 619 619 476 333 310 214 Gross Salary 3,734 2,885 2,376 3,395 2,376 1,154 1.528 1,290 883 883 678 468 433 294 Company Taxes 1,049 811 668 953 668 326 430 364 250 250 192 134 124 85 Total Costs 4,783 3,696 3,044 4,348 3,044 1,480 1,958 1,654 1,132 1,132 870 602 557 378 Annual Gross Salary 57,392 44,356 36,532 52,176 36,532 17,757 23,496 19,846 13,588 13,588 10,442 7,223 6,686 4,538

Source: Lugera - The People Republic, Bucharest commands salaries with 10-20% higher compared with the country level

Jones Lang LaSalle Victoria Center 145 Calea Victoriei, 10th Floor Bucharest 1, 010072 Romania

Content Partners Manuela Furdui Managing Partner FiNEXPERT 145 Calea Plevnei Bucharest, Romania +40 21 311 44 65 manuela.furdui@fin-expert.ro www.fin-expert.ro Marius Dobrescu Business Development Manager Lugera - The People Republic 98 Vulturilor Street Bucharest, Romania + 40 21 318 71 20 marius.dobrescu@lugera.ro www.lugerarepublic.ro

Gijs Klomp Managing Director Romania + 40 21 302 3400 gijs.klomp@eu.jll.com www.jll.ro Kevin Turpin Head of Research CEE + 420 224 234 809 kevin.turpin@eu.jll.com www.joneslanglasalle.cz Levis Vlad Head of Research Romania + 40 21 302 3400 levis.vlad@eu.jll.com www.jll.ro

May 2013 Advance publications are topic-driven white papers from Jones Lang LaSalle that focus on key real estate and business issues. www.jll.ro Front page photo by Diana Iorgulescu COPYRIGHT JONES LANG LASALLE IP, INC. 2013. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without prior written consent of Jones Lang LaSalle. It is based on material that we believe to be reliable. Whilst every effort has been made to ensure its accuracy, we cannot offer any warranty that it contains no factual errors. We would like to be told of any such errors in order to correct them