Deloitte Report on Tbilisi Real Estate MTrket

Real Estate Market Overview

Deloitte••••

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Economic Policy Agency

Tbilisi City Hall Supports Your Business

Time for Business in Tbilisi

REAL ESTATE MARKET OVERVIEW

Tbilisi 2007



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This Report has been complied by “Deloitte and Touche” Kiev office on the basis of publically available information and discussions with various developers and real estate advisors in Georgia. Deloitte’s work on the Report was commissioned by the Tbilisi City Authorities.

While the information herein is believed to be a fair summary of current developments in the Tbilisi Real Estate market, Deloitte disclaims any and all responsibility or liability for the contents of the Report and any errors, misstatements in or omissions from the Report. In particular, but without prejudice to the generality of the foregoing, no representations or warranties are made as to the accuracy or completeness of any statements, estimates and projections with regard to future events.

It should be noted that Deloitte undertakes no obligation in respect of any actions taken by a reader of the Report. Deloitte will not regard any reader of the Report as a client.



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1. EXECUTIVE SUMMARY 4

2. ECONOMIC OVERVIEW 7

3. RESIDENTIAL REAL ESTATE MARKET OVERVIEW 14

4. OFFICE PREMISE MARKET OVERVIEW 23

5. HOTEL MARKET OVERVIEW 33

6. RETAIL REAL ESTATE MARKET OVERVIEW 41

7. WAREHOUSE MARKET OVERVIEW 48

8. FUNDING FOR REAL ESTATE 52

9. TAX OVERVIEW AND REGULATORY ENVIRONMENT 55



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1. Executive summary



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Executive summary

The Real Estate sector is one of the fastest developing sectors of the Georgian economy and is attracting substantial attention from international investors. Tbilisi, the capital of Georgia, is at the center of Georgia’s political and economical development and is seeing the majority of the new Real Estate projects. A large number of new projects are expected to be completed in the next 2-3 years. Publicly announced projects by developers will more than double office, retail, warehouse and hotel stock in this period. In addition to the announced projects, there are a number of very large projects at an early planning stage. Prices for real estate have increased more than 4 times since 2003. However the supply of new stock will lead to much greater completion between landlords. The market does not therefore expect further sharp increases in rental rates, but property prices are expected to grow further in the absence of major political turmoil. As property prices increase, prime yields will start falling towards Eastern European levels. Residential Real Estate More and more Georgians are hoping to move from old soviet-style flats into new apartments and improve their living conditions. Total residential stock per capita is one of the lowest in Eastern Europe and average household size is much higher than in any other Eastern European capitals. Most of the existing residential stock was built between 1945 and 1985 and is not of good quality. With the progressive increase of GDP per capita and disposable income, the trend of abandoning old-Soviet style apartments will accelerate and the demand for new residential property will increase. From the supply side the major problem is lack of suitable land plots especially in the city center. This constraint significantly restricts the prospects of residential real estate development in Tbilisi. Office Premises Tbilisi is far behind other Eastern European capitals in its office stock per capita and there are only four A class office premises in the city. Current demand for high class office premises is higher than existing supply and vacancy rates are extremely low, almost zero. The resulting high rents and the yields which are among the highest in Eastern Europe means that office premises are still undervalued. The pipeline of new projects is significant and A&B class office space will almost double in next 2-3 years. Even after completion of the new project pipeline, per capita stock will still be one of the lowest in major Eastern European cities. Hotel Market Hotel sector growth is being fueled by development of the tourism industry and by FDI growth. By 2010 Tbilisi is expected to have ten high class hotels, but the number of rooms per capita will still be behind the level in major Eastern European cities. Currently prices for up-market hotel rooms in Tbilisi are higher and vacancy rates are lower than in comparable Eastern European cities. Following completion of the known new developments, vacancy rates will likely increase and rates per night fall from current levels. Retail Real Estate Market . The retail sector of the real estate market is seeing major switches from old soviet-style open markets and bazaars to modern shopping centers. Based on announced projects, Tbilisi in the next 3-4 years will have at least an additional 150,000 m2 of shopping center space (and there are several large developments which might involve conversions into new shopping centers). This compares to current stock which is in the 60,000-80,000 m2 range. As a result, Tbilisi will have a higher retail stock per 1000 residents by 2010 than Kiev or Bucharest has today. Any slowdown in growth in retail activity and people’s disposable income may generate the risk of oversupply of modern retail premises. Warehouse . The warehouse segment is the least developed part of the Real Estate sector in Tbilisi. There are currently no A or B class warehouse facilities, and seemingly only a few new projects in the pipeline. These are at very early stages of development with no confirmed completion timelines. This segment definitely has room for more growth. Risks associated with Real Estate sector in Tbilisi Political Risk . Political factors have a major influence on the future prospects of Real Estate in Georgia. On the one hand the potential integration into NATO and the European Union will significantly increase demand for all real estate sectors. However any political uncertainties and any deterioration in regional flashpoints such as Abkhazia and South Ossetia will undermine the prospects of development.



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The recent demonstrations and State of Emergency in November 2007 immediately had a negative impact on the Real Estate sector in Tbilisi. While prices for properties did not fall, sales levels of new apartments decreased. It is important that the recent Presidential election result generates stability. Financial Risk . Local developers have very limited access to capital markets. Pre-payments from clients remain one of the main sources of financing especially in the residential sector. This source of financing involves inherent uncertainties as prices for property are fixed, construction costs are increasing and sentiment can change very quickly. Undercapitalised developers are often fulfilling obligations on existing projects using cashflow from new projects. Significant value appreciation in recent years has protected developers and buyers, but continued reliance on this funding approach could lead to significant liquidity problems for even larger developers and buyers. Project and quality management risk . The buoyancy of the Real Estate market in recent years has attracted an increasing number of new developers but even large and established players have significant problems meeting deadlines and quality. Currently there is an impressive list of projects under development but only a few of them are being completed in line with the planned timetables.



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2. Economic overview




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Economic climate

During the last 5 years the Georgian economy grew at a real effective rate of 9% per annum, owing to liberal reforms, growing domestic demand and foreign direct investments.

Major changes generated by the reforms include:

• creation of one-stop shop for obtaining building permits

• significant liberalization of labour code

• optimization of civil courts system

Stable economic growth combined with liberal reforms turned Georgia into a country with a favorable economic climate.

As a result, Georgia was named the year's number one reformer in the World Bank's 2007 "Doing Business Survey," improving its overall ranking from 112 to 37. Georgia also improved from 52nd to 35th place on the Heritage Foundation's 2007 Economic Freedom Index

Table 2-1. Major macroeconomic indicators USD m 2002 2003 2004 2005 2006 2007*

Real GDP 3,383 3,759 3,981 4,363 4,773 5,161

Real GDP growth (in %) 5.5 11.1 5.9 9.6 9.4 8.1

GDP per capita (in USD) 778 920 1,197 1,485 1,759 2,013

CPI (in %) 5.4 6.9 5.3 6.2 8.8 11.7

Trade deficit (453) (586) (859) (1,141) (1,858) (2,111)

FDI, net 172 344 509 360 1,008 1,280

Population (in thousands) 4,372 4,343 4,315 4,322 4,401 4,395

Unemployment (in %) 12.6 11.5 12.6 13.8 13.6 N/A

Fiscal deficit (% of GDP) 3.3% 2.1% 1.3% 0.2% 0.2% N/A Source: Economist Intelligence Unit, Ministry of Economic Development of Georgia, The NBG

* 2007 is estimated




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Political climate

The Georgian economy and especially the real estate sector in Georgia are very sensitive to political instabilities. In November 2007 political tension arose around early presidential elections. This had an immediate negative effect on the real estate market in Georgia as sales transactions in November decreased significantly while prices remain unchanged. The recent Presidential election result now needs to generate stability for a return to continued growth in the sector.

Growth dynamics

Positive GDP dynamics from 2005 to 2006 are attributable to

• trade expansion of 19.8%

• industrial sector growth rate of 15.9%

• transport and communication sectors expansion by 14.1%

• construction sector growth by 9.8%

Current economic growth is expected to continue into the future. Despite the recent period of political instability, the improved economic climate is expected to stimulate further domestic entrepreneurship and attract foreign direct investments. Much of the growth is due to disciplined fiscal policy – the fiscal deficit in relative terms declined throughout the last five years and was below 0.25% of GDP in 2005-2006.

An additional factor excepted to stimulate further growth is the decrease in the corporate tax rate from 20% to 15%, scheduled for January 2008.

Figure 1 Real GDP dynamics

3,383

4,363

3,759

4,773

3,981

5.5 5.9

9.6

9.411.1

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2002 2003 2004 2005 2006

USD m

56789101112131415

Gro

wth

, %CAGR:~9%

Source: Economist Intelligence Unit, Ministry of Economic Development of Georgia

Inflation and prices

During 2006 several factors had a negative impact on price levels in Georgia: increases in world oil and sugar prices, avian flu, gas and electricity price increases by Russia. Price levels in Georgia were influenced by price changes in Georgia’s principal trade partner countries. The annual inflation rate in Russia and Turkey equaled 9.1% and 9.7% respectively.

Doubling of the country’s foreign reserves is explained by the Georgian Central Bank’s purchases of FOREX on interbank market. Interventions of Central Bank were lead by pressure on the Georgian currency from growing imports prices and the inflow of foreign currency from privatization proceeds.




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Figure 2 Inflation and local currency exchange rate

2.15

1.781.811.92

2.20

5.3

8.86.96.2

5.4

0

2

4

6

8

10

12

14

16

2002 2003 2004 2005 2006

CPI, % p.a.

0.0

0.5

1.0

1.5

2.0

2.5

Lari/USD


International trade

The deterioration of the country’s trade balance is closely correlated with the embargoes introduced by Russia in 2006. The embargoes resulted in contraction of wine and mineral water exports to Russia by over 50% in 2006. Georgia has however managed to expand its exports of wine and mineral water to its other trade partners – Turkey, Ukraine, the USA – and mitigate the consequences of the embargoes.

Georgia has also grown its exports of basic resources – exports of ferroalloys are up by 12%, nitrogen fertilizers (30%), gold (42%), and copper scrap metal (180%).

The increase in imports is mostly attributable to increased imports of energy products (up by 46%), motor-vehicles (70%), computers (110%), mobile telephones (120%), and medicaments (20%). Georgia maintains a stable positive balance on trade in services, mainly due to inbound tourism. During 2006 the number of inbound tourists increased by 50%.

Figure 3 International trade

1,632

2,552

1,273

2,171

996

1,859

4,410

3,312

2,491

1,449

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2002 2003 2004 2005 2006

USD m

CAGR:Exports ~27%Imports ~32%


Labour productivity

During 2006 the highest productivity growth occurred in trade, financial sector, healthcare and education, fostered growth in all these sectors.




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Liberalization of the labour code led to fewer restrictions on the duration of term contracts and overtime workload. There was also a reduction of social security contributions paid on wages by businesses from 31% to 20%. Starting from January 2008 social contributions are eliminated, while the personal income tax rate increased from 12% to 25%.

Due to ageing and emigration, the country’s labour force is slowly decreasing. However a positive phenomenon is the growth in overseas workers’ remittances which equalled USD 409 million in 2006. The level of unemployment stabilized at 13% in 2005-2006.

Figure 4 Productivity and wage

64.876.7

99.8

123.7

146.6

45.1

82.4

47.3

106.8

60.7

-

20

40

60

80

100

120

140

160

2002 2003 2004 2005 2006

USD / month

Monthly GDP per capita Monthly wage


Foreign direct investments

Flow of FDI to Georgia was not large in 2002-2005 to compare with 2006. The largest investors came from US, UK, Russia and Turkey.

The largest share of FDI flows to the transportation sector, and particularly to the Baku-Tbilisi-Ceyhan (BTC) oil and gas pipeline project. Other important investment sectors include hospitality, retail trade, construction, and mining. With the completion of the BTC pipeline in spring 2005 FDI inflows fell, but they have recovered strongly in 2006 due to liberalization measures referred to and an active privatization programme.

Figure 5 Foreign direct investments

172

360344

1,008

509

0

200

400

600

800

1000

2002 2003 2004 2005 2006

USD m CAGR:~56%





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Table 2-2 Major indicators of Georgian economy USD m if not otherwise stated 2001 2002 2003 2004 2005 20 06 2007*

Real sector:

Nominal GDP 3,219 3,400 3,995 5,166 6,416 7,744 8,375

Nominal GDP per capita (in USD) 727 778 920 1,197 1,485 1,759 2,013

CPI (in % p.a.) 3.4 5.4 6.9 5.3 6.2 8.8 11.7

External sector:

Exports in goods (FOB) 496 603 831 1,092 1,472 1,667 1,876

Import in goods (FOB) 1,046 1,092 1,469 2,008 2,686 3,686 4,214

Exports in services 314 392 443 540 698 886 1,010

Import in services 237 357 390 483 625 724 783

Trade deficit in goods and services (472) (453) (586) (859) (1,141) (1,858) (2,111)

Current account deficit (212) (234) (383) (423) (752) (1,243) (1,656)

Foreign direct investments, net 110 172 344 509 360 1,008 1,280

Labour sector:

Population (in thousands) 4,401 4,372 4,343 4,315 4,322 4,401 4,395

Labour force (in thousands) 2,113 2,104 2,050 2,041 2,024 1,969 N/A

Unemployment (in % to labor force) 11.1 12.6 11.5 12.6 13.8 13.6 N/A

Monetary sector:

Broad money, M2 357 395 497 793 1,064 1,511 1,793

Foreign reserve 159 199 191 375 478 930 N/AN/A

Loans to GDP ratio (in %) 7.1 7.6 8.3 8.8 9.5 14.6 N/AN/A

Deposits to GDP ratio (in %) 5.0 5.7 6.3 7.2 9.1 10.1 N/A

Fiscal sector:

Fiscal budget revenues 438 528 625 1,189 1,799 2,489 N/AN/A

Fiscal budget expenses 497 640 708 1,256 1,813 2,508 N/AN/A

Fiscal budget balance (59) (112) (83) (68) (13) (19) N/A

Source: Economist Intelligence Unit, Ministry of Economic Development of Georgia, National Bank of Georgia

Tbilisi the capital of Georgia, has a population of 1.1 million and a total area of 500 km2. The Real Estate segment in Tbilisi is growing fast and most of Georgia’s new construction projects take place in Tbilisi.The output of Tbilisi’s construction sector reached around $425 million in 2006 vs $85 million in 2003. Taking into consideration the upward trend in approved constructions, construction activity is expected to continue to increase in future.

Figure 6 Output of construction sector in Tbilisi $

$0$50

$100$150$200$250$300$350$400$450

2003 2004 2005 2006

Source: Tbilisi city hall




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Figure 7 Approved new projects in Tbilisi in m 2

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2003 2004 2005 2006

Source: Tbilisi city hall



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3. Residential Real Estate Market Overview




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Overview

Residential real estate is one of the fastest growing sectors of the Georgian economy. The residential construction boom in Tbilisi is driven by individuals seeking to improve their living conditions and move from older housing in the suburbs to modern city center residential complexes.

Supply

The high demand for residential space has been followed by the appearance of many new construction and development companies offering a wide variety of newly-built apartments. Reflecting its capital city status, Tbilisi is the most developed part of Georgia. Key players of Tbilisi residential real estate sector are domestic developers. International companies and institutional investors are mostly attracted by the office premises and hotel sectors.

Vake and Saburtalo districts of Tbilisi city center are the most active areas for residential projects. Individual buyers making pre-payments for apartments before building completion remain the main source of funding for residential property developers. Demand continues to impact supply and motivates developers to implement residential projects in Tbilisi. Table 3-1 below lists the major residential projects which will be completed in the next few years.

Based on data of the Georgian Statistical Department, the average living space per person in Tbilisi for the year 2002 was 12.2 m2. Based on this and Tbilisi City Hall information on completed residential projects from 2003 to 2006, we estimated that average living space per person in Tbilisi does not now exceed 17 m2 per person.

Tbilisi residential property market is the most buoyant in the country, driven mostly by local residents. Real estate developers seek to buy land for their projects, but the boom in residential construction in Tbilisi has reduced the number of available locations in attractive districts of the city, and construction activity for the development of houses is shifting to the regions, especially mountain and forest areas surrounding Tbilisi. The Tsavkisi Valley located 6.5 kilometres away from the capital is seeing a project consisting of 168 individual houses. Prices per m2 in the Tsavkisi Valley currently range from $ 777 to $ 977. Another project is Tbilisi Heights, developed by the Arab-based company “Rakeen Development”, located in the northern mountains overlooking Tbilisi, 1200 meters above sea level. It consists of 50 super deluxe villas, 100 deluxe villas, 100 semi detached villas and 10-12 high rise condo buildings. Developers seek to avoid complicated negotiation processes with residents of still available small land plots in the capital. They instead want better access to land plots for development, and lower competition than Tbilisi. Regional expansion is a key strategic objective among all developers, as they seek to benefit from low competition and first-mover advantage.




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Table 3-1 Main residential complexes underdevelopment

Developer: Project name: Total living

area m 2 :

Completion date:

Average expected price

per m 2: in $ Center Point Group Saakadze - Residential complex 38,964 2008 N/A Center Point Group Venecia - Mixed complex 11,031 2008 665 Center Point Group Marijani - Mixed complex 13,011 2008 2015 Center Point Group Robaqidze - Mixed complex 11,567 2008 645 Axis Axis Palace 2 on Saburtao st 33,000 2008 795

Iberia Residential house on Chavchavadze #33 a

9,992 2008 450-950

Iberia Residential house Kipshidze #7 8,123 2008 600-900 Iberia Residential house on Radiani #13 1,211 2008 1700-2200

CI&D Architects High-Income Housing Condominium “Villa Vake” 3,000

2008 1000-1500

Kalasi Elite residential complex-“Vake Palace” 22,798

2008 N/A

Texx Group Shankhai Texx N/A 2008 420-690 Texx Group Isani Texx N/A 2008 370-540 Center Point Group Krtsanisi - Mixed complex 17,520 2009 1015 Center Point Group Khorashauli 69,429 2009 815 Center Point Group Ninoshvili -Mixed complex 12,611 2009 1215 Center Point Group Jikia - Mixed complex 13,020 2009 765 Axis Axis Palace on Saburtao st. 55,000 2009 815 Center Point Group Didi dighomi - Residential complex 44,369 2009 604 Center Point Group Mioni - Residential complex 23,121 2009 815

Axis High class residential house on Chavchavadze 75

10,171 2009 1300

Axis Residential house on Abashidze St. 10,818 2009 1600 Iberia Iberia hills 25,000 2009 1100-1400 Development Solutions Sakanela residential zone 60,000 2009

N/A Arci Avlabari-Residential complex 25,000 2009 900 Arci Vake 6,000 2009 2300 Bagebey City Group

Poolhouse - Residential comples 7,379 2009 1250-1700

Bagebey City Group Residential project "parkgate" 18,055

2009 1800

Texx Group Texx Lux N/A 2009 2500 Center Point Group Grmagele - Mixed complex 20,661 2010 675 Axis Axis Palace 3 on Sairme 15,370 2010 825

Aci Ortachalis "turfa" 95,000 2012 850

Demand

The residential housing sector is heavily supported by demand from individuals. Key factors are:

• average household size,

• average living space per person,

• decreased immigration,

• increased disposable income,




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• increased availability of mortgage loans,

• cash inflows from Georgians working abroad, and

• attractiveness of real estate as a investment product.

The largest average households in Eastern Europe are in Tbilisi. According to the last population census, in 2002 average household size in Tbilisi was 3.5 persons. Based on the expectation that household sizes are tending to decline as Georgia integrates into Europe, we estimated that today average household size in Tbilisi is in the range 3.2-3.4 persons. That number is still considerably higher than the household sizes in other European capitals, but the process of new family formation remains a force boosting current demand for residential properties.

Figure 8 Average household size

3.4

2.62.5 2.5 2.2 2.2 2.3 2.3 2.4 2.4 2.4

0

1

2

3

4

Tbilisi Bucharest Sofia Kiev Warsaw Prague Budapest Bratislava Vilnius Riga Tallinn

Source: REAS report, Georgian Department of Statistics, Deloitte & Touche estimates

Figure 9 Average living space per person

16m2

36m2

24m2

0

5

10

15

20

25

30

35

40

Tbilisi EU 15 capitals CE 10 capitals

Source: REAS Report, Georgian Department of Statistics, Deloitte & Touche estimates




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Approximately 15-17m2 of living space per person in Tbilisi is lower than average living spaces indicated in Central European and European Union countries. See figure 9 which compares Tbilisi with EU 15 and CE 10 capitals. Future residential projects in Tbilisi, which will be completed during the years 2007-2010, will increase average living space per person, but average space will still be far bellow Eastern European levels.

The Rose Revolution encouraged people to return from foreign countries and migration from Georgia decreased from 2002 to 2005. Figure 10 shows net migration of Georgian population.

Figure 10 Net immigration balance from Georgia

5.5

76.3

-28.6-29.1

-40

-20

0

20

40

60

80

100

2002 2003 2004 2005

Source: Georgian Department of Statistics

Reported salaries in Georgia do not reflect the actual income of potential middle class buyers. Statistical data for disposable income is unavailable. Average monthly income in Georgia is far bellow to average monthly income in other European countries but is growing fast. Average monthly salaries more than doubled since 2003, but are still low around $130 per month. Figure 11 shows the growth rate of average income in Georgia. Wage growth is not spread evenly across the all segment of labor force and employees in private sectors earn considerable more than employees in public sector. The middle class is in the process of formation and consists of individuals having an average $1,000-$1,200 monthly salary, who can afford mortgage loans with monthly payments of $500-$600.

Figure 11 Growth rate of average income

13%

18%

10%

8%

5%

7%

9%

11%

13%

15%

17%

19%

2003 2004 2005 2006

Source: Georgian Department of Statistics

Tbilisi accounts for about a third of Georgia’s population if Internally Displaced Persons (IDPs) and refugees are included. This plus the concentration of economic activity in the city is driving residential property demand.




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Figure 12 Percentage relate to country size

5.5%

16%

8.9%

16.8%

7.9%

11.5%

4.4%

16.3%

31.7%29.5%

32.5%

0%

5%

10%

15%

20%

25%

30%

35%

Tbilisi Tallinn Riga Vilnius Warsaw Prague Bratislava Budapest Bucharest Sofia Kiev

Source: REAS report, Georgian Department of Statistics, Deloitte & Touche estimates

Another factor that influences demand for residential properties in Tbilisi is the ready availability of mortgage loans and the declining interest rates offered by banks as well as attractive payment conditions offered by developers. The arrival of well known international names in Georgian banking sector (Societe Generale Group and HSBC) is influencing the banking sector to modify existed services and offer new banking products. An important driver of demand is the cash inflow from Georgians working abroad. The amount of transfers from abroad in the three years 2003-2005 was approximately $180 million. In 2006 capital inflows were $545 million and for the first nine months of 2007 a further $600 million. Finally, wealthy individuals are interested in investment in a high yield sector. Most of the wealthy individuals in Georgia have limited access to various investment instruments and they are buying into apartment developments and other real estate opportunities as prices are appreciating tremendously.

Prices

Prices of residential real estate properties significantly increased during the period of 2003-2007. Figures 14-15 show growth of newly constructed “white frame” prices.

During the years 2005-2007 selling price of Tbilisi’s residential properties, especially in the city centre, increased considerably, compared to rental prices, growth rate of which was lower. Figure 16 shows comparison of selling and rental prices growth rates in central districts of Tbilisi. Part of the price growth was fuelled by purchases for investment rather than of a place to live.

Economic analysts state that during the last 4-5 years the prices of real estate have increased about four times and they do not expect the prices for real estate to decrease. However a degree of saturation of demand in the market in Tbilisi slowed down the prices growth rate in 2007.

Figure 13 contains a pricing range comparison of several European capitals with Tbilisi for the year 2006 and shows some interesting differences. The bars of the figure 11 show the price range of newly built units. The bottom of the bar indicates starting prices and the top of the bar represents average top of the range residential house prices. (We have limited information about detail price ranges for the residential real estate in Kazakhstan and Azerbaijan but based on our web research it should be in Astana in a range of $4,000 to $5,000 per m2 and in Baku in a range $1,500-$2 500). Compared to most EU and CE capitals prices in Tbilisi are far bellow average European level.




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Figure 13 Price range, 2006

4201,690 1,690 1,300 1,300 650 1,300 650 1,3001,300 1,560

7,930

3,9002,600

7,540

3,900

10,2709,100

6,2406,500

4,420

2,000

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Tbilisi

Tallinn Riga

Vilnius

War

saw

Pragu

e

Bratis

lava

Budap

est

Bucha

rest

Sofia

Kiev

Source: REAS report, Interviews with developers, Deloitte & Touche estimates

Figure 14 Top tier centre

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

2003 2004 2005 2006 2007Average price of white frame

Source: Interviews with developers, Deloitte & Touche estimates

Figure 15 Second tier centre

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

2003 2004 2005 2006 2007Average price of white frame

Source: Interviews with developers, Deloitte & Touche estimates

The poor quality of houses in Tbilisi, many of which were constructed during 1945-1985 in the post-communist era, is a significant housing problem and in spite of high prices individuals prefer to move from old apartments to newly designed residential houses.




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The majority of apartments continue to be sold in white frame (standard product of Georgian developers, most common renovation condition of new apartments), but high competition is forcing developers to offer additional services included in the price.

According to real estate experts the sharp increase of prices in Tbilisi was also due several factors other than increase of demand:

• the "legalization" of the construction industry with companies now paying taxes;

• increases in price of construction materials, especially iron imported from Russia and Ukraine.

The construction costs per m2 of a flat constructed by a leading construction company is now between $300-$1,000. In previous years, the price per m2 was in range $130-$250.

Figure 16 Rental rates vs selling prices

36%33%24% 29%

54%

77%

0%10%20%30%40%50%60%70%80%90%

2005 2006 2007

Average rental growth rate Average selling price growth rate

Source: Newspaper “sitkva da sakme”, Interviews with developers, Deloitte & Touche estimates

Main Developers of Tbilisi Residential Real Estate Sector

The major players in the Tbilisi real estate market, especially residential sector, are local development companies. They seek to identify locations, define type and scale of property to develop and attract sufficient interest from potential buyers. High demand for housing in Tbilisi encourages developers to offer a wide variety of residential complexes. A lack of reliable statistical data is an obstacle to drawing a clear picture of the residential real estate market and its players. However, based on the information received from interviews of developers regarding their current projects under development and the data produced by the Tbilisi Urban Planning Agency, during the period 2006-2007 the total amount of approved residential projects made up around 2 million m2. We have estimated the approximate market shares of developers. The number of domestic developers exceeds 100 and according to construction volume the leader on the market is Center Point Group, with a market share of 15-20%. Other well known developers, Axis, Iberia Construction and Arci, have a market share of less than 10% and residuary part of the market is divided among other developers with individually small market shares.

Conclusion

Georgia is still far behind other Eastern European Countries, but integration into the European Union will further drive the growth of the residential real estate segment and prices.

Employment rate in the real estate sector is increasing and the base of it is the growth rate of the total amount of the capital in the sector. The residential market has become highly speculative in the absence of efficient saving mechanisms, with individuals buying flats as an investment.




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Quality control of project implementation process by developers remains the main risk factor in the residential real estate sector. There are few specialized property management companies capable of operational management of the large-scale projects scheduled for delivery in the next few years. This factor negatively affects developers’ property values and incomes on project completion.

Accordingly, we think that any real estate company with a diversified project portfolio and a positive track record in project delivery should be regarded as an opportunity to gain exposure to the fast-growing, high-potential Tbilisi real estate segment.



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4. Office Premise Market Overview




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Overview

The office premises market in Tbilisi is heavily supported by demand from international companies launching operations in Georgia, mostly in Tbilisi, followed by local companies seeking to improve and enlarge their office space to cater for greater operational scale and scope. Increased demand and the very limited supply of new Class A office space have led to overpricing of existing properties allowing landlords to boost prices while keeping overall vacancy rates low.

Only a fraction of the total available office space is of true Class A quality, while prospective tenants are becoming increasingly demanding in terms of both size and quality. According to local observers, only four existing offices can be classified as Class A properties, while the rest represent Class B or C premises.

Georgian developers are becoming more willing to construct A-class office spaces based on the increasing demand for quality premises.

Demand is increasing and raising investment activity in this market segment. To ensure long-term success, new office spaces need to be in compliance with international quality standards.

Supply

As mentioned above, the supply of A-class office premises is limited. In the Georgian market there are only four office premises with Class A quality. Two of them were just completed in 2007. But the pipeline of new projects is impressive and almost 7-8 times more A class stock space will appear in next 3-4 years.

Below is short description of the existing A class office premises in Tbilisi:

GMT Plaza: A-class office premise.

GMT Plaza

GMT Plaza, the seven storeys A-class office building at 4, Freedom Square, offers an ideal location and prestigious address




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• 3000 m2 Class A-office space

• high visibility location on central plaza next to the City Hall

• numerous amenities within walking distance including hotels, restaurants, banking retail and entertainment services

Main tenants of GMT Plaza are:

• IMF ( International Monetary Fund) • British Embassy • Bechtel • OSCE • United Georgian Bank • BMI • Batumi oil terminal

Table 4-1 Major existing Business Centres in Tbilisi

# Existing Office premises Address Category M2 Monthly rental

rate, $/M2 1 GMT Plaza Freedom square A-class 3,000 35

2 Green Building 6, Marjanishvili street A-class 4,400 25-40

3 Aword Business Center Melikishvili ave. A-class 2,000 40-45

4 Sheraton Metekhi Palace 20, Telavi street A-class 1,400 45

5 Green Office 154, Marjanishvili Avenue B-class 4,600 20-25

6 Maidan Palace Rkinigzis Street B-class 8,000 20

7 Cartu Group Chavchavadze avenue B-class 7,200 25-30

8 Saqskalakproeqmsheni Chavchavadze avenue B-class 10,000 14-20

9 Soflmsheni Vaja Pshavela B-class 6,800 14-15

10 Metekhi Business Group Avlabari B-class 2,100 25-30

Table 4-2 Major Business Premises Expected by 2008-2010

# New Projects Address Category M2 Completion

Date 1 Hotel Adjara Gamsakhurdia avenue A-class N/A 2008

2 Axis Towers Chavchavadze avenue A-class 29,700 2009

3 Pixel 34 34, Chavchavadze avenue 34 A-class 8,700 2009

4 7, Feedom square, GRDC 7 Freedom Square A-class 25,000 2009

5 Hyatt # 1 Right Embankment A-class 30,000 2010

6 The Printing House-Class B Office 5, Marjanishvili street B-class 13,000 N/A




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Map of Tbilisi business centers

Sheraton Metekhi Palace This high class hotel development offers 1,400 m2 of high level, A-class office space. Sheraton Metekhi Palace is located at 20, Telavi Street, in a picturesque old district on the Mtkvari riverbank. It seems however that demand for hotel rooms exceeds the demand for such A class office space and management plans to convert existing this office space into further hotel facilities. GRDC, Green Building

“Green building” is the high quality 4,400 m2 office premise located at 6, Marjanishvili Street. The building was constructed in 2007 by GRDC, the leading Georgian real estate developer. The building represents one of the highest quality office premises in Tbilisi. The rental rate for the office space located on ground flour is $40 per m2 per month without VAT and service charges and for first floor office space, $25 per m2 per month.

ABC Aword Business Center

Aword business center is located on Melikishvili Avenue and represents a further A-class office premise. Two packages for office space are available: standard and VIP. Rentals are $45 per m2 plus VAT and service charges.




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Aword Business Center

As more and more multinational corporations enter the Georgian market and as local companies demand higher quality office spaces, the A-class market segment appears to be quite attractive for local and international investors who have adequate funds and are willing to construct A-class office premises providing local and foreign clients with the highest level services at international quality standards.

The leading developers in office space have to date been Georgian companies. However in the last two years more and more international and Russian developers are entering the market, mostly through partnership with local Georgian developers.

Currently the total available A-class office stock in Tbilisi is around 10,000 m2, which is far below the relative levels in the main Eastern European cities.

Supply of B-class offices

The supply of B-class offices in Tbilisi is significantly higher than A-class offices premises due to the former pattern of demand and the historically low rental rates.




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Green Office

Green office, located on 154, Mardjanishvili Avenue, offers 11 storeys of B class office space amounting in total to 4,462 m2. Rental rate per month per m2 is in the region of $20 without VAT and service charges. Green Office has exploited the strong market demand and has for several years had occupancy rates of 100%.

It is important to note that Green Office has a diverse group of tenants ranging from consulting to private firms and SME’s.

Major tenants are:

• Procredit Bank: 65% of 12 year growing lease agreement (new owner can increase lease rate according to market reality, which is at least three time bigger than now)

• Madneuli (Copper mining company)

• Kvartsiti (Australian-Georgian gold mining joint stock company)

• PSP (Biggest pharmaceutical chain and producer in Georgia)

• UFC (TBC bank owned, Visa and MasterCard licensed Company)

• Basis Bank’s Investment and Brokerage Joint Venture

• other consulting and professional services firms

Other major B-class office space providers are: Meidan Palace, Cartu Group, Saqqalaqaproeqti, Sofmsheni, Saqtskalproeqti, Green Office etc. Based on our estimations, total B class office space stock in Tbilisi is in range of 40,000 -50,000 m2

Figure 17 Office space breakdown by the year 2007

10%

44%

46%

A-class B-class C-class

Source: Deloitte & Touche estimate

Future projects

Concerning future projects, two major developers: Axis and GRDC are developing A-class office complexes. Axis towers will be located on Chavchavadze Avenue. This involves 35,000 m2 of A-class office space and will be completed in 2009. On 7, Freedom Square 25,500 m2 of A-class office space is being developed by GRDC and majority of the building will be devoted to office space. The planned completion date is 2009. Other Georgian and foreign developers are also heavily investing in high quality office development projects. By the end of 2010 in Tbilisi it is expected that the demand for A-class business centers will be fully met. Developers may risk an oversupply of such office premises and experience significant cuts in rental levels.

One of the main characteristics of Tbilisi office premise market is that most of the office space stock is either C class office (old soviet style buildings in poor conditions and rented in very low rental rates in average $7-$8 per m2 per month) or non professional facilities located in private apartment.




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It is very difficult to make even approximate calculations of non professional office premise stock, but we estimate that largest part of the total office space represents this kind of office space. By our estimation total A and B class office space should be in a range of 50,000- 60,000 m2 which is sufficient to accommodate around 300 companies and it seems that most part of small and medium sized companies are still located in very low quality office premises.

Demand

Most of the users of office premises are local companies from service sector and international companies entering the Georgian market. Figure 19 below shows the growth rate of annually registered Georgian and foreign companies.

Unemployment in country is still high. The expected integration of Georgia into the European Union and NATO will trigger further economic growth, resulting in a reduction in unemployment which in turn will result to further growth in demand for office space.

Figure 18 Number of employed persons

-

50,000

100,000

150,000

200,000

2003 2004 2005 2006 1H'07

Source: Georgian Department of Statistics.

As we mentioned above most part of the office space stock is still in form of class C and non-professional office space. But the latest trend is that more and more companies are moving in large office centers. Currently more and more Georgian companies have demand for the safety, international standards and shared services (security, utilities, internet, etc). So in next few years one of the drivers of demand for A and B class office space would be companies changing their location from low quality office space to the high quality office space.




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Figure 19 Number of companies registered in Tbilisi

-1,0002,0003,0004,0005,0006,0007,000

2003 2004 2005 2006 2007

Foreign Companies Local Companies

Source: Deloitte estimates, Georgian Department of Statistics.

Rental rates, vacancy rates and yields

Rental rates for A class office premises are in range a $35-$45 per m2 per month without VAT and service charges and for B class office space in range $20-25 per m2. In general rental rates are growing, but there are exceptions like GMT Plaza, which has seen the same rental rates since opening at $35 per m2.

Vacancy rates are extremely low and most of the A and B class facilities are fully leased. 2-3 years ago vacancy rates in most B class facilities were high, in the range 20%-30%, while today vacancy rates are minimal.

Figure 20 Office space price breakdown per m 2

$0$5

$10$15$20$25$30$35$40$45

2003 2004 2005 2006 2007

A-class B-class C-class

Source: Deloitte estimates

Yields are difficult to calculate as there are no large transactions involving sale of A and B class office premises. Based on average market price per m2 of similar premises and announced rental rates for A-class facilities, yield for A-class offices appears to be in the 12%-14% range.

Comparative analysis

Per capita stock of office premises in Tbilisi is far below Eastern European levels. As we mentioned above, the majority of small and medium size Georgian companies are still located in private apartments and non professional office premises.




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The low level of office real estate stock per capita for Tbilisi relates to the fact that the chart does not consider the stock of the non professional office premises in Tbilisi.

After all expected new project delivery, Tbilisi will achieve a level of around 175 m2 per 1,000 residents, which is comparable to current level of Alma-Aty and Belgrade, but still is far below that in major European cities.

Figure 21 Stock of offices, m2. per 1000 residents

7592

171171227

508

1,238

1,482

-

200

400

600

800

1,000

1,200

1,400

1,600

Warsaw Budapest Moscow Kiev Almaty Belgrade St.Petersburg

Tbilisi

Source: Colliers International, JLL, Deloitte & Touche estimates

Average rental rates for A and B class office premises in Tbilisi are among the lowest for the selected markets. They are comparable to rental levels in Warsaw and Budapest, which have oversupply of high quality office space.

Figure 22 Monthly rental rate, $ per m2

25.4

23.0

19.5

16.9

57.6

59.4

32.0

32.4

- 10.0 20.0 30.0 40.0 50.0 60.0

Almaty

Moscow

Kiev

St. Petersburg

Belgrade

Tbilisi

Warsaw

Budapest


* Rates are net of VAT and OPEX




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Because of limited stock of good quality office premises vacancy rates are close to zero for Tbilisi. This situation is comparable to the low vacancy rate levels in Kyiv, Almaty and St. Petersburg, other cities also seeing high levels of office construction activity.

The figures should be treated with caution as only class A and class B premises are considered in the chart.

Figure 23 Vacancy rates, %

11.7%

9.5%

5.0%

2.0%

4.0%

4.0%

4.0%

1.5%

0.0% 2.5% 5.0% 7.5% 10.0% 12.5% 15.0%

Belgrade

Budapest

St. Petersburg

Almaty

Warsaw

Moscow

Tbilisi

Kiev


Tbilisi showed the highest annualized yields among the selected capital cities. Only Kyiv and Almaty showed yields close to that of Tbilisi office market. Such Eastern European markets as Budapest and Warsaw showed twice lower yields.

The high yield relates to the fact that prices for office premises are still considerable lower than in most Eastern European capitals while rental rates are quite high and comparable to those in the same Eastern European cities.

Tbilisi office market moves into expansion phase, which would lead to increasing rental rates and expansion of office stock. Though yields might decrease, but ROI for the investors which tapped the market earlier would be expected to increase.

Figure 24 Prime yields

6.0%

9.0%9.0%9.3%9.9%

10.5%

5.5%

12.5%

0%

3%

5%

8%

10%

13%

15%

Tbilisi Kiev Almaty Moscow Belgrade St.Petersburg

Budapest Warsaw


.



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5. Hotel Market Overview




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Overview

Since 2003, Georgia has undergone serious changes and reforms significantly improving its worldwide image and making the investment climate more and more attractive to the foreign investors.The hospitality market in Tbilisi is developing as the inflow of foreign tourists, businessmen and governmental delegations increases at a fast pace attracting well celebrated international hotel chains.

Business tourism is growing in line with the FDI growth. As a result, vacancy rates at the premium Tbilisi hotels have decreased and the room rates have risen substantially.

Supply

During recent years there has been no significant increase in the supply of hospitality facilities. However supply is now going to increase dramatically, based on the fact that several foreign investors have entered the market and several large projects are under development.

Figure 25 Number of Hotels in Tbilisi

0

20

40

60

80

100

120

140

160

2003 2004 2005 2006 2007


Figure 26 Total number of rooms

-

1,000

2,000

3,000

4,000

5,000

2006 2007 2008 2009 2010

Source: Georgian Department of Statistics, Deloitte & Touche estimates.

Currently Tbilisi boasts three luxury, full service western hotels:

• Courtyard Marriott, • Tbilisi Marriott, and




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• Sheraton Metekhi Palace. In addition, Tbilisi offers a number of mid-range, three star hotels located in the centre of Tbilisi offering high quality service. Most popular and attractive mid-range hotels are located in the most beautiful and historic centre known as Old Tbilisi mostly attracting foreign tourists. Totally, there are around 130 hotels in Tbilisi and approximately 3,000 rooms, of which around 350 represent five star hotels and 200 rooms in four star hotels.

Four global franchise hotel brands are expected to open in the coming years and provide visitors and local clients with the highest level of service in compliance with world standards:

• InterContinental Hotels & Resorts • Park Hyatt Tbilisi Hotel • Radisson, and • Kempinski.

The following Hotels are expected to open in the next few years:

Hotel Adjara ( project under development )




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Hotel Adjara

Hotel Adjara” - the most desired place to stay in Tbilisi during the Soviet Union period is now under reconstruction. This high building is going to be totally renovated. Park Hyatt Tbilisi Hotel

The proposed hotel development will be part of a mixed-use project comprising office space, five star hotel, conference facilities and SPA & leisure components. The project will consist of four separate buildings.

InterContinental Hotels & Resorts

InterContinental Hotels Group (IHG), the owner of the InterContinental Hotels & Resorts brand, and THED International, signed an agreement with Georgian Properties LLC to open the first InterContinental hotel in Tbilisi, the capital city of Georgia. Scheduled to open early 2010, the InterContinental Tbilisi is aimed at both travellers doing business in the rapidly flourishing Georgian economy and leisure visitors.

Radisson- Hotel Iveria

Project Iveria implies the full restoration of a building which was constructed in 1960. Iveria was considered as the best hotel in Tbilisi in the past. The restored building will be operated under the "Radisson" brand. The base building will include 248 hotel apartments. Completion date is 2008.

Kempinski Hotel (Opening Early 2010)

The Kempinski Hotel will be located in Tbilisi's city centre, on the main boulevard and close to the Opera house. The hotel will have 200 rooms and suites and up to 50 serviced apartments. The hotel is being designed by Krier - Kohl architects to meet the needs of business travellers.

Map of the Major Hotels in Tbilisi




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Table 5-1 Summary of existing hotels

# Existing Hotels Address Category * Number of Rooms Pri ces, $

1 Sheraton Metekhi Palace 20, Telavi str. 5 * 182 230-4802 Tbilisi Marriott Hotel 13, Rustaveli Ave. 5 * 127 275-4853 Courtyard by Marriot Tbilisi 4 Freedom square 4 * 118 1844 Ambassadori 13, Shavteli str. 4 * 46 115-2705 Betsy’s Hotel 32/34, Makashvili Str. 4 * 28 140-1756 Beaumond Garden - Elegant 4a, Marshal Gelovani Str. 3 * 11 100-1507 Boutique Hotel 9, Metekhi Ascent 3 * 15 140-1808 Hotel Prestige 51, Marjanishvili Str. 3 * 31 50-1209 KMM 10, Metekhi turn 3 * 12 70-15010 Old metekhi 3, Metekhi Ascent 3 * 15 80-110

Table 5-2 Hotels expected by 2007-2010

# Declared Openings (2007-2009) Address Category Number of Rooms Completion Date

1 Radisson Rustaveli Ave. 4 * 248 20082 Hotel Adjara Pekin street 4 * 192 20083 Intecontinental Kostava street 5 * 170 20104 Kempinski Rustaveli Ave. 5 * 200 N/A5 Hyatt # 1 Right Embankment 5 * 183 N/A


A number of the major international hotel brands will thus be present by 2010. Existing and expected hotels by 2007-2010 are expected to satisfy the 5 star demand of the market and may even create excess supply, increasing vacancy rates and causing prices to decline.

Demand

Tourism in Tbilisi- Tourism is growing rapidly in Georgia and in Tbilisi. Many of the foreign and local investors are interested in investment opportunities in tourism and tourism-related infrastructure. Tourism is seen as a way to accelerate sustainable growth and development all across the Georgian economy. The development of tourism appears to be one of the strategic objectives for the Georgian government. The result is that the number of tourists arriving in Georgia increased by 50% from 2005 to 2006, In March 2006, the World Economic Forum's first annual Travel and Tourism Competitiveness report ranked Georgia as the most competitive tourism destination country in the region. The country ranked first among 124 countries in respect of the simplicity of visa requirements.

Figure 27 Total number of visitors

-

50,000

100,000

150,000

200,000

250,000

2005 2006 2007

Source: Georgian Department of Statistics,.




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Impact of Government policy - With a new visa policy and improving infrastructure, combined with a new, firm commitment to safety, Georgia is ready to welcome investors, travellers and explorers.

Simplification of Visa Issuing Procedures - There is no visa requirement for nationals of Israel, Japan, Canada, United States of America and members of European Union countries. Also for CIS nationals, except for citizens of the Russian Federation and Turkmenistan, a visa is not required. Nationals able to enter Georgia without a visa are allowed to stay for 90 days. Passengers on cruise ships who stay in Georgia for less than 72 hours also do not require visas. Basic Infrastructure Development - Roads and highways, energy systems and water supply systems are now developing rapidly, with positive results for tourism. Tbilisi and Batumi are serviced by new modern airports approved for full membership in ECAC (European Civil Aviation Conference), with direct flights to 32 cities. Currently two Marriott hotels and one Sheraton hotel provide luxury accommodation in Tbilisi, while an SAS Radisson hotel is under construction, and Hyatt, Accor and Hilton hotels are scheduled for construction. Taxation - According to the existing Tax Code, enacted in January 2005, tour operators' incoming tourist revenue falls into the category of exports and is therefore free of VAT. The total number of tourists visiting Georgia and Tbilisi is expected to increase based on the factors mentioned above.

Concerning the tourist inflows to Georgia, Tbilisi International Airport reaches approximately 231,000 people in 2006, up from 150,000 in 2003. During the years 2003-2007 the number of foreign tourists almost doubled with several hundred thousand more visitors entering from Turkey, Azerbaijan and Armenia. Figure 27 shows the total number of incoming visitors to Tbilisi.

Prices and vacancy rates

The average rate of price increases was 16% from 2004 to 2007 caused by the sharp increase in demand for hotel rooms, (especially for five and four star hotels). Based on the information obtained from our interviews with the management of major, five and four star various hotels, vacancy rates vary from 10 to 20 %. Especially in five star hotels the demand is high and vacancy rates are thus low.

Figure 28 Hotel prices

$-

$50

$100

$150

$200

$250

$300

2004 2005 2006 2007





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Comparative analysis

The Tbilisi hotel market involves much less four- and five-star hotel rooms than the capitals of Eastern European countries. The number of rooms in four- and five-star hotels per 1000 residents is also far lower than in main Eastern European cities. As a result occupancy rates are higher than in other East European capital cities and the price of a single room in a 5 star hotel is high compared to those cities, apart from Kiev.

As it is shown in Table 5-2, three five-star and two four-star hotels are expected to be opened in next few years, which will increase the number of four- and five-star hotel rooms up to 1,494. The four- and five-star hotel room per 1000 resident will reach 1.4, which exceeds the same index for Kiev, but will still be far behind other Eastern European capital cities.

Figure 29 Comparison to Eastern European countries

0

5000

10000

1500020000

25000

30000

Tbilis

iKie

vRig

a

Vilnius

Tallin

n

War

saw

Budap

est

Pragu

e

Rooms Rooms in 4-5*

Source: Georgian Department of Statistics, Colliers International, JLL, Deloitte & Touche estimates.

Figure 30 Comparison to Eastern European countries

275

$0$50

$100$150$200$250$300$350$400$450$500

War

saw

Budap

est

Pragu

e

Bucha

rest

Riga

Tallin

n

Vilnius

Tbilis

iKie

v

0%

20%

40%

60%

80%

100%

Single room price in 5* Occupancy





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Figure 31 Four- and five-stars rooms per 1000 residents

0

2

4

6

8

10

12

Tbilisi

Kiev Riga

Vilnius

Tallinn

War

saw

Budap

est

Pragu

e




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6. Retail Real Estate Market Overview




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Overview

The Retail real estate market in Tbilisi is quite different from most of the Eastern and Central European markets. There are no large international retail chains. Large shopping malls and shopping centers are also very rare. The current retail sector is characterized by smaller high street shops and retailers and on the other hand by non-organized open markers (“bazaars”) in the suburbs of Tbilisi.

Supply

Due to the relatively small size of the market, the major international retailers and shopping center operators have not yet entered Georgia. Georgia is not yet listed in the top 30 developing countries in the latest Index of Emerging Markets Priorities for Global Retailers research prepared by AT Kearney, Several former Soviet republics like Russia, Ukraine, Lithuania and Latvia are among the top priorities of Global retailers. Georgia’s market is fully dominated by local operators and retailers. Several Georgian retailers do however have franchising agreements with well known international brands.

The current supply of retail real estate in Tbilisi can be divided into three major groups:

• Several Large Shopping centers

• High street shops and retail chains

• Open markets

The largest part of retail activity takes place in high street shops, retail chains and open markets

Based on our analysis of the Tbilisi market, there are several major shopping centers with convenient locations involving significant renovations. The map below shows the locations of the main existing properties and the new projects in the pipeline.

Georgian Trade Center (GTC) is located in top tier center of Tbilisi. It has just been renovated and today is a popular place for shopping. Total area is around 10,000 m2 The Shopping center is host for many leading retailers such as Bata, Nike, Ici Pari, Levis, Wrangler/Lee , etc




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Pasaj&Kidobani . This location was renovated and converted from an old “Bazaar”-style open market into a shopping center with small shops inside. Most of the Tbilisi citizens consider this shopping center as catering to the low-to-middle price segment, where you can find products at affordable prices.

Megaline is a relatively new shopping and entertainment center located in the Didube district of Tbilisi. It includes an entertainment area as part of its retailing concept.

Goodwill - this is the first hypermarket in Tbilisi, with a total area of 24,000 m2 including 11,000 m2 of warehouse facilities.

Based on our estimations and interviews with major shopping centers operators, the total existing stock of modern shopping centers premises is in the range 60,000-80,000 m2 .

Unlike large shopping centers, high street style retail chains are well developed in Tbilisi. The main high streets, Rustaveli, Chavchavadze, Mardjanishvili, are the most popular places for shopping and most of the leading Georgian retailers have their retail units there. Currently these areas are dominated by pharmacy, food and consumer goods orientated retail chains. For example, Aversi and PSP, the leading Georgian pharmacy chains, have more than 100 pharmacy units in Tbilisi. BEKO and Elit Electronics (main consumer electronics companies ) have retail chains of around 20-30 units each spread out across Tbilisi. Populi is one of the largest Georgian supermarket chains with more than 30 retail units in Tbilisi and other major Georgian cities.

Open markets are very common in Tbilisi. It is difficult to call these premises developed real estate because in most cases they are located in open places without roofs and any significant customer facilities. Due to the relatively low disposable income of a large part of the Georgian population these places are still popular as prices are lower than in modern shopping centers or in high street shops.

In Tbilisi there are 110 registered open market places (compared to 310 in Georgia as a whole). The number of registered traders (trade units) was around 19,000 last year according the State Statistics Department. Total area of all 310 open markets in Georgia is around 1.8 million m2 . we can therefore estimate that the total area of open markets in Tbilisi is around 500,000-600,000 m2.

Modern Shopping centers are attractive investment opportunities for Georgian and International Developers. There are several large projects in pipeline which will considerably change supply within the retail property market in the near future. GRDC plans to deliver two modern shopping centers. One of them with a total area around 22,500 m2 will be located in Tbilisi Central Railway Station. GRDC has a 49 year Leasing agreement with Georgian Railways. Currently this project is under development and the expected completion date is in first half of 2009. The same company is planning to develop around 8,000 m2 of A Class shopping space in the heart of Tbilisi’s Rustaveli Avenue, but the project is in its infancy and the exact date of completion is not yet known.

One of the leading Georgian developers, “Arci”, plans to deliver a 19,000 m2 shopping center. Location will be near to the Central Railway Station and near to the existing shopping centers Kidobani and Pasaj. The developer intends to sell the facilities to various retailers and wealthy individuals and has already sold out almost 100 retail units,based on pre-payment agreements, for $2,500 per m2.

The largest Georgian developer, Centre Point Group, has announced one of the largest shopping centers in Georgia. Its shopping center with a total area of 30,000 m2 will be located in Didube District

A new luxurious shopping center Pixel 34 will be opened in 2008 in Chavchavadze Avenue. The modern building will be multifunctional, but the majority of space will be retail premises. The developer of the project plans to exit project after completion and sell most part of the building to various retailers.

Two of the most popular shopping places during Soviet times, Tbilisi Central Supermarket and Department Store “Tbilisi”, will be converted into modern style shopping centers. International developer and investment companies Herald Trade Company and Miller Global Properties plan to complete the projects by 2009.

Based on our estimation, the total new retail space which is at a development phase and should arrive on market by 2010 is around 150,000 m2. Moreover, there are several large land plot transactions which may involve further retail space so it is also predicted that several additional large shopping malls will appear on the market in next 2-3 years. For example one of the largest potential projects coming to the market in next 3-4 years will be a large shopping mall located in western part of Tbilisi.




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The developer of the project is “Rakeen Development”, a real estate development and investment company based in United Arabic Emirates. Total area of development may be around 75,000 m2 and will include modern shopping center, residential and office premises.

Table 6-1 Summery of existing major shopping centres # Existing Shopping Centers Address M2 Rental rates

1 GTC - Georgian Trade Center 3 V. Vakua st 10,000 50-100

2 Megaline Didube District(Kereselidze Street) 4,000 30-60

3 Kidobani 8 Tsabadze St 10,000 50

4 Pasaji 19 Tsabadze St 5,000 N/A

5 Morkinally 1 26 May Sq 3,000 N/A

6 Mukhianis Varskvlavi Akhmeteli Subway Station N/A N/A

7 Goodwill (Hapemarket) 1 Parnavaz Mepe St 27,000 N/A Table 6-2 New project pipeline 2007-2010

# Name Address M2 Completion Date1 Tbilisi Railway Station 2 Railway Station Sq. 22,800 2008

2 Tbilisi Department Store Freedom Squeare N/A 2009

3 Pixel 34 34 Chavchavadze St 8,700 2009

4 Karvasla Dadiani Street, Nadzaladevi 19,000 2009

5 Axis Towers Chavchavadze 3,000 2009

6 Center Point Trade Center Didube District (Eliava Bazroba) 30,000 2010

7 Geost Group Didube District 20,000 N/A

8 Tbilisi Central Supermarket Didube(former central Bazaar Tbilisi) 20,000 N/A

Source: Georgian Department of Statistics, Deloitte & Touche estimate

Demand

Demand for retail real estate is largely driven by the high growth rate of retail turnover in Tbilisi. From 2003 to 2007 retail turnover in Tbilisi grew almost 4 times. Future growth of GDP per capital and level of disposable income will be one of the main drivers of demand for retail premises.

In future one of the additional driver of demand for retail real estate will be conversion of old style open markets into new style shopping centers. As in many Eastern European counties, the majority of traders in existing open markets will gradually change their locations into modern shopping centers. 4-5 years ago the most popular place for retail were open markets and small convenient kiosk in the suburbs, but today open markets are losing their attractiveness and positions and new modern shopping centers are attracting the clients. Consumers are more and demanding regarding the quality of shopping places and more and more consumers prefer to pay higher prices for the same product but shop in modern renovated locations.




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Rental rate, vacancy rate and yields

Retail real estate is one of the most expensive property categories in Georgia. The most convenient and popular places in central locations of Tbilisi are priced two times above A class office space in same regions of Tbilisi. For example in GTC best locations are rented at up to $100 per month per m2 including VAT and service charges. Rental rates in popular shopping centers like Pasaji, Kidobani and Megaline are in a range of $30-$60.

Vacancy rates are almost zero, currently majority of the shopping centers are fully rented and they very seldom have any vacant space for long time.

As for rental rates in open markets. average annual rental rates per m2 appear to be in range $40 -$50 per annum, which is almost 8-10 times lower than rental rates of large modern shopping centers. Tbilisi vacancy rates are around 75-80% for such open market facilities.

Due to very limited information about sales transactions of large shopping centers it is difficult to calculate yields. But based on market values per m2 we can calculate range of yields for this kind of properties. For example current market price per m2 of retail premise in “Qarvasla” project (which is under development) is around $2,500 and current rental rates in shopping centers located in this district are on average $40 without VAT. The announced prices per m2 for space in Pixel 34 are in range $4,500-$7,500 and current annual rental rates per m2 in GTC are in a range $700-$1,200. Our estimated current yield for retail property is in range 14%-16%.




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Figure 32 Total space, 000’ m2

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Figure 33 Space per 1000 resident in m2

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Figure 34 Average annual rental rate

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As it is shown on the charts, Tbilisi has the lowest total retail stock, retail space per 1000 resident and average retail rental rates compared to Eastern European countries.

Conclusion

More than 150,000m2 of new stock is arriving on market in next 2-3 years and there are announcements of several further large projects which are currently in very early stages of planning. Tbilisi will therefore likely have one of the highest ratios of retail stock per 1000 residents by the 2010 in Eastern Europe, and there is therefore a risk of future oversupply of retail premises.



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7. Warehouse Market Overview




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Supply

Despite Georgia’s favorable location, the warehousing sector still remains the least developed part of the real estate sector. There are no A & B class warehouse facilities and there is no presence of international professional warehouse operators. Largest part of existing warehouse stock is just renovated old Soviet style industrial premises. According to the Georgian statistic department, currently in Tbilisi there are around 15 warehouse facilities with total stock of order of 100,000-120,000 m2 and in addition there are many small and owner-occupied logistics premises.

Local real estate developers started investment in the warehouse segment only recently. In the pipeline there are several high A or B class facilities coming to market in next few years, but the projects are at very yearly stages of development and approximate timeline of completion are unknown.

The Georgian Real Estate Development Company (GRDC) Company plans to deliver two large warehouse projects. One of them is located near Tbilisi International Airport and projected total area is 105, 000 m2. The second project is located 20 km west of Tbilisi. Total projected area is around 95,000 m2. Both of these premises are intended to be the first A class warehouse facilities in Tbilisi, but both of them are at a very early stage of development and it is difficult to estimate their completion timeline.

Most of the existing warehouse premises are located in Samgori/Lilo or Didube districts of Tbilisi. Samgori/ Lilo district is traditionally regarded as a very convenient location for warehouse stock due to its proximity to Tbilisi International Airport and the city centre and its good access to the railway. Most of the current and announced projects are located in this district. Didube district is considered as a good warehouse location because of proximity to the main retail and open markets. Didube is a popular location for main consumer goods and beverage warehouses and has facilities to store cold products.

Demand

Georgia is considered as one of the main transportation corridors connecting Europe to Caucasus region and Central Asia. Western business demonstrates stronger and stronger interest in Eastern countries, Georgia is at the crossroads of the North-South and East-West (Great Silk Road) transport corridors. Goods are transported from main western Black Sea ports of Constance and Burgos through Georgia to Azerbaijan, Armenia and the main Central Asian countries. Turnover of Georgian transportation companies from 2003 to 2006 increased by 4 times.

Other factors stimulating demand for warehouse facilities are import of goods and retail turnover. From 2003 to 2006 import of goods in Georgia increased by three times and retail turnover grew by almost four times.

Rental rate, vacancy rate and yields

Rental rates for existing low quality logistic centers are quite high and comparable to the rental rates for the high quality facilities in most of Central and Eastern European countries. Monthly rental rates are in a range of $2-$5 per m2 including VAT and operational expenses. The developers of new A & B class warehouses think that by the time of delivery high class facilities could be leased at rates of $7-$8 per month without VAT and operational expenses.

Vacancy rates are low as almost all small logistic centers are fully rented. Only largest warehouse has a high vacancy rate because part was just renovated and part is still under renovation. We assume average vacancy rates are around 10%. It has been very difficult to estimate current yields as there are no publicly disclosed transactions and very limited information about sales offerings.




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Table 7-1 Major Logistic Centers in Tbilisi

Warehouse Address Gross Leasable Area Monthly Rental Rates per m 2 in $

JSC Saqcivproduct Didube District 10,000 N/A JSC Bakaleya Isani District 5,000 3 LTD LIlo1 Lilo District 38,016 3,5 LTD Arko Samgori District 4,000 4 SB Real Estate(Lilo Warehouse) Lilo District 9,195 4,5 Terminal Isani Lilo District 5,000 3,8 LTD Macivarkombinati Isani District 5,000 N/A Goodwill Digomi District 11,000 N/A

Table 7-2 New project pipeline

Warehouse Address Gross Leasable Area Completion Date

GRDC Lilo District N/A N/A GRDC Natakhtari(20 West Tbilisi) N/A N/A

Comparative Analysis

Tbilisi ranks third lowest among the selected markets for its stock of industrial premises. This result reflects the fact that Tbilisi’s industrial premises are of class C only, compared to the presence of class A and B space in other markets.

Figure 35 Stock of industrial real-estate per 1000 resident s in m2

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Rental rates in Tbilisi industrial real-estate market are the lowest among the Eastern European counterparts. This is again explained by the fact that the Tbilisi market is represented by only class C warehouses.




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Figure 36 Average monthly rental rate per m2 in $

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Figure 37 Average vacancy rates

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8. Funding for Real Estate

8. Funding For Real Estate



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Mortgage Loans

The banking sector is the one of the most developed segments in the Georgian economy and it has contributed greatly to the development of the Real Estate sector in Georgia. The banking market has also attracted international players like HSBC and Societe Generale Group. Increased demand and the boom in residential properties’ construction has influenced Georgian banks to offer favorable conditions of mortgage loans and decreased interest rates, which currently ranges from 14% to 18%, compared to previous years when the range was 20-25%. Presently, amount of the mortgage loan available range from $3,000 to $300,000 and depends on the average income of the potential borrower. Repayment period is from 5 to 25 years. Currently, the share of mortgage loans in the loan portfolios of banks is around 18%. Figure 8 shows trend in mortgage loans volume according to National Bank of Georgia for the years 2003-2007 (Data for 2005 are not available). The volume of mortgage loans from 2003 increased more than twenty times, which is one of the additional drivers of the booming residential real estate market in Georgia.

Figure 38 Mortgage loan volume in million $

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Project Financing.

Georgian real estate developers do not have access to capital markets, There is not a single listed company in this sector. Developers usually use several sources of financing. First and the most popular source of finance in Georgia (especially in residential real estate segment) is pre-payments from individual buyers before completion of the project. Another financing source is funding from the developer’s own capital. Third source of financing is a project financing from local Georgian banks and occasionally from international financial institutions. Although loans to the construction sectors grew more than five times since 2003, loan maturities for project financing loans are usually no more than 3 years. In addition lenders require additional collateral, which is typically around 20-30% of the project value. Local banks prefer to finance mostly residential projects with 2-3 years maturity (where main source of repayments is sale of property) and seldom finance long term projects for industrial and commercial development (where source of repayment is cash flow based rental payments). Interest rates range from 16% to 18% per annum.

8. Funding For Real Estate



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Figure 39 Loans to Construction Sector in million $

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Source: National Bank of Georgia



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9. Tax Overview and Regulatory Environment




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Tax Overview

The Tax Code of Georgia is the principal source of tax law. The Tax Code has been amended several times since it was published on June 13, 1997. With effect from January 1, 2005 the Parliament of Georgia. adopted new Tax Code of Georgia. Many considers that introduction of the new Tax Code in 2005 was the one major step forward, that allowed the Georgian market reforms to advance in the right direction.

Rental Income

Pursuant to the Tax Code, rental income received by a Georgian company should be included in the taxable gross income of that company subject to profit tax at the rate of 20%; however profit tax rate will be reduced to 15% from 1 January 2008.

Georgian companies making taxable supplies which exceed GEL 100,000 within the last consecutive twelve-month period have to register as a VAT payer. Pursuant to the Tax Code, voluntary VAT registration is permitted. The current VAT rate is 18%. According to the Tax Code leasing of property is considered as a VATable transaction.

12% of income tax rate applies to profit received by individuals from selling real estate objects (if they owned the object for more than 2 years).

Deductibility of Loan Interest Payments

Any interest expense paid or incurred by the Georgian taxpayer in the course of its business activities is generally deductible. However, there are some interest deductibility limitations. During the calendar year, the taxpayer is entitled to deduct from the gross income 24% of the received loan, considering the corresponding period of time and corresponding ratio, when the loan was actually received. It should be noted that if the actual interest rate of the loan is below 24%, in this case the taxpayer will be entitled to deduct only actually paid/payable loan interest.

Tax Depreciation/Acquisition of Immovable property

Depreciation charges for fixed assets used in an economic activity are deductible from the gross income in terms of the limits provided by the Tax Code. Land, works of art, museum items, property with historical value (except for buildings), cattle, animals and other non-depreciable assets are not subject to depreciation. In addition, a fixed asset with a value lower than lower or 1,000 GEL is not subject to depreciation. Such assets should be fully deducted from gross income in the accounting year when there are purchased or produced.

Assets subject to depreciation are categorized into five groups. Fixed assets that are grouped into the first and second groups are subject to depreciation at the rate of 20%; for the third, fourth and fifth groups the depreciation rates are 8%, 5% and 15% respectively. Depreciation charge for each building and construction structure should be calculated separately and consequently each building / construction is considered to represent a separate group. However, taxpayers are entitled to use accelerated depreciation rates in respect of the second and third groups, but not higher than double the amount of the rates established for the respective group.

According to the tax legislation a taxpayer has the right to deduct from gross income the full purchase, leasing (discounted value of lease payments) or production cost of a purchased or produced fixed asset in the tax year when the fixed asset’s exploitation started. For profit tax purposes, such fixed assets should not be broken down into the groups and included in the book value of the group respectively. Upon sale of such assets or in case of leasing, upon the return of leased assets if their final purchase was expected, proceeds received or to be received excluding VAT should be included into gross income of the taxpayer and taxed.

Repair Expenses of Fixed Assets

In accordance with the Tax Code, an annually allowable deduction of expenditures incurred for the repair of fixed assets amounts to 5% of the book value of the assets during that year. The book value of the group to which the repaired assets belongs should be increased by the amount of repair expenses exceeding the established limit. Expenditures that improve standard (normative, original) performance of the fixed asset (including modification (reconstruction) of an item of building to extend its useful life and increase its capacity; upgrading parts of machinery and equipment to improve the condition of the asset beyond its originally assessed standard of performance and adoption of new production processes), excluding current exploitation expenditures on repairs or maintenance in order to restore or maintain the performance of fixed assets are considered expenses related to the repair of fixed assets.




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Hence, an expense that does not increase standard (normative, original) performance of the fixed asset is not considered as a repair expense of fixed assets, but as a general expenditure of a taxpayer.

Loss Carry Forward

The Tax Code allow Georgian legal entities to carry forward prior years losses for a period of up to five years and cover such losses at the expense of the gross income of future periods.

The Tax Code provides limitations for the carrying forward of losses in the case of a change of ownership of shares of a legal entity. Where there has been a change of 50 percent or more of partners with shares with voting rights in the legal entity, as compared with the previous year, the carrying forward of a loss and deduction from a previous tax year ceases to be available starting with the tax year in which the change occurred, unless for a period of three years after the change, the legal person continues to conduct the same entrepreneurial activity.

Capital Gains Tax

There is no specific tax payable on capital gains in Georgia payable by the acquirer. According to the Georgian tax legislation, profit / loss that are related to purchase / sale of shares of a Georgian company is not included in taxable income or deductible expenses of the company, the shares of which are subject to sale.

The profit/ loss from the transfer of shares will be considered as taxable income / expense of the owner (seller) of the shares and the owners (seller) will be liable to income tax.

Domestic Dividends Taxation

Pursuant to the Tax Code dividends are subject to withholding tax if they are paid to individuals or foreign entities. It should be mentioned that dividend payments between the Georgian legal entities are exempt from withholding tax at the source of payment and the dividends received by the legal entities should not be included into their taxable gross income.

Withholding Tax

Withholding tax at the standard rate of 10% applies to income received by non-residents from sources in Georgia. Georgian source income includes dividends, interest, royalties, lease payments, fees for engineering services and some other types of income. The withholding tax burden may be reduced by virtue of the double tax treaty concluded between Georgia and the country of residence of the entity receiving income. Georgia has an extensive double tax treaty network with about 25 countries, most of which follow the OECD Model Convention.

VAT Charge on Supply of Land and Building

Sale and purchase of real estate within the territory of Georgia is normally VATable transaction. As an exception, supply of land does not represent a VATable transaction in Georgia. However, the sale of a building is subject to VAT at the rate of 18%. The seller will be required to charge VAT on the price of the building, collect the tax from the customer and pay to the tax authorities of Georgia.

Property Tax

Local self-government bodies are entitled within their authority, to establish local taxes in the respective territory within the maximum limit stipulated by the Tax Code. Property tax is a local tax and comprises of land tax and property tax of individuals and enterprises.

Fixed assets, installed equipment, incomplete capital investment, and intangible assets that are recorded in the balance sheet of a taxpayer are subject to property tax at a rate of 1 percent of the average annual net book value of the assets, unless specifically exempt.

According to the Tax Code owners and users of land pay the land tax. The land tax is differentiated according to the quality and location of the land. The base annual rate for the non-agricultural land amounts to GEL 0.24 per one square meter. The tax rate on non-agricultural land should be established by local self-governing bodies. The tax must be calculated by multiplying the annual base tax rate by the territorial coefficient and the land area. The differentiation of the land tax by territorial coefficient is made in accordance with location and zones of the land plot.




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If a Georgian company has purchased state-owned land after beginning of a calendar year, the company will be liable to pay land tax on a pro rata basis of ownership period of the land. According to the Tax Code a Georgian company purchasing land from the Government of Georgia is required to pay the tax during the month following the acquisition of the land. The basis for assessment of the land tax is considered to be a document proving possession or acquisition of the land.

Regulatory Environment

According to the Georgian legislation the issuance of construction permit includes three phase and minimum 60 days. • The first phase: Assessment of appropriateness of project for city landscape. The time needed for this

phase is 30 days(it is possible to extend the deadline by additional 15 days or in case of very important project by additional 30 days)

• The Second phase: Approval of architectural design of project. The time needed for this phase is 20 days(possible extensions: 10 days or 20 days for very important projects)

• The Third phase: Issuance of construction permit. The time needed for this phase is 10 days(possible extensions: 5 days or 10 days in case of very important projects)

According to the legislation the issuance of construction permit became much more simple procedure for many small projects. For example, objects with no more than 100 m3 construction volume don’t require the construction permit at all. If the building’s main function does not change and the area of building is the same the construction permit issuance process requires only the second and third phases.

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Deloitte Report on Tbilisi Real Estate MTrket

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