DIRECT MARKET REPORT GERMAN RETAIL - Europe Real Estate

www.petercam.com 

Real Estate November 28, 2007 

DIRECT MARKET REPORT 

GERMAN RETAIL 

TEUTONIC OPPORTUNITIES ASSESSED 

Stephan van Weeren 

+31.20.573.54.22 

s.vanweeren@petercam.nl

Table of contents 

Table of contents ................................................................................ 2 

Executive Summary ............................................................................ 3 

Introduction........................................................................................ 5 

Economic context Germany................................................................. 6 

Economic growth............................................................................6 

Retail sales growth .........................................................................9 

Consumer Price Index ................................................................... 11 

Growth per region ........................................................................ 12 

Demographic context; urban society ............................................... 13 

Retail power per conglomerate ....................................................... 14 

Retail business segment development ............................................. 16 

Concentration in the German retail sector ........................................ 17 

Demand ...................................................................................... 20 

Supply ........................................................................................ 21 

Resizing exercise .......................................................................... 24 

Yields.......................................................................................... 26 

Shopping centres ......................................................................... 27 

Non-food retail warehouses: DIY .................................................... 28 

High street shops ......................................................................... 29 

Rental levels ................................................................................ 31 

Rental indexation ......................................................................... 32 

Construction costs ........................................................................ 32 

Available products ............................................................................ 34 

Deutsche EuroShop ...................................................................... 34 

Hahn Group................................................................................. 36 

Dawnay Day Treveria.................................................................... 37 

BBI Immobilien ............................................................................ 38 

GWB........................................................................................... 40 

German retail update - 28/11/2007 2

Executive Summary 

“The secret of making money in German property lies in the fact that Germany 

has a history of administration instead of asset management”. Ralph Winter – 

Corestate Capital 

• The German economy is doing well and the labour market is showing off 

today with promising employment rates. Furthermore, the introduction of 

the G-REIT and reduction of corporate tax might assist herein. However, 

the increase in VAT beginning 2007, credit crunch perils and strong euro 

are still preventing the ‘engine of Europe’ to shift second gear short term, 

which is reflected in the 6-month ZEW indicator (-32.5). As of mid 2008 

we expect the sound underlying fundamentals to take-over again. Regions 

that are outperforming the German average from an economic growth and 

retail sales perspective are Baden-Württemberg, Bavaria, Saarland and 

Schleswig-Holstein. Some locations in Nord Rhein-Westfalen (e.g. 

• 

Düsseldorf) are attractive as well; 

The German real estate market shifted lately from a debt-driven financial 

investor based market to one dominated by real estate investors 

performing active asset management in order to add value. The sub-prime 

credit issues and new thin-cap rules are assisting in this respect. Also the 

open-ended funds are coming back into the market, assisted by their lowleveraged 

balance sheet. In the first 9 months of 2007 they collected EUR 

6.9bn and signed purchase agreements for EUR 8.3bn. They tend to shift 

from passive buy & hold strategies to active asset management with more 

focus. However, the open-ended funds only invested 19% of total 

investments in retail in 2007 so far. Portfolio transactions within the retail 

segment are becoming more important (63% in HY1 07), to a large extent 

these are mixed schemes containing either an office-retail or officelogistics 

combination; 

• For the whole of retail Germany it is expected that rents in prime locations 

increase by 3.6% in 2007, although clear regional differences must be 

taken into account. However, the indexation methodology is very old 

fashioned due to the usual step-up indexation. Luckily, more and more 

new contracts are linked to retail sales growth as well and annually 

indexed; 

• Germany, in a recent policy shift, will do more to discourage out-of-town 

retail schemes in favour of in-town/residential area developments, a move 

that could constrain the construction of shopping centres. From a 

supply/demand perspective mid-sized cities are proven to be most 

favourable in Germany. Most investments take place in Baden- 

• 

Württemberg, Hesse and Bavaria due to the purchase power and low 

provision of retail surface; 

The big question is whether yields will fall further, flatten out or bounce 

back after all things happening this year. German yields are generally 

higher than in other European countries with a mature market and rents 

per square meter are lower. This leads investors to assume yields can fall 

a bit further, despite an interim level of interest rates that is slightly 

higher (but stabilizing now). However, it is clear the “banking crisis” has 

rationalised the market in the meantime. During the last 3 months 

property yields for retail increased by 50 basis points on average. Overall, 

we believe yields to crawl up somewhat further (25 bps) in order to reflect 

risk premiums to a larger extent in the (6) months to come. After that the 

market picks up again gradually and only on the longer term (>4 years) 

we expect that yields will flatten out; the provision per inhabitant will be 

balanced out more and construction costs will effect net property yields; 


• For a more exact view on the retail market one should distinct the various 

sub segments and regions. Yields in Germany for retail warehouses/parks 

are still 100 basis-points higher than the ones for prime shopping centres 

and expected to fall further seen the strong market demand. However, the 

market is expected to become mature now the attention has been so 

intense. A study performed by Hahn estimates that warehouses increase 

their market share by more than 3% to 25% by 2010. Many warehouses 

will size more than 800m 2 , which correlates to the increase in food 

discount stores (e.g. Lidl, Aldi). 56.7% of all investors are considering 

retail warehouse centres the most attractive form of investment; 

• Prime shops in high streets that contain a long-term contract with an 

international fashion chain (e.g. H&M) are extremely popular. We expect 

the demand for high street shops to be ongoingly strong and supply 

limited; 

• For prime inner city shopping centres and large dominant modern out-oftown 

centres –both well let and actively managed- we expect yields to 

dive below 5% overall. The lower rate of return and the implied lower 

investment risk of shopping centres are partly attributable to their selected 

location (e.g. inner city locations) or in the diversified tenant mix; 

• Other operating retail formats like hypermarkets, specialist retailers, old 

fashioned outdated supermarkets and shopping centres are currently in 

their saturation phase and therefore less promising from an investor point 

of view. Supermarkets peaked in terms of market share already back in 

2000. The only chance to survive is to adapt and remodel themselves to 

current and future market conditions; 

• Not many dedicated German retail players are on our radar screen. The 

best known listed players are Deutsche EuroShop, the Hahn Group, 

Dawnay Day Treveria, BBI Immobilien and GWB. All have quite a 

distinctive business model. By taking retail sales performance, 

demographics, provision and demand into account for the various retail 

products, segments and regions we very much fancy Deutsche EuroShop 

and BBI Immobilien. 

o Deutsche EuroShop focuses on prime inner-city centres throughout 

Germany, Austria, Poland and Hungary that bear long-term leases 

which are indexed and are financed conservatively. The average 

portfolio yield today is 5.4%, total portfolio size EUR 2.6bn. 2007 was 

a year of consolidation but in 2008 both centres in Hamelin (March 

’08) and Passau (autumn ’08) are delivered. Pre-letting rates for both 

properties are already high, 95% respectively 76%. Further sourcing 

opportunities are in place (ECE). 

o BBI went through a transformation from the oldest listed brewery in 

Germany to a real estate player which invests exclusively in specialist 

retail, gardening and mid-sized shopping centres in Bavaria and 

Baden-Württemberg, acquired mostly off-market from local 

companies and regional developers. The current average property 

yield is 6.9% and quite some revaluation potential is in place. Target 

is to grow from approximately EUR 150m today to more than EUR 

750m. 

“A lot of people went into the market and out again. They were never going to 

undertake asset management in Germany”. Tony Quayle – Edinburgh House 


Introduction 

Following the record result on the German property market (+12% y.o.y.) 

totalling EUR 15.5bn for retail property transactions in 2006 –the Karstadt 

Portfolio included- one assumes a further increase for 2007 as a consequence of 

very favourable market conditions; the economy is buoyant, the unemployment 

rate falls, interest rates are still relatively low –even after the peak in July 2007 

and current credit crunch. For this year at least another 5% growth in overall 

property investments is expected. 

Exhibit 1 Transaction volume Germany for all segments 

Source: Jones Lang Lasalle 

Retail properties are regarded as one of the safest investments due to increasing 

rents –even though somewhat slowly in Germany- and low volatility of total return 

throughout the years compared to e.g. offices. Especially outside the largest cities 

(Berlin, Munich and Hamburg) the returns on retail have been buoyant since 

2003. However, average rental growth used to be higher in the top three cities 

(0.6%/annum) compared to smaller regional cities. 

Most property –both offices and retail- has been sold by German open-ended 

funds during last years. It is expected that the exodus of their assets is coming to 

a stand-still. In the first 9 months of 2007 they collected EUR 6.9bn and signed 

purchase agreements for EUR 8.3bn. They tend to shift from passive buy & hold 

strategies to active asset management with more focus. The open-ended funds 

currently bear too much liquid means; Hausinvest Global (a Commerzbank 

subsidiary) keeps more than 28% in cash. In order to make it to the promised 6% 

dividend yield one should make it yielding (currently 5.3%). Even Deka Bank, the 

worst hit fund manager in recent years has returned to the market and bought 

two properties in Hamburg last month. 

Foreign parties are still over-represented in Germany; of all disposals 3/4 th was 

initiated by a German party and that same share was purchased by a foreign 

party so far this year. Demand from Anglo-Saxon investors remains very strong, 

especially for shopping centres, even though the highly leveraged investors 

backed-up since this summer. 

On the long term many specialists expect a gradual decline of new capital flowing 

into the market and furthermore that many funds are exiting their assets by then 

(>2010). We are convinced that the pressure of capital will continue to be in place 

for the 2-3 years to come seen the huge amount of cash still available for 

investment purposes. 


Economic context Germany 

Economic growth 

In 2006 the 2.8% growth in gross domestic product was higher than initially 

forecasted and considerably above the level of 2004 (1.2%) and 2005 (0.9%). In 

contrast to the previous years, the positive development in 2006 was not driven 

by exports but also through stronger domestic economic activity, accompanied by 

a rising demand for retail and commercial real estate. 

Exhibit 2 GDP growth for Germany 2001-2008e 

Source: Allianz Dresdner Economic Research, Statistisches Bundesamt, (*ifo-Institut) 

The following exhibit shows the year-on-year GDP growth in history as registered 

by the Federal Ministry of Economics and Deutsche Bundesbank. 

Exhibit 3 GDP growth for Germany 2002-2008e 

Source: Deutsche Bundesbank, Federal Ministry of Economics 

The assessment of the current economic situation in Germany worsened in last 

months. The corresponding indicator declined by 4.2 points to 70.2 points in 

October and another 0.2 points to 70.0 points in November. 

To put things in perspective: economic expectations for the euro zone decreased 

in November. The indicator dropped by 11.0 points and now stands at minus 30.0 

points. The corresponding indicator for the current economic situation in the euro 

zone decreased by 2.7 points to 60.2 points. 


The ZEW Indicator of Economic Sentiment 1 for Germany remained unchanged in 

October 2007 and stood like in September at minus 18.1 points. In November 

2007 however it dived to minus 32.5 points! The historical average is 31.8 points. 

Due to the sub-prime crisis, which is definitely not over yet, financial market 

experts have re-adjusted their economic expectations, especially for the United 

States. 

Source: ZEW 

Exhibit 4 ZEW Indicator of Economic Sentiment 

The greatest risk factor for the development of the German economy in the 

following six months are the exports, which are expected to decrease owing to the 

strong Euro and the decreasing rate of growth of the US-economy. The current 

ongoing rise in oil prices (> USD 93/barrel) isn’t helping either. 

The cornerstone of the German economy is the labour market (exhibit 5). 

However, the current discussion on the Hartz-IV reforms on the German labour 

market might impair expectations. 

Exhibit 5 Unemployment rate development in time 

Source: Federal Labour Ministry 

1 The ZEW Indicator of Economic Sentiment shows the balance between positive and negative expectations regarding future 

economic activity in Germany within a timeframe of six months. The horizontal line indicates the historical mean of the indicator. 


As can also be seen in exhibits 2 and 3 the forecast for Germany‘s economic 

performance in 2007 and 2008 predict further growth, even though the dynamics 

of this will be slightly more restrained in comparison with the buoyancy of 2006 

that proved to be well above average. Accordingly, the assessments of business 

conditions in industry at the start of 2007 were rebounding into the positive range 

for the first time in almost five years. 

Concluding: the sub-prime issues are expected to continue for at least another 

half year and will suppress the economic sentiment as reflected in the ZEW 

indicator. However, we believe this is in the end a credit issue, which puts hurdles 

for financing large sized assets and projects (>EUR 100m) and increase risk 

premiums i.e. margins slightly. The underlying fundamentals of the German 

economy are solid. 


2 Destatis 

3 Federal Statistical Office 

Retail sales growth 

In first instance it looked that the 3% increase in VAT from the 1st of January 

2007 didn’t have that much of a negative consequence on consumer spending. 

However, in May it decreased by 3.7% y-o-y in real terms, which was well below 

the previous forecasts. A portion of this decline can be attributed to bad weather 

conditions, the extraordinary high retail sales in May 2006 (+ 4.1% in real terms) 2 

but also to the fact that German retailers indeed are still suffering the effects of 

the VAT increase. Nevertheless, this entails recognising that a recovery in 

consumer spending might take longer than expected. 

As we can see in exhibit 6, retail sales seem to have had a small spike in April 

2007, and apart from that they are down in the first half of 2007 over the 2006 

level (0.8% over six months). 

Exhibit 6 Retail sales per month (2006-2007 ytd) 

Source: Federal Labour Office 

In September 2007 turnover in retail trade was in nominal terms 1.2% 3 and in 

real terms 2.2% smaller to that of the corresponding month of the previous year, 

taking into account the number of days open for sale (25 in September 2007 and 

26 in September 2006). When adjusted for calendar and seasonal variations 

(CENSUS-X-12-ARIMA), the September turnover was in nominal terms 2.6% and 

in real terms 2.3% larger than that of the preceding month. Compared with the 

corresponding period of the previous year, retail turnover was in the first nine 

months 2007 in nominal terms 0.9% and in real terms 1.6% smaller than that in 

the first nine months of 2006. We actually had hoped that due to the improving 

labour market the VAT effect would have been mitigated by now. 

Looking back further in history one is able to overlook both absolute and relative 

growth in time (exhibit 7). 


Exhibit 7 Development of retail turnover 1992-2008e 

Source: BAG, EHI, ifo Institute, HDE 

We are confident that the VAT effect will be visible during the coming Christmas 

shopping period. For the coming years Dr. Lademann & Partner expects to see 

German retail sales to grow at a constant rate of 0.7% to 1.2% per annum, 

ceteris paribus the positive development of the economy and an ongoing easing 

labor market. 

The retail’s share in private consumption will only fall marginally and not as much 

as before (over the last ten years by 10%). The forecast for 2010 sees the retail’s 

share at almost 27 percent. Especially next year the positive macro-economical 

developments should provide for momentum in retail sales growth. 


Consumer Price Index 

Consumer prices have increased 0.2% on the month in October 2007 in Germany, 

and 2.4% from October last year, pushed by the increase of food and oil prices, 

according to the CPI estimate released by Destatis. These figures were in line with 

the market analysts’ expectations which advanced a 0.1% monthly rise and a 

2.4% yearly increase. According to Destatis, the European Harmonized Index for 

Consumer Prices has increased 0.2% on the month and 2.7% on the year. The 

reason for these figures have been the higher prices of food, such as milk, eggs, 

vegetables and sharp increase of fuel prices. 

In a more narrow perspective, inflation is very important for both purchase power 

and rental indexation. 

Exhibit 8 Consumer Price Index 2000-May 2007 

Source: Statistisches Bundesamt, Statistisches Jahrbuch 2007 


Growth per region 

The following exhibit shows the GDP growth development in the various regions 

from 1996 to 2005. Bavaria seems to be the ever lasting number one whereby the 

East German states lack behind. 

Exhibit 9 GDP growth 1996-2005 

Source: Bayerisches Staatsministerium für Wirtschaft, Infrastruktur, Verkehr und Technologie 

Unemployment has always been relatively low in southern states like Baden- 

Württemberg and Bavaria: 

Exhibit 10 Unemployement rate in january 2007 

Source: Bayerisches Staatsministerium für Wirtschaft, Infrastruktur, Verkehr und Technologie 

A further rise in disposable income is foreseen due to the improved job market 

circumstances, however, to a certain extent offset by a further rise in private 

household savings, rising energy and commodity prices. Overall, the average net 

income already amounted to approximately EUR 2766 in 2003, which is already 

relatively high compared to other European countries. Many households actually 

exceed this amount to a large extent. 


Exhibit 11 Division median net income per household in EUR in 2003 


If we look at the regional differences Baden-Württemberg, Bavaria and Hessen 

are topping the ranks. 

Exhibit 12 Division median net income per household in EUR in 2003 


Demographic context; urban society 

From a demographic perspective quite some important developments are 

expected; the number of people living in Germany will decline by almost 10% by 

the middle of this century. Furthermore, the Germany population is ageing fast; 

the share of 65 year-olds will increase from 17% to roughly 30%. Also important 

to notice is that regional differences will become larger as highly educated young 

people tend to migrate to dynamic economic regions. People from the east go 

west, people from the west again go south. 

Germany actually lacks a true cosmopolitan city like London or New York and 

there are very big conurbations. A total of eleven agglomeration areas exist to 

which the urban areas are tightly linked. The hubs of these agglomerations are of 

such crucial importance to the retail trade because they exert powerful centripetal 

forces. 


Major cities like Berlin, Hamburg and Munich generate the highest retail turnover 

in absolute terms, but it is also well worth mentioning the more than 80 midsized 

towns and cities in Germany with populations in excess of 100,000. Actually these 

can be regarded as the heart of an economic area, providing services to the 

surrounding region. 

Exhibit 13 Population forecast 2020 and Purchasing Power 

source: Berlin-Institut für Weltbevölkerung und globale Entwicklung 

Retail power per conglomerate 

In order to determine which cities and its wider surroundings are best positioned 

to house retail, one can find some key performance indicators in exhibit 14. 

Besides the size of the population and its dynamics, the purchase power index 

(Germany = 100) provides for an indication if the conglomerate is viable or not 

for retail. The turnover index, also called the retail turnover at Point of Sale index, 

gives a more effective view on the earlier mentioned purchase power index. Retail 

trade centrality brings the previous indices together and is the ‘outcome’ for the 

desirability of a retail-location; if the centrality value is > 100 than purchase 

power is ‘flowing in’, if the value is below 100 purchase power ‘flows out’. 


Exhibit 14 Population, purchase power, turnover and retail trade centrality 2006 

Population growth % purchase Turnover retail trade change to 

2006 to 2005 power '06 index '06 centrality '06 05 in % 

Berlin 3,395,189 0.2 91.4 103.4 113.1 4.4 

Dresden 495,181 1.6 91.9 106.5 115.9 - 0.7 

Düsseldorf 574,514 0.3 120.5 146.4 121.5 - 2.4 

Frankfurt a.M. 651,899 0.8 111.9 126.2 112.8 0.8 

Hamburg 1,743,627 0.5 106.5 122.5 115.0 - 1.6 

Cologne 983,347 1.4 110.1 136.2 123.7 - 0.8 

Leipzig 502,651 0.5 84.5 98.9 117.0 2.5 

Munich 1,259,677 0.8 136.7 155.3 113.6 - 1.9 

Stuttgart 592,569 0.3 113.5 140.4 123.7 1.6 

Bremen 546,852 0.2 95.6 122.5 128.1 2.0 

Erfuhrt 202,844 0.2 88.2 106.2 120.4 - 9.7 

Hanover 1,128,543 - 106.5 114.8 107.8 2.9 

Kiel 234,433 0.5 90.4 140.2 155.1 6.1 

Magdeburg 229,126 1.1 84.4 115.9 137.3 - 7.6 

Mainz 194,372 4.5 114.3 127.2 111.3 2.0 

Potsdam 147,583 1.3 94.3 82.4 87.4 - 9.2 

Saarbrücken 341,940 - 0.8 92.7 122.0 131.6 0.5 

Schwerin 96,656 - 0.5 89.7 114.3 127.4 10.4 

Wiesbaden 274,611 0.2 115.5 132.9 115.1 1.0 

Source: GfK Nuremberg, DEGI Research 

One can conclude that from a purchase power perspective Munich, Düsseldorf, 

Wiesbaden/Mainz and Stuttgart are regarded as strong. This is furthermore 

emphasized by the turnover index, which also puts the first northern city in the 

spotlights; Kiel. The retail trade centrality index confirms the potential of Kiel but 

also puts the first East German cities on the map; Magdeburg and Schwerin. The 

latter noticeable due to the 10.4% increase in trade centrality. Kiel also made a 

large move in this respect last year (+6.1%). 


Retail business segment development 

In the retail sector for smaller units (Einzelhandel) we have seen a slight decrease 

in revenues in July 07. Year-on-year wise the overall sale figure declined, the 

stock of products unsold increased somewhat. However, it seems that retailers do 

have a strong confidence towards the future, which hasn’t been translated so far 

in a higher ordering quote. Concessions have indeed been made for sales prices 

but are already vanishing in a rapid pace. One can expect the improvement on the 

labor market will shore up private consumption in a first step and then the retail 

industry in a second step. 

The current structural change has considerable significance when assessing the 

further development of the German real estate market for retail. The development 

of the various retail sub-segments is showing a growing importance of specialist 

mail order (internet!), retail parks and food discounters. Size and comfort really 

starts to matter. 

Exhibit 15 Shift in retail market shares (type of business in % turnover) 

Source: BAG, EHI, ifo Institute, HDE 

Retail warehouses and discounters are currently undergoing the growth/maturity 

phase, whilst hyper- and supermarkets have already passed that stage and are 

now in their saturation phase. This negative momentum can be delayed by 

modernizing, resizing or re- positioning the retail concept and lay-out. The 

demand for the factory outlet concept by investors is even smaller than demand 

by retail players. 


Exhibit 16 Life cycles of the various retail formats 

Source: Dr. Lademann & Partner, according to Nieschlag / Dichtl / Hörschgen 

People have become more mobile, petrol stations have steadily broadened their 

range, traffic hubs such as airports and railway stations offer shopping almost 

round the clock and the internet is open 24/7. The watering down of regulations 

makes further liberalisation of the stationary retail trade a sensible way of 

creating a level playing field for conventional retailers. Although significant sales 

growth is not to be expected from this, since households’ disposable incomes will 

not alter much, it could staunch further losses in sales to new distribution 

channels. 

Concentration in the German retail sector 

The trend of consolidation has so far be seen in the DIY and garden store sector, 

where 2006 alone saw two take-overs; Max Bahr & Praktiker, Marktkauf & REWE. 

But also Metro AG‘s take-over of the 85 Wal-Mart markets has shaped the market. 

Also on an international level this tendency can be seen; e.g. REWE Austria Group 

stake in ADEG Österreich Handels-AG and DennerAG taken by Migros- 

Genossenschafts-Bund. This consolidation should allow the remaining players to 

utilize their greater market might into better sales margins over the long term. 


Opening hours Germany 

On 30 June 2006, as part of the Föderalismusreform ("Federalism Reform"), the 

regulatory responsibility for the well-known opening hours restriction was 

devolved to the German states. Berlin was the first state to deregulate closure 

times to a 24/6 scheme on November 9, 2006. In the meantime North Rhine- 

Westphalia, Rhineland-Palatinate, Hesse, Thuringia, Brandenburg, Schleswig- 

Holstein, Hamburg, Bremen, Baden-Württemberg, Lower Saxony/Saxony passed 

the law. In these states, the maximum allowed opening times are Monday 00:00 

to Saturday 24:00 with individual regulations on Sunday opening times during 

select Sundays. As of May 2007, Bavaria and the Saarland have expressed no 

intent to modify the opening times at all. The state government of Mecklenburg- 

Western Pomern has expressed its intent to pass legislation allowing 24 hour 

opening Mondays to Fridays, with opening times up to 22:00 on Saturdays. The 

law is effective since July 2007. It remains to be seen whether the long demanded 

liberalisation of trading hours will actually generate additional sales in the retail 

sector. Longer opening times will foremost accommodate changing consumer 

behaviour and have the effect of a supporting measure, the fundamental impulses 

are however provided by an improved job market situation and a higher level of 

purchase power. Altogether, a nominal increase in turnover of 0.5% is expected 

for 2007 but the retail sector is only going to benefit from this positive momentum 

as of 2008. 

G-REIT 

The German REIT legislation will be retro-active as of 1 January 2007 and will 

allow transfer of commercial properties and office buildings into a REIT whereas 

residential properties can only be transferred to the REIT provided they are built 

after 31 December 2006. The REIT will not be subject to corporate income tax and 

local business/trade tax. When selling properties to a G-REIT only half the profit 

generated is liable to taxation. The main features of the German REIT are: 

1. Corporate Structure; it should be a listed stock corporation, at least 15% of all 

shares need to be held by shareholders each holder holding less than 3%; 

2. Free float; at the time of floatation, 25% must be free floating. No individual 

shareholder must own 10% or more in the REIT; 

3. Revenues; at least 75% of total assets must be real estate and 75% of gross 

revenue must be generated from renting out real estate or from the disposal of 

individual assets; 

4. Dividend; at least 90% of net profits must be distributed to investors (the 

equivalent of the depreciation of the real estate assets cannot be distributed); 

5. Exit tax; only half of the capital gains realized upon the transfer of real 

property will be subject to income tax subject to certain conditions (e.g. property 

has been held for at least 5 years as business asset and not disposed by the REIT 

within 4 years after acquisition) 

6. Corporate tax; the REIT will be tax exempt after floatation; 

7. Taxation at shareholder level; resident and non-resident investors will be 

subject to a 26.38% withholding tax. Non-resident investors may not claim 

protection under the European Parent Subsidiary directive and double taxation 

treaty protection is restricted. This ruling however will change as of 1 January 

2009. We refer to our section at the end of this page. 

Many companies will wait with selling their properties or with the foundation of a 

REIT, because the tax burden will be substantially lower as of January 1, 2008. 


Corporate tax rate to 15.8% 

In the summer of 2007 the German Government passed the bill of the business 

tax reform 2008. With the commencement of this reform -effective from 1 

January 2008- the tax rate (corporation tax + solidarity surcharge) will fall from 

26.375% to 15.825% i.e. -10.55%. The trade tax shall be reduced as well. The 

final reduction depends on the municipality where the corporation is established or 

where the business is located. However, most real estate buy & hold companies 

don’t have to pay any trade tax. 

Interest cost deduction barrier 

The difference to the current thin capitalization rules is that the limitation is not 

only applicable to interest paid for shareholder loans but for all other loans 

including bank loans. The legislation means that the interest rate barrier will come 

into effect if the free quota on the financing balance exceeds EUR 1m. The 

consequence will be that merely financing costs of 30% of earnings before 

interest, taxes, depreciation and amortization can be tax-deducted. Interest cost 

deduction barrier is aimed at corporate groups i.e. an operation forms part of a 

group if it is (or could be) consolidated with one or several other companies. 

Withholding Tax 

The taxation of private investors’ capital income will change per 1 January 2009. 

Private investors are no longer subject to their progressive individual income tax 

rate (up to 45%) but instead subject to a flat tax of 25%. This flat tax applies to 

investment income like dividends, interests and other income from financial 

products and for capital gains. The taxation of interests with a flat tax of 25% is 

an improvement. A disadvantage that has to be pointed out is that capital gains 

from moveable assets (especially financial products) are taxed independently of 

the period of ownership. The current situation (until the end of 2008) is that the 

capital gain of moveable properties is not taxed if the owner sells the properties 

after a period of more than one year. Domestic banks holding affected securities 

in custody are obliged to deduct the tax and to transfer it to the tax authorities. 

Dividends distributed from the capital contribution account in accordance with 

section 27 of the German Corporation Tax Act are not subject to definitive 

withholding tax. 

Trade tax 

Another component of the 2008 corporate tax reform concerns the allocation of 

retailers’ rental payments on the trade tax; effectively almost 19% of rental 

payments will be taken liable for trade tax in order to avoid tax savings by owneroccupiers 

(e.g. Aldi, Bauhaus) Exemplary calculations show that a higher tax 

burden will have to be taken by (international) chains, which pay relatively high 

levels of rent and recognize low profits in their balance sheets. 


Demand 

Occupational demand continued to improve over the second and third quarter of 

2007. In prime locations, the demand is being driven almost exclusively by 

multiple clothing retailers. Especially retail parks, shopping centres (new and 

existing), higher-yielding small-sized retail parks and DIY stores, are very much 

looked for by tenants. 

Exhibit 17 Transaction volume per retail type in HY1 2007 

6% 

14% 

15% 

6% 

German retail update - 28/11/2007 20 

4% 

DIY Shopping centre Supermarkets Retail warehouse Retail park High street Other 

Source: Jones Lang Lasalle 

Today investor demand is very much coming from asset managers, of which 1/3 rd 

from Great Britain. Especially Dawnay Day Treveria is growing in a tremendous 

pace by acquiring DIY-, shopping centres and king-size portfolios containing 

individual retail units. Garigal AM’s DIY portfolio is another example. The recent 

Hahn Group survey concluded that overall 53.3% of the investors are planning to 

invest more in 2007 than they did in 2006, whereas 26.7% intend to stick to their 

current investment volume. 

Despite the credit crunch, which has also touched ground in Germany, more than 

EUR 6.9bn has been collected by the open-ended Funds during the first 3 quarters 

of 2007. This is quite a surprise seen the expected overall downward revaluation 

of assets and image left after the recent capital outflow. Due to their relative 

conservative leverage (LTV 50%) they are able to act much stronger on the 

investment market now highly leveraged parties have been set off-site and assets 

are becoming available at more reasonable prices. This also applies to REIT-like 

firms which are financed in a conservative way. Another issue one should take 

into account for the open-ended funds is the earlier mentioned huge amount of 

liquid means still kept in money market products. 

For the decision makers of the real estate industry their focus for investments 

remains Southern Germany, as this region is regarded as strong, both 

economically as well as demographically. The views expressed by the decision 

makers from the large-scale retail sector differ hardly from those of the real 

estate industry. Here too, emphasis is on the economically strong regions of 

Baden-Württemberg (30%), Bavaria (27%) and Southern Germany as a whole 

24% 

31%

(30%) 4 . The preference for hypermarkets and superstores in the state of North 

Rhine-Westphalia (50 percent) is not surprising given the densely populated 

conurbations in that state. Both retailers and investors will in future place more 

weight on sites within the German inner cities and residential centres. This hardly 

comes as a surprise given the forecast of demographic change in Germany. The 

agglomeration formats are not only limited to shopping centres, but the 

expectation is also for retail parks and/or retail warehouse centres to grow. 

Supply 

4 Hahn Group survey 2007/2008 

As stated before, the amount of square meters (GLA) per 1,000 inhabitants has 

always been below the European average, i.e. tends to be in short supply in 

Germany. Today Germany has 360 shopping centres for more than 11 million 

square meters, which means that shopping centre space has nearly doubled over 

the past 10 years. In 2006 another 20 centres got up and running and currently 

another 27 malls are in the pipeline (1,150,000m 2 ). But this still means only 

145m² of shopping centre space for every 1,000 inhabitants, which is lower than 

the EU-24 average of 176m²/1,000 (EU-15 219m²/1,000). This is quite a contrast 

with Spain (200 m²), even Portugal, France and both number one and two, the 

Netherlands and Sweden (> 400m²) per 1,000 residents. Especially retail 

warehouse formats are less widespread than in other countries as municipalities 

are trying to protect their downtown locations. 

Tight planning in more mature markets such as the UK, France and Germany has 

shifted the focus back to in-town development. Only 4% of all shopping centres in 

Germany built since 2002 are on green fields. In Germany one can definitely 

speak about a so called “back to the city centre” trend; in the years 1995-1999 

the share of inner-city shopping centres was only 30.5%, which rose to almost 

50% in the last 5 years. Presently large scale schemes which are increasingly 

located on central and peripherical inner-city sites for its high frequency of visitors 

are regarded as attractive. Especially the ones that contain a full multifunctional 

range are unbeatable; shopping, office, residential, public services, culture, 

gastronomy and leisure facilities. Besides a less restrictive interpretation of 

building laws and permits in inner cities, a central factor for this trend could well 

be the more favourable risk assessment of real estate in city locations compared 

to other locations. 

On the other hand, the old high streets will always attract people in order to shop 

in the more old fashion way, especially in summer time. Therefore it’s crucial to 

rededicate or re-position obsolete properties in between the chique warehouses 

and shopping centres. 


Exhibit 18 Existing shopping centres space in square meters per 1,000 inhabitants 

Source: DEGI Research 

Given the uptake in retail sales, area productivities will stabilize after years of 

persistent decline and despite the fact that total sales areas are expanding. This 

trend is having a positive effect on the commercial properties market, as area 

productivity is relevant for the sustainability of rents. However, looking at the 

longer term; by 2010 a further 6 million square retail space will have been 

created. 

Exhibit 19 Provision and potential for retail-surface per 1,000 inhabitant per county 

Niedersachsen 

Rheinland-Pf. 

Baden-Wb. 

Saarland 

Nordrhein-W. 

Bayern 

Hessen 

Schleswig-H. 

Thüringen 

Hamburg 

Berlin 

Mecklenb-Vorp 

Sachsen 

Sachsen-Anhalt 

Bremen 

Brandenburg 

25.0 75.0 125.0 175.0 225.0 275.0 325.0 

total 2010 2006 

Source: EHI, Realinstitut, Wegweiser Demographischer Wandel (WDW) 

This again will on the long term result in a decline in productivity per unit area as 

retail turnover is developing in a slower pace than supply. For Eastern Germany 

much is dependent on the continuation of the “Aufbauprogramm Ost” program, 

the economic development program for Eastern Germany. 


Exhibit 20 Indexed space development and productivity per unit area 

Source: Federal Statistical Office 

Large scale centres in Germany are becoming increasingly important for the retail 

landscape, just like factory outlet, leisure and entertainment centres, station and 

airport shopping centres and city centre shopping malls. 

Exhibit 21 Development of shopping centres (>10,000m2 rentable area) in Germany 

Source: EHI Retail Institute 

However, foreign investors are not interested in the entire spectrum of properties, 

but only in properties already traded on the investment market, mainly shopping 

centres and other retail warehouse formats. Precisely in this segment Germany 

still appears undersupplied. The reason why international investors are highly 

interested in German retail is threefold: 

• undersupply of shopping centres and retail parks 

• average yield levels and -gap for German retail 

• ongoing sustainable economic growth expected. 

Most favourite locations are cities that have more than 70,000 inhabitants; 

between 2001 and 2006 2/3rd of the newly developed centres were built in such 

large conglomerates. Smaller cities up to 20,000 residents and eastern German 

cities are regarded as unpopular. 


Resizing exercise 

The modern discounter has extended its size from a previous total between 500 to 

800m², to often more than 1,000 to 1.200m². Hypermarkets are evidently 

continuing to resize their sales spaces. Unlike before (when they had around 

10,000m² sales area), today’s operating formats are sought in the region between 

4,000 to 7,000m². The average sales area of the large superstores continues to 

grow, which makes it increasingly difficult to distinguish between the operating 

types hypermarket and large superstore. The best example in case is the largescale 

discounter “Kaufland”, who, with an average sales area of 4,500 m², is 

blurring the boundary between these two operating formats. 

Exhibit 22 Site preferences in the large-scale food retail trade 

Source: Experts survey, Retail Real Estate Report 2007 /2 008 

The Hahn Group survey revealed that 36.7% of retailers interviewed confirm that 

the need for larger floor space is a growing trend. The retail sector will, according 

to 60% of retailers, undergo more concentration. 

Around 1/5th of the planned shopping centres is to be found in Baden- 

Württemberg and Bavaria, both are still below average with respect to per capita 

retail area in a nationwide comparison. But looking at the regional purchase 

power/retail sales per head (exhibit 14) and future employment situation these 

states offer very good conditions for successful retail strategies. Around Berlin 7 

large-scale shopping centres are planned in the next 4 years. In combination with 

the fact that the retail coverage is around 229m 2 per 1,000 residents –followed by 

Brandenburg and Saxony Anhalt- competition between the various centres will be 

fierce. Largest competition for the shopping centres and retail parks can be 

expected from the classical department stores, often in inner-city locations (e.g. 

Hertie brand revival). 

As the following table shows (exhibit 23) there are presently approximately 50 

retail development projects with a GLA of at least 10,000m 2 to be completed 

within 4 years. 25% of these projects are located in East Germany, of which 7 

in/around Berlin. A significant focus has been detected in both southern states – 

Bavaria and Baden-Württemberg- for the earlier mentioned reasons. 


Exhibit 23 Shopping centre pipeline 2007-2010 

Source: GCSC German Council Report Autumn/Winter 2006 + DEGI Research 


Yields 

As stated before, from an investment point of view 2006 was one of the best 

years ever for retail, very much supported by the low interest rates. Total 

investment volume in retail only was EUR 15.5bn, i.e. 1/3 rd of total real estate 

volume in Germany and 182% higher than 2005. However, the Karstadt deal only 

made up for 29%. Demand of Anglo-Saxon investors remained very high. 

In June 2007 yields were unchanged on March 2007 across all sub sectors, 

following the downward yield shift in the first quarter. There is a little sign of 

investor interest diminishing and the second quarter recorded numerous 

transactions. However, we have to take into account that –due to the credit 

crunch perils- higher financing costs have led to a withdrawal of financially driven 

investors which made up for 65% of total commercial property transactions last 

year. During last 3 months yields for retail premises have increased by 50 basis 

points on average. 

In order to put things in perspective we have to look back however. Net initial 

yields of western German retail property in city centres have risen over the past 

ten years by 30 basis points to roughly 6.5%. In the east of Germany initial yields 

have climbed since 1995 by 80 basis points and are currently about one 

percentage point above the level in the west. Here, too, there are marked regional 

differences. In Dresden the initial yield, close to 6%, is well below the average 

East German level, in Görlitz, at almost 10%, is clearly above. Both the trend and 

the yield differential between East and West German cities are plausible in the 

light of the market developments described. They clearly reflect the higher risk in 

the weaker retail markets, some of which post high vacancy rates. It speaks for 

itself that the risk premium for the eastern part has always been in place, 

although a certain conversion has taken place lately. 

Exhibit 24 Prime yields in Germany 1999-2007 

Source: Jones, Lang Lasalle 

What about near future expectations? An investigation by the Hahn Group made 

clear that overall investors in retail are, of course, largely positive. Only 10% 

think that the volume of German retail transactions will decrease. While a third 

feel that prices for retail assets will continue to rise, 46.7% believe that prices will 

stagnate. In the event of any changes in asset prices, investors say exhaustion of 

interest rates would be the main drivers. We expect that yields will have increased 


y approximately 25 basis points by the end of Q1 2008 i.e. one year of net rental 

income. 

For secondary grade assets overall expectations are more bearish, an increase of 

50 basis points is expected for the coming 6 months at least. According to the 

Hahn Group survey German retail overall is “no longer up-to-date”. However, for 

both A and B grade assets one has to distinct market dynamics per sub segment 

within the retail chapter; shopping centres, retail parks/warehouses and individual 

high street shops. 

Shopping centres 

The shopping centre boom of 1990-1995 is past and new openings of centres 

seem to have levelled out on a growth rate between 2.5% and 4.5% p.a. For the 

moment no saturation of the shopping centre market is foreseen, also helped by 

the relative low density of shopping centres in (Western) Germany. In 2006 and 

2007 the federal states of North Rhine-Westphalia, Bavaria and Lower Saxony 

registered the highest increase in shopping centres. In Berlin, on the other hand, 

in that same time phrame, 8 new centres were in the stages of planning or 

completion, even though the city already has a retail space density of 

229m 2 /1,000 inhabitants. Also in this segment the trend from the green field 

back to the inner cities can be seen. Besides new developments, the 

revitalization of existing shopping centres will become a central issue. The 

statistic average between the initial construction and the first revitalization of a 

shopping centre is 17 years. Taking into account that the boom was in 1990- 

1995, one can easily presume the consequence for available shopping centre 

space and property prices. Yields for prime centres are expected to harden 

marginally further in the years to come. Mixed in-town/residential area schemes 

(e.g. office-retail combination) are regarded as favourites in the near future. 

After 5 years we foresee a flattening out of average yields due to an increased 

maturity of this specific market taken supply, demand and competition into 

account. 


Exhibit 25 Shopping Centre map in Germany (> 8,000 m²) 

Source: EuroHypo, Real estate Appraisal & Consulting 

Non-food retail warehouses: DIY 

The market for ‘do-it-yourself’ has put itself on the map due to the Toomportfolio 

transaction; Marktkauf Holding sold its 133 ‘Baumarkten’ to Rewe for a 

three-digit amount in millions. This transaction lifted the share of DIY centres in 

Germany in 2007 y.t.d. over 30% of total transaction volume. A total of 82 new 

DIY and garden retail warehouses were newly opened in Germany in 2006. Netnet 

the units closed over the year, this spells out as a net increase of 37 DIY 

stores. The total sales area of all DIY stores nationwide decreased by around 

90,000 m² sales area to a total of 17.6 million m². However, domestic sales of 

the 20 biggest businesses in the DIY sector grew by around 1.5 percent (EUR 

19.7m) in 2006. 

In the specialised retail market segment, it is primarily the large-scale DIY 

markets (>8,000m 2 ) which, as a result of restrictive approval practises for new 

building retail properties, make the risks accompanying investments to a 

calculable long term factor. An important particularity of building approval 

applications for consumer markets with over 1,200m 2 GLA is that an application 

for special utilisation rights must also be submitted. This means that already 

existing properties and developments under construction are protected against 

competition and provided with a long term safeguard for the location and its 

tenants, which in turn allows tenancy agreements for 10 to 20 years. The yield- 


spread of DIY over shopping centres today is around 100 basis points on 

average. The following chains in Germany are active: Praktiker AG, Toom 

BauMarkt GmbH, Hagebau Group, OBI, Hornbach AG, Bauhaus AG, Globus DIY 

stores. 

The process of consolidation in the German DIY sector continues. The effect of 

Praktiker’s take-over of Max Bahr last year is still unclear, but one believes that 

it has all to do with the battle for consolidation. Both parties have 

complementary strategies: Praktiker is more price-aggressive, Max Bahr more 

service minded. Chains that lack a clear profile are expected to drop out; e.g. 

Toom, Marktkauf. Sales for the industry remained more or less constant in 

2006 and as such do not offer any room for market growth. As a consequence, 

the competitive squeeze-out is set to continue. In view of the expected growth 

of sales area in 2007 and 2008 given the strong economy, the sales area 

productivity of the industry’s top 20 companies will remain at best stable. Today 

the earlier mentioned market players are already adjusting their assortments 

and area concepts in order to get an approval for their projects. A downside 

protection for yields going up too much is provided by 2 guarantees; 

1. A restrictive policy adopted by the states and municipalities for the 

granting of building permissions; 

2. These objects carry long-term rent agreements (normally > 10 years 

plus options for 2 x 5 years) 

High street shops 

3 Years ago the usual multiple for a high street shop in western Germany was 

12-13 times annual rent (7.7-8.3% yield), nowadays one needs to start bidding 

at 14.5/15 times, for true prime 17-18 times is required to be on the short list. 

Especially shops that contain a fashion player from an international chain with a 

long term contract are sought after. Asset/property management costs usually 

are higher than large scale property and one is automatically tight to residential 

and/or office units upstairs. Due to the current credit issues in the market we 

expect and actually see in the market that yields for high street units are 

flattening out and even increase slightly in B locations and shops along main 

connection roads. Once this storm has flown over we foresee a further gradual 

decrease of prime yields, whilst the ones for secondary assets going the other 

way. The difference in prime and sub-prime will become more and more visible. 

One thing stands; people will always return to their city centres for shopping 

and leisure purposes. 

Exhibit 26 provides an overview from DEGI Research with current prime yields for 

retail throughout Germany. The lowest cap rates can still be found in Munich; 

DEGI reports a 4.35%, however, Cushman & Wakefield latest report contained a 

sharp 3.85%. 


Exhibit 26 Retail yields for prime retail per city 


Exhibit 27 Retail yields for prime retail per city 



Rental levels 

Not only prime assets in major cities are faced with rising rents as these are 

occupied by financially healthy high turnover global franchise companies, but also 

in medium sized cities and conurbations. The major difference is the level of 

rents. Munich is still the most expensive place to lease retail space (EUR 260/m 2 ). 

Cologne (EUR 200/m 2 ), Düsseldorf (EUR 185/m 2 ) and not to forget Leipzig 

(+9.5% y.o.y.) due to the improved quality of shops and reversed migration of 

spending power. The Peterstrasse for instance has shown EUR 115/m 2 in some 

prime units, which is way above the eastern German average. A further increase 

is expected. In Berlin a pick-up is visible as well due to revitalisation and 

restructuring around the Alexander Platz. The Kurfürstendamm does EUR 200/m 2 

today. In other prime areas –in for instance Hamburg- rents remained flat. For 

the whole of retail Germany it is expected that rents in prime locations increase 

by 3.6%, although clear regional differences must be taken into account. 

The study performed by the Hahn Group showed that only 30% of all surveyed 

retailers think rents will increase upon renewal. But 56.7% of retailers believe that 

rents in newly developed assets will rise, 73.3% expect rent rates of existing 

properties to remain unchanged or to rise. 33% think that they are still to reap 

the rewards of Germany’s economic growth. 

However, the situation in B-grade locations and urban district centres remains 

strained. Demand remains reserved and marketing of retail meters is still difficult 

considering the constant pressure on rents. In the most positive scenario rental 

levels stop declining. In fact, a focused retail trade compatible and urban 

development upgrade is recommended for these locations. Investments in newly 

custom built multi-functional retail centres with a first class yield oriented 

management structure are nevertheless attractive from an investment and tenant 

perspective. “We all need to shop”. 

Exhibit 28 Rent levels for prime assets in Germany 

300 

250 

200 

150 

100 

50 

0 

Essen Dresden Leipzig Hamburg Berlin Düsseldorf Cologne Stuttgart Frankfurt Munich 

Source: Cushman & Wakefield 

Prime retail rents/month Jun-06 Prime retail rents/month Jun-07 

Another asset class is distressed retail on promising locations. These properties 

are mainly sought by Anglo-Saxon investors, who trust that they can achieve a 

speedy turnaround of the objects. This is essentially fuelled by the expectation 

that a change of tenant will go hand-in-hand with a mid-term increase of rent, 

either by raising the rent or through better exploitation of the rental area. Added 

to this is the view that the current economic climate will enable filling the existing 

vacancies in the objects with relevant usages and thus to improve rental income 

substantially. However, one needs to understand the needs of the indigenous 

tenant and market at best. 


Exhibit 29 Rent levels per retail segment in Germany 

Source: Jones, Lang Lasalle 

Rental indexation 

Rents and rent increases can be freely negotiated and agreed upon in Germany. 

The contract may contain a graduated rent increase clauses, or an indexation 

clauses. The rent must remain unchanged for at least a year and the tenant must 

be informed, in writing, when an index-linked increase is due. Where no 

indexation clause is included, a landlord may require the tenant to accept a rent 

increase to the rent level customary in an area, provided that the last increase of 

rent took place at least 15 months prior to the date when the increase is to take 

place. As a general rule, this type of rent increase is limited to 20% over three 

years. According to the law of Obligations 558, the landlord must state reasons for 

the rate increase by means of an expert opinion, or three ‘sample’ rents charged 

for comparable properties, show a so-called ‘qualified rent table’ (qualifizierter 

Mietenspiegel) or rental database – a statistical measure of rents issued by the 

local authorities and approved by landlord and tenant associations. The tenant has 

two months to accede to the demand; if he refuses, the landlord can sue him. 

Furthermore, the contract should provide for which utility charges the tenant has 

to pay, if not specified the landlord pays. 

For smaller units most of the contracts have step-up provisions, which mean that 

if a cumulative inflation rate (CPI based) reaches a certain threshold a step is 

made for either the full amount (10%/100%) or part (10%/60%). In many cases 

for the first 3 years (e.g.) no indexation is applicable. This methodology is 

beneficial for the tenant as it takes approximately 5 years before a new lease level 

is applied. 

For large sized shopping centres often a two-tier indexation is applicable; a 

threshold amount based upon an annual CPI-indexation which can be overruled by 

retail sales growth (%) if the latter is larger than CPI. 

Construction costs 

A complaint heart in Germany is the rise of construction costs. For retail assets 

specifically these have risen to a factor of around 13 times net annual rent 

excluding utilities in 2006. According to information from the Federal Office of 

Statistics, costs will continue to rise in 2007. Due to an increase in VAT and higher 

prices for energy and materials a percentage of 15-20% for the last 2 years has 

been heart frequently. Most REITs have fixed their terms and conditions for the 

projects currently under development. 


Exhibit 30 Retail yields and rents 



5 covered by Petercam Research 

Available products 

Not many dedicated German retail players are on our radar screen. The best 

known listed players are Deutsche EuroShop, Hahn Group, Dawnay Day Treveria, 

BBI Immobilien and GWB. All have quite a distinctive business model. Vastned 

Retail left the German market in 2004, Eurocommercial Properties is looking 

passively for opportunities. 

Deutsche EuroShop 5 

• Bloomberg ticker: DEQ GY Eq. 

• Market cap: EUR 941.8m 

• Free float: 81% 

Deutsche EuroShop buys & holds foremost shopping centres and currently has 

equity interests in 16 European shopping centres in Germany, Austria, Hungary 

and Poland. The market value of these shopping centres, which are predominantly 

in city centre locations, amounts to EUR2.6bn (1,650 shops, 643,000m 2 GLA). The 

occupancy rate has been in excess of 99% for quite some time now. Leases have 

10 year duration, no break-up options are in place, turnover-linked rents and a 

CPI threshold. Rent to sales is 6.5-8.5%. Major tenants are the Metro Group, 

Douglas, Peek & Cloppenburg, H&M, New Yorker and Zara. Fashion is still king 

with 47% of all tenants from that sector. 

Most German centres are located in former Western Germany, Sulzbach, 

Viernheim and Passau being the most southern ones. Dresden and Dessau are the 

only centres in the former east. The Main-Taunus-Zentrum in Sulzbach (Frankfurt 

area) and the Rhein-Neckar-Zentrum in Viernheim (Mannheim area) are the only 

out-of-town locations within the portfolio. 

Exhibit 31 Portfolio overview Deutsche EuroShop 

Source: Deutsche EuroShop AG 

The company from Hamburg had it's IPO in the late 2000 and was founded by DB 

Real Estate, a subsidiary of Deutsche Bank and kicked off with EUR 450m on 

assets, today exclusively invests in shopping centres that are acquired either 

directly or indirectly by means of equity interests. When purchasing centres under 

development, a pre-let rate of at least 50% of the leasable space must be 

guaranteed, for existing buildings this rate should at least amount 80%. In 

addition, at least 25% of space in existing buildings must be let for a remaining 

term of more than five years. Locations must have a long-term catchment area of 

at least 100,000 inhabitants. Portfolio expansion is targeted at 10% per year by 


acquisition of new shopping centres and extending their share in a holding. 2007 

was a year of consolidation -no new investments were made-, 2008 will be 

important as 3 new centres will be operational for the first time. Galeria Baltycka 

in Gdansk opened its doors for business on 4 October 2007. One expects that this 

74% stake contributes EUR 11.3m per year to rental income. The Hameln 

property is due to be opened in March 2008. The topping-out ceremony for the 

Stadt-Galerie in Passau was held on 11 October, with the centre scheduled to 

open in autumn 2008. Preletting rates for both properties are already high, at 

95% for Hamelin and 76% for Passau. The company will focus more and more on 

Germany and bordering CEE countries (75%/25%). In the meantime all centres in 

France and Italy are disposed; in 2004 the exit of the Udine-Italy centre was a 

fact, in April 2006 Etrembières in Annemasse-France (close to Geneva) was sold, 

in December that same year the disposal of Viterbo-Italy was concluded. Mid 2007 

the average net yield for the overall portfolio was 5.39%. 

Deutsche EuroShop is owned for 19% by the Otto family, which also holds 100% 

of the non listed ECE Projektmanagement G.m.b.H. & Co. KG. This also Hamburg 

based company has implemented leased and managed shopping centres since 

1965 and is the largest (inner-city) retail center manager in Europe and Deutsche 

EuroShop's preferred center manager and supplier for developments. 

The company is conservatively leveraged and fully hedged against interest risks, 

for the moment the company is not applying for the REIT status. Investors buying 

DEQ GY shares up to 1 January 2009 continue to receive dividends without any 

tax deduction (return of equity), as of that date a flat rate of 25%, plus a 

solidarity surcharge applies. 


Hahn Group 

• Bloomberg ticker: H4I GR Eq. 

• Market cap: EUR 125m 

• Free float: 18.6% 

For the past 25 years the Hahn Group has specialized itself in large-scale retail 

real estate. They perform investments for own account, asset management for 

third parties and fund management. Currently it has 1.4 million m 2 under 

management spread out over 150 locations and a total volume of around EUR 

2.1bn. The specific retail properties managed by Hahn are superstores, 

hypermarkets, DIY stores and shopping centres. The company is particularly 

active in smaller and medium-sized cities and towns as the objects offer a specific 

competitive advantage. Major tenants are the Metro Group, Edeka, REWE, 

Tengelmann and Kaufland. The average yield on properties is estimated to be 

around 6.9%. Following the IPO in October 2006 (General Standard in Frankfurt), 

the Hahn Group is listed on all German stock exchanges. In 2008 they will apply 

for the Prime Standard. Founding father Michael Hahn –today chairman of the 

supervisory board- still owns 78.9%. 

Exhibit 32 Portfolio overview Hahn Group 

Source: Hahn AG 


Dawnay Day Treveria 

• Bloomberg ticker: DTR LN Eq. 


• Free float: 80% (estimated) 

Dawnay Day is active in its current form since early 1980s and specialised in 

commercial property and financial services. It launched Dawnay Day Treveria PLC 

and was listed on the AIM in December 2005 by raising EUR 444m with a 

subsequent placing in November 2006 of EUR 300m. Treveria is a tax-efficient 

property company incorporated in the Isle of Man. Total assets under 

management per July 2007 were EUR 2.1bn (EUR 1.7bn at 31 Dec. 2006) and 

their latest target is EUR 3.3bn. The breakdown by region is 83% in former West 

Germany, 9% in East Germany and 8% in Berlin. They focus primarily on high 

street retail with a solid tenant mix and yield arbitrage opportunities. Shopping 

centres and retail warehouses are also part of their portfolio and the average net 

yield is 6.2%. Major tenants are C&A, Metro Group, Kaufhof, Real, REWE, Sinn 

Leffers, H&M, Toom and Edeka Vacancy amounted to 4.67% per July 2007. 

Speculative development opportunities are kept outdoors and diversification is 

key, no single asset should exceed 10% of target portfolio. 

Exhibit 33 Portfolio overview Treveria 

Source: Dawnay Day Treveria 


BBI Immobilien 

• Bloomberg ticker: BBI GY Eq. 


• Free float: 56% 

BBI invests exclusively in commercial real estate like specialist retail centres, 

shopping centres and in logistics real estate, acquired mostly from local 

companies and regional developers. Hunting grounds are Germany and the areas 

bordering BBI’s home country, Czech Republic and Austria, but main focus is 

Bavaria and Hesse. Management prefers to source buildings or ground plots in 

mid-sized towns of 50,000 inhabitants or more. 

The name Bürgerliches Brauhaus Ingolstadt reveals quite a bit from its origins, 

which go back to the 18th century; some breweries in Ingolstadt merged into one 

of the first listed companies in Germany (1882). The first two acquisitions made in 

December 2006 that accompany the old brewery and the restaurants were the 

following: one existing portfolio for EUR 97m (acquisition costs included) for 15 

gardening centres of one single chain located throughout the whole of Germany, 

surface of 87,800m 2 , duration rental contracts for 20 years, CPI indexed, fully let 

(100%) and a net yield of 6.6%. The other investment was the so called “Bavaria 

portfolio”; a project for EUR 110m (acquisition costs included) for 10 specialty 

stores and retail centres located in the Southern Bavarian area, surface of 62,400 

m 2 , contract-duration of 14 years, CPI indexed, rental guarantee for the first 3 

years for the surface not leased (besides anchor tenants) and an expected net 

yield of 6.8%. Delivery will take place in the coming years. On 29 March 2007 the 

company signed a Letter of Intent (LOI) for the acquisition of the so called 

Bavaria-Westphalia portfolio for EUR 29.1m, including acquisition costs. The 

portfolio comprises a total of six planned specialist retail centres at different 

locations in Bavaria and North Rhine-Westphalia. On July 13, 2007, BBI signed a 

purchase agreement for the acquisition of a commercial plot of approx. 23,500m² 

in Pfaffenhofen/Ilm. BBI was already able to secure this property on March 12, 

2007 by way of a Letter of Intent (LOI). A contractor will construct a self-service 

department store with a rental area of around 6,700 m² on the plot. Completion 

of the building is scheduled for the first quarter of 2008. 

BBI has so far followed the policy of around 40% equity, while the remaining 60% 

has been covered by long-term bank loans. The main target is to build up a real 

estate portfolio of more than EUR 750m in the medium-term. The size of the 

specialist retail centres should measure from 8,000 to 10,000m 2 . BBI takes the 

project on board on a turn-key basis but only once the anchor tenants have 

signed and a rental guarantee has been put in place for the remaining surface. 

The company works closely with some project developers from whom BBI usually 

receives the right of “first call” if new projects are on their radar screen. Needless 

to say, that all deals are done off-market. 


Exhibit 34 Portfolio overview BBI Immobilien 

Source: BBI AG 


GWB 

• Bloomberg ticker: G7B GR Eq. 

• Market cap: EUR 45.9m 

• Free float: 36.33% 

GWB from Hamburg was founded 15 years ago and focuses on shopping- and 

‘Fachmarkt’ centres that sizes at least 10,000m 2 (> EUR 15m). They perform both 

project development and refurbishments, consequently asset management and 

dispose the well let premises. For this purpose the company recently announced a 

strategic alliance with Deutsche Land plc from London. The company is lined up in 

three divisions; GWB Mafo (research), GWB Object (asset management) and GWB 

Plan (project management). Today the portfolio measures approximately EUR 

80m, spread over 27 objects all over Germany; e.g. Nürnberg, Berlin, Münster- 

Wolbeck, Wuppertal. To-date they have constructed over 40 schemes, leased and 

sold them accordingly. In 2006 approximately EUR 45m on assets have been sold. 

The gross initial yield should at least amount to 8.5% for new centres and 8% for 

existing ones, 70% ought to be pre-let. They are leveraged more aggressively 

than many REIT-like peers; 20%/80%. Currently the pipeline amounts to EUR 

250m; EUR 134m for developments (10 objects), EUR 112m for refurbishment 

projects (9 objects). The share price peaked in May and June this year and 

followed the same pattern as many other real estate shares lately; on the Xetra it 

is priced at EUR 9.66, in Frankfurt it is one cent less. 

We herewith provide an overview with the most liquid and commonly traded 

stocks of the company’s listed above: 

Exhibit 35 Bloomberg overview: comparative returns 

Source: Bloomberg 


Petercam Institutional Research and Sales 

Marc Janssens - Managing Director - +32.2.229.64.28 

Analysts Sales 

Stefaan Genoe Head of Research +32.2.229.64.66 Damien Fontaine +32.2.229.65.62 

Imaging Isabelle Brasseur +32.2.229.66.12 

Thijs Berkelder Telecom/Transport +31.20.573.54.72 Kris De Backer +32.2.229.64.76 

Emmanuel Carlier Industrials +32.2.229.63.97 Rob de Jong +1.212.521.67.23 

Damien Caucheteux Breweries +32.2.229.63.63 Mathieu De Sutter, CFA +1.212.521.67.13 

Fernand de Boer Retail +31.20.573.54.17 Jasper Foppele +31.20.573.55.02 

Eric de Graaf IT Hardware & Equipment +31.20.573.54.64 Sebastien Füki +32.2.229.64.35 

Matthias De Wit Technology +32.2.229.65.56 Xavier Gossaert +32.2.229.63.27 

Ton Gietman Financials +31.20.573.54.63 Marc Kennis +31.20.573.54.16 

Laure-Anne Heylen Industrials +32.2.229.65.51 Gerben Lagerwaard +31.20.573.55.08 

Kris Kippers Industrials +32.2.229.65.95 Thomas Marchandise +32.2.229.66.91 

Paul Linssen Food/Construction/Staffing +31.20.573.54.67 Jurgen Smits van Oyen +31.20.573.55.03 

Gert Potvlieghe Media/Shipping +32.2.229.66.59 Jean-Marc Temple +32.2.229.65.72 

Eric Tjong Financials +31.20.573.55.09 Simon Vlaminck +1.212.521.67.35 

Luuk van Beek IT Services/Engineering +31.20.573.54.71 

Jan Van den Bossche, CFA Life Sciences/Chemicals +32.2.229.66.82 

Bart Van den Wijngaard Industrials +31.20.573.54.73 

Sales Trading 

Pieter van der Meijden Real Estate +32.2.229.63.40 Nienke Abma +31.20.573.54.07 

Stephan van Weeren Real Estate +31.20.573.54.22 Hans de Jonge +31.20.573.54.04 

Alexandre Weinberg, CFA Industrials +32.2.229.63.42 Veronique De Schoemaecker +32.2.229.66.20 

Bert Lesterhuis +31.20.573.54.09 

Senior Advisor Stéphane Logist +32.2.229.66.18 

Marc Debrouwer Industrials/Utilities +32.2.229.65.78 Michel Mol +31.20.573.54.03 

Tim Olijerhoek +31.20.573.54.10 

Jan Paul Raterink +31.20.573.55.07 

Richard Schulein +31.20.573.54.11 

Amaury Steyaert +32.2.229.65.50 

Investment rating system: The Petercam stock ratings are based on the estimated performance relative to the Petercam Benelux coverage universe. 

The total return required for a given rating depends on the risk profile relative to this universe. This risk profile is represented by the Beta, as estimated 

by the analyst. Low risk stocks have an estimated Beta below or equal to 0.9, Medium risk stocks have a Beta between 0.9 and 1.3 and High risk 

stocks have a Beta equal to or above 1.3. The required relative performance for a given rating is indicated below. The price targets given and the expected 

relative performance are always based on a 12 month time Horizon. 

High 

Beta > 1.3 

Medium 

0.9 < Beta ≤ 1.3 

Low 

Beta ≤ 0.9 

Place Sainte-Gudule 19 – 1000 Brussels 

De Lairessestraat 180 – 1075 HM Amsterdam 

Madison Avenue 595 – 38th floor – 100 22 New York 

SELL REDUCE HOLD ADD BUY 

RP

DIRECT MARKET REPORT GERMAN RETAIL - Europe Real Estate

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