DIRECT MARKET REPORT GERMAN RETAIL - Europe Real Estate
DIRECT MARKET REPORT GERMAN RETAIL - Europe Real Estate
DIRECT MARKET REPORT GERMAN RETAIL - Europe Real Estate
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www.petercam.com<br />
<strong>Real</strong> <strong>Estate</strong> November 28, 2007<br />
<strong>DIRECT</strong> <strong>MARKET</strong> <strong>REPORT</strong><br />
<strong>GERMAN</strong> <strong>RETAIL</strong><br />
TEUTONIC OPPORTUNITIES ASSESSED<br />
Stephan van Weeren<br />
+31.20.573.54.22<br />
s.vanweeren@petercam.nl
Table of contents<br />
Table of contents ................................................................................ 2<br />
Executive Summary ............................................................................ 3<br />
Introduction........................................................................................ 5<br />
Economic context Germany................................................................. 6<br />
Economic growth............................................................................6<br />
Retail sales growth .........................................................................9<br />
Consumer Price Index ................................................................... 11<br />
Growth per region ........................................................................ 12<br />
Demographic context; urban society ............................................... 13<br />
Retail power per conglomerate ....................................................... 14<br />
Retail business segment development ............................................. 16<br />
Concentration in the German retail sector ........................................ 17<br />
Demand ...................................................................................... 20<br />
Supply ........................................................................................ 21<br />
Resizing exercise .......................................................................... 24<br />
Yields.......................................................................................... 26<br />
Shopping centres ......................................................................... 27<br />
Non-food retail warehouses: DIY .................................................... 28<br />
High street shops ......................................................................... 29<br />
Rental levels ................................................................................ 31<br />
Rental indexation ......................................................................... 32<br />
Construction costs ........................................................................ 32<br />
Available products ............................................................................ 34<br />
Deutsche EuroShop ...................................................................... 34<br />
Hahn Group................................................................................. 36<br />
Dawnay Day Treveria.................................................................... 37<br />
BBI Immobilien ............................................................................ 38<br />
GWB........................................................................................... 40<br />
German retail update - 28/11/2007 2
Executive Summary<br />
“The secret of making money in German property lies in the fact that Germany<br />
has a history of administration instead of asset management”. Ralph Winter –<br />
Corestate Capital<br />
• The German economy is doing well and the labour market is showing off<br />
today with promising employment rates. Furthermore, the introduction of<br />
the G-REIT and reduction of corporate tax might assist herein. However,<br />
the increase in VAT beginning 2007, credit crunch perils and strong euro<br />
are still preventing the ‘engine of <strong>Europe</strong>’ to shift second gear short term,<br />
which is reflected in the 6-month ZEW indicator (-32.5). As of mid 2008<br />
we expect the sound underlying fundamentals to take-over again. Regions<br />
that are outperforming the German average from an economic growth and<br />
retail sales perspective are Baden-Württemberg, Bavaria, Saarland and<br />
Schleswig-Holstein. Some locations in Nord Rhein-Westfalen (e.g.<br />
•<br />
Düsseldorf) are attractive as well;<br />
The German real estate market shifted lately from a debt-driven financial<br />
investor based market to one dominated by real estate investors<br />
performing active asset management in order to add value. The sub-prime<br />
credit issues and new thin-cap rules are assisting in this respect. Also the<br />
open-ended funds are coming back into the market, assisted by their lowleveraged<br />
balance sheet. In the first 9 months of 2007 they collected EUR<br />
6.9bn and signed purchase agreements for EUR 8.3bn. They tend to shift<br />
from passive buy & hold strategies to active asset management with more<br />
focus. However, the open-ended funds only invested 19% of total<br />
investments in retail in 2007 so far. Portfolio transactions within the retail<br />
segment are becoming more important (63% in HY1 07), to a large extent<br />
these are mixed schemes containing either an office-retail or officelogistics<br />
combination;<br />
• For the whole of retail Germany it is expected that rents in prime locations<br />
increase by 3.6% in 2007, although clear regional differences must be<br />
taken into account. However, the indexation methodology is very old<br />
fashioned due to the usual step-up indexation. Luckily, more and more<br />
new contracts are linked to retail sales growth as well and annually<br />
indexed;<br />
• Germany, in a recent policy shift, will do more to discourage out-of-town<br />
retail schemes in favour of in-town/residential area developments, a move<br />
that could constrain the construction of shopping centres. From a<br />
supply/demand perspective mid-sized cities are proven to be most<br />
favourable in Germany. Most investments take place in Baden-<br />
•<br />
Württemberg, Hesse and Bavaria due to the purchase power and low<br />
provision of retail surface;<br />
The big question is whether yields will fall further, flatten out or bounce<br />
back after all things happening this year. German yields are generally<br />
higher than in other <strong>Europe</strong>an countries with a mature market and rents<br />
per square meter are lower. This leads investors to assume yields can fall<br />
a bit further, despite an interim level of interest rates that is slightly<br />
higher (but stabilizing now). However, it is clear the “banking crisis” has<br />
rationalised the market in the meantime. During the last 3 months<br />
property yields for retail increased by 50 basis points on average. Overall,<br />
we believe yields to crawl up somewhat further (25 bps) in order to reflect<br />
risk premiums to a larger extent in the (6) months to come. After that the<br />
market picks up again gradually and only on the longer term (>4 years)<br />
we expect that yields will flatten out; the provision per inhabitant will be<br />
balanced out more and construction costs will effect net property yields;<br />
German retail update - 28/11/2007 3
• For a more exact view on the retail market one should distinct the various<br />
sub segments and regions. Yields in Germany for retail warehouses/parks<br />
are still 100 basis-points higher than the ones for prime shopping centres<br />
and expected to fall further seen the strong market demand. However, the<br />
market is expected to become mature now the attention has been so<br />
intense. A study performed by Hahn estimates that warehouses increase<br />
their market share by more than 3% to 25% by 2010. Many warehouses<br />
will size more than 800m 2 , which correlates to the increase in food<br />
discount stores (e.g. Lidl, Aldi). 56.7% of all investors are considering<br />
retail warehouse centres the most attractive form of investment;<br />
• Prime shops in high streets that contain a long-term contract with an<br />
international fashion chain (e.g. H&M) are extremely popular. We expect<br />
the demand for high street shops to be ongoingly strong and supply<br />
limited;<br />
• For prime inner city shopping centres and large dominant modern out-oftown<br />
centres –both well let and actively managed- we expect yields to<br />
dive below 5% overall. The lower rate of return and the implied lower<br />
investment risk of shopping centres are partly attributable to their selected<br />
location (e.g. inner city locations) or in the diversified tenant mix;<br />
• Other operating retail formats like hypermarkets, specialist retailers, old<br />
fashioned outdated supermarkets and shopping centres are currently in<br />
their saturation phase and therefore less promising from an investor point<br />
of view. Supermarkets peaked in terms of market share already back in<br />
2000. The only chance to survive is to adapt and remodel themselves to<br />
current and future market conditions;<br />
• Not many dedicated German retail players are on our radar screen. The<br />
best known listed players are Deutsche EuroShop, the Hahn Group,<br />
Dawnay Day Treveria, BBI Immobilien and GWB. All have quite a<br />
distinctive business model. By taking retail sales performance,<br />
demographics, provision and demand into account for the various retail<br />
products, segments and regions we very much fancy Deutsche EuroShop<br />
and BBI Immobilien.<br />
o Deutsche EuroShop focuses on prime inner-city centres throughout<br />
Germany, Austria, Poland and Hungary that bear long-term leases<br />
which are indexed and are financed conservatively. The average<br />
portfolio yield today is 5.4%, total portfolio size EUR 2.6bn. 2007 was<br />
a year of consolidation but in 2008 both centres in Hamelin (March<br />
’08) and Passau (autumn ’08) are delivered. Pre-letting rates for both<br />
properties are already high, 95% respectively 76%. Further sourcing<br />
opportunities are in place (ECE).<br />
o BBI went through a transformation from the oldest listed brewery in<br />
Germany to a real estate player which invests exclusively in specialist<br />
retail, gardening and mid-sized shopping centres in Bavaria and<br />
Baden-Württemberg, acquired mostly off-market from local<br />
companies and regional developers. The current average property<br />
yield is 6.9% and quite some revaluation potential is in place. Target<br />
is to grow from approximately EUR 150m today to more than EUR<br />
750m.<br />
“A lot of people went into the market and out again. They were never going to<br />
undertake asset management in Germany”. Tony Quayle – Edinburgh House<br />
German retail update - 28/11/2007 4
Introduction<br />
Following the record result on the German property market (+12% y.o.y.)<br />
totalling EUR 15.5bn for retail property transactions in 2006 –the Karstadt<br />
Portfolio included- one assumes a further increase for 2007 as a consequence of<br />
very favourable market conditions; the economy is buoyant, the unemployment<br />
rate falls, interest rates are still relatively low –even after the peak in July 2007<br />
and current credit crunch. For this year at least another 5% growth in overall<br />
property investments is expected.<br />
Exhibit 1 Transaction volume Germany for all segments<br />
Source: Jones Lang Lasalle<br />
Retail properties are regarded as one of the safest investments due to increasing<br />
rents –even though somewhat slowly in Germany- and low volatility of total return<br />
throughout the years compared to e.g. offices. Especially outside the largest cities<br />
(Berlin, Munich and Hamburg) the returns on retail have been buoyant since<br />
2003. However, average rental growth used to be higher in the top three cities<br />
(0.6%/annum) compared to smaller regional cities.<br />
Most property –both offices and retail- has been sold by German open-ended<br />
funds during last years. It is expected that the exodus of their assets is coming to<br />
a stand-still. In the first 9 months of 2007 they collected EUR 6.9bn and signed<br />
purchase agreements for EUR 8.3bn. They tend to shift from passive buy & hold<br />
strategies to active asset management with more focus. The open-ended funds<br />
currently bear too much liquid means; Hausinvest Global (a Commerzbank<br />
subsidiary) keeps more than 28% in cash. In order to make it to the promised 6%<br />
dividend yield one should make it yielding (currently 5.3%). Even Deka Bank, the<br />
worst hit fund manager in recent years has returned to the market and bought<br />
two properties in Hamburg last month.<br />
Foreign parties are still over-represented in Germany; of all disposals 3/4 th was<br />
initiated by a German party and that same share was purchased by a foreign<br />
party so far this year. Demand from Anglo-Saxon investors remains very strong,<br />
especially for shopping centres, even though the highly leveraged investors<br />
backed-up since this summer.<br />
On the long term many specialists expect a gradual decline of new capital flowing<br />
into the market and furthermore that many funds are exiting their assets by then<br />
(>2010). We are convinced that the pressure of capital will continue to be in place<br />
for the 2-3 years to come seen the huge amount of cash still available for<br />
investment purposes.<br />
German retail update - 28/11/2007 5
Economic context Germany<br />
Economic growth<br />
In 2006 the 2.8% growth in gross domestic product was higher than initially<br />
forecasted and considerably above the level of 2004 (1.2%) and 2005 (0.9%). In<br />
contrast to the previous years, the positive development in 2006 was not driven<br />
by exports but also through stronger domestic economic activity, accompanied by<br />
a rising demand for retail and commercial real estate.<br />
Exhibit 2 GDP growth for Germany 2001-2008e<br />
Source: Allianz Dresdner Economic Research, Statistisches Bundesamt, (*ifo-Institut)<br />
The following exhibit shows the year-on-year GDP growth in history as registered<br />
by the Federal Ministry of Economics and Deutsche Bundesbank.<br />
Exhibit 3 GDP growth for Germany 2002-2008e<br />
Source: Deutsche Bundesbank, Federal Ministry of Economics<br />
The assessment of the current economic situation in Germany worsened in last<br />
months. The corresponding indicator declined by 4.2 points to 70.2 points in<br />
October and another 0.2 points to 70.0 points in November.<br />
To put things in perspective: economic expectations for the euro zone decreased<br />
in November. The indicator dropped by 11.0 points and now stands at minus 30.0<br />
points. The corresponding indicator for the current economic situation in the euro<br />
zone decreased by 2.7 points to 60.2 points.<br />
German retail update - 28/11/2007 6
The ZEW Indicator of Economic Sentiment 1 for Germany remained unchanged in<br />
October 2007 and stood like in September at minus 18.1 points. In November<br />
2007 however it dived to minus 32.5 points! The historical average is 31.8 points.<br />
Due to the sub-prime crisis, which is definitely not over yet, financial market<br />
experts have re-adjusted their economic expectations, especially for the United<br />
States.<br />
Source: ZEW<br />
Exhibit 4 ZEW Indicator of Economic Sentiment<br />
The greatest risk factor for the development of the German economy in the<br />
following six months are the exports, which are expected to decrease owing to the<br />
strong Euro and the decreasing rate of growth of the US-economy. The current<br />
ongoing rise in oil prices (> USD 93/barrel) isn’t helping either.<br />
The cornerstone of the German economy is the labour market (exhibit 5).<br />
However, the current discussion on the Hartz-IV reforms on the German labour<br />
market might impair expectations.<br />
Exhibit 5 Unemployment rate development in time<br />
Source: Federal Labour Ministry<br />
1 The ZEW Indicator of Economic Sentiment shows the balance between positive and negative expectations regarding future<br />
economic activity in Germany within a timeframe of six months. The horizontal line indicates the historical mean of the indicator.<br />
German retail update - 28/11/2007 7
As can also be seen in exhibits 2 and 3 the forecast for Germany‘s economic<br />
performance in 2007 and 2008 predict further growth, even though the dynamics<br />
of this will be slightly more restrained in comparison with the buoyancy of 2006<br />
that proved to be well above average. Accordingly, the assessments of business<br />
conditions in industry at the start of 2007 were rebounding into the positive range<br />
for the first time in almost five years.<br />
Concluding: the sub-prime issues are expected to continue for at least another<br />
half year and will suppress the economic sentiment as reflected in the ZEW<br />
indicator. However, we believe this is in the end a credit issue, which puts hurdles<br />
for financing large sized assets and projects (>EUR 100m) and increase risk<br />
premiums i.e. margins slightly. The underlying fundamentals of the German<br />
economy are solid.<br />
German retail update - 28/11/2007 8
2 Destatis<br />
3 Federal Statistical Office<br />
Retail sales growth<br />
In first instance it looked that the 3% increase in VAT from the 1st of January<br />
2007 didn’t have that much of a negative consequence on consumer spending.<br />
However, in May it decreased by 3.7% y-o-y in real terms, which was well below<br />
the previous forecasts. A portion of this decline can be attributed to bad weather<br />
conditions, the extraordinary high retail sales in May 2006 (+ 4.1% in real terms) 2<br />
but also to the fact that German retailers indeed are still suffering the effects of<br />
the VAT increase. Nevertheless, this entails recognising that a recovery in<br />
consumer spending might take longer than expected.<br />
As we can see in exhibit 6, retail sales seem to have had a small spike in April<br />
2007, and apart from that they are down in the first half of 2007 over the 2006<br />
level (0.8% over six months).<br />
Exhibit 6 Retail sales per month (2006-2007 ytd)<br />
Source: Federal Labour Office<br />
In September 2007 turnover in retail trade was in nominal terms 1.2% 3 and in<br />
real terms 2.2% smaller to that of the corresponding month of the previous year,<br />
taking into account the number of days open for sale (25 in September 2007 and<br />
26 in September 2006). When adjusted for calendar and seasonal variations<br />
(CENSUS-X-12-ARIMA), the September turnover was in nominal terms 2.6% and<br />
in real terms 2.3% larger than that of the preceding month. Compared with the<br />
corresponding period of the previous year, retail turnover was in the first nine<br />
months 2007 in nominal terms 0.9% and in real terms 1.6% smaller than that in<br />
the first nine months of 2006. We actually had hoped that due to the improving<br />
labour market the VAT effect would have been mitigated by now.<br />
Looking back further in history one is able to overlook both absolute and relative<br />
growth in time (exhibit 7).<br />
German retail update - 28/11/2007 9
Exhibit 7 Development of retail turnover 1992-2008e<br />
Source: BAG, EHI, ifo Institute, HDE<br />
We are confident that the VAT effect will be visible during the coming Christmas<br />
shopping period. For the coming years Dr. Lademann & Partner expects to see<br />
German retail sales to grow at a constant rate of 0.7% to 1.2% per annum,<br />
ceteris paribus the positive development of the economy and an ongoing easing<br />
labor market.<br />
The retail’s share in private consumption will only fall marginally and not as much<br />
as before (over the last ten years by 10%). The forecast for 2010 sees the retail’s<br />
share at almost 27 percent. Especially next year the positive macro-economical<br />
developments should provide for momentum in retail sales growth.<br />
German retail update - 28/11/2007 10
Consumer Price Index<br />
Consumer prices have increased 0.2% on the month in October 2007 in Germany,<br />
and 2.4% from October last year, pushed by the increase of food and oil prices,<br />
according to the CPI estimate released by Destatis. These figures were in line with<br />
the market analysts’ expectations which advanced a 0.1% monthly rise and a<br />
2.4% yearly increase. According to Destatis, the <strong>Europe</strong>an Harmonized Index for<br />
Consumer Prices has increased 0.2% on the month and 2.7% on the year. The<br />
reason for these figures have been the higher prices of food, such as milk, eggs,<br />
vegetables and sharp increase of fuel prices.<br />
In a more narrow perspective, inflation is very important for both purchase power<br />
and rental indexation.<br />
Exhibit 8 Consumer Price Index 2000-May 2007<br />
Source: Statistisches Bundesamt, Statistisches Jahrbuch 2007<br />
German retail update - 28/11/2007 11
Growth per region<br />
The following exhibit shows the GDP growth development in the various regions<br />
from 1996 to 2005. Bavaria seems to be the ever lasting number one whereby the<br />
East German states lack behind.<br />
Exhibit 9 GDP growth 1996-2005<br />
Source: Bayerisches Staatsministerium für Wirtschaft, Infrastruktur, Verkehr und Technologie<br />
Unemployment has always been relatively low in southern states like Baden-<br />
Württemberg and Bavaria:<br />
Exhibit 10 Unemployement rate in january 2007<br />
Source: Bayerisches Staatsministerium für Wirtschaft, Infrastruktur, Verkehr und Technologie<br />
A further rise in disposable income is foreseen due to the improved job market<br />
circumstances, however, to a certain extent offset by a further rise in private<br />
household savings, rising energy and commodity prices. Overall, the average net<br />
income already amounted to approximately EUR 2766 in 2003, which is already<br />
relatively high compared to other <strong>Europe</strong>an countries. Many households actually<br />
exceed this amount to a large extent.<br />
German retail update - 28/11/2007 12
Exhibit 11 Division median net income per household in EUR in 2003<br />
Source: Statistisches Bundesamt, Statistisches Jahrbuch 2007<br />
If we look at the regional differences Baden-Württemberg, Bavaria and Hessen<br />
are topping the ranks.<br />
Exhibit 12 Division median net income per household in EUR in 2003<br />
Source: Statistisches Bundesamt, Statistisches Jahrbuch 2007<br />
Demographic context; urban society<br />
From a demographic perspective quite some important developments are<br />
expected; the number of people living in Germany will decline by almost 10% by<br />
the middle of this century. Furthermore, the Germany population is ageing fast;<br />
the share of 65 year-olds will increase from 17% to roughly 30%. Also important<br />
to notice is that regional differences will become larger as highly educated young<br />
people tend to migrate to dynamic economic regions. People from the east go<br />
west, people from the west again go south.<br />
Germany actually lacks a true cosmopolitan city like London or New York and<br />
there are very big conurbations. A total of eleven agglomeration areas exist to<br />
which the urban areas are tightly linked. The hubs of these agglomerations are of<br />
such crucial importance to the retail trade because they exert powerful centripetal<br />
forces.<br />
German retail update - 28/11/2007 13
Major cities like Berlin, Hamburg and Munich generate the highest retail turnover<br />
in absolute terms, but it is also well worth mentioning the more than 80 midsized<br />
towns and cities in Germany with populations in excess of 100,000. Actually these<br />
can be regarded as the heart of an economic area, providing services to the<br />
surrounding region.<br />
Exhibit 13 Population forecast 2020 and Purchasing Power<br />
source: Berlin-Institut für Weltbevölkerung und globale Entwicklung<br />
Retail power per conglomerate<br />
In order to determine which cities and its wider surroundings are best positioned<br />
to house retail, one can find some key performance indicators in exhibit 14.<br />
Besides the size of the population and its dynamics, the purchase power index<br />
(Germany = 100) provides for an indication if the conglomerate is viable or not<br />
for retail. The turnover index, also called the retail turnover at Point of Sale index,<br />
gives a more effective view on the earlier mentioned purchase power index. Retail<br />
trade centrality brings the previous indices together and is the ‘outcome’ for the<br />
desirability of a retail-location; if the centrality value is > 100 than purchase<br />
power is ‘flowing in’, if the value is below 100 purchase power ‘flows out’.<br />
German retail update - 28/11/2007 14
Exhibit 14 Population, purchase power, turnover and retail trade centrality 2006<br />
Population growth % purchase Turnover retail trade change to<br />
2006 to 2005 power '06 index '06 centrality '06 05 in %<br />
Berlin 3,395,189 0.2 91.4 103.4 113.1 4.4<br />
Dresden 495,181 1.6 91.9 106.5 115.9 - 0.7<br />
Düsseldorf 574,514 0.3 120.5 146.4 121.5 - 2.4<br />
Frankfurt a.M. 651,899 0.8 111.9 126.2 112.8 0.8<br />
Hamburg 1,743,627 0.5 106.5 122.5 115.0 - 1.6<br />
Cologne 983,347 1.4 110.1 136.2 123.7 - 0.8<br />
Leipzig 502,651 0.5 84.5 98.9 117.0 2.5<br />
Munich 1,259,677 0.8 136.7 155.3 113.6 - 1.9<br />
Stuttgart 592,569 0.3 113.5 140.4 123.7 1.6<br />
Bremen 546,852 0.2 95.6 122.5 128.1 2.0<br />
Erfuhrt 202,844 0.2 88.2 106.2 120.4 - 9.7<br />
Hanover 1,128,543 - 106.5 114.8 107.8 2.9<br />
Kiel 234,433 0.5 90.4 140.2 155.1 6.1<br />
Magdeburg 229,126 1.1 84.4 115.9 137.3 - 7.6<br />
Mainz 194,372 4.5 114.3 127.2 111.3 2.0<br />
Potsdam 147,583 1.3 94.3 82.4 87.4 - 9.2<br />
Saarbrücken 341,940 - 0.8 92.7 122.0 131.6 0.5<br />
Schwerin 96,656 - 0.5 89.7 114.3 127.4 10.4<br />
Wiesbaden 274,611 0.2 115.5 132.9 115.1 1.0<br />
Source: GfK Nuremberg, DEGI Research<br />
One can conclude that from a purchase power perspective Munich, Düsseldorf,<br />
Wiesbaden/Mainz and Stuttgart are regarded as strong. This is furthermore<br />
emphasized by the turnover index, which also puts the first northern city in the<br />
spotlights; Kiel. The retail trade centrality index confirms the potential of Kiel but<br />
also puts the first East German cities on the map; Magdeburg and Schwerin. The<br />
latter noticeable due to the 10.4% increase in trade centrality. Kiel also made a<br />
large move in this respect last year (+6.1%).<br />
German retail update - 28/11/2007 15
Retail business segment development<br />
In the retail sector for smaller units (Einzelhandel) we have seen a slight decrease<br />
in revenues in July 07. Year-on-year wise the overall sale figure declined, the<br />
stock of products unsold increased somewhat. However, it seems that retailers do<br />
have a strong confidence towards the future, which hasn’t been translated so far<br />
in a higher ordering quote. Concessions have indeed been made for sales prices<br />
but are already vanishing in a rapid pace. One can expect the improvement on the<br />
labor market will shore up private consumption in a first step and then the retail<br />
industry in a second step.<br />
The current structural change has considerable significance when assessing the<br />
further development of the German real estate market for retail. The development<br />
of the various retail sub-segments is showing a growing importance of specialist<br />
mail order (internet!), retail parks and food discounters. Size and comfort really<br />
starts to matter.<br />
Exhibit 15 Shift in retail market shares (type of business in % turnover)<br />
Source: BAG, EHI, ifo Institute, HDE<br />
Retail warehouses and discounters are currently undergoing the growth/maturity<br />
phase, whilst hyper- and supermarkets have already passed that stage and are<br />
now in their saturation phase. This negative momentum can be delayed by<br />
modernizing, resizing or re- positioning the retail concept and lay-out. The<br />
demand for the factory outlet concept by investors is even smaller than demand<br />
by retail players.<br />
German retail update - 28/11/2007 16
Exhibit 16 Life cycles of the various retail formats<br />
Source: Dr. Lademann & Partner, according to Nieschlag / Dichtl / Hörschgen<br />
People have become more mobile, petrol stations have steadily broadened their<br />
range, traffic hubs such as airports and railway stations offer shopping almost<br />
round the clock and the internet is open 24/7. The watering down of regulations<br />
makes further liberalisation of the stationary retail trade a sensible way of<br />
creating a level playing field for conventional retailers. Although significant sales<br />
growth is not to be expected from this, since households’ disposable incomes will<br />
not alter much, it could staunch further losses in sales to new distribution<br />
channels.<br />
Concentration in the German retail sector<br />
The trend of consolidation has so far be seen in the DIY and garden store sector,<br />
where 2006 alone saw two take-overs; Max Bahr & Praktiker, Marktkauf & REWE.<br />
But also Metro AG‘s take-over of the 85 Wal-Mart markets has shaped the market.<br />
Also on an international level this tendency can be seen; e.g. REWE Austria Group<br />
stake in ADEG Österreich Handels-AG and DennerAG taken by Migros-<br />
Genossenschafts-Bund. This consolidation should allow the remaining players to<br />
utilize their greater market might into better sales margins over the long term.<br />
German retail update - 28/11/2007 17
Opening hours Germany<br />
On 30 June 2006, as part of the Föderalismusreform ("Federalism Reform"), the<br />
regulatory responsibility for the well-known opening hours restriction was<br />
devolved to the German states. Berlin was the first state to deregulate closure<br />
times to a 24/6 scheme on November 9, 2006. In the meantime North Rhine-<br />
Westphalia, Rhineland-Palatinate, Hesse, Thuringia, Brandenburg, Schleswig-<br />
Holstein, Hamburg, Bremen, Baden-Württemberg, Lower Saxony/Saxony passed<br />
the law. In these states, the maximum allowed opening times are Monday 00:00<br />
to Saturday 24:00 with individual regulations on Sunday opening times during<br />
select Sundays. As of May 2007, Bavaria and the Saarland have expressed no<br />
intent to modify the opening times at all. The state government of Mecklenburg-<br />
Western Pomern has expressed its intent to pass legislation allowing 24 hour<br />
opening Mondays to Fridays, with opening times up to 22:00 on Saturdays. The<br />
law is effective since July 2007. It remains to be seen whether the long demanded<br />
liberalisation of trading hours will actually generate additional sales in the retail<br />
sector. Longer opening times will foremost accommodate changing consumer<br />
behaviour and have the effect of a supporting measure, the fundamental impulses<br />
are however provided by an improved job market situation and a higher level of<br />
purchase power. Altogether, a nominal increase in turnover of 0.5% is expected<br />
for 2007 but the retail sector is only going to benefit from this positive momentum<br />
as of 2008.<br />
G-REIT<br />
The German REIT legislation will be retro-active as of 1 January 2007 and will<br />
allow transfer of commercial properties and office buildings into a REIT whereas<br />
residential properties can only be transferred to the REIT provided they are built<br />
after 31 December 2006. The REIT will not be subject to corporate income tax and<br />
local business/trade tax. When selling properties to a G-REIT only half the profit<br />
generated is liable to taxation. The main features of the German REIT are:<br />
1. Corporate Structure; it should be a listed stock corporation, at least 15% of all<br />
shares need to be held by shareholders each holder holding less than 3%;<br />
2. Free float; at the time of floatation, 25% must be free floating. No individual<br />
shareholder must own 10% or more in the REIT;<br />
3. Revenues; at least 75% of total assets must be real estate and 75% of gross<br />
revenue must be generated from renting out real estate or from the disposal of<br />
individual assets;<br />
4. Dividend; at least 90% of net profits must be distributed to investors (the<br />
equivalent of the depreciation of the real estate assets cannot be distributed);<br />
5. Exit tax; only half of the capital gains realized upon the transfer of real<br />
property will be subject to income tax subject to certain conditions (e.g. property<br />
has been held for at least 5 years as business asset and not disposed by the REIT<br />
within 4 years after acquisition)<br />
6. Corporate tax; the REIT will be tax exempt after floatation;<br />
7. Taxation at shareholder level; resident and non-resident investors will be<br />
subject to a 26.38% withholding tax. Non-resident investors may not claim<br />
protection under the <strong>Europe</strong>an Parent Subsidiary directive and double taxation<br />
treaty protection is restricted. This ruling however will change as of 1 January<br />
2009. We refer to our section at the end of this page.<br />
Many companies will wait with selling their properties or with the foundation of a<br />
REIT, because the tax burden will be substantially lower as of January 1, 2008.<br />
German retail update - 28/11/2007 18
Corporate tax rate to 15.8%<br />
In the summer of 2007 the German Government passed the bill of the business<br />
tax reform 2008. With the commencement of this reform -effective from 1<br />
January 2008- the tax rate (corporation tax + solidarity surcharge) will fall from<br />
26.375% to 15.825% i.e. -10.55%. The trade tax shall be reduced as well. The<br />
final reduction depends on the municipality where the corporation is established or<br />
where the business is located. However, most real estate buy & hold companies<br />
don’t have to pay any trade tax.<br />
Interest cost deduction barrier<br />
The difference to the current thin capitalization rules is that the limitation is not<br />
only applicable to interest paid for shareholder loans but for all other loans<br />
including bank loans. The legislation means that the interest rate barrier will come<br />
into effect if the free quota on the financing balance exceeds EUR 1m. The<br />
consequence will be that merely financing costs of 30% of earnings before<br />
interest, taxes, depreciation and amortization can be tax-deducted. Interest cost<br />
deduction barrier is aimed at corporate groups i.e. an operation forms part of a<br />
group if it is (or could be) consolidated with one or several other companies.<br />
Withholding Tax<br />
The taxation of private investors’ capital income will change per 1 January 2009.<br />
Private investors are no longer subject to their progressive individual income tax<br />
rate (up to 45%) but instead subject to a flat tax of 25%. This flat tax applies to<br />
investment income like dividends, interests and other income from financial<br />
products and for capital gains. The taxation of interests with a flat tax of 25% is<br />
an improvement. A disadvantage that has to be pointed out is that capital gains<br />
from moveable assets (especially financial products) are taxed independently of<br />
the period of ownership. The current situation (until the end of 2008) is that the<br />
capital gain of moveable properties is not taxed if the owner sells the properties<br />
after a period of more than one year. Domestic banks holding affected securities<br />
in custody are obliged to deduct the tax and to transfer it to the tax authorities.<br />
Dividends distributed from the capital contribution account in accordance with<br />
section 27 of the German Corporation Tax Act are not subject to definitive<br />
withholding tax.<br />
Trade tax<br />
Another component of the 2008 corporate tax reform concerns the allocation of<br />
retailers’ rental payments on the trade tax; effectively almost 19% of rental<br />
payments will be taken liable for trade tax in order to avoid tax savings by owneroccupiers<br />
(e.g. Aldi, Bauhaus) Exemplary calculations show that a higher tax<br />
burden will have to be taken by (international) chains, which pay relatively high<br />
levels of rent and recognize low profits in their balance sheets.<br />
German retail update - 28/11/2007 19
Demand<br />
Occupational demand continued to improve over the second and third quarter of<br />
2007. In prime locations, the demand is being driven almost exclusively by<br />
multiple clothing retailers. Especially retail parks, shopping centres (new and<br />
existing), higher-yielding small-sized retail parks and DIY stores, are very much<br />
looked for by tenants.<br />
Exhibit 17 Transaction volume per retail type in HY1 2007<br />
6%<br />
14%<br />
15%<br />
6%<br />
German retail update - 28/11/2007 20<br />
4%<br />
DIY Shopping centre Supermarkets Retail warehouse Retail park High street Other<br />
Source: Jones Lang Lasalle<br />
Today investor demand is very much coming from asset managers, of which 1/3 rd<br />
from Great Britain. Especially Dawnay Day Treveria is growing in a tremendous<br />
pace by acquiring DIY-, shopping centres and king-size portfolios containing<br />
individual retail units. Garigal AM’s DIY portfolio is another example. The recent<br />
Hahn Group survey concluded that overall 53.3% of the investors are planning to<br />
invest more in 2007 than they did in 2006, whereas 26.7% intend to stick to their<br />
current investment volume.<br />
Despite the credit crunch, which has also touched ground in Germany, more than<br />
EUR 6.9bn has been collected by the open-ended Funds during the first 3 quarters<br />
of 2007. This is quite a surprise seen the expected overall downward revaluation<br />
of assets and image left after the recent capital outflow. Due to their relative<br />
conservative leverage (LTV 50%) they are able to act much stronger on the<br />
investment market now highly leveraged parties have been set off-site and assets<br />
are becoming available at more reasonable prices. This also applies to REIT-like<br />
firms which are financed in a conservative way. Another issue one should take<br />
into account for the open-ended funds is the earlier mentioned huge amount of<br />
liquid means still kept in money market products.<br />
For the decision makers of the real estate industry their focus for investments<br />
remains Southern Germany, as this region is regarded as strong, both<br />
economically as well as demographically. The views expressed by the decision<br />
makers from the large-scale retail sector differ hardly from those of the real<br />
estate industry. Here too, emphasis is on the economically strong regions of<br />
Baden-Württemberg (30%), Bavaria (27%) and Southern Germany as a whole<br />
24%<br />
31%
(30%) 4 . The preference for hypermarkets and superstores in the state of North<br />
Rhine-Westphalia (50 percent) is not surprising given the densely populated<br />
conurbations in that state. Both retailers and investors will in future place more<br />
weight on sites within the German inner cities and residential centres. This hardly<br />
comes as a surprise given the forecast of demographic change in Germany. The<br />
agglomeration formats are not only limited to shopping centres, but the<br />
expectation is also for retail parks and/or retail warehouse centres to grow.<br />
Supply<br />
4 Hahn Group survey 2007/2008<br />
As stated before, the amount of square meters (GLA) per 1,000 inhabitants has<br />
always been below the <strong>Europe</strong>an average, i.e. tends to be in short supply in<br />
Germany. Today Germany has 360 shopping centres for more than 11 million<br />
square meters, which means that shopping centre space has nearly doubled over<br />
the past 10 years. In 2006 another 20 centres got up and running and currently<br />
another 27 malls are in the pipeline (1,150,000m 2 ). But this still means only<br />
145m² of shopping centre space for every 1,000 inhabitants, which is lower than<br />
the EU-24 average of 176m²/1,000 (EU-15 219m²/1,000). This is quite a contrast<br />
with Spain (200 m²), even Portugal, France and both number one and two, the<br />
Netherlands and Sweden (> 400m²) per 1,000 residents. Especially retail<br />
warehouse formats are less widespread than in other countries as municipalities<br />
are trying to protect their downtown locations.<br />
Tight planning in more mature markets such as the UK, France and Germany has<br />
shifted the focus back to in-town development. Only 4% of all shopping centres in<br />
Germany built since 2002 are on green fields. In Germany one can definitely<br />
speak about a so called “back to the city centre” trend; in the years 1995-1999<br />
the share of inner-city shopping centres was only 30.5%, which rose to almost<br />
50% in the last 5 years. Presently large scale schemes which are increasingly<br />
located on central and peripherical inner-city sites for its high frequency of visitors<br />
are regarded as attractive. Especially the ones that contain a full multifunctional<br />
range are unbeatable; shopping, office, residential, public services, culture,<br />
gastronomy and leisure facilities. Besides a less restrictive interpretation of<br />
building laws and permits in inner cities, a central factor for this trend could well<br />
be the more favourable risk assessment of real estate in city locations compared<br />
to other locations.<br />
On the other hand, the old high streets will always attract people in order to shop<br />
in the more old fashion way, especially in summer time. Therefore it’s crucial to<br />
rededicate or re-position obsolete properties in between the chique warehouses<br />
and shopping centres.<br />
German retail update - 28/11/2007 21
Exhibit 18 Existing shopping centres space in square meters per 1,000 inhabitants<br />
Source: DEGI Research<br />
Given the uptake in retail sales, area productivities will stabilize after years of<br />
persistent decline and despite the fact that total sales areas are expanding. This<br />
trend is having a positive effect on the commercial properties market, as area<br />
productivity is relevant for the sustainability of rents. However, looking at the<br />
longer term; by 2010 a further 6 million square retail space will have been<br />
created.<br />
Exhibit 19 Provision and potential for retail-surface per 1,000 inhabitant per county<br />
Niedersachsen<br />
Rheinland-Pf.<br />
Baden-Wb.<br />
Saarland<br />
Nordrhein-W.<br />
Bayern<br />
Hessen<br />
Schleswig-H.<br />
Thüringen<br />
Hamburg<br />
Berlin<br />
Mecklenb-Vorp<br />
Sachsen<br />
Sachsen-Anhalt<br />
Bremen<br />
Brandenburg<br />
25.0 75.0 125.0 175.0 225.0 275.0 325.0<br />
total 2010 2006<br />
Source: EHI, <strong>Real</strong>institut, Wegweiser Demographischer Wandel (WDW)<br />
This again will on the long term result in a decline in productivity per unit area as<br />
retail turnover is developing in a slower pace than supply. For Eastern Germany<br />
much is dependent on the continuation of the “Aufbauprogramm Ost” program,<br />
the economic development program for Eastern Germany.<br />
German retail update - 28/11/2007 22
Exhibit 20 Indexed space development and productivity per unit area<br />
Source: Federal Statistical Office<br />
Large scale centres in Germany are becoming increasingly important for the retail<br />
landscape, just like factory outlet, leisure and entertainment centres, station and<br />
airport shopping centres and city centre shopping malls.<br />
Exhibit 21 Development of shopping centres (>10,000m2 rentable area) in Germany<br />
Source: EHI Retail Institute<br />
However, foreign investors are not interested in the entire spectrum of properties,<br />
but only in properties already traded on the investment market, mainly shopping<br />
centres and other retail warehouse formats. Precisely in this segment Germany<br />
still appears undersupplied. The reason why international investors are highly<br />
interested in German retail is threefold:<br />
• undersupply of shopping centres and retail parks<br />
• average yield levels and -gap for German retail<br />
• ongoing sustainable economic growth expected.<br />
Most favourite locations are cities that have more than 70,000 inhabitants;<br />
between 2001 and 2006 2/3rd of the newly developed centres were built in such<br />
large conglomerates. Smaller cities up to 20,000 residents and eastern German<br />
cities are regarded as unpopular.<br />
German retail update - 28/11/2007 23
Resizing exercise<br />
The modern discounter has extended its size from a previous total between 500 to<br />
800m², to often more than 1,000 to 1.200m². Hypermarkets are evidently<br />
continuing to resize their sales spaces. Unlike before (when they had around<br />
10,000m² sales area), today’s operating formats are sought in the region between<br />
4,000 to 7,000m². The average sales area of the large superstores continues to<br />
grow, which makes it increasingly difficult to distinguish between the operating<br />
types hypermarket and large superstore. The best example in case is the largescale<br />
discounter “Kaufland”, who, with an average sales area of 4,500 m², is<br />
blurring the boundary between these two operating formats.<br />
Exhibit 22 Site preferences in the large-scale food retail trade<br />
Source: Experts survey, Retail <strong>Real</strong> <strong>Estate</strong> Report 2007 /2 008<br />
The Hahn Group survey revealed that 36.7% of retailers interviewed confirm that<br />
the need for larger floor space is a growing trend. The retail sector will, according<br />
to 60% of retailers, undergo more concentration.<br />
Around 1/5th of the planned shopping centres is to be found in Baden-<br />
Württemberg and Bavaria, both are still below average with respect to per capita<br />
retail area in a nationwide comparison. But looking at the regional purchase<br />
power/retail sales per head (exhibit 14) and future employment situation these<br />
states offer very good conditions for successful retail strategies. Around Berlin 7<br />
large-scale shopping centres are planned in the next 4 years. In combination with<br />
the fact that the retail coverage is around 229m 2 per 1,000 residents –followed by<br />
Brandenburg and Saxony Anhalt- competition between the various centres will be<br />
fierce. Largest competition for the shopping centres and retail parks can be<br />
expected from the classical department stores, often in inner-city locations (e.g.<br />
Hertie brand revival).<br />
As the following table shows (exhibit 23) there are presently approximately 50<br />
retail development projects with a GLA of at least 10,000m 2 to be completed<br />
within 4 years. 25% of these projects are located in East Germany, of which 7<br />
in/around Berlin. A significant focus has been detected in both southern states –<br />
Bavaria and Baden-Württemberg- for the earlier mentioned reasons.<br />
German retail update - 28/11/2007 24
Exhibit 23 Shopping centre pipeline 2007-2010<br />
Source: GCSC German Council Report Autumn/Winter 2006 + DEGI Research<br />
German retail update - 28/11/2007 25
Yields<br />
As stated before, from an investment point of view 2006 was one of the best<br />
years ever for retail, very much supported by the low interest rates. Total<br />
investment volume in retail only was EUR 15.5bn, i.e. 1/3 rd of total real estate<br />
volume in Germany and 182% higher than 2005. However, the Karstadt deal only<br />
made up for 29%. Demand of Anglo-Saxon investors remained very high.<br />
In June 2007 yields were unchanged on March 2007 across all sub sectors,<br />
following the downward yield shift in the first quarter. There is a little sign of<br />
investor interest diminishing and the second quarter recorded numerous<br />
transactions. However, we have to take into account that –due to the credit<br />
crunch perils- higher financing costs have led to a withdrawal of financially driven<br />
investors which made up for 65% of total commercial property transactions last<br />
year. During last 3 months yields for retail premises have increased by 50 basis<br />
points on average.<br />
In order to put things in perspective we have to look back however. Net initial<br />
yields of western German retail property in city centres have risen over the past<br />
ten years by 30 basis points to roughly 6.5%. In the east of Germany initial yields<br />
have climbed since 1995 by 80 basis points and are currently about one<br />
percentage point above the level in the west. Here, too, there are marked regional<br />
differences. In Dresden the initial yield, close to 6%, is well below the average<br />
East German level, in Görlitz, at almost 10%, is clearly above. Both the trend and<br />
the yield differential between East and West German cities are plausible in the<br />
light of the market developments described. They clearly reflect the higher risk in<br />
the weaker retail markets, some of which post high vacancy rates. It speaks for<br />
itself that the risk premium for the eastern part has always been in place,<br />
although a certain conversion has taken place lately.<br />
Exhibit 24 Prime yields in Germany 1999-2007<br />
Source: Jones, Lang Lasalle<br />
What about near future expectations? An investigation by the Hahn Group made<br />
clear that overall investors in retail are, of course, largely positive. Only 10%<br />
think that the volume of German retail transactions will decrease. While a third<br />
feel that prices for retail assets will continue to rise, 46.7% believe that prices will<br />
stagnate. In the event of any changes in asset prices, investors say exhaustion of<br />
interest rates would be the main drivers. We expect that yields will have increased<br />
German retail update - 28/11/2007 26
y approximately 25 basis points by the end of Q1 2008 i.e. one year of net rental<br />
income.<br />
For secondary grade assets overall expectations are more bearish, an increase of<br />
50 basis points is expected for the coming 6 months at least. According to the<br />
Hahn Group survey German retail overall is “no longer up-to-date”. However, for<br />
both A and B grade assets one has to distinct market dynamics per sub segment<br />
within the retail chapter; shopping centres, retail parks/warehouses and individual<br />
high street shops.<br />
Shopping centres<br />
The shopping centre boom of 1990-1995 is past and new openings of centres<br />
seem to have levelled out on a growth rate between 2.5% and 4.5% p.a. For the<br />
moment no saturation of the shopping centre market is foreseen, also helped by<br />
the relative low density of shopping centres in (Western) Germany. In 2006 and<br />
2007 the federal states of North Rhine-Westphalia, Bavaria and Lower Saxony<br />
registered the highest increase in shopping centres. In Berlin, on the other hand,<br />
in that same time phrame, 8 new centres were in the stages of planning or<br />
completion, even though the city already has a retail space density of<br />
229m 2 /1,000 inhabitants. Also in this segment the trend from the green field<br />
back to the inner cities can be seen. Besides new developments, the<br />
revitalization of existing shopping centres will become a central issue. The<br />
statistic average between the initial construction and the first revitalization of a<br />
shopping centre is 17 years. Taking into account that the boom was in 1990-<br />
1995, one can easily presume the consequence for available shopping centre<br />
space and property prices. Yields for prime centres are expected to harden<br />
marginally further in the years to come. Mixed in-town/residential area schemes<br />
(e.g. office-retail combination) are regarded as favourites in the near future.<br />
After 5 years we foresee a flattening out of average yields due to an increased<br />
maturity of this specific market taken supply, demand and competition into<br />
account.<br />
German retail update - 28/11/2007 27
Exhibit 25 Shopping Centre map in Germany (> 8,000 m²)<br />
Source: EuroHypo, <strong>Real</strong> estate Appraisal & Consulting<br />
Non-food retail warehouses: DIY<br />
The market for ‘do-it-yourself’ has put itself on the map due to the Toomportfolio<br />
transaction; Marktkauf Holding sold its 133 ‘Baumarkten’ to Rewe for a<br />
three-digit amount in millions. This transaction lifted the share of DIY centres in<br />
Germany in 2007 y.t.d. over 30% of total transaction volume. A total of 82 new<br />
DIY and garden retail warehouses were newly opened in Germany in 2006. Netnet<br />
the units closed over the year, this spells out as a net increase of 37 DIY<br />
stores. The total sales area of all DIY stores nationwide decreased by around<br />
90,000 m² sales area to a total of 17.6 million m². However, domestic sales of<br />
the 20 biggest businesses in the DIY sector grew by around 1.5 percent (EUR<br />
19.7m) in 2006.<br />
In the specialised retail market segment, it is primarily the large-scale DIY<br />
markets (>8,000m 2 ) which, as a result of restrictive approval practises for new<br />
building retail properties, make the risks accompanying investments to a<br />
calculable long term factor. An important particularity of building approval<br />
applications for consumer markets with over 1,200m 2 GLA is that an application<br />
for special utilisation rights must also be submitted. This means that already<br />
existing properties and developments under construction are protected against<br />
competition and provided with a long term safeguard for the location and its<br />
tenants, which in turn allows tenancy agreements for 10 to 20 years. The yield-<br />
German retail update - 28/11/2007 28
spread of DIY over shopping centres today is around 100 basis points on<br />
average. The following chains in Germany are active: Praktiker AG, Toom<br />
BauMarkt GmbH, Hagebau Group, OBI, Hornbach AG, Bauhaus AG, Globus DIY<br />
stores.<br />
The process of consolidation in the German DIY sector continues. The effect of<br />
Praktiker’s take-over of Max Bahr last year is still unclear, but one believes that<br />
it has all to do with the battle for consolidation. Both parties have<br />
complementary strategies: Praktiker is more price-aggressive, Max Bahr more<br />
service minded. Chains that lack a clear profile are expected to drop out; e.g.<br />
Toom, Marktkauf. Sales for the industry remained more or less constant in<br />
2006 and as such do not offer any room for market growth. As a consequence,<br />
the competitive squeeze-out is set to continue. In view of the expected growth<br />
of sales area in 2007 and 2008 given the strong economy, the sales area<br />
productivity of the industry’s top 20 companies will remain at best stable. Today<br />
the earlier mentioned market players are already adjusting their assortments<br />
and area concepts in order to get an approval for their projects. A downside<br />
protection for yields going up too much is provided by 2 guarantees;<br />
1. A restrictive policy adopted by the states and municipalities for the<br />
granting of building permissions;<br />
2. These objects carry long-term rent agreements (normally > 10 years<br />
plus options for 2 x 5 years)<br />
High street shops<br />
3 Years ago the usual multiple for a high street shop in western Germany was<br />
12-13 times annual rent (7.7-8.3% yield), nowadays one needs to start bidding<br />
at 14.5/15 times, for true prime 17-18 times is required to be on the short list.<br />
Especially shops that contain a fashion player from an international chain with a<br />
long term contract are sought after. Asset/property management costs usually<br />
are higher than large scale property and one is automatically tight to residential<br />
and/or office units upstairs. Due to the current credit issues in the market we<br />
expect and actually see in the market that yields for high street units are<br />
flattening out and even increase slightly in B locations and shops along main<br />
connection roads. Once this storm has flown over we foresee a further gradual<br />
decrease of prime yields, whilst the ones for secondary assets going the other<br />
way. The difference in prime and sub-prime will become more and more visible.<br />
One thing stands; people will always return to their city centres for shopping<br />
and leisure purposes.<br />
Exhibit 26 provides an overview from DEGI Research with current prime yields for<br />
retail throughout Germany. The lowest cap rates can still be found in Munich;<br />
DEGI reports a 4.35%, however, Cushman & Wakefield latest report contained a<br />
sharp 3.85%.<br />
German retail update - 28/11/2007 29
Exhibit 26 Retail yields for prime retail per city<br />
Source: DEGI Research<br />
Exhibit 27 Retail yields for prime retail per city<br />
Source: DEGI Research<br />
German retail update - 28/11/2007 30
Rental levels<br />
Not only prime assets in major cities are faced with rising rents as these are<br />
occupied by financially healthy high turnover global franchise companies, but also<br />
in medium sized cities and conurbations. The major difference is the level of<br />
rents. Munich is still the most expensive place to lease retail space (EUR 260/m 2 ).<br />
Cologne (EUR 200/m 2 ), Düsseldorf (EUR 185/m 2 ) and not to forget Leipzig<br />
(+9.5% y.o.y.) due to the improved quality of shops and reversed migration of<br />
spending power. The Peterstrasse for instance has shown EUR 115/m 2 in some<br />
prime units, which is way above the eastern German average. A further increase<br />
is expected. In Berlin a pick-up is visible as well due to revitalisation and<br />
restructuring around the Alexander Platz. The Kurfürstendamm does EUR 200/m 2<br />
today. In other prime areas –in for instance Hamburg- rents remained flat. For<br />
the whole of retail Germany it is expected that rents in prime locations increase<br />
by 3.6%, although clear regional differences must be taken into account.<br />
The study performed by the Hahn Group showed that only 30% of all surveyed<br />
retailers think rents will increase upon renewal. But 56.7% of retailers believe that<br />
rents in newly developed assets will rise, 73.3% expect rent rates of existing<br />
properties to remain unchanged or to rise. 33% think that they are still to reap<br />
the rewards of Germany’s economic growth.<br />
However, the situation in B-grade locations and urban district centres remains<br />
strained. Demand remains reserved and marketing of retail meters is still difficult<br />
considering the constant pressure on rents. In the most positive scenario rental<br />
levels stop declining. In fact, a focused retail trade compatible and urban<br />
development upgrade is recommended for these locations. Investments in newly<br />
custom built multi-functional retail centres with a first class yield oriented<br />
management structure are nevertheless attractive from an investment and tenant<br />
perspective. “We all need to shop”.<br />
Exhibit 28 Rent levels for prime assets in Germany<br />
300<br />
250<br />
200<br />
150<br />
100<br />
50<br />
0<br />
Essen Dresden Leipzig Hamburg Berlin Düsseldorf Cologne Stuttgart Frankfurt Munich<br />
Source: Cushman & Wakefield<br />
Prime retail rents/month Jun-06 Prime retail rents/month Jun-07<br />
Another asset class is distressed retail on promising locations. These properties<br />
are mainly sought by Anglo-Saxon investors, who trust that they can achieve a<br />
speedy turnaround of the objects. This is essentially fuelled by the expectation<br />
that a change of tenant will go hand-in-hand with a mid-term increase of rent,<br />
either by raising the rent or through better exploitation of the rental area. Added<br />
to this is the view that the current economic climate will enable filling the existing<br />
vacancies in the objects with relevant usages and thus to improve rental income<br />
substantially. However, one needs to understand the needs of the indigenous<br />
tenant and market at best.<br />
German retail update - 28/11/2007 31
Exhibit 29 Rent levels per retail segment in Germany<br />
Source: Jones, Lang Lasalle<br />
Rental indexation<br />
Rents and rent increases can be freely negotiated and agreed upon in Germany.<br />
The contract may contain a graduated rent increase clauses, or an indexation<br />
clauses. The rent must remain unchanged for at least a year and the tenant must<br />
be informed, in writing, when an index-linked increase is due. Where no<br />
indexation clause is included, a landlord may require the tenant to accept a rent<br />
increase to the rent level customary in an area, provided that the last increase of<br />
rent took place at least 15 months prior to the date when the increase is to take<br />
place. As a general rule, this type of rent increase is limited to 20% over three<br />
years. According to the law of Obligations 558, the landlord must state reasons for<br />
the rate increase by means of an expert opinion, or three ‘sample’ rents charged<br />
for comparable properties, show a so-called ‘qualified rent table’ (qualifizierter<br />
Mietenspiegel) or rental database – a statistical measure of rents issued by the<br />
local authorities and approved by landlord and tenant associations. The tenant has<br />
two months to accede to the demand; if he refuses, the landlord can sue him.<br />
Furthermore, the contract should provide for which utility charges the tenant has<br />
to pay, if not specified the landlord pays.<br />
For smaller units most of the contracts have step-up provisions, which mean that<br />
if a cumulative inflation rate (CPI based) reaches a certain threshold a step is<br />
made for either the full amount (10%/100%) or part (10%/60%). In many cases<br />
for the first 3 years (e.g.) no indexation is applicable. This methodology is<br />
beneficial for the tenant as it takes approximately 5 years before a new lease level<br />
is applied.<br />
For large sized shopping centres often a two-tier indexation is applicable; a<br />
threshold amount based upon an annual CPI-indexation which can be overruled by<br />
retail sales growth (%) if the latter is larger than CPI.<br />
Construction costs<br />
A complaint heart in Germany is the rise of construction costs. For retail assets<br />
specifically these have risen to a factor of around 13 times net annual rent<br />
excluding utilities in 2006. According to information from the Federal Office of<br />
Statistics, costs will continue to rise in 2007. Due to an increase in VAT and higher<br />
prices for energy and materials a percentage of 15-20% for the last 2 years has<br />
been heart frequently. Most REITs have fixed their terms and conditions for the<br />
projects currently under development.<br />
German retail update - 28/11/2007 32
Exhibit 30 Retail yields and rents<br />
Source: DEGI Research<br />
German retail update - 28/11/2007 33
5 covered by Petercam Research<br />
Available products<br />
Not many dedicated German retail players are on our radar screen. The best<br />
known listed players are Deutsche EuroShop, Hahn Group, Dawnay Day Treveria,<br />
BBI Immobilien and GWB. All have quite a distinctive business model. Vastned<br />
Retail left the German market in 2004, Eurocommercial Properties is looking<br />
passively for opportunities.<br />
Deutsche EuroShop 5<br />
• Bloomberg ticker: DEQ GY Eq.<br />
• Market cap: EUR 941.8m<br />
• Free float: 81%<br />
Deutsche EuroShop buys & holds foremost shopping centres and currently has<br />
equity interests in 16 <strong>Europe</strong>an shopping centres in Germany, Austria, Hungary<br />
and Poland. The market value of these shopping centres, which are predominantly<br />
in city centre locations, amounts to EUR2.6bn (1,650 shops, 643,000m 2 GLA). The<br />
occupancy rate has been in excess of 99% for quite some time now. Leases have<br />
10 year duration, no break-up options are in place, turnover-linked rents and a<br />
CPI threshold. Rent to sales is 6.5-8.5%. Major tenants are the Metro Group,<br />
Douglas, Peek & Cloppenburg, H&M, New Yorker and Zara. Fashion is still king<br />
with 47% of all tenants from that sector.<br />
Most German centres are located in former Western Germany, Sulzbach,<br />
Viernheim and Passau being the most southern ones. Dresden and Dessau are the<br />
only centres in the former east. The Main-Taunus-Zentrum in Sulzbach (Frankfurt<br />
area) and the Rhein-Neckar-Zentrum in Viernheim (Mannheim area) are the only<br />
out-of-town locations within the portfolio.<br />
Exhibit 31 Portfolio overview Deutsche EuroShop<br />
Source: Deutsche EuroShop AG<br />
The company from Hamburg had it's IPO in the late 2000 and was founded by DB<br />
<strong>Real</strong> <strong>Estate</strong>, a subsidiary of Deutsche Bank and kicked off with EUR 450m on<br />
assets, today exclusively invests in shopping centres that are acquired either<br />
directly or indirectly by means of equity interests. When purchasing centres under<br />
development, a pre-let rate of at least 50% of the leasable space must be<br />
guaranteed, for existing buildings this rate should at least amount 80%. In<br />
addition, at least 25% of space in existing buildings must be let for a remaining<br />
term of more than five years. Locations must have a long-term catchment area of<br />
at least 100,000 inhabitants. Portfolio expansion is targeted at 10% per year by<br />
German retail update - 28/11/2007 34
acquisition of new shopping centres and extending their share in a holding. 2007<br />
was a year of consolidation -no new investments were made-, 2008 will be<br />
important as 3 new centres will be operational for the first time. Galeria Baltycka<br />
in Gdansk opened its doors for business on 4 October 2007. One expects that this<br />
74% stake contributes EUR 11.3m per year to rental income. The Hameln<br />
property is due to be opened in March 2008. The topping-out ceremony for the<br />
Stadt-Galerie in Passau was held on 11 October, with the centre scheduled to<br />
open in autumn 2008. Preletting rates for both properties are already high, at<br />
95% for Hamelin and 76% for Passau. The company will focus more and more on<br />
Germany and bordering CEE countries (75%/25%). In the meantime all centres in<br />
France and Italy are disposed; in 2004 the exit of the Udine-Italy centre was a<br />
fact, in April 2006 Etrembières in Annemasse-France (close to Geneva) was sold,<br />
in December that same year the disposal of Viterbo-Italy was concluded. Mid 2007<br />
the average net yield for the overall portfolio was 5.39%.<br />
Deutsche EuroShop is owned for 19% by the Otto family, which also holds 100%<br />
of the non listed ECE Projektmanagement G.m.b.H. & Co. KG. This also Hamburg<br />
based company has implemented leased and managed shopping centres since<br />
1965 and is the largest (inner-city) retail center manager in <strong>Europe</strong> and Deutsche<br />
EuroShop's preferred center manager and supplier for developments.<br />
The company is conservatively leveraged and fully hedged against interest risks,<br />
for the moment the company is not applying for the REIT status. Investors buying<br />
DEQ GY shares up to 1 January 2009 continue to receive dividends without any<br />
tax deduction (return of equity), as of that date a flat rate of 25%, plus a<br />
solidarity surcharge applies.<br />
German retail update - 28/11/2007 35
Hahn Group<br />
• Bloomberg ticker: H4I GR Eq.<br />
• Market cap: EUR 125m<br />
• Free float: 18.6%<br />
For the past 25 years the Hahn Group has specialized itself in large-scale retail<br />
real estate. They perform investments for own account, asset management for<br />
third parties and fund management. Currently it has 1.4 million m 2 under<br />
management spread out over 150 locations and a total volume of around EUR<br />
2.1bn. The specific retail properties managed by Hahn are superstores,<br />
hypermarkets, DIY stores and shopping centres. The company is particularly<br />
active in smaller and medium-sized cities and towns as the objects offer a specific<br />
competitive advantage. Major tenants are the Metro Group, Edeka, REWE,<br />
Tengelmann and Kaufland. The average yield on properties is estimated to be<br />
around 6.9%. Following the IPO in October 2006 (General Standard in Frankfurt),<br />
the Hahn Group is listed on all German stock exchanges. In 2008 they will apply<br />
for the Prime Standard. Founding father Michael Hahn –today chairman of the<br />
supervisory board- still owns 78.9%.<br />
Exhibit 32 Portfolio overview Hahn Group<br />
Source: Hahn AG<br />
German retail update - 28/11/2007 36
Dawnay Day Treveria<br />
• Bloomberg ticker: DTR LN Eq.<br />
• Market cap: EUR 553m<br />
• Free float: 80% (estimated)<br />
Dawnay Day is active in its current form since early 1980s and specialised in<br />
commercial property and financial services. It launched Dawnay Day Treveria PLC<br />
and was listed on the AIM in December 2005 by raising EUR 444m with a<br />
subsequent placing in November 2006 of EUR 300m. Treveria is a tax-efficient<br />
property company incorporated in the Isle of Man. Total assets under<br />
management per July 2007 were EUR 2.1bn (EUR 1.7bn at 31 Dec. 2006) and<br />
their latest target is EUR 3.3bn. The breakdown by region is 83% in former West<br />
Germany, 9% in East Germany and 8% in Berlin. They focus primarily on high<br />
street retail with a solid tenant mix and yield arbitrage opportunities. Shopping<br />
centres and retail warehouses are also part of their portfolio and the average net<br />
yield is 6.2%. Major tenants are C&A, Metro Group, Kaufhof, <strong>Real</strong>, REWE, Sinn<br />
Leffers, H&M, Toom and Edeka Vacancy amounted to 4.67% per July 2007.<br />
Speculative development opportunities are kept outdoors and diversification is<br />
key, no single asset should exceed 10% of target portfolio.<br />
Exhibit 33 Portfolio overview Treveria<br />
Source: Dawnay Day Treveria<br />
German retail update - 28/11/2007 37
BBI Immobilien<br />
• Bloomberg ticker: BBI GY Eq.<br />
• Market cap: EUR 56m<br />
• Free float: 56%<br />
BBI invests exclusively in commercial real estate like specialist retail centres,<br />
shopping centres and in logistics real estate, acquired mostly from local<br />
companies and regional developers. Hunting grounds are Germany and the areas<br />
bordering BBI’s home country, Czech Republic and Austria, but main focus is<br />
Bavaria and Hesse. Management prefers to source buildings or ground plots in<br />
mid-sized towns of 50,000 inhabitants or more.<br />
The name Bürgerliches Brauhaus Ingolstadt reveals quite a bit from its origins,<br />
which go back to the 18th century; some breweries in Ingolstadt merged into one<br />
of the first listed companies in Germany (1882). The first two acquisitions made in<br />
December 2006 that accompany the old brewery and the restaurants were the<br />
following: one existing portfolio for EUR 97m (acquisition costs included) for 15<br />
gardening centres of one single chain located throughout the whole of Germany,<br />
surface of 87,800m 2 , duration rental contracts for 20 years, CPI indexed, fully let<br />
(100%) and a net yield of 6.6%. The other investment was the so called “Bavaria<br />
portfolio”; a project for EUR 110m (acquisition costs included) for 10 specialty<br />
stores and retail centres located in the Southern Bavarian area, surface of 62,400<br />
m 2 , contract-duration of 14 years, CPI indexed, rental guarantee for the first 3<br />
years for the surface not leased (besides anchor tenants) and an expected net<br />
yield of 6.8%. Delivery will take place in the coming years. On 29 March 2007 the<br />
company signed a Letter of Intent (LOI) for the acquisition of the so called<br />
Bavaria-Westphalia portfolio for EUR 29.1m, including acquisition costs. The<br />
portfolio comprises a total of six planned specialist retail centres at different<br />
locations in Bavaria and North Rhine-Westphalia. On July 13, 2007, BBI signed a<br />
purchase agreement for the acquisition of a commercial plot of approx. 23,500m²<br />
in Pfaffenhofen/Ilm. BBI was already able to secure this property on March 12,<br />
2007 by way of a Letter of Intent (LOI). A contractor will construct a self-service<br />
department store with a rental area of around 6,700 m² on the plot. Completion<br />
of the building is scheduled for the first quarter of 2008.<br />
BBI has so far followed the policy of around 40% equity, while the remaining 60%<br />
has been covered by long-term bank loans. The main target is to build up a real<br />
estate portfolio of more than EUR 750m in the medium-term. The size of the<br />
specialist retail centres should measure from 8,000 to 10,000m 2 . BBI takes the<br />
project on board on a turn-key basis but only once the anchor tenants have<br />
signed and a rental guarantee has been put in place for the remaining surface.<br />
The company works closely with some project developers from whom BBI usually<br />
receives the right of “first call” if new projects are on their radar screen. Needless<br />
to say, that all deals are done off-market.<br />
German retail update - 28/11/2007 38
Exhibit 34 Portfolio overview BBI Immobilien<br />
Source: BBI AG<br />
German retail update - 28/11/2007 39
GWB<br />
• Bloomberg ticker: G7B GR Eq.<br />
• Market cap: EUR 45.9m<br />
• Free float: 36.33%<br />
GWB from Hamburg was founded 15 years ago and focuses on shopping- and<br />
‘Fachmarkt’ centres that sizes at least 10,000m 2 (> EUR 15m). They perform both<br />
project development and refurbishments, consequently asset management and<br />
dispose the well let premises. For this purpose the company recently announced a<br />
strategic alliance with Deutsche Land plc from London. The company is lined up in<br />
three divisions; GWB Mafo (research), GWB Object (asset management) and GWB<br />
Plan (project management). Today the portfolio measures approximately EUR<br />
80m, spread over 27 objects all over Germany; e.g. Nürnberg, Berlin, Münster-<br />
Wolbeck, Wuppertal. To-date they have constructed over 40 schemes, leased and<br />
sold them accordingly. In 2006 approximately EUR 45m on assets have been sold.<br />
The gross initial yield should at least amount to 8.5% for new centres and 8% for<br />
existing ones, 70% ought to be pre-let. They are leveraged more aggressively<br />
than many REIT-like peers; 20%/80%. Currently the pipeline amounts to EUR<br />
250m; EUR 134m for developments (10 objects), EUR 112m for refurbishment<br />
projects (9 objects). The share price peaked in May and June this year and<br />
followed the same pattern as many other real estate shares lately; on the Xetra it<br />
is priced at EUR 9.66, in Frankfurt it is one cent less.<br />
We herewith provide an overview with the most liquid and commonly traded<br />
stocks of the company’s listed above:<br />
Exhibit 35 Bloomberg overview: comparative returns<br />
Source: Bloomberg<br />
German retail update - 28/11/2007 40
Petercam Institutional Research and Sales<br />
Marc Janssens - Managing Director - +32.2.229.64.28<br />
Analysts Sales<br />
Stefaan Genoe Head of Research +32.2.229.64.66 Damien Fontaine +32.2.229.65.62<br />
Imaging Isabelle Brasseur +32.2.229.66.12<br />
Thijs Berkelder Telecom/Transport +31.20.573.54.72 Kris De Backer +32.2.229.64.76<br />
Emmanuel Carlier Industrials +32.2.229.63.97 Rob de Jong +1.212.521.67.23<br />
Damien Caucheteux Breweries +32.2.229.63.63 Mathieu De Sutter, CFA +1.212.521.67.13<br />
Fernand de Boer Retail +31.20.573.54.17 Jasper Foppele +31.20.573.55.02<br />
Eric de Graaf IT Hardware & Equipment +31.20.573.54.64 Sebastien Füki +32.2.229.64.35<br />
Matthias De Wit Technology +32.2.229.65.56 Xavier Gossaert +32.2.229.63.27<br />
Ton Gietman Financials +31.20.573.54.63 Marc Kennis +31.20.573.54.16<br />
Laure-Anne Heylen Industrials +32.2.229.65.51 Gerben Lagerwaard +31.20.573.55.08<br />
Kris Kippers Industrials +32.2.229.65.95 Thomas Marchandise +32.2.229.66.91<br />
Paul Linssen Food/Construction/Staffing +31.20.573.54.67 Jurgen Smits van Oyen +31.20.573.55.03<br />
Gert Potvlieghe Media/Shipping +32.2.229.66.59 Jean-Marc Temple +32.2.229.65.72<br />
Eric Tjong Financials +31.20.573.55.09 Simon Vlaminck +1.212.521.67.35<br />
Luuk van Beek IT Services/Engineering +31.20.573.54.71<br />
Jan Van den Bossche, CFA Life Sciences/Chemicals +32.2.229.66.82<br />
Bart Van den Wijngaard Industrials +31.20.573.54.73<br />
Sales Trading<br />
Pieter van der Meijden <strong>Real</strong> <strong>Estate</strong> +32.2.229.63.40 Nienke Abma +31.20.573.54.07<br />
Stephan van Weeren <strong>Real</strong> <strong>Estate</strong> +31.20.573.54.22 Hans de Jonge +31.20.573.54.04<br />
Alexandre Weinberg, CFA Industrials +32.2.229.63.42 Veronique De Schoemaecker +32.2.229.66.20<br />
Bert Lesterhuis +31.20.573.54.09<br />
Senior Advisor Stéphane Logist +32.2.229.66.18<br />
Marc Debrouwer Industrials/Utilities +32.2.229.65.78 Michel Mol +31.20.573.54.03<br />
Tim Olijerhoek +31.20.573.54.10<br />
Jan Paul Raterink +31.20.573.55.07<br />
Richard Schulein +31.20.573.54.11<br />
Amaury Steyaert +32.2.229.65.50<br />
Investment rating system: The Petercam stock ratings are based on the estimated performance relative to the Petercam Benelux coverage universe.<br />
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<br />
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<br />
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<br />
relative performance are always based on a 12 month time Horizon.<br />
High<br />
Beta > 1.3<br />
Medium<br />
0.9 < Beta ≤ 1.3<br />
Low<br />
Beta ≤ 0.9<br />
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