DIRECT MARKET REPORT GERMAN RETAIL - Europe Real Estate

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
German retail update - 28/11/2007 26