DIRECT MARKET REPORT GERMAN RETAIL - Europe Real Estate

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.
German retail update - 28/11/2007 5