KPMG - IERE

The value of the Property Portfolio and the performance of the Company are subject to fluctuations in real
estate markets and economic conditions outside the Group’s control
As at the date of this Prospectus, the Company was invested in 4 countries in Continental Europe. 47
per cent. of the Market Value of the Property Portfolio is concentrated in Germany (approximately
half of which has been acquired) and 31 per cent. in France (two thirds of which has been acquired).
The value of the Property Portfolio and the Company’s ability to generate rental income will depend
on the state of the real estate market and economy in the Company’s target markets and in
particular Germany and France. Real estate market conditions in Continental Europe are influenced
by interacting factors that are not under the Group’s control, including, but not limited to:
* the supply and demand of commercial real estate;
* interest and inflation rate fluctuations;
* general economic trends such as growth of GDP, employment levels and investment;
* the availability and the creditworthiness of tenants;
* attractiveness of real estate relative to other investment choices;
* potentially adverse tax consequences;
* changes in regulatory requirements and applicable laws; and
* the stability of political conditions.
A downturn in the real estate market or economy in any of the Company’s target markets could
have a material adverse effect on the Company’s business, results of operations, assets and financial
condition.
If the Group is unable to retain current tenants on existing or better terms, the Group’s business, financial
condition and operating results may suffer a material adverse effect
Certain leases within the Property Portfolio are scheduled to expire or have break clauses within the
next three years. The Group enters into contracts with tenants with lease terms that vary according to
the local real estate market. Certain markets, for example France and Germany, where the Property
Portfolio is significantly invested, tend to have lease lengths of 10 years or less often with interim
break opportunities. Certain jurisdictions (particularly Germany) require contractual provisions of
leases to be drawn up in a certain way in order to comply with statutory form. Should a lease fail to
comply with these requirements, tenants who would otherwise be bound by a long lease may have a
right to terminate early or argue that provisions imposed on them were invalid. As is relatively
common in the German commercial property market, certain leases within the Property Portfolio do
not comply with the statutory form which could enable the tenant to claim they are not bound by
the lease. Were they to do so that would adversely affect the Group’s income unless it was able to
obtain a replacement tenant on better or equal terms. The Group must renegotiate the terms of leases
upon their expiration, which may result in financial and other terms that are less favourable to the
Group than the terms of the expired contracts. In order to persuade tenants to renew contracts, the
Group may be required to offer incentives such as substantial rent abatements, tenant improvements,
early termination rights or below-market renewal options. If the Group does not succeed in renewing
lease contracts when they expire or finding replacement tenants on the same or better terms, that
could result in a loss of revenue and additional losses while properties remain vacant.
If any of the Group’s tenants go into bankruptcy or otherwise default on their lease obligations, that
will result in an immediate loss of income. It may be difficult and costly to obtain vacant possession
of the relevant property and doing this may result in additional costs and losses for the Group.
In addition, if existing tenants do not renew their leases, the Group cannot guarantee that
replacement tenants will have credit ratings or financial stability comparable to current tenants or will
be able or agree to pay the same level of rent.
In addition, 44 per cent. of the Group’s total expected Net Annual Rent in respect of the Property
Portfolio, as detailed in the Valuation Report set out in Part VI of this Prospectus, was attributable
to the Group’s five largest tenants. The Group’s dependence on rental revenue from a few large
tenants increases its risk exposure to those tenants and the loss of, or a substantial decrease in
revenues from, any of these tenants would be likely to result in a material adverse effect on the
Group’s profitability, cash flow and ability to meet its target dividend yield.
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