REAL ESTATE MARKET GERMANY

REAL ESTATE MARKET GERMANY 21 217 STRONG DEMAND IN METROPOLITAN AREAS LACK OF SUPPLY IN OFFICE FLOOR SPACE FOLLOWS SHORTAGE IN RESIDENTIAL SPACE A RESEARCH PUBLICATION BY DG HYP OCTOBER 21

TABLE OF CONTENTS Greeting 3 Summary 5 Current economic situation in Germany 8 Brexit: an opportunity for the German office market? 9 Residential and commercial construction struggling to gain momentum 1 Yield compression persists for commercial investments 13 Retail space 15 Office space 29 Residential property 41 Overview of forecasts 4 Imprint 47 Disclaimer 47 DG HYP offices 48 1

GREETING Dear Readers, As the commercial real estate bank within the Volksbanken Raiffeisenbanken cooperative financial network, we regularly analyse the markets we actively cover, in order to better assess opportunities and risks. The present report continues our series of studies concerning the German real estate market, published in the autumn of each year. This research study looks at market developments for retail, office and residential real estate in German metropolitan areas during 21, and provides an outlook for 217. The real estate markets in the prime locations the report covers Hamburg, Berlin, Cologne, Dusseldorf, Frankfurt, Stuttgart and Munich have continued to benefit from the positive economic environment. Hence, the trend of rising rents remains intact, even though the upward momentum seen over recent years cannot be maintained, despite strong demand. Given the high rent levels reached already, there are signs of saturation for retail real estate, particularly in top locations, whereas rent increases in the office and residential sectors are increasingly the result of a decline in available space. Whilst the housing sector is burdened by a lack of completions, the development of office markets is being impeded by the level of construction activity, which is still too low. We will discuss the causes holding back stronger growth in more detail in a separate chapter. Furthermore, this market report looks at opportunities for the German office market in the wake of Brexit, and illustrates different yield developments for commercial real estate in the seven German economic hubs. The German real estate market report is of course also available in German. All previously published DG HYP market reports can be downloaded from our website (on www.dghyp.de/en/unternehmen/market-research); contact us if you prefer a hard copy. Yours sincerely, DG HYP October 21 3

SUMMARY» The German property market is continuing to develop very positively. The key growth drivers are the sound economic situation, the robust employment market, increasing population figures thanks to inward migration and low interest rates. This is generating strong demand for commercial space and housing as well as considerable enthusiasm for buying German property among investors. Rents, but most notably property prices, are maintaining their upward trend while yields for commercial real estate and blocks of flats have been falling for around seven years.» The trend described above is particularly marked at top locations. In these areas, strong demand for office and retail space as well as the housing needed to house the rapidly increasing numbers of inhabitants are encountering a limited supply. Offices and homes, where new construction has failed to match demand for some time, are particularly scarce. There has already been a dramatic fall in vacant office space, which was so abundant a few years ago. However, a whole series of retail projects have been developed in response to the boom in city-centre shopping, meaning that there are now signs of saturation in the trend in rents.» It is likely that the property market will continue to benefit from favourable conditions, even though economic growth in Germany is likely to soften somewhat. In this respect, we assume that demand for offices, retail space and homes will by and large persist. Investor interest in German commercial real estate and blocks of flats is likely to continue unabated, as commercial real estate will still offer a relatively advantageous yield compared with bond yields, which are expected to remain in the doldrums.» With regard to the trend in rents, we are assuming an increase of around 3 per cent in average annual prime office rents and the first-time occupancy rents for the seven top locations until 217. However, growth in prime retail rents is likely to be more modest. Following the sharp increase in rents in recent years, there has been a perceptible decline in retailers willingness to accept still higher rents. TOP LOCATIONS: RENTS CONTINUE TO RISE, BUT NOT QUITE SO RAPIDLY 12 top location: rent yoy in % 9 3-3 - -9-12 -15 1994 1995 199 1997 1998 1999 2 21 22 23 24 25 2 27 28 29 21 211 212 213 214 215 21e217e retail (prime rent) office (prime rent) residential (average rent first occupation) average Source: BulwienGesa, DZ BANK AG forecast 5

» There has been a further improvement in the favourable conditions enjoyed by retailers: low inflation means that sharply rising incomes and pensions can be enjoyed almost to the full, the number of people in employment is increasing and saving is becoming ever less rewarding. This is generating a positive consumer climate, which is reflected in booming retail sales, as it was last year; the German Retail Federation (HDE) expects growth of 2 per cent in 21. Retailers close to the city centres in the top locations are also benefiting from the expanding urban population and increasing numbers of tourists. E-commerce is also more of an opportunity than a challenge for retailers in 1A locations thanks to their hybrid sales concepts. Retail sector: prime rents closer to peaking» Demand for first-class retail space in shopping malls and city centre shopping centres therefore remains strong. The sound economic situation in Germany is also contributing to strong interest in the German market among international retailers. Given that large cities with their substantial markets and international clientele are just as suitable for establishing an initial market presence as for testing new retailing concepts, prime rents could rise sharply as a result of high demand for space in top locations. They have almost doubled within 2 years.» However, despite favourable conditions, the strong upward trend in rents is likely to be thing of the past. Since prime rents have now reached around EUR 3 per sqm on average, there has been a perceptible decline in retailers willingness to accept still higher rents. FORECAST FOR RETAIL SPACE Retail prime rents in EUR pro sqm Change in retail prime rents yoy (%) 215 21e 217e 215 21e 217e Berlin 3 315 32 3.4 5. 1. Cologne 25 25 255 4.2. 2. Dusseldorf 27 27 27 3.8.. Frankfurt 3 3 35 3.4. 1.7 Hamburg 285 285 285 3... Munich 34 345 35 4. 1.5 1.4 Stuttgart 245 25 25 2.1 2.. Top location average 292 299 33 3. 2.3 1.2 Source: BulwienGesa, Feri, forecast DZ BANK AG The prime rent represents an average of the top 3-to-5 per cent of market lettings, meaning that the figure quoted does not equate to the absolute prime rent.» The positive trend in employment figures has led to high demand for first-class office space in major cities in the last few years and hence to a noticeable rise in prime rents. At the same time, the previously high vacancy rates have fallen sharply because construction of new space has not kept pace with demand in recent years.» The scarcity of office space that has now emerged in some locations combined with persistently high demand are likely to result in a further rise in prime rents this year and next. Demand for space could also be boosted if British companies relocate staff to other EU member countries because of the imminent Brexit. In Germany, Frankfurt is likely to benefit most from this because of its status as a financial centre. Ultimately, we expect prime rents to grow by around 3 per cent per year up to 217. Office: the shortage of office space is pushing rents higher

FORECAST FOR OFFICE SPACE Office prime rents in EUR pro sqm Change in office prime rents yoy (%) 215 21e 217e 215 21e 217e Berlin 24. 2. 27. 4.3 8.3 3.8 Cologne 21. 21.2 21.4. 1..9 Dusseldorf 24. 24.5 25.. 2.1 2. Frankfurt 35.5 3.2 38. 1.4 2. 5. Hamburg 25. 25.4 25.7 2. 1.5 1.3 Munich 34.1 34.8 35.5 1.8 2.1 2. Stuttgart 19.3 19.7 2. 1. 1.8 1.8 Top location average 2.7 27.5 28.3 1.9 3.2 2.7 Source: BulwienGesa, Feri, DZ BANK AG forecast The prime rent represents an average of the top 3-to-5 per cent of market lettings, meaning that the figure quoted does not equate to the absolute top rent.» Although the number of people living in major cities has been rising sharply for some years, residential construction has failed to keep pace with this trend. As a result, there are practically no vacant flats, meaning that the increasing demand for housing can only be met through construction. However, completion figures are the sole exception is Hamburg far from being sufficient to satisfy current demand, let alone deal with the shortage that has arisen in recent years. Demand also continues to grow, as more people move to cities, households have fewer people living in them and as a result of the refugees who arrived in 215 and are now gradually moving from temporary accommodation to normal housing.» The increasing shortage of housing in top locations has resulted in residential rents rising sharply over the last ten years or so. Cumulatively, they have increased by around a quarter over this period. Today, tenants can expect to pay around EUR 13 per sqm on average as a first occupancy rent, while rents in the prime segment of the housing market are EUR 5 per sqm more expensive.» However, the growth in rents for newly built flats has slowed. The annual increases of 5 per cent and more in some cases are no longer being achieved on average in top locations. This is because there is a limited number of people looking for property in this comparatively expensive part of the housing market, while supply is expanding thanks to the increase in the amount of new properties being built. We assume that first occupancy rates will firm by around 3 per cent per year up to 217. Residential: the shortage of housing combined with high demand is pushing rents higher FORECAST FOR RESIDENTIAL REAL ESTATE Average first occupancy rents in EUR per sqm Average first occupancy rents, yoy % change 215 21e 217e 215 21e 217e Berlin 11.5 11.8 12.1 1.8 2. 2.5 Cologne 11.5 11.8 12.1.9 2. 2.5 Dusseldorf 12.4 12. 12.8 1. 1. 1. Frankfurt 13.5 14. 15. 3.1 4..8 Hamburg 13.2 13.4 13..8 1.5 1.5 Munich 15.8 1.8 17.3..3 3. Stuttgart 12. 12.8 13.3 7.1.7 3.9 Top location average 12.7 13.1 13.5 2.7 3.4 2.8 Source: BulwienGesa, Feri, DZ BANK AG forecast 7

CURRENT ECONOMIC SITUATION IN GERMANY The German economy reported robust growth in the first half of 21. Gross domestic product grew by.7 per cent in the first quarter and by.4 per cent in the second quarter. Momentum has therefore weakened slightly, but remained fairly strong until the summer. Compared year on year, the growth rate in gross domestic product was still 1.7 per cent, not a bad figure given the numerous negative factors affecting the international economy. However, there are signs of growth slowing in the second half of the year. Not least because of a downturn in expectations, the Ifo Business Climate Index consequently fell from 18.3 to 1.2 points in August, which indicates a marked downturn in sentiment. The companies questioned by the Ifo Institute have now seemingly revised their business forecasts downwards in response to the Brexit decision. Sentiment has deteriorated sharply among wholesalers, who are heavily dependent on exports, but retailers are also less confident than they were in early summer. Robust economic activity in the first half of the year... but downturn in sentiment in the summer It looks as though economic growth will be respectable in 21 as a whole, primarily because of positive momentum in the first half of the year. At 1.8 per cent, the rate is even likely to be slightly higher than in 215 and will be somewhat better than our recent forecasts. However, we are assuming a slowdown in the second half of the year, not least because of the negative impact of the UK s Brexit vote on the European economy. We are therefore sticking to our cautious forecast of 1.1 per cent growth for the coming year. Strong growth in 21 as a whole, but a slowdown is expected ECONOMIC FORECAST GERMANY % yoy 214 215 21e 217e GDP 1. 1.7 1.8 1.1 Private consumption.9 2. 1. 1.1 Public consumption 1.1 2.8 3.8 1.5 Investment 3.5 1.9 2.5 1.5 Exports 4.1 5.1 2.9 2.8 Imports 4. 5.5 3.1 3.8 Unemployment rate (%).7.4.2.4 Inflation rate (HCPI).8.1.3 1.4 Public budget balance (% of GDP).3.7.2. GDP GROWTH VS PREVIOUS YEAR (IN PER CENT) UNEMPLOYMENT RATE (IN PER CENT) 13 4 2 12 11 1 9-2 -4-22 Germany Eurozone 27 2 25 24 23 28 29 21 211 212 213 214 215 21e 217e 8 7 5 22 23 24 Germany Eurozone 25 2 27 28 29 21 211 212 213 214 215 21e 217e Source: DZ BANK AG 8

BREXIT: AN OPPORTUNITY FOR THE GERMAN OFFICE MARKET? Shortly after the Brexit vote, the price of real estate shares on the London stock market slumped. Many of the listed companies have invested in UK commercial real estate often in the London area. However, the voters decision also led to substantial outflows from UK real estate funds, meaning that several funds with assets in the double-digit billions had to suspend trading. The reason for this strong reaction is investors fear that the real estate market will suffer from both the anticipated economic downturn and the relocation of a large number of employees to locations in the EU. The picture looks very different in Frankfurt am Main. The city and consequently the real estate market could benefit considerably if a large number of British bankers were relocated from London to Frankfurt. Brexit is putting the UK real estate market under pressure The fact that the Brexit vote has such an impact on real estate markets is largely because supply only responds sluggishly to changes in demand at a location. However, it is not easy to forecast how this will now change on the European markets for commercial and residential real estate. It will depend on the extent to which the British and the European economy is adversely affected by Brexit. In a soft scenario, for instance, the macroeconomic growth rate could fall by only a few percentage points, while there is a risk of recession if things go badly in the UK and on the continent. However, so far it looks as though both the UK and the continental Europe will be spared the latter. Supply on the real estate market is sluggish; the impact of Brexit on demand will be crucial BREXIT CAUSES A SLUMP IN UK REAL ESTATE SHARES MATHEMATICALLY, THOUSANDS OF STAFF CAN BE ACCOMMO- DATED IN THE EMPTY OFFICES IN TOP LOCATIONS 21 71 2 8 314 19 18 17 1 5 2 59 5 18 18 5 31 11 217 7 125 122 75 15 14 UK real estate equities / FTSE EPRA (lhs) 53 5 FTSE 1 (rhs) Berlin Dusseldorf Frankfurt Hamburg 438 428 22 Cologne Munich Stuttgart vacant office space in ' sqm vacant office space sufficient for x additional office work stations Source: Bloomberg Source: BulwienGesa, DZ BANK AG Assumption: 35 sqm per office workplace There is also no reliable basis for assessing the extent to which economic activities would have to be relocated from the UK to other EU countries in order for the UK to continue benefiting from the EU s internal market. Will the notorious offshore company in an EU country suffice or will large parts of the value added chain have to be relocated? And to what extent does that make economic sense? Whether the company will require new offices or office blocks at its new location will depend on the answers. However, the question as to where the journey is headed is also important. Accordingly, Frankfurt should keep in mind that cities such as Amsterdam, Dublin, Luxembourg and Paris are also possible locations. To what extent will economic activities be relocated? 9

Consequently, the extent to which staff will actually be relocated to Frankfurt is entirely unclear, but even if the decision is made for only a small part of the London financial sector, it will still come to a considerable number given that 7, are employed there in total. Frankfurt s chances are not bad either: it is already home to the ECB s headquarters, offers excellent international connections, with the airport only ten minutes from the city, and compared with London rents and salaries are moderate. Frankfurt s chances are not bad It is not only companies in the financial sector that may be affected by relocations. An example of this is the telecommunications group Vodafone, which generates a majority of its revenues in EU countries. Dusseldorf could stand to benefit because the company has had a substantial presence in the city since the acquisition of Mannesmann many years ago. EU authorities such as the European Medicines Agency and the European Banking Authority, which is responsible for banking supervision, will almost certainly leave the UK. Other sectors and other German office locations could also benefit from Brexit However, the fact that there is an increasing shortage of attractive office space in central German office locations could prove problematic. The vacancy rate has decreased significantly in recent years. Nevertheless, sufficient office space for new workplaces could be found, as the vacancy rate is still relatively high in the two locations mentioned, namely Dusseldorf and Frankfurt. However, in practice, it would be difficult to fully exhaust the mathematical potential accommodation shown in the diagram on the previous page because some buildings are obsolete, in poor locations or the space is too small. However, the space is likely to be sufficient for a few thousand UK workers. In purely mathematical terms, there is space for 15, office workplaces in the top locations Is Brexit therefore an opportunity for the German office market despite the risks for the European economy? It is difficult to say, as the positive effects resulting from the relocation of staff from the UK to German locations could rapidly be more than offset if the macroeconomic slowdown has a more adverse effect on growth in employment. A more marked downturn may rapidly undo the positive effect of staff relocating RESIDENTIAL AND COMMERCIAL CONSTRUCTION STRUGGLING TO GAIN MOMENTUM The construction industry has not always had an easy time in recent years, but the prospects of full order books are currently good. Scarcely a week goes by in which the lack of housing is not raised in the media. The reasons are well known: people moving into towns and cities, immigration from outside Germany, increasing numbers of smaller households and, not least, a failure to construct enough housing over many years. However, attention is also regularly focused on ageing public infrastructure, be it dilapidated roads and bridges or schools needing redevelopment. By contrast, the public is less aware that demand for commercial space is also considerable. This is clear merely from the space needed for additional workplaces resulting from the sharp increase in the number of people in employment, but logistics properties are also needed for the expanding online retail sector and hotels for the steadily increasing number of visitors. Housing, commerce, infrastructure: demand for new construction is considerable It is not unusual for construction projects to fail because of insufficient funding, but this is not a problem either: interest rates have fallen sharply meaning that repayments on property loans have become noticeably less onerous. Many investors are also looking for alternative investments to the bond market. And even the usually cash-strapped public purse is well-filled at the moment thanks to soaring income tax receipts.... and the funds needed are also available 1

NET IMMIGRATION INCREASES TO RECORD LEVELS migrants in thousand 2,4 2,1 1,8 1,5 1,2 9 3-3 1975 198 1985 199 1995 2 25 21 215 net migration immigration emigration Source: Federal Statistical Office SURGE IN EMPLOYMENT CONTINUES UNABATED 44 43 42 41 4 39 38 37 3 1995 2 25 21 215 employees in million Source: Federal Employment Agency In actual fact, far more is being built than was the case a few years ago. This is evidenced by the large number of cranes seen in cities, but there has been no real construction boom. Strong growth is still most apparent in housing construction. Compared with the low reached at the end of the last decade, the number of construction permits has doubled to date. At the end of June 21, the figure increased by 2 per cent year on year to an annualised level of over 4, construction permits. However, completions are lagging behind. Compared with 214, they also increased marginally by 1 per cent to approximately 248, units last year. Residential construction is increasing sharply, but completions are still lagging behind construction permits WHILE RESIDENTIAL CONSTRUCTION HAS BEEN SLOWLY PICKING UP SINCE 21 THERE ARE NO SIGNS OF GENERAL GROWTH IN COMMERCIAL CONSTRUCTION 8 dwelling construction in ' dwelling units 8, construction of office and administration buildings, space ' sqm 7 7,, 5 5, 4 4, 3 2 1 199 1995 2 25 21 215 completions building permits Source: Federal Statistical Office 3, 2, 1, 199 1995 2 25 21 215 completions building permits Source: Federal Statistical Office By contrast, office construction has not picked up significantly so far. Although the completions reached their highest level since 29, at 2. million sqm in 215, this is still low compared with the annual volume up to 2. And unlike residential construction, construction permits do not point to an upward trend, albeit one that has only been delayed somewhat. The consequences of this meagre construction activity are very apparent in office markets (see page 29), since the huge amount of vacant office space that was a feature ten years ago has decreased significantly. In some locations, the vacancy rate is so low that an increasing number of companies are failing to find suitable space. Office construction is struggling to gain momentum 11

Overall, construction investment is also picking up in commercial construction, although the increase is far less than in residential construction. Growth is even reported in public construction, which has been stagnant for many years. On an annualised basis, investment in residential construction is accelerating by not quite 5 per cent, but by only around 2 per cent in commercial and public construction. Aggregate construction investment is currently growing by just under 4 per cent per year. Nominal construction investment increased by just under 4 per cent CONSTRUCTION INVESTMENT IS MORE OR LESS STAGNANT IN RELA- TION TO GDP CAPACITY UTILISATION IN THE CONSTRUCTION TRADES RISES TO THE HIGHEST FIGURE SINCE THE BEGINNING OF THE 199S 8 7 5 4 3 investments in construction in % of the GDP 8 75 7 5 2 1 1992 199 2 24 28 212 21 public sector commercial residential Source: Feri, Federal Statistical Office 55 5 1992 199 2 24 28 212 21 capacity utilisation in the construction industry in % Source: Ifo Institute However, the nominal growth, which appears gratifying at first sight, is less impressive when construction investment is looked at in relation to GDP. On this basis, construction investment has been stagnant at around 1 per cent for around five years. Only residential construction investment increased its share of GDP from 5 per cent to per cent in recent years. Why is construction investment growth not higher, when there is both demand and financial resources? Rents are also trending upwards; the prospects are good for homes and offices, at least. And investor interest in the real estate market remains keen. Construction investment is stagnant in relation to GDP There is no obvious principal factor curbing investment. It is possible that there are various factors preventing a marked upturn in construction investment. The process of concentrating on cities and conurbations has reduced the space available here for residential and commercial buildings and resulted in higher land prices. However, in regions where there is sufficient space available, there is often no demand. Construction has also become significantly more expensive. The Federal Statistical Office reports that the cost for constructing rental flats has risen by 32 per cent per sqm since 25. At 42 per cent, the costs for office and administrative buildings have increased even faster. By contrast, consumer prices have only risen by 1 per cent in this period. Capacity bottlenecks in the construction industry could be another factor. However, capacity utilisation in the construction trades has climbed to the highest level since the beginning of the 199s although far more was built at the time. Various factors may be curbing an upturn in construction activity 12

YIELD COMPRESSION PERSISTS FOR COMMERCIAL INVESTMENTS Where can funds be invested? The fact that bond yields have been falling for many years has made this question far more difficult to answer. Increased interest in alternative investments, such as real estate, has also squeezed its yield. Admittedly, the fall in yields is less dramatic here, which means that real estate investments offer a significant yield advantage over government bonds. As a result, opportunity/risk analyses often lead to the conclusion that commercial real estate or flats in major German cities should be purchased despite the sharp increase in property prices. This project is also becoming increasingly difficult because the concrete gold search profile acceptable yields combined with manageable risks looks identical for many investors, whereas the supply of their preferred core properties in major cities is small. On the one hand, these properties only account for a fraction of the market; on the other hand, owners are not prepared to sell despite being able to achieve high prices. Ultimately, the former owner will be confronted by the above question immediately after selling. Homes and commercial real estate offer relatively high yields compared with the bond market YIELDS ON COMMERCIAL REAL ESTATE CONTINUE TO FALL, BUT ARE FAR HIGHER THAN THOSE ON GOVERNMENT BONDS INVESTMENT VOLUME FALLING DUE TO LACK OF PURCHASE OPPOR- TUNITIES 9 8 7 5 4 3 yield in % 2 German Federal bonds 9-1 years office central location () 1 office peripheral location () 199 1995 2 25 21 215 27 24 21 18 15 12 9 3 investments in German commercial real estate in EUR bn -25% 11,1 8,4 12,9 9, H1 215 H1 21 other location top location Source: Datastream, BulwienGesa Source: JLL The lack of supply is particularly responsible for the fact that demand for German commercial real estate can only be satisfied to a limited degree. The 25 per cent fall in investment volume in the first half of the current year compared with the first half of 215 must also be construed to this effect. The gap could be closed if investors would increasingly focus on less favoured locations or other cities, which would also offer higher yields. However, this move might also expose investors to greater risk. The investment of substantial sums outside top locations is also far more onerous, as a larger number of properties would have to be purchased there to achieve the investment objective. Despite the limited supply, investors are reluctant to look at alternative locations and cities In any case, the top locations appeal is undimmed, while the run to B or C locations, which has been forecast again and again, has not occurred to the extent anticipated despite their yield advantage. This is apparent from the fact that the gap in yields between the city categories (illustrated overleaf in the diagrams on the left) between the categories of cities has only shrunk relatively slightly. By and large, a yield disadvantage of around one percentage point is accepted for a real estate investment in the top locations in the retail, office and residential segments. The gap in yields between the top seven and the B/C locations has only shrunk slightly 13

The fall in yields described above affects all seven top locations. However, the extent differs from location to location. As a result, a gap in yields has opened in the three segments under consideration. This is attributable, in particular, to the sustained upward trend in prices in Munich, as a result of which the yield achievable for offices and retail properties or rather the multiplier for blocks of flats has visibly moved away from the other six locations. The cross-location gap in yields is lowest in the retail sector, with all locations bar Munich at a similar level. The range for offices is somewhat wider, but is still exceeded by blocks of flats. The gap in yields between the top locations has widened RETAIL: TREND IN YIELDS 7..5. 5.5 5. 4.5 4. 3.5 net initial yield in % of retail investments in central locations 3. 1995 1999 23 27 211 215 spread in basis points (rhs) top-7 (lhs) regional-12 (lhs) OFFICE: TREND IN YIELDS 7..5. 5.5 5. 4.5 4. 3.5 net initial yield in % of office investments in central locations 3. 1995 1999 23 27 211 215 RESIDENTIAL: MULTIPLIER FOR APARMENT BLOCKS 1 14 12 1 8 4 2 14 12 1 spread in basis points (rhs) top-7 (lhs) regional-12 (lhs) 8 4 2 MOVEMENT IN YIELDS AT THE INDIVIDUAL TOP LOCATIONS.1 5.8 5.5 5.2 4.9 4. 4.3 4. 3.7 net initial yield in % of retail investments in central locations Berlin 3.4 1992 199 2 24 28 212 H1 21 MOVEMENT IN YIELDS AT THE INDIVIDUAL TOP LOCATIONS.7.4.1 5.8 5.5 5.2 4.9 4. 4.3 4. 3.7 3.4 1992 199 2 24 28 212 H1 21 MULTIPLIER AT THE INDIVIDUAL TOP LOCATIONS Dusseldorf Frankfurt Hamburg Cologne Munich Stuttgart net initial yield in % of office investments in central locations Berlin Dusseldorf Frankfurt Hamburg Cologne Munich Stuttgart 21 average gross rent multiplier of multifamily investments 5. 2 4.5 19 4. 18 3.5 17 3. 1 2.5 15 2. 14 1.5 13 1. 12.5 11. 1995 1999 23 27 211 215 difference (rhs) top-7 (lhs) regional-12 (lhs) 2 average gross rent multiplier of multifamily investments 25 24 23 22 21 2 19 18 17 1 15 14 13 1992 199 2 24 28 212 H1 21 Berlin Dusseldorf Frankfurt Hamburg Cologne Munich Stuttgart Source: BulwienGesa Source: BulwienGesa The initial net yield for office and retail is calculated by dividing the annual net income through the total purchase price including fees and taxes. The gross rent multiplier is calculated by dividing the purchase price through the base rent (excluding fees and taxes). 14

RETAIL SPACE Market development, trend and outlook In last year s issue of this market report, we stated that economic conditions could hardly be better for the German retail sector. They have actually improved further still: employment has increased. Private households are receiving significant increases in wages with virtually nothing being lost to inflation and, at over 4 per cent in western Germany and almost per cent in eastern Germany, this year s increase in pensions could be viewed as a typing error. Overall, private households disposable income adjusted for inflation is likely to increase by over 2 per cent once more this year. Cumulatively, this implies an increase of more than per cent from 214 to 21, which would previously have taken ten years. In light of the positive trend in incomes and economic stability in Germany, not even the many international crises have put a damper on the excellent consumer climate. Furthermore, the retail sector has acquired around one million additional consumers due to the refugees who came to Germany in 215. Purchasing power is also being supported by the flourishing tourism sector. The positive conditions enjoyed by the retail sector have improved further still Given the positive conditions, it would be extremely surprising if retail sales had not grown strongly. Consequently, the German Retail Federation (HDE) expects growth AVAILABLE INCOME ADJUSTED FOR INFLATION AGAIN INCREASES PERCEPTIBLY 3.5 3. 2.5 2. 1.5 1..5. -.5-1. 9 1992 199 2 24 28 212 21 real disposable income of private households yoy in % (lhs) real disposable income of private households 1992 = 1 (rhs) Source: AMECO 135 13 125 12 115 11 15 1 95 STILL AT A VERY HIGH LEVEL: THE GERMAN CONSUMER CLIMATE DEFIES INTERNATIONAL CRISES 18 1 14 12 1 8 4 2-2 -4 21 24 27 21 213 21 GfK consumer climate Source: GfK STRONG REAL WAGE GROWTH BOOSTS THE SCOPE FOR ADDI- TIONAL CONSUMPTION PENSIONERS ARE BENEFITING FROM THE LARGEST PENSION IN- CREASE IN THE LAST 2 YEARS 5 yoy in % 7 yoy in % 4 3 5 2 4 1 3 2-1 1-2 1995 1998 21 24 27 21 213 21 consumer prices Nominallöhne real wages Source: Federal Statistical Office, Thomson Reuters 1995 1998 21 24 27 21 213 21 Western Germany Eastern Germany Source: German pension insurance 15

of 2 per cent in its sales forecast for 21, which would boost retail sales excluding the vehicle trade, fuel and pharmacies to around EUR 482bn. However, the expected increase in sales is not outstandingly positive either. Growth of 2 per cent corresponds exactly to the average rise from 21 to 215. Consequently, neither the increase in cash paid into current accounts each month nor the continuing fall in interest rates are boosting consumption. Admittedly, the further deterioration in investment options is resulting in surging purchase prices for houses and flats, but it is not benefiting retailers more than in previous years. The HDE expects growth in sales of 2 per cent in 21 RETAIL SALES HAVE RISEN NOTICEABLY SINCE 21 THE SHARE ATTRIBUTABLE TO E-COMMERCE IS INCREASING CONSTANTLY 5 4 3 2 1-1 -2-3 -4-5 retail sales excl. VAT, vehicle sales, service station sales, fuel and pharmacy sales 5 49 48 47 4 45 44 43 42 41 4 2 22 24 2 28 21 212 214 21e yoy in % (lhs) in EUR bn (rhs) 5 48 4 44 42 4 38 2 22 24 2 28 21 212 214 21e e-commerce sales in EUR bn (lhs) retail sales in stores in EUR bn (lhs) e-commerce in % of total retail sales (rhs) 12 1 8 4 2 Source: HDE Source: HDE, DZ BANK AG The expansion in retail sales is also not impressive when one considers that they were more or less stagnant a few years ago; as in previous years, increased high-street sales are being squeezed by the rapid growth in e-commerce. With annual growth of around 1 per cent, online sales are likely to top EUR 45bn this year. At first glance, the share of less than a tenth of total retail sales might be viewed as less significant, but in actual fact strong online growth means that sales growth in local shops only amounts to 1 per cent not 2 per cent. In view of the positive conditions enjoyed by retailers at present, this is not much. The marked expansion in e-commerce does not leave much for the high street Retail: Comparison of top locations Retailers in top locations not only benefit fully from the favourable economic environment, but also from other additional advantages. Large cities in which many jobs are created act as drivers of economic growth. Combined with the preference for city-living shared by many people despite the higher living costs, this is generating rapid population growth. In the seven cities alone, the number of inhabitants increased by around 8, people or 9 per cent from 1995 to 215. However, the positive trend in the population has not been linear and has accelerated significantly in the recent past, in particular. Accordingly, more than two thirds of the population growth is attributable to the last five of the past 2 years. Consequently, the number of inhabitants in the top locations has increased by around 1.2 per cent per year on average during these five years. This alone has resulted in noticeably higher sales in the retail sector. Since the expansion of the large cities is continuing, retailers based there are also likely to benefit from this effect over the next few years. Rapid population growth in the last five years 1

WITHIN 2 YEARS, THE NUMBER OF PURCHASERS HAS ALSO RISEN SHARPLY IN LINE WITH POPULATION GROWTH THE TOP LOCATIONS ARE BENEFITING GREATLY FROM BOOMING CITY TOURISM 12 115 11 population 1995 = 1 growth from 1995 to 215 in thousand inhabitants 32 28 24 2 overnight stays in million 32% growth from 1995 to 215 15 1 95 9 195 8 38 88 141 21 51 Munich 1995 2 25 21 215 Berlin Cologne Dusseldorf Frankfurt Hamburg Stuttgart 1 12 8 4 128% 14% 15% 24% 13% Munich 1995 2 25 21 215 132% Berlin Cologne Dusseldorf Frankfurt Hamburg Stuttgart Source: Feri Source: BulwienGesa, statistical offices of the cities (215) Customer potential at the top locations has also benefited from growing visitor numbers. The increase overnight stays is by far most marked in Berlin: after 7.5 million visitors stayed overnight in 1995, the figure rose to just over 3 million in 215. This corresponds to growth of around 3 per cent. Admittedly, the increase is less dramatic at the other top locations; however, here too, the rates of increase are considerable, ranging from around 1 per cent in Dusseldorf to just over 2 per cent in Hamburg. This is good news for the city centre retailers that are the focus in this analysis, because this is where visitors generally shop. City tourism is booming, especially in Berlin Even rapidly expanding e-commerce, which has seen its market share increase continuously, is not a problem for retailers in city centre A1 locations. Rather it offers chain stores and brands the opportunity to combine in-store browsing with shopping online at home: products can be ideally staged in attractive stores, while user-friendly online shops score highly with a wide range, the fact that they can be visited at any time from anywhere and the comprehensive product information they provide. Retailers in city centres often benefit from the internet The upward trend in retail sales in A1 sites in top locations now dates back 2 years. Essentially, the trend is based on three factors: first, the upturn in the seven top locations overall, second the increased attractiveness of city centre shopping areas, thanks to successful architecture and the range of places to eat and drink, and third, Germany s economic success, which has also boosted its profile outside Germany. This has generated interest among national and international retailers, whose products have added to the appeal of city centres. Retail sales in A1 sites in top locations have been trending upwards for 2 years With these tail winds, prime rents have headed almost continuously in just one direction: up. As a result, the rent level has almost doubled within 2 years. At the same time, the lead enjoyed by the top locations with their unique mix of appealing factors over other large cities is massive. For instance, prime rents in regional centres often described as B or C locations have only increased by around one quarter in this period. which means that prime rents have almost doubled in this period 17

RETAIL SECTOR: PRIME RENTS IN THE TOP LOCATIONS HAVE ALMOST DOUBLED WITHIN 2 YEARS 32 retail prime rent in EUR per sqm 3 28 2 24 22 2 18 1 14 12 1 8 1997 21 25 29 213 217e Regional-12 HOWEVER, THE UPWARD TREND IN PRIME RENTS HAS SLACKENED 12 retail prime rent yoy in % 1 8 4 2-2 -4 - -8 1997 1999 21 23 25 27 29 211 213 215 217e Regional-12 Source: BulwienGesa, DZ BANK AG forecast Source: BulwienGesa, DZ BANK AG forecast : Index of top locations Berlin, Cologne, Dusseldorf, Frankfurt, Hamburg, Munich and Stuttgart Regional-12: Index of regional centres Augsburg, Bremen, Darmstadt, Dresden, Essen, Hanover, Karlsruhe, Leipzig, Mainz, Mannheim, Münster and Nuremberg The upward trend in rents has accelerated dramatically in recent years, in particular, with Berlin s phoenix-like ascent playing a considerable role here. Having been rather a problem case, Berlin has muscled its way into the top league of major European cities. As a result, retail space has become considerably more expensive in a few years, which has raised the average of top locations significantly. The other cities have also contributed greatly to the upward trend in rents. Five years ago, it was still remarkable that Munich s prime locations had topped EUR 3 per sqm. Today, this prime rent only equates to the average rent payable in top locations, which has increased by 2 per cent in this period from EUR 25 per sqm. However, this 2 per cent increase in rent coincides with growth in retail sales of only half this rate. High-street sales only managed an increase of per cent. Average prime rent reaches EUR 3 per sqm Growth in retail sales in A1 locations is also likely to have outperformed sales growth in less favoured locations, which would justify a disproportionate increase in rents. However, prime rents in top locations had previously risen sharply. City centre retail concepts are therefore likely to be gradually reaching the limits of their economic viability. This assumption is underlined by the visible slowdown in the rent increase in recent quarters. Apart from rent increases in Berlin and Stuttgart, prime rents in top locations have been stagnant since the fourth quarter of 215. This might indeed only be a respite in a continuing upward trend, but we think, that the rent level reached has come relatively close to the end of the road. We no longer expect any dramatic increases in the period covered by our forecasts up to the end of 217. Are retail concepts in A1 locations gradually reaching the limits of economic viability? However, the chart overleaf not only illustrates the slowdown in the upward trend in rents, it also shows the shift in the rankings of the top locations in terms of prime rents, which has applied for many years. Both the real estate market s star performer, namely Berlin, and the established shopping centre, Dusseldorf, have climbed a few places. While Dusseldorf overtook Cologne and Stuttgart some time ago, Berlin only succeeded in pushing the perennial No. 2 Frankfurt behind Munich into third place this year. Berlin moves up the ratings: measured by prime rents, Frankfurt falls back to third place 18

IS THE UPWARD TREND IN PRIME RENTS COMING TO AN END? DESPITE OPTIMAL CONDITIONS, RENTS ARE STAGNANT BEYOND THE SPRUCED-UP SHOPPING AREAS 35 325 3 275 25 225 retail prime rent in EUR per sqm Berlin Dusseldorf Frankfurt Hamburg Cologne Munich Stuttgart 3 25 2 15 1 retail rent peripheral location in EUR per sqm Regional-12 2 5 175 28 Q1 29 Q1 21 Q1 Source: BulwienGesa 211 Q1 212 Q1 213 Q1 214 Q1 215 Q1 21 Q1 1997 21 25 29 213 217e Source: BulwienGesa, DZ BANK AG Prime rents in Berlin have increased by almost 7 per cent over ten years from 25 to 215 more than twice as much as in Stuttgart. In Hamburg, Dusseldorf and Frankfurt, they have risen by approximately 5 per cent. At less than 4 per cent, the increases have been somewhat more moderate in Cologne and Munich. Prime rents have risen by 3 to 7 per cent in 1 years Halfway through 21, prime rents currently range from EUR 25 in Cologne and Stuttgart to EUR 34 in Munich. At EUR 27 and EUR 285 respectively, Dusseldorf and Hamburg are just below the average for top locations of around EUR 3 per sqm. Frankfurt s prime rents equal the market average, while Berlin is somewhat more expensive at EUR 31 per sqm. A presence in A1 sites in top locations will cost at least EUR 25 per sqm BERLIN S PRIME RENTS HAVE RISEN MOST RAPIDLY IN 217, PRIME RENTS AT 4 OF THE 7 TOP LOCATIONS COULD EXCEED EUR 3 PER SQM growth of the retail prime rent from 25 to 215 in % 9 5 3 retail prime rent in EUR per sqm 35 32 35 39 4 5 5 52 34 32 3 28 2 32 255 27 35 285 25 33 24 22 Stuttgart Cologne Munich Hamburg Dusseldorf Frankfurt Berlin 2 Berlin Munich Cologne Dusseldorf Frankfurt Hamburg Stuttgart 212 213 214 215 21e 217e Source: BulwienGesa Source: BulwienGesa, DZ BANK AG However, it is not only the upward trend in prime rents that has ground to a halt. The longstanding expansion in per capita retail space over many years has also slowed significantly. This is initially surprising given the very large number of project developments in A1 locations and a whole series of inner-city shopping centres which have been constructed in the recent past. However, the number of inhabitants is growing rapidly and consequently reducing the growth in per capita retail space. In addition, this figure takes total retail space across all sites at the respective locations into account, which makes it less meaningful. Growth in per capita retail space has slowed significantly 19

The development has also had a positive effect on sales floor productivity measured as sales per sqm which is increasing slightly once more, having fallen for many years. It is, however, well down on the high level of the past. Even if things look better in city centre locations than in the locations as a whole, the trend still makes clear that the scope for further growth in rents in the retail sector is limited. Sales floor productivity is edging up once more INCREASE IN PER CAPITA RETAIL SPACE HAS STOPPED SALES FLOOR PRODUCTIVITY CONTINUES TO GROW IN THE TOP LO- CATIONS 2.2 2. 1.8 retail space per capita in sqm 1994 215 5, 4,8 4, retail sales in EUR per sqm (average of top locations) 1. 1.4 1.2 1. 4,4 4,2 4, 3,8 3,.8 3,4. Berlin Munich Cologne Dusseldorf Frankfurt Hamburg Stuttgart 3,2 3, 1992 199 2 24 28 212 21e Source: Feri N.B.: gap between bars 3 years in each case Source: Feri in 2 prices The purchasing power and centrality indicators show the usual picture. Purchasing power is above average with the exception of Berlin. Munich towers over the other cities and is well ahead of number two Dusseldorf. In the case of the second key retail figure, centrality, the figures are relatively close. All locations out-perform the national average, which is not surprising given the attractiveness of the shopping locations. Here also, Berlin has the lowest score. In contrast, the city offering the highest degree of centrality is Cologne, although the gap in relation to the number two and three Stuttgart and Dusseldorf is small. Top locations score well in terms of purchasing power APART FROM BERLIN, THE TOP LOCATIONS BENEFIT FROM HIGH PURCHASING POWER 14 13 12 11 1 9 IN TERMS OF CENTRALITY, THE DIFFERENCES BETWEEN THE SEVEN TOP LOCATIONS ARE SMALL 14 13 12 11 1 9 8 purchasing power federal average Munich 8 Berlin retail centrality Munich Berlin Cologne Hamburg Stuttgart Frankfurt Dusseldorf Frankfurt Hamburg Dusseldorf Stuttgart federal average Cologne Source: BulwienGesa Source: BulwienGesa 2

European retail comparison of top locations A European comparison shows that prime rents in top German locations are only roughly in line with the average. In the light of the positive performance, they might have been expected to do better. The discrepancy can be explained by the relatively substantial average figure of EUR 33 per sqm, which is boosted significantly by the three most expensive European shopping locations: London, Paris and Zurich. If instead, we consider the median, i.e. the rent which divides the cities into two groups of equal size, which is around EUR 1 less, then the figure shifts in the anticipated direction: the top German locations are definitely in the more expensive half. In any comparison with other European countries, account should also be taken of the fact that they often have only one city that functions as an outstanding and correspondingly expensive real estate location whereas Germany has several strong locations, which have to share the comparatively small premium segment of the real estate market. Top German locations are on the expensive side compared with other European cities PRIME RETAIL RENTS IN EUROPE: FIGURES FOR GERMAN CITIES ARE AVERAGE 1,2 retail prime rent in EUR per sqm 1, 8 4 average 2 Source: CBRE, own calculations As at: Q2/215 21

Berlin: retail space PRIME RETAIL RENTS IN EURO PER SQM PER CAPITA RETAIL SPACE IN SQM 35 3 25 2 15 Regional-12 Berlin 2,4 2,2 2, 1,8 1, 1,4 1 5 22 25 28 211 214 217e Source: BulwienGesa, Feri, DZ BANK AG forecast 1,2 Berlin Regional-12 1, 22 25 28 211 214 217e Source: Feri Berlin has undergone an outstanding development as a shopping location, which has boosted interest among investors and retailers significantly. This is also illustrated by the sharp rise in prime rents. With an increase in rents of over 4 per cent within five years, Berlin has worked its way into the leading group of top locations. Prime rents currently stand at EUR 31 per sqm, making only Munich more expensive. This reflects a number of factors: Germany s economic strength has attracted greater international attention for Germany s capital than was the case in the past. In addition, there is the size, importance and international character of the market in the city of 3.5 million inhabitants by far the largest city in Germany. Berlin therefore offers the right conditions for market-testing new retail concepts and is consequently predestined as the first location for market entry by foreign retailers on the German market. The downside of its persistent economic problems is gradually becoming less significant thanks to gratifying economic growth, although the purchasing power of Berlin s residents is still far lower than that of the other top locations. Demand among retailers for A1 locations is so great that Berlin is probably the only top location which might still report rents rising significantly in 21. Thereafter, the upward trend in rents is likely to level off even in Berlin. Demand for Hackescher Markt, which scores highly with its range of places to eat and cultural activities and will continue to develop into an A1 location, remains high. However, the highest rents for retail space are generated in Tauentzienstrasse off Ku damm. Berlin has worked its way into the leading group of top shopping locations Among the top locations, Berlin, in particular, still has a chance of further growth in rents in 21 RETAIL SPACE IN BERLIN 214 215 21e 217e Demand Per capita disp. income EUR per year 17,55 17,549 17,23 17,741 Unemployment rate (BA) % 11.1 1.7 1.4 1.9 Retail sales EUR bn / % yoy 14.4 / 2.9 14.7 / 1.9 14.9 / 1.4 15.1 / 1.4 Retail sales EUR per capita 4,19 4,214 4,244 4,281 Supply Total retail space million sqm.2.3.5. Total retail space % yoy 2.7 1.7 2.2 2. Retail rents Prime rents/location EUR/sqm 29 / 14. 3 / 14.5 315 / 14.5 32 / 14.5 Prime rents/location % yoy 7.4 /. 3.4 / 3. 5. /. 1. /. Source: Feri, BulwienGesa, DZ BANK AG forecast 22