Real Estate Market Germany

Real Estate Market Germany 2009 1 A RESEARCH PUBLICATION BY DG HYP March 2009 Global economic crisis burdens property markets Germany less affected than its European peers Member of the Cooperative Financial Services Network

Real Estate Market Germany 2009 1 Table of Contents Preface 2 Real Estate Market Germany 3 Office 5 Situation and trends Outlook Retail 14 Situation and trends Outlook Residential 22 Situation and trends Outlook Logistics Real Estate 25 Situation and trends Outlook Imprint 28 Disclaimer DG HYP Offices 29 1

Real Estate Market Germany 2009 1 Preface In our current market report, we analyse the impact of the global economic crisis on the local real estate markets served by our offices in Hamburg, Düsseldorf, Berlin, Frankfurt, Stuttgart, and Munich. On a general note, the German market appears to be more stable than many other major international real estate markets. A detailed analysis of different sectors and regions both nationally and internationally is more important than ever, given the significant divergence in the price range for office and retail buildings in top vs. peripheral locations which we observe in the various regions. At present, it is retail properties have been hardest hit by the economic slump. Office buildings are somewhat better off, although a strong increase in vacancies is on the cards with the corresponding impact on rents. Construction activity for rented housing is stagnating, having only just achieved the levels last seen in 1993. As a specialist bank for commercial real estate finance, our market reports will provide you with an update on current real estate market developments in the regions we cover. For international investors, an English version of the market report is also available. The next report on the German real estate market will be published in autumn 2009. Deutsche Genossenschafts-Hypothekenbank AG March 2009 2

Real Estate Market Germany 2009 1 Real Estate Market Germany Office Real Estate All primary centres for office space are likely to be impacted by lower rental prices this year and next due to lower demand for office space. At the same time, we anticipate that vacancy rates will increase in all locations: The extent of the decline in the individual cities depends largely on the amount of new office space coming onto the market as new buildings are completed. We expect rental prices for office space in prime locations to fall by four percent on average in 2009. The price decrease in Berlin and Düsseldorf will probably be greater than average, whereas we anticipate that rental prices in Frankfurt, Hamburg and Munich will fall by around three percent. Retail Real Estate The fall in the retail sales ratio by sales area in German retail real estate will probably accelerate its downward trend this year. As a result, productivity in Berlin and Frankfurt will reach a new record low but other locations will probably also approach previous lows. We anticipate that rents will decline in 2009 in all German locations. At least this year, with a decline of five percent on average, the current recession would thus impact rents for retail space more negatively than office space. Residential Real Estate The number of private households in the major business centres has shown a greater than average increase in recent years in comparison to the regions. As a result, rent increases also exceeded the national average. Given the poor economic outlook for the employment market we see no potential for a significant recovery in residential rents in 2009 at any of the locations reviewed. However, we do not anticipate declines either. Logistics Real Estate The level of goods traffic has already fallen substantially due to the recession. This is having a negative impact in 2009 particularly on rents for real estate in secondary locations. Properties close to airports or seaports face the threat of only slight declines. 3

Real Estate Market Germany 2009 1 Real Estate Market Germany Economic momentum collapsed during the course of last year The German economy is likely to contract by 2.0% in 2009 Economic activity in Germany deteriorated sharply again towards the end of last year. Thus GDP growth slowed to 1.3 percent in 2008 following 2.5 percent growth the previous year. In contrast to previous years, the impetus last year came solely from domestic growth. Both capital as well as construction investment increased sharply. Investment in non-residential construction showed above-average growth whereas investment in residential construction barely increased. We anticipate that GDP will continue to decline in the first half of this year but the economic momentum is likely to gradually improve from the middle of the year onwards. The German economy is likely to contract by 2.0 percent in 2009. Macroeconomic forecast Germany in per cent compared to previous year 2008 2009 2010 Real GDP growth 2.5 1.3 2.0 1.5 Private consumption 0.4 0.2 0.3 0.9 Public consumption 2.2 2.7 3.6 2.6 Investment 4.3 4.3 3.0 3.0 Exports 7.5 3.9 4.4 0.5 Imports 5.0 4.9 0.5 4.1 Inflation rate (HCPI) 2.3 2.8 0.9 1.7 Unemployment rate (ILO) 8.4 7.3 8.0 8.5 Budget balance in % of GDP 0.0 0.2 3.3 3.6 Unemployment likely to increase noticeably in 2009 As a result of the strong gain in energy prices until the middle of the year, last year s inflation rate of 2.8 percent was the highest ever since the creation of the European Monetary Union. In contrast, the unemployment rate was in a downward trend until the middle of the year so that the rate was only 7.2 percent in 2008. However, we anticipate a noticeable increase in unemployment during the course of this year. 4

Office Real Estate Market Germany 2009 1 Office Compared to the major Western European markets, primary German centres for office space are still inexpensive even after the last economic upswing. In the most expensive German location Frankfurt prime office space is still somewhat cheaper than in Milan, as the following chart shows. Office space in Frankfurt is only one third of the price of central London. Rents for German office space remain inexpensive in comparison internationally In contrast, Frankfurt still tops the leaderboard for vacancy rates in Western Europe, whereas in Paris, for example, only four percent of available office space is vacant. Rents for office space across Europe began to increase during 2005 and reached their peak in the third quarter of 2008: As a result rents for office space in many foreign markets exceeded levels achieved during the New Economy boom at the beginning of the millennium. However, Germany failed to regain its 2001 levels. Given strong construction activity throughout Europe, vacancy rates benefitted little from the last economic upswing. Rents in foreign countries reached new record levels not so in Germany Office rents in selected European locations Vacancy rates in European locations 100 80 60 40 20 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 16 14 12 10 8 6 4 2 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 Inner London Paris Rome Barcelona Frankfurt Outer London Rome Paris London Frankfurt Barcelona Source: Feri, Euro per square meter of prime office space Source: Feri Situation and trends Rents for prime office space in Germany have increased by around 13 percent on average since the previous low point in mid 2005. Of the major locations for office space Frankfurt (+17%) and Hamburg (+24%) recorded above-average growth rates. The performance was considerably weaker in Stuttgart (+6%) and Berlin (+9%), whereas the increase in Munich and Düsseldorf was only slightly below the average. Since mid 2005 office rents have increased by 13 percent in Germany As the following chart shows, there is quite a close correlation between economic growth and demand for office space. As a consequence, hardly any further office space was rented or sold in the second half of 2008. The slump is likely to continue for the time being since the economic outlook is bleak. In the next few quarters we The recession has led to a collapse in demand 5

Real Estate Market Germany 2009 1 Office anticipate that demand for office space will only be very weak and we therefore anticipate very low office space revenue, whether rent or sales. Overall, with around 1.5 million sq. m of space either sold or rented, revenue will probably only reach half the levels experienced in. Office space turnover in 1,000 sq.m (rentals and sales) 3,500 4 3,000 3 2 2,500 1 2,000 0 office space turnover 1,500-1 -2 GDP growth rate yoy Source: DZ BANK Research 1,000 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009e -3 In all locations rents are likely to fall and vacancies increase in 2009 As was the case in the past when rental and sales prices for all primary office centres profited from the economic upswing, they will probably also be affected this year and next by lower rents due to lower demand. At the same time vacancy rates in all locations will probably increase: The extent of the decline in individual cities depends on numerous factors: However, one important factor is the addition of new space in 2009. Key figures and forecasts for prime office space Rents 2008 2009e Vacancy rates 2008 2009e Berlin 21.50 22.10 20.60 8.9 8.8 9.1 Hamburg 23.00 24.00 23.60 7.2 7.3 7.9 Frankfurt 36.30 38.50 37.50 14.6 14.4 15.5 Munich 30.30 31.40 30.50 9.2 9.2 10.3 Düsseldorf 22.00 22.80 20.70 10.2 10.1 10.9 Stuttgart 17.50 17.00 16.50 5.1 5.2 6.0 Source: DZ BANK Research, monthly rental prices in Euro per sq.m, vacancy rates: vacancy as a percentage of stock 6

Office Real Estate Market Germany 2009 1 Frankfurt Frankfurt remains the most expensive German location for office space despite current rental prices of EUR 38.50 per sq.m in prime locations being well below levels seen during the New Economy boom. Given the high proportion of international clients, rental prices in the financial hub increased noticeably again during the first half of last year before the financial crisis once again intensified, so that rents probably increased by 6.9% on average for the year. This enabled Frankfurt to record the highest rent increase of all the primary office centres in 2008 despite having by far the highest vacancy rate. Frankfurt: Rents showed the sharpest increase of all the primary German office centres in 2008 However, office space outside prime locations saw a weaker performance. Rental prices stagnated last year. This market sector carries the legacy of substantial vacancies over many years: Although prices increased slightly in, rental levels currently correspond to 1994 levels such that they failed even to keep pace with the consumer price increase. Rents for secondary locations are at 1994 levels Office rents in prime locations in Euro per sq.m Change in office rents in prime locations yoy in % Berlin Munich 55 50 45 40 Frankfurt Hamburg Munich 20 15 10 5 Frankfurt Berlin Hamburg 35 0 30-5 25-10 20-15 15 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009e -20 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009e Source: Feri Source: Feri This year Frankfurt will see the completion of speculative office development on a significant scale. At the same time, demand for office space in the dominant financial services sector is falling as a consequence of the financial crisis and bank mergers resulting in the number of office employees declining. This is likely to put rents in prime locations under pressure and they are forecast to fall by around three percent compared to last year. We anticipate that vacancy rates will increase again substantially following a two-year hiatus when they declined to 15.5 percent. This would then be higher than the level following the collapse of the dotcom bubble in 2002. Rents for prime locations are likely to decline in 2009 Vacancy rates climb to record levels 7

Real Estate Market Germany 2009 1 Office Munich Munich: Prime rents almost reached 2001 level With rents of just over EUR 30 per sq.m, Munich is the second most expensive location for office space in Germany. Rents in prime locations increased by four percent in 2008, similar to the rate in the two previous years. Therefore, at EUR 31.40, rents almost reached 2001 levels. The Munich real estate office market clearly also profited from the recent economic upswing. Despite this positive performance, however, there was no fall in vacancy rates. They remained at the previous year s level (see table in the situation and trends section). Munich: Sharp increase in office space in 2008 and 2009 yoy 2.25 2.00 1.75 1.50 1.25 1.00 0.75 2009e 2008 Source: Feri, DZ BANK Research 0.50 0.25 0.00 Hamburg Berlin Frankfurt Munich Düsseldorf Stuttgart Vacancy rates are likely to reach double digits in 2009 A significant increase in available office space, as numerous development projects completed last year came online, was responsible for the stable vacancy rate. Since there were hardly any rentals on a significant scale once demand had collapsed in the middle of the year, vacancies increased as a direct result. Numerous development projects will also be completed this year so the supply of office space will increase again. Given the very weak economic situation we forecast that the vacancy rate in Munich will reach double digits this year. Rents for office space are likely to fall by three percent in 2009 Rents for office space in prime locations are likely to fall by three percent in 2009 as a result of the very strong increase in supply. This decrease, however, which appears modest at first glance, will probably persist well into 2010 since demand for office space is likely to pick up in the second half of next year at the earliest. By that time, rents in Munich s core locations are likely to have fallen to below EUR 30. 8

Office Real Estate Market Germany 2009 1 Berlin During the last economic upswing, rents in the largest German office space market the metropolitan area of Berlin increased at a below-average rate: While rents for prime locations in major German office centres had increased by 13% since 2005, Berlin recorded an increase of only 8.7%. Only Stuttgart experienced weaker performance with an increase of only 6.1%. In Frankfurt, for example, rents during this period increased by 16.7%. Berlin: Rents increased at a below-average rate during the last upswing Berlin: Rents for office space in Euro per sq.m Rents for secondary office locations in Euro per sq.m rent prime location 2008 32 rent secondary location 13 28 24 11 20 16 9 12 8 7 4 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009e 5 Frankfurt Stuttgart Düsseldorf Munich Hamburg Berlin Source: Feri, DZ BANK Research Source: Feri, DZ BANK Research With rental prices of around EUR 22 for prime office space, the Berlin market is more or less level with Düsseldorf and only just behind Hamburg (EUR 24). The situation is different for secondary office locations. Berlin falls well behind the other major locations here: At EUR 6 per square meter office space in Berlin is not even half as expensive as in Frankfurt (EUR 13). In our view, the reduction in this market sector came to only a temporary halt in the past three years and it is likely to resume in the months ahead. The major importance of the public sector marks the city s somewhat provincial rent level. Rents in secondary locations relatively cheap We anticipate that rents for prime locations in Berlin will have to make substantial concessions in 2009. Prices declined slightly in the closing quarter of last year already and we anticipate a decline of approximately seven percent this year. International clients are currently either pulling out of Berlin altogether or are transferring to considerably cheaper but nevertheless mostly very modern offices outside core prime locations. Berlin: Rents for prime locations are likely to fall substantially 9

Real Estate Market Germany 2009 1 Office Hamburg Hamburg: Office rents have increased by one quarter since 2005 The market for office space in the north was the winner during the last economic upswing: since mid 2005 office rents have increased by almost a quarter. With a gain of +6.8 percent last year rents in prime locations recorded an increase that was almost as strong as in Frankfurt. At the same time vacancy rates declined noticeably until 2008, so that here too the performance was higher than average (see following chart). At EUR 24 per square meter, Hamburg was last year once again the third most expensive location after Frankfurt and Munich, as was already the case in. Hamburg: Vacancy rates clearly below the national average 12 10 8 Hamburg 6 German office vacancy rate without Hamburg Source: Feri, DZ BANK Research forecasts 4 2 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009e Trading hub with China The price momentum in Hamburg office rents is certainly partly due to the recent globalisation push, which attracted many new rental occupiers from abroad. The international seaport has clearly profited as a trading centre from its historical contacts with Asia. Thus Hamburg is the key European port in the container business with China. More than 400 Chinese companies have representative offices in Hamburg and use the city as the European hub for their services and to export their goods throughout Europe. Rents are likely to drop by three percent in 2009 Nevertheless, office rents will drop in Hamburg due to the European recession and the economic collapse in Asia: in 2009 we anticipate a drop of around three percent for primary locations. Since new office space in the seaport will reach completion on a larger scale in 2010, while at the same time, the economic momentum will probably be somewhat muted, we expect rents to fall even faster. However, the long-term outlook remains positive for Hamburg since its status as gateway to the world in intercontinental trade is still a profit-generating factor for the million-strong city. 10

Office Real Estate Market Germany 2009 1 Düsseldorf Rents for Düsseldorf prime real estate barely managed to show a further improvement in 2008 since the high number of vacancies were too much of a burden on the price performance. However, a 1.3 percent increase in office rents was enough to keep this sector slightly more expensive than Berlin, Germany s capital. Since the completion of numerous new buildings increased the supply of office space by just below two percent, vacancy rates remained virtually unchanged at a high level of 10.1%. Similar to Frankfurt and Munich, the sizeable number of vacancies has still not recovered from the collapse of the dotcom bubble. The proportion of antiquated and thus unlettable space in Düsseldorf is probably relatively low, so that this vacancy really is largely genuine excess supply. Düsseldorf: Prime rents are still higher than in Berlin but high vacancies negatively impact the market Düsseldorf: Double-digit vacancy rates already for some time 7,500 12 7,000 10 vacancy rate (rhs) 6,500 6,000 8 6 4 inventory office space in `000s sq.m Source: Feri, DZ BANK Research forecast 5,500 5,000 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009e 2 0 We anticipate that the number of office employees in the capital of North Rhine- Westphalia will fall this year for the first time since 1995. This is because the completion of some development projects will lead to another visible increase in office space supply, we forecast that the vacancy rate will increase to 11 percent. The outlook for rent in prime locations is quite bleak for 2009: Since rents are still virtually at the 2001 level and some firms based in Düsseldorf are disproportionately affected by the current financial crisis, we forecast that prices will decline by 9 percent. The downturn is also likely to continue into 2010. Office rents are likely to fall noticeably in 2009 11

Real Estate Market Germany 2009 1 Office Stuttgart Stuttgart: Rents already declined slightly in 2008 The economic downturn hit the Stuttgart office market earlier than other locations. As a result rents for prime locations fell slightly by 0.3 percent in 2008. Not only the abrupt collapse in demand but also the completion of almost 80,000 sq.m of new office space plays a role here. This was the strongest increase in supply since 2003. The vacancy rate accordingly stagnated at the previous year s level of 5.2 percent. Rents are low for prime locations but space in secondary locations is as expensive as Düsseldorf At a level of only EUR 17.00 per sq.m prime rents in Stuttgart are significantly lower than in othermajor office locations. However, rents for office space outside prime locations show a different picture: At EUR 7.80 they are level with Düsseldorf in second place behind Frankfurt. Prime rents will fall by around three percent in 2009 Stuttgart benefitted only disproportionately from the last upswing in German rental prices: At +6 percent the increase since 2005 in the Swabian capital is only half as strong as the average for the other Big 5. Given a further noticeable decline in demand for office space, we forecast that the vacancy rate this year will increase again from its still relatively low level. Consequently prime rents in Stuttgart will probably decline by around three percent. Stuttgart: Office rents in prime locations in Euro per sq.m Düsseldorf Stuttgart Berlin Source: Feri, DZ BANK Research forecast 32 30 28 26 24 22 20 18 16 14 12 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009e 12

Office Real Estate Market Germany 2009 1 Outlook Germany has been in economic recession since the middle of last year. Office rents generally respond after a delay of two to three quarters to such weak economic phases. We therefore anticipate that rents for office space in prime locations will decline by four percent on average in 2009. We do not anticipate a stronger decline since during the last upswing rents showed only a somewhat muted gain and were still far from their record levels during the dotcom boom. Office rents will fall by four percent on average in 2009 Berlin and Düsseldorf will probably be hardest hit with rental prices falling by 7 and 9 percent, respectively. Given the high number of vacancies we forecast concessions in rental prices in the short term in both locations. The decline is likely to be more modest in Stuttgart due to the relatively flat office rent performance and the already very low rent level there. In Frankfurt, Hamburg and Munich we anticipate a decline of only around three percent on average for the year since these locations will react only very sluggishly to the decline in demand with lower rents. However, the weak German office market will probably not be over in 2010. Berlin and Düsseldorf are hardest hit 13

Real Estate Market Germany 2009 1 Retail Retail No German city is amongst the Top 10 most expensive locations in Europe As a result of the economic collapse, investment in continental European retail real estate in 2008 was not even half the previous year s level. This collapse also affected the German market. Nevertheless, Germany managed to maintain its leading position on the continent accounting for almost one fifth of the market. However, in terms of rents for prime locations, no German city is included on the list of the ten most expensive locations in Europe. Paris is the leader in retail real estate, followed by Milan and Rome, whereas Munich as the most expensive German city is ranked 12th. Percentage increase in retail space in selected countries since 1998 Percentage change in retail sales from 1998 to 2008 60 60 50 50 40 40 30 30 20 20 10 10 0 Germany France Spain United Kingdom 0 Germany France Spain United Kingdom Source: Feri Source: Feri Situation and trends Retail sales ratio by sales area has fallen in Germany Available retail space increased by almost one third in Germany over the past ten years, similar to the rate in other major European economies. Whereas retail sales in France, Spain and Great Britain during the same period showed an even stronger increase, the German retail sector recorded growth of only 10 percent (see chart). Given this weak performance, the retail sales ratio by sales area declined noticeably in Germany while it increased in much of the rest of Europe. Rents still increased noticeably in 2008 Rents for prime retail real estate in Berlin, Frankfurt and Düsseldorf still showed a clear gain in 2008 with a rise of five to six percent. In contrast Munich recorded an increase of just under four percent, and Stuttgart and Hamburg only one and three percent respectively. Overall, rents increased by five percent on average in the major German retail centres. However, demand for retail real estate already showed a noticeable decline in the second half of last year, therefore we forecast substantially lower rent levels in all locations this year. We anticipate that retail sales in Germany will stagnate at best in 2009. This is also likely to negatively impact demand for retail real estate. 14

Retail Real Estate Market Germany 2009 1 Frankfurt Frankfurt is the second most expensive location for retail real estate in Germany. In 2008 rents per square metre of prime retail real estate increased by five percent, which generated a rent of EUR 177. This was quite a positive performance in view of the strong increase in supply during the past two years: Retail space has increased by 12 percent since 2006. This is equivalent to an area of 140,000 sq.m. However, since both the number of private households and retail sales increased only marginally, the turnover ratio by sales area declined again in 2008. As a result of the second decline in succession, the turnover ratio by sales area was therefore as low as in 1999. Of the locations considered in this report only Berlin recorded an even lower productivity. Frankfurt: Very low turnover ratio by sales area Frankfurt: Expansion of retail space in % Y/Y 7 6 5 4 2009e 2008 Source: Feri, DZ BANK Research forecasts 3 2 1 0 Hamburg Berlin Frankfurt Munich Düsseldorf Stuttgart Since numerous projects will be completed in Frankfurt this year leading to new retail space coming onto the market, we forecast that rents will decline at an above average rate of around seven percent. As a result of substantial concessions, rents by the end of the year are likely to undershoot levels seen in 2005 and 2006. In the coming months the financial crisis is also likely to have deep repercussions on the Frankfurt employment market, so we forecast a substantial fall in private consumption. This will further reduce the turnover ratio by sales area. Rents for prime locations are likely to fall substantially in 2009 15

Real Estate Market Germany 2009 1 Retail Munich Munich: Prime rents still showed a robust increase in 2008 Munich is still the most expensive location for retail real estate in Germany. With a substantial increase of more than seven percent in prime rents in 2008 the southern German city managed to further extend its domestic lead and consolidate its international ranking (see following chart). With an average annual increase of three percent since 1997, the rent increases were clearly higher than the German average (1.8%). The turnover ratio by sales area also declined in Munich since retail sales growth last year failed to match the increase in retail space. However, 2009 will see a downturn As was the case last year, supply will increase in Munich this year due to the completion of new development projects. Combined with the weak overall economic outlook, we therefore forecast clear declines in rental prices in Munich this year and next. Furthermore, we do not believe that a rental price of over EUR 200 per sq.m can be achieved in Munich in the medium term. Rents for space in secondary locations at a very low level Rents for real estate in secondary locations show a completely different picture: At just under EUR 17 per sq.m Munich is ranked the lowest compared to the rest of the major locations in Germany (see chart in the section: Düsseldorf) and with a difference of almost EUR 200 shows the largest spread in the market. Whereas prime rents have increased by one quarter since 2004, landlords of secondary retail space managed to record an increase of only 6 percent during the same period. Munich: Rents for prime retail space in Euro per sq.m 225 200 175 150 Berlin Frankfurt Hamburg 125 100 75 Munich 50 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009e Source: Feri, DZ BANK Research 16

Retail Real Estate Market Germany 2009 1 Berlin The supply of retail space in the federal capital has expanded significantly over the past 10 years: This amounted to a 50% increase relative to the level in 2008, whereas Germany as a whole registered an increase of only 30 percent. With 2.9 sq.m of retail space per household there is now as much shopping space available in Berlin as there is in Düsseldorf and it is even somewhat ahead of Hamburg (2.7 sq.m). Since retail space is likely to increase by around four percent this year due to the completion of some development projects, we forecast that retail space per household will increase further to 3.0 sq.m. Berlin: Supply of space increased at an above-average rate Berlin: Change in retail space in % versus previous year Germany Berlin Source: Feri, DZ BANK Research forecasts 10 9 8 7 6 5 4 3 2 1 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009e Despite the robust increase in retail space in Berlin, retail sales have increased by only 10 percent since 1998. As a result, the turnover ratio by sales area fell even further, despite Berlin having shown the lowest productivity for some time of all the locations reviewed here. as a result the sales area productivity is at a record low Given the weak retail sales performance in Berlin during the recent economic upswing, we do not regard the slight increase in retail rental prices in recent years as justified. Therefore rents in Berlin will probably be pulled downwards at an above average rate as a result of the recession: we forecast a six percent decline in 2009. Prime rents are likely to fall sharply 17

Real Estate Market Germany 2009 1 Retail Hamburg Hamburg: Relatively inexpensive prime rents Of the 6 locations reviewed the cheapest prime retail space is in Hamburg. Since 1997 prime retail rents have fallen on average by almost three percent annually. Despite the 2.8% increase last year, the current rental price of EUR 72 is not even at 2005 levels. but Hamburg has caught up for space in secondary locations Retail sales increased at an above-average rate since 1998 The situation looks different for rents at non-prime locations. In recent years Hamburg has caught up noticeably in this sector. At EUR 22.40 per sq.m the Hanseatic city closed the rent gap on Berlin and is now only marginally lower than Düsseldorf. The high level of rent in Hamburg in secondary relative to prime locations is probably due to the large number of long-established, quite upmarket, and frequently modernised shopping centres. No doubt some of the momentum in rental prices in Hamburg is due to the recent globalisation push given the city s position as a trading hub with China, which has consequently benefitted the Hamburg employment market. As a result, retail sales per household increased at a strong above-average rate of 3.4% from 1998 to 2008 (see chart). Nevertheless, rents this year are likely to fall noticeably The current collapse in global demand is now increasingly affecting the Hamburg real estate market: We forecast that rents for retail space in prime locations will fall by five percent this year. However, the downturn will probably come to an end as early as 2010 since the rent levels of approximately EUR 68 are cheap compared to the other locations. Hamburg: Growth rates in retail sales per household 1998 to 2008 in % Hamburg Frankfurt Stuttgart Düsseldorf Munich Berlin Source: DZ BANK Research 0.5 1.0 1.5 2.0 2.5 3.0 3.5 18

Retail Real Estate Market Germany 2009 1 Düsseldorf The city on the Rhine has achieved the highest rents for secondary real estate, whereas it is ranked only 3rd in respect of prime locations. However, this should not detract from the fact that since 2000 there has been a substantial downturn in real estate outside prime locations: Rents of just under EUR 25 last year were only half as high as the levels eight years ago. Düsseldorf: Despite the downturn still the most expensive real estate outside prime locations In contrast, prime rents in Düsseldorf have increased by one third since 1998 (see chart in the section: Stuttgart). As a result of the positive performance at the beginning of the year, last year still managed to generate an increase of five percent compared to the previous year. Even the Düsseldorf market for retail real estate cannot escape the clutches of the economic recession and retail rents are therefore likely to decline by four percent in 2009. Retail rents are in reverse gear in 2009 Düsseldorf: Retail rents in non-prime locations in Euro per sq.m 45 40 35 Düsseldorf Munich Hamburg 30 25 20 15 Berlin Source: Feri, DZ BANK Research forecasts 10 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009e 19

Real Estate Market Germany 2009 1 Retail Stuttgart Stuttgart: Prime rents are twice as high as in Hamburg In 2008 rents per square metre of prime retail space in Stuttgart were almost twice as high as in the cosmopolitan city of Hamburg at EUR 136. However, rents in the Swabian city have virtually stagnated over the past three years, which indicates an excessive level for example, the population density of the Stuttgart city centre catchment area is quite low compared to the other locations. and are therefore likely to decline more sharply than the average rate Also partly due to the crisis in the car industry we forecast that prime rents will decline sharply by around six percent, higher than the average rate. This would lead to a further downturn in rents that had been halted by robust economic growth in recent years. We forecast modest performance for real estate in secondary locations The development in secondary locations shows a different picture. Rents here of EUR 19 are relatively low. Munich alone underbids this rent while rents in Hamburg, Berlin and Düsseldorf generate rental prices of over EUR 20. This is likely to remain the case in the future despite the current downturn in real estate markets. In contrast, Frankfurt is in a different price league for retail space outside prime locations, fetching around EUR 48. Given the weak outlook for demand, we forecast a decline for real estate rental values outside prime locations in Stuttgart, even though this is unlikely to be as severe as seen with prime real estate. Stuttgart: Prime retail rents in Euro per sq.m 170 150 130 110 Hamburg 90 Stuttgart 70 Düsseldorf Source: Feri, DZ BANK Research forecasts 50 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009e 20

Retail Real Estate Market Germany 2009 1 Outlook The turnover ratio by sales area for German retail real estate is likely to accelerate its downward trend this year. This is due to another addition of around 2 million square meters in supply while at the same time retail sales will stagnate at best. As a result, the productivity by sales area will fall to new record lows in Berlin and Frankfurt. Figures in the other locations will probably approach their previous lows. Turnover ratio by sales area falls to new lows Retail rents in Germany are likely to fall noticeably in all locations in 2009. With an average decline of five percent, the current recession may therefore impact retail rents more sharply than office rents, at least this year. However, in all locations retail real estate sales revenues are likely to fall even faster than rents. Retail rents in all locations set to decline in 2009 21

Real Estate Market Germany 2009 1 Residential Residential Number of private households barely rose in and 2008 With a home ownership rate of only 43 percent the German residential real estate market is at the lower end of the European range. More than half of private households (around 22 million) comprise rented accommodation. Since 1998 the number of households in Germany has increased on average by 0.6 percent annually. However, and 2008 recorded an annual increase of less than 0.1 percent: As a result, demand for new residential space has stagnated and, according to population forecasts, will probably increase marginally at best over the next few years. Given the continuing trend towards single occupier households the number of private households still managed to increase slightly in recent years despite the population decline since 2004. Situation and trends Weak increase in residential rents since 1998 rents in 2008 were as high as 1993 In Germany, rents for new apartments have increased on average by only 0.9% p.a. during the past ten years. The increase is clearly below the average inflation rate, which was 1.6 percent during this period. Also in 2008, rents (excluding utilities) increased by only 1.8 percent given an inflation rate of 2.8 percent this too was a weak performance. Despite this muted increase, the average rent in Germany increased to EUR 7.10 per square meter thereby just exceeding the EUR 7 level last seen in 1993. Residential rents and the number of private households in 2008 in % yoy 1.0 4.0 0.8 3.0 0.6 rent new apartments in % (left) yoy 2.0 0.4 Source:Feri number of private households in % (right) yoy 1.0 0 Munich Hamburg Stuttgart Berlin Düsseldorf Frankfurt 0.2 0 22

Residential Real Estate Market Germany 2009 1 In recent years however, the major commercial centres have seen a higher than average increase in the number of private households. Consequently in 2008, the number of households rose most sharply in Munich (+0.8%), Hamburg (+0.6%) and Stuttgart (+0.5%) but Berlin and Düsseldorf also experienced a noticeable increase (see chart). Of all the locations reviewed, Frankfurt recorded the weakest gain of +0.2 percent. However, over the past two years, the quantitative increase in demand for residential real estate due to the increase in the number of households is only partly responsible for higher rental prices. On a long-term basis, the decline in unemployment and the robust increase in disposable income probably had a more substantial impact. The number of private households in commercial centres increased at an above average rate Rents in Munich showed the strongest growth last year. The increase was 4.4 percent compared to the previous year with rents consequently listed at EUR 12.00 per sq.m. Frankfurt managed to jump to EUR 9.00, a 2.7 percent increase. However, in terms of rental prices Frankfurt is still lower than Hamburg (EUR 10.60) and Stuttgart (EUR 10.50). Berlin is still the cheapest residential location at only EUR 7.00 per square meter rents are almost half as expensive as in Munich. Munich rents rose significantly Monthly rent for new apartments per sq.m in Euro Munich Hamburg Stuttgart Düsseldorf Frankfurt Berlin Source:Feri 5 6 7 8 9 10 11 12 23

Real Estate Market Germany 2009 1 Residential Outlook Residential rents are likely to stagnate in 2009 The number of housing permits has experienced a virtually uninterrupted decline in recent years, and at only 175,000 units in 2008 as a result probably reached its lowest level in twenty years. Multi-family buildings were particularly hard hit in recent years. Given the weak economic outlook which will have a visible impact on the German employment market in the months ahead, we do not see any scope for significant increases in residential rents in any of the locations reviewed. However, we do not anticipate a decline in rents either given weak construction activity. Number of housing permits and housing completions in 1,000 units 500 450 400 350 300 building permits in 000s completions in 000s Source: Feri 250 200 150 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008e 24

Logistics Real Estate Real Estate Market Germany 2009 1 Logistics Real Estate In principle, logistics real estate in Germany faces demand from all sectors in the production and manufacturing industry. This applies equally to domestic and foreign companies. However, there are many reasons behind the decision to locate in Germany the country, or a specific location within Germany: Firstly, a site may be chosen as an international distribution centre because of its central location in Europe, secondly, because the intention is to ensure the shortest distribution channels within Germany. Therefore demand for logistics real estate is more dependent on both foreign and domestic economic growth than are other sectors of the real estate market. Demand highly dependent on foreign and domestic economic activity As a result, real estate demand for distribution centres in logistics locations will theoretically not collapse even if the economic outlook for Germany is weak while at the same time foreign demand is strong. In reality however, the European economies generally move in tandem as the current European and global recession demonstrates. In principle, there is considerable potential demand for logistics real estate in Germany since Europe alone accounts for one third of global trade. Goods are largely transported by road within Europe, whereas shipping dominates global trade. Europe accounts for one third of global trade Warehouse space (rent and sales) in sq.m ( 000s) 5500 5000 4500 4000 3500 3000 2500 Source: Jones Lang LaSalle, DZ BANK Research forecast 2000 2003 2004 2005 2006 2008e 2009e 25

Real Estate Market Germany 2009 1 Logistics Real Estate Situation and trends Turnover of warehouse space is likely to fall by ten percent in 2009 According to estate agents, turnover of warehouse space suffered a severe collapse in last year s closing quarter. We therefore forecast that 2008 revenues rose only very marginally. However, prospects for this year are considerably bleaker: Given the European recession we forecast that revenue from warehouse space will decline by around ten percent. This is likely to affect high-density areas and rural regions in equal measure. The fall in goods traffic, due to lower demand for goods, is acting as direct brake on demand. This particularly affects all goods supplied to the car industry. Hamburg still managed a higher than average performance in 2008 Turnover of warehouse space in Hamburg experienced a higher than average performance last year. Many Asian companies use the seaport as a distribution centre to export their goods throughout Europe. This gives Hamburg as a seaport exceptional importance as a reloading point for overseas trade. The Hanseatic city also benefits from popularity with domestic companies: The German industrial and trading firms responsible for logistics voted Hamburg the most popular European location in 2008 ahead of Rotterdam and the Frankfurt am Main region. Virtually an inevitable consequence of this excellent rating is the shortage of quality space in the Hamburg city area. This shortage is intensified by various requirements: for example, at least one job has to be created for every 100 square meters of usable space this is required by the job quota. Restructurings impact demand patterns Demand for logistics real estate throughout Germany is still influenced by restructuring in megaparks. In this concentration process, companies amalgamate several small distribution centres into one centre with a larger supply radius. This has significantly increased demand for large-scale space. An increasing number of properties larger than 40,000 sq.m are being leased: Nevertheless, the average logistics space leased in Germany outside high-density areas is only half this size and in high-density areas it is only one quarter of this size. Since the cost advantages of large-scale warehouses can be enormous, this amalgamation trend is likely to continue. Goods traffic highly dependant on industrial production 8 6 4 2 0 industrial production in % yoy goods traffic in % yoy Source: destatis, Bundesbank, DZ BANK Research -2-4 -6 2004 2005 2006 2008 2009e 26

Logistics Real Estate Real Estate Market Germany 2009 1 Outlook Rents for logistics real estate are likely to fall sharply in 2009 due to weakened demand. Firstly, the supply of space is increasing outside of high-density areas due to municipalities steadily allocating new space for industrial estates. Secondly, goods traffic has fallen sharply due to the recession. This is affecting rents for real estate in secondary locations particularly hard. The situation is different for storage depots and production space that are in close proximity to an airport or seaport. Rent levels here are likely to fall only slightly. Central locations with ideal production conditions (e.g. 24 hour operating license) will not be relinquished so easily by occupiers despite an economic downturn. The recession will probably affect the German logistics real estate sector harder this year than the office and retail real estate markets. However, the recovery in the future is also expected to be more rapid. Goods traffic falls during a recession therefore rents are likely to decline substantially but a more rapid recovery is also possible 27

Real Der Immobilienmarkt deutsche Estate Market Pfandbriefmarkt Deutschland Germany 2009 2008 1 12009 Imprint Published by: DG HYP Deutsche Genossenschafts-Hypothekenbank AG, Rosenstrasse 2, 20095 Hamburg Management Hans-Theo Macke (Chairman), Dr Georg Reutter, Board: Manfred Salber Authors: Responsible: Klaus Holschuh, Head of Research and Volkswirtschaft Dr. Hans Jäckel, Head of Volkswirtschaft and Content Management Author: Dr. Christine Schäfer, Senior Economist All DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main 2009 Reprinting and reproduction requires the approval of DG HYP Disclaimer This document has been published by DG HYP Deutsche Genossenschafts-Hypothekenbank AG, Hamburg. This document has been prepared by DZ BANK AG Deutsche Zentral-Genossenschaftsbank ( DZ BANK ) and is intended for distribution within the Federal Republic of Germany. This document is not intended for persons having their domicile and/or registered offi ce and/or branches outside Germany, particularly in the United States of America, Canada, the United Kingdom or Japan. This brochure may only be distributed outside Germany in compliance with the laws and regulations applicable in the relevant country. Anyone gaining possession of this information or material must inform themselves of the applicable laws and regulations and observe said laws and regulations. Nothing contained herein constitutes a public offer to buy securities or fi nancial instruments. This document constitutes an independent assessment of the relevant issuer and/or securities by DZ BANK. All assessments, expressions of opinion and statements contained herein are those of the writer and are not necessarily shared by the issuer or third parties. DZ BANK has obtained the information on which this document is based from sources that are considered reliable, but has not, however, verifi ed all of these documents. Accordingly, no representation or warranty as to the accuracy or completeness of the information or expressions of opinion contained herein is made by DZ BANK. DZ BANK shall not be liable for losses caused by the distribution and/or use of this document or any losses in connection with the distribution and/or use of this document. Investors are urged not to base their investment decision regarding securities or other fi nancial instruments on this document, but rather on personal discussions with an adviser and the relevant sales prospectus or information memorandum. Depending on the specifi c investment objectives, investment horizon, and fi nancial situation, any such recommendations may not suitable, in whole or in part, for individual investors. As trading recommendations are largely based on short-term market conditions, they may also confl ict with other recommendations made by DZ BANK. The recommendations and expressions of opinion contained herein are as at the date of this document. They may become obsolete as a result of future developments, without this document being amended accordingly. Competent supervisory authority Bundesanstalt für Finanzdienstleistungsaufsicht (German Federal Financial Supervisory Authority), Lurgiallee 12, 60439 Frankfurt am Main, Germany 28

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