Real Estate Market Germany

A RESEARCH PUBLICATION BY DG HYP

2010 | 1
March 2010

Recovery of retail and logistics in sight Rents still under pressure in 2010

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Real Estate Market Germany 2010 | 1

Table of Contents
Preface ____________________________________________________________________ Real Estate Market Germany _______________________________________________ Ofce _____________________________________________________________________ Situation and trends Outlook Retail ______________________________________________________________________ Situation and trends Outlook Residential ________________________________________________________________ Situation and trends Outlook Logistics __________________________________________________________________ Situation and trends Outlook Imprint ____________________________________________________________________ Disclaimer DG HYP Ofces ____________________________________________________________ 19 18 15 13 9 2 3 4

Real Estate Market Germany 2010 | 1

Preface
As a commercial real estate bank, we support our sales units and risk management teams with their credit and lending decisions through regular analysis of the markets which we actively cover. We publish the results of our research in real estate market reports which are openly available to all market participants. The present report continues our series of studies on the German real estate market, published in the spring and autumn of each year. In this study, we have assessed market trends for ofce, retail and residential real estate, providing our outlook for the year 2010. The report also includes a market analysis of logistics properties. As with all our research studies, this market report is available in German and English. The next report on the German real estate market will be published in autumn 2010. An overview of DG HYPs real estate market reports is available on our website: http://www.dghyp.de/en/unternehmen/markt-research/

Deutsche Genossenschafts-Hypothekenbank AG March 2010

Real Estate Market Germany 2010 | 1

REAL ESTATE MARKET GERMANY

Office The DZ BANK rental index for the top 6 locations is likely to bottom out in the second half of this year, since the downward trend in prime rents should then have come to a halt. However, this is dependent on a further recovery in macroeconomic growth. We expect rents to decline by around 4 per cent compared to the previous year. The vacancy rate is increasing again in major office centres and could consequently reach just over 10 per cent by year-end. We would expect office space which is outdated in terms of energy or other facilities aspects to become increasingly unmarketable in future years.

Retail In 2010, rents for retail space in Germany are initially likely to decline further, and we therefore anticipate an average decline of around one per cent over the year in the top 6 locations. The DZ BANK index for retail rents in side locations shows that rents in this market segment have already been under pressure for around 10 years and are also therefore clearly below their 1997 level.

The shopping centre trend continues and the number of centres in Germany has more than quadrupled since 1990. Although Germany has a low volume of retail space in centres on an international comparison, the demand for more shopping centres should not be overestimated. The downward trend in retail rents in side locations shows that the need of strong expansion of sales space is fairly low and likely to be restricted to a small number of locations. Careful consideration should always be given as to whether the revitalisation of existing retail space at a location perceived to have development potential is not the better option, or whether an opportunity exists to merge retail space into one shopping centre.

Residential Rents for new apartments in commercial centres are likely to have increased by 2 to 3 per cent last year. This is a positive trend given the economic recession and rising unemployment. Contributory factors are robust demand for housing in metropolitans and continuing weak construction activity in the housebuilding sector. We expect rents for new apartments to continue increasing slightly in 2010.

Logistics Although the market for logistics properties should recover again slightly this year, we do not anticipate any scope for rent rises. We expect competition from sites within Germany and in other European countries to intensify further, since, despite a slight increase in demand for space, all companies are still seeking cost-savings potential. New rental contracts are likely to extend into the medium term for around 5 years. We estimate that space turnover is increasing in both conurbations and non-conurbations, since the former are benefiting from their proximity to airports and ports, while the latter provide more cost-saving potential.

Real Estate Market Germany 2010 | 1

REAL ESTATE MARKET GERMANY

Economic output in Germany declined by 5.0 per cent in 2009. The main factor responsible for this negative trend was the sharp decline in GDP at the beginning of last year. However, modest economic growth was reported again in the second and third quarters thanks to state support measures, such as the car scrappage premium. In contrast, initial estimates show that the German economy stagnated in the final quarter. For the first time since 2005, construction investment is likely to have fallen slightly by 0.7 per cent last year given the severity of the recession still a very positive result. While investment in residential properties is likely to have fallen slightly and investment in commercial construction sharply, public building projects have been stepped up significantly in the construction sector.
ECONOMIC FORECAST GERMANY

Construction investment likely to have fallen in 2009

as % compared to previous year Real GDP growth Private consumption Public consumption Investment Exports Imports inflation rate (HICP) Unemployment rate (ILO) Public budget balance (as % of GDP) Source: DZ BANK Research

2008 1.3 0.4 2.2 2.9 2.9 4.3 2.8 7.3 0.0

2009 -5.0 0.4 2.4 -8.4 -14.9 -9.1 0.2 7.5 -3.2

2010e 1.2 -0.4 1.3 1.5 6.3 5.2 1.2 8.1 -5.5

This year we anticipate only a sluggish recovery in economic growth in Germany. The export economy could continue to suffer from relatively weak demand from abroad in the first half, while private consumption will still be depressed by the difficult conditions in the labour market. Economic growth will pick up again slightly in 2011 to around 2 per cent.

Only sluggish recovery in economic growth in 2010

OFFICE
The German property market is regarded as a beacon of stability internationally, however German office rents are also being adversely affected by the impact of the financial market crisis and the global recession. The volume of transactions (sales and rentals) in the commercial property markets declined drastically in the course of last year and is likely to remain very low this year. As a consequence of what is only a sluggish economic recovery, we expect a slight increase in the number of transactions for office properties from mid-year. In the 6 major German office centres, weak demand for space is likely to have led to an average decline of almost 5 per cent in prime locations in 2009. The vacancy rate could have almost reached double digits at 9.8 per cent. We also expect rents to fall and vacancy rates to increase this year. Since the decline in rents should slow from mid-year as a result of the economic recovery, we anticipate a decline of around 4 per cent in 2010 compared to the previous year. Volume of transactions down sharply in 2009

Office rents decline further and vacancy rates increase

Real Estate Market Germany 2010 | 1

FIGURES AND FORECASTS FOR TOP-6-LOCATIONS

Rent top location (as % yoy) 2008 Berlin Hamburg Frankfurt Munich Dsseldorf Stuttgart Source: DZ BANK Research 6.4 3.2 6.2 4.2 4.1 0.0 2009 -8.1 -1.7 -5.5 -6.0 -3.9 -3.0 2010e -3.0 -4.7 -4.4 -3.0 -6.4 -2.9

Vacancy rate in % 2008 8.6 7.0 12.4 9.0 9.7 5.0 2009 8.9 7.9 15.5 10.1 10.5 5.8 2010e 9.3 9.0 15.8 11.2 11.6 6.1

Situation and trends Under current conditions relationships with tenants have become even more important. Good and intensive service for tenants long before contracts are due for renewal should be a permanent feature from a number of aspects. This pays off since the extension of a contractual relationship is generally a more favourable option for owners than acquiring a new tenant. If, for example, the tenant is unsatisfied with the floor layout or other factors and the issue is addressed at an early stage, it may be possible to find a solution without incurring any major costs. This can prevent a change in tenants which is often associated with high conversion costs or the creation of a vacancy. The level of additional costs of between EUR 1.50 and 4.50 per sqm depending on the condition and age of the floor space - is becoming increasingly significant in the office property segment. There is often substantial savings potential, particularly in relation to energy costs; so-called energy management systems and light management systems which, for example, ensure that artificial lighting is only switched on when there is insufficient daylight can reduce the additional costs for the tenant. Of course the owner of an existing property has to consider the question of whether

Intensive service for tenants can prevent vacancies

Level of additional costs also influences tenant satisfaction

SALES OF OFFICE SPACE REMAIN LOW AT THE MOMENT

3000 2400 21 00 2600 2200 1 900 1 870 1 800 1 550 1 650 2500 3000 2600

OFFICE RENTS FOLLOW THE ECONOMY

1 4 1 2 1 0 8 6 4 2 0 -2 -4 -6 -8 -1 0 -1 2 -1 4

GDP grow th yoy in % office rents Top-6-locations

1 998 1 999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009e201 0e

1 998 1 999 2000 20012002 2003 2004 2005 2006 2007 2008 2009 201 0e

Source: Feri, forecast DZ BANK Research, space turnover in 1,000 sqm

Source: Feri, forecast DZ BANK Research

Real Estate Market Germany 2010 | 1

it pays to carry out energy-saving measures. It also has to be considered whether the associated higher construction costs for a new building will also generate higher profits. A clear calculation of the cost savings cannot be made since no precise information on the trend in energy costs over the next 10 to 20 years is available. However, we assume that office space in a building with lower than average energy consumption will be fundamentally easier to let and will also facilitate the signing of a long-term rental contract (e.g. with a duration of 10 years). This advantage should not be underestimated, although according to information from estate agents, in recent years the average contract term has been reduced visibly from 7 to 5 years. The cachet of occupying space in a green building and thus demonstrating environmental awareness is also likely to become more important. However, it is likely to be difficult, particularly under current market conditions, to reflect the energy-saving measures or increased construction costs in a correspondingly higher rent. In terms of the long-term life of a property, investment should however pay off, since buildings with high levels of energy consumption are likely to become unmarketable more quickly in future. Although no uniform international standard exists for sustainable buildings, we expect the certification of a building to be fundamentally useful in the long term. However, this must always be reviewed in terms of the individual property. Frankfurt Rents for top locations in Frankfurt are likely to have declined by around 5 per cent last year. The already very high vacancy level has increased further, probably to a level of 15 per cent. As a result of the completion of a large number of new buildings, the vacancy rate for high-value space has also increased further: according to estate agents, these first-class floor areas even account for more than half of the vacant space in Frankfurt. Numerous incentives are being used in Frankfurt in particular to prevent rents from declining further. However, given the continuing job losses in the financial sector, we expect office rents for 1A locations to fall by around 4 per cent. On account of the incentives, for example longer rent-free periods, the effective decline in rents could however be higher.

Properties with low energy consumption are easier to let

Certification likely to be useful in long term

Frankfurt: first-class space accounts for more than half of vacant properties

FRANKFURT OFFICE RENTS SHOW STRONG RATES OF CHANGE (IN % YOY)

20 1 5 1 0 5 0 1 998 -5 -1 0 -1 5 -20 2000 2002 2004 2006 2008 201 0e

MUNICH: VACANCY RATE INCREASING FURTHER

1 2 1 0 8 6 4 2 0 1 998 2000 2002 2004 2006 2008 201 0e

Munich Top-6-locations

Frankfurt Top-6-locations

Source: Feri, forecast DZ BANK Research

Source: Feri, forecast DZ BANK Research

Real Estate Market Germany 2010 | 1

Munich Demand for rented space in Munich also declined again sharply last year. Despite a visible decline in office rents for prime locations, the vacancy rate is likely to have exceeded 10 per cent. Similar to last year, in the course of this year a large number of new office buildings will be completed, and rents will therefore remain under pressure. Following the severe decline in rent levels in 2009, we expect a weaker decline of 3 per cent this year. The vacancy rate is likely to continue to climb, more or less reaching the Dsseldorf level of 11 per cent. Berlin According to Jones Lang LaSalle, a substantial proportion of empty office space in the main German business centres is very out-of-date and therefore no longer marketable. If we remove this space from the overall vacancy rate, this gives the vacancy rates showed in the graph below. In Berlin, taking account of this aspect, the vacancy rate would only have been around 7.8 per cent in 2009. However, rent negotiations are generally influenced by the obvious vacant office buildings in a market. After a sharp decline of 8 per cent last year, rents for prime locations could fall by another 3 per cent in 2010. Hamburg This year the supply of excellent office space in Hamburg is increasing visibly due to the completion of new building projects in the harbour city. The fairly subdued economic outlook for the trading city and the expansion of office space are strengthening the negotiating power of potential tenants, and we therefore anticipate a steeper decline in office rents this year than in 2009 (see table). In 2010 we expect a vacancy rate of 9 per cent the highest level since 1992. Dsseldorf With available space of just over 7m sqm, the Dsseldorf office market is only half as large as Hamburg. As in the other top 6 locations, the number of office employees declined last year in Dsseldorf and the process is likely to continue this year. Since the Dsseldorf office market has the second highest vacancy rate

Vacancy rate in Munich now in double digits

Berlin: vacancy rate excluding obsolete buildings is lower

Hamburg: office rents could fall visibly in 2010

Dsseldorf: office market only half as large as Hamburg

OBSOLETE BUILDINGS DEPRESS VACANCY RATE

15,5

OFFICE RENTS FOR TOP LOCATIONS IN EURO PER SQM

55 50 45 40 35 30 25 20 15 10

vacancy rate w ithout outdated inventories vacancy rate

10,1 9 7,2 7,9 9,7 10,5

Berlin Hamburg

Frankf urt Munich

10,7 8,9 7,8

B erlin

Frankfurt

H am burg

M nchen

Dsseldo rf

1997

1999

2001

2003

2005

2007

2009e

Source: Jones Lang La Salle, DZ BANK Research, 2009 figures

Source: Feri, DZ BANK Research forecast

Real Estate Market Germany 2010 | 1

after Frankfurt amongst the main office centres at 10.5 per cent, we anticipate a further sharp decline of around 6 per cent in office rents in 2010. Stuttgart Despite a comparatively low vacancy rate of only 5.8 per cent, the Stuttgart office market is continuing to show downward movement. After a 3 per cent decline in rents last year, we expect a similarly steep downturn in 2010. The industrial companies based in Stuttgart have been hit disproportionately hard by the recent recession, and are likely to continue with their cost-cutting measures. Outlook The DZ BANK rental index for the top 6 locations is likely to bottom out in the second half of this year, since the downward trend in prime rents should then have come to a halt. However, this is dependent on a further recovery in macroeconomic growth. We expect rents to decline by around 4 per cent compared to the previous year. The vacancy rate is increasing again in major office centres and could consequently reach just over 10 per cent by year-end. We would expect office space which is outdated in terms of energy consumption or other facilities to become increasingly unmarketable in future years. Downward trend in office rents could peter out in second half

Stuttgart: despite low vacancy rate, office rents falling here too

HIGHER THAN AVERAGE VACANCY RATE IN DSSELDORF

DZ BANK RENTAL INDEX OF TOP OFFICE LOCATIONS BOTTOMING OUT

1 40 1 35 1 30 1 25 1 20 15 1

1 2 1 1 1 0 9 8 7 6 5 4 3 1 998 2000 2002 2004 2006 2008 201 0e

DZ BANK index of office rents 1997=100

Dsseldorf Top-6-locations

10 1 1 05 1 00 95 90 1 998 2000 2002 2004 2006 2008 201 0e

Source: Feri, forecast DZ BANK Research

Source: Feri, forecast DZ BANK Research

Real Estate Market Germany 2010 | 1

RETAIL
The retail property segment in Germany is also continuing to suffer the effects of the recent economic crisis. However, the negative consequences here are not quite as severe as in the office sector. In the top 6 locations, rents for one sqm of sales space in a prime site are likely to have declined by 2.4 per cent last year, after a slight increase at the beginning of 2008. On an international comparison, the top 6 locations in Germany which have average top rents of EUR 166 per sqm - are broadly in line with the Italian and French capitals, while significantly higher retail rents are being obtained in London. In all the above-mentioned European locations, the downward trend of recent years is likely to persist in 2010. Situation and trends Despite the economic crisis, 15 new shopping centres were opened in Germany last year, and the trend towards shopping centres has not apparently slowed compared to previous years. The success story of shopping centres in Germany began as long ago as 1965, however the trend received a major boost (see graph) from 1990 as a result of reunification. In the Greater Berlin area in particular a large number of new centres were set up, representing many different types of the shopping experience. At the moment, at 428 there are more than four times as many shopping centres in Germany than 20 years ago. The average size of the centres has remained virtually constant since 2002 at just under 32,000 sqm. Although the proportion of retail space in shopping centres to total retail space has increased in recent years, the proportion of sales space in centres is currently only around 11 per cent. On a European comparison, Germany lags well behind in terms of available retail space in shopping centres. Amongst the large countries, it brings up the rear with only 154 sqm per 1,000 people, with otherwise mainly Eastern European countries at the bottom of the pile. The frontrunner with 640 sqm is Norway, with, for example, the Netherlands ranking in fourth position at 343 sqm. A quarter of total Dutch retail Shopping centre trend continues Retail rents likely to have fallen by 2.4% in 2009

Rents showing downward trend throughout Europe

Number of shopping centres has more than quadrupled

NO. OF SHOPPING CENTRES CLEARLY BENEFITED FROM REUNIFICATION

428 363

HOWEVER, PROPRTION OF SALES SPACE IN CENTRES STILL COMPARATIVELY LOW

1 0,7

number of shopping-centers

share of shopping center space of retail space

7,2

9,9 8,7

279

1 79

4,0

50 1 4 1 970 1 975

65

81

93

1 980

1 985

1 990

1 995

2000

2005

201 0e

1 990

1 995

2000

2005

201 0e

Source: EHI Retail Institute

Source: Feri, DZ BANK Research

Real Estate Market Germany 2010 | 1

space is however in shopping centres, but in France too the proportion of around 21 per cent is significantly higher than in Germany. Precisely because of the small proportion of sales space in centres internationally, many experts believe that there is still considerable potential for more shopping centres in Germany. This view generally ignores the weak sales growth at German retailers in recent years, which is also depressing sales floor productivity in most locations. However, the downward trend in rents for retail space in side locations shows that need of strong expansion of available space (generally as a result of the construction of a shopping centre) is fairly low and likely to be restricted to a small number of locations. In our opinion, careful consideration should always be given as to whether the revitalisation of existing sales space at a location perceived to have development potential is not the better option, or whether an opportunity exists to merge sales space into one shopping centre. Frankfurt The volume of retail sales space in the banking metropolis also showed aboveaverage growth of almost 5 per cent last year. This is depressing the Frankfurt market all the more since available per capita space of around 2 sqm already exceeds the country-wide average. With rents for retail space in prime locations estimated to have declined by around 3 per cent in 2009, we expect a similar downward trend this year. In addition to weak demand for retail space, this is attributable to the ongoing expansion of inventories in the city on the Main. As in other locations, there is a wide divergence in Frankfurt between rents for prime sites and side locations, although the gap is fairly small here on account of the comparatively high rents for non-central locations (see graphs). Munich As in the rest of Germany, we expect the disposable incomes of private households in the catchment area of central Munich to decline in 2010, although by only a modest extent. Another negative factor is that retailers are unlikely to achieve any significant growth in sales, and not only because there are fewer foreign tourists. However, the very high rents for prime retail space in Munich are only coming under However, low level of sales space in centres in international comparison

Need of more shopping centres in Germany might be overestimated

Frankfurt: continuing strong expansion of sales space

Munich still the most expensive location in Germany

MAJOR DIVERGENCE BETWEEN PRIME SIDE LOCATIONS

BIGGEST RENT SPREAD IN MUNICH

M unich 1 0,5

rent side location in Euro per sqm prime rent in Euro per sqm
B erlin Stuttgart Dsseldo rf H am burg Frankfurt M unich 22,3 213,3 22,3 140 18,9 147,9 24,6 170,9 22,9 172,7 47,8 176,4

STUTTGA RT

1 2,8

HA M B URG

1 3,3

DSSELDORF

1 4,4

rent side location in % of prime rent

B ERLIN

1 5,9

FRA NKFURT

27,1

Source: Feri, data for 2008

Source: DZ BANK Research

10

Real Estate Market Germany 2010 | 1

slight pressure: at around 2 per cent, the decline last year is likely to have been below average. We expect an even weaker decline of only 1 per cent this year. The main contributory factor in the below-average decline is that retail space is in comparatively short supply Munich remains by far the most expensive location for retail space in Germany. Berlin The German capital has by far the largest supply of retail space in Germany of around 5.8m sqm. Since reunification, not only has available space increased significantly (in 1995 the figure was only around 3.0m sqm), but the diversity of shopping streets and shopping options available has altered very impressively. Despite the large number of international tourists travelling to the city for short breaks every year, of the top 6 locations examined here, Berlin still has the lowest retail rents. Nevertheless, because of the continuing expansion of sales space, which has however now slowed significantly, rents for prime and non-central locations in Berlin are likely to have fallen by around 3 per cent last year. Although the downward trend is likely to continue initially this year, we expect a decline of only around 1 per cent, mainly because the level is still low. Hamburg Despite numerous shopping centres, available per capita space in Hamburg corresponds only to the country-wide average, while it is significantly higher in many other major cities. As in the other top 6 locations in Germany, retail rents in the city on the Elbe showed a strong upward surge in 2008. Rents are now declining again, and in 2009 rents for prime locations are likely to have fallen by 2 per cent. On account of the above-average availability of per capita sales space compared to other large German cities, we also expect rents to show only a very weak decline in 2010. Dsseldorf In terms of rents for retail space in prime locations, the city on the Rhine, which also likes to be described as the fashion city with quality of life, lags slightly behind Hamburg and Frankfurt (see the graph above). On the other hand, in relation to rent

Berlin: rents declining only slightly this year

Hamburg: retail rents down only slightly in 2010

Dsseldorf: despite a decline, year-end rents should still be much higher than in 2007

RENTS FOR TOP-LOCATIONS SLIGHTLY DECLINING

230 210 190 170 150 130 110 90 70 50 1998 2000 2002 2004 2006 2008 2010e

MUNICH STILL MOST EXPENSIVE RETAIL LOCATION

230 210 190 170 150 130 110

Dsseldorf Stuttgart Munich

2000 2002 2004 2006 2008 2010e

Berlin Hamburg

Frankf urt Munich

90 70 50 1998

Source: Feri, Forecast DZ BANK Research, rents in Euro per sqm

Source: Feri, Forecast DZ BANK Research, rents in euro per sqm

11

Real Estate Market Germany 2010 | 1

levels for non-central locations, Dsseldorf ranks only second after the significantly more expensive Frankfurt at around EUR 24 per sqm. However, rents for noncentral locations account for only around 14 per cent of top rents here, which is roughly in line with the average rate for the top 6 markets examined here (see graph in Frankfurt section). The Dsseldorf market cannot escape the slight downward trend in retail rents country-wide, and we therefore anticipate a slight decline of around 2 per cent in rents in 2010. As a result of the sharp increase in rents in 2008, the rent level at the end of this year should however still be well above the 2007 level. Stuttgart In the period from 1998 to 2003, retail rents in Stuttgart surged, with substantial growth of around 70 per cent. Since then, rents in the regional capital of BadenWrttemberg have been easing back slightly. At 1.6 sqm per inhabitant, available space corresponds to the average for the top 6 locations, and no major expansion of retail space is planned this year. However, given weak demand for space and the subdued prospects for Stuttgart as a business centre, retail rents in the regional capital are likely to fall slightly in 2010. This could also have an impact on the already very cheap sales space in side locations. Outlook Rents for retail space in Germany are likely to initially fall in 2010, and we therefore expect an average annual decline of slightly more than one per cent in the top 6 locations. With rents for non-central locations likely to have fallen slightly more sharply than for prime sites in 2009, we expect only weak downward movement in both market segments this year. The DZ BANK Index for retail rents in side location (top 6 locations) shows that rents in this market segment have already been under pressure for the last 10 years or so and have also therefore clearly fallen below their 1997 levels. Given the comparatively low supply of per capita retail space, retail rents in Munich are showing only a below-average decline, while in Frankfurt the visible expansion of space is depressing rent levels. Munich remains by far the most expensive location in Germany. Rents for retail space in prime and non-central locations in the top 6 locations likely to decline only slightly in 2010

Stuttgart: rents down only slightly here too

RENT INDEX FOR RETAIL SPACE IN PRIME LOCATIONS

1 35 1 30 1 25 1 20 15 1 10 1 1 05 1 00 95 90 1 998 2000 2002 2004 2006 2008 201 0e

RENT INDEX FOR RETAIL SPACE IN SIDE LOCATIONS

1 35 1 30 1 25 1 20 15 1

DZ BANK index of retail rents side locations

DZ BANK index of retail rents top-locations

10 1 1 05 1 00 95 90 1 998 2000 2002 2004 2006 2008 201 0e

Source: DZ BANK Research 1997=100

Source: DZ BANK Research 1997=100

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RESIDENTIAL
In some cases there is a major divergence in the size of the markets for residential properties in the top 6 locations. In Berlin alone, the number of private households is even greater than in Munich, Frankfurt, Dsseldorf and Stuttgart combined at around 1.9 million. The numbers of households in the cities of Frankfurt, Dsseldorf, and Stuttgart are very similar at 300,000 to 400,000. Munich represents the median with around 770,000 units, while Hamburg is the second largest market after Berlin for rented apartments with almost one million. Situation and trends In the market for rented residential property, rents for new apartments in the commercial centres should also have increased by 2 to 3 per cent last year. Given the economic recession and growing unemployment, this is a positive trend. However, ultimately this is a result, on the one hand, of continuing growth in demand for residential property in the conurbations, and on the other hand of weak construction activity in the apartment complex segment which also declined in 2009. Rents are likely to have shown above-average increases in Frankfurt, Dsseldorf and Hamburg, and monthly rents in Dsseldorf are also now around EUR 10 per sqm. In contrast, the city of Berlin is still at the lower end of the range for the top 6 locations at just over EUR 7 per sqm. Rents for existing apartments in Berlin are also comparatively low, since, as in the other locations, these are approximately EUR 2 below rents for new build apartments. With the exception of Berlin, residential rents in the top locations in Germany are virtually the same as in other European countries (apart from Paris and London), as can be seen from the graph below. In the southern cities of Madrid, Rome and Vienna, private households can however rent an apartment in a good location at slightly more favourable terms than in the German metropolitans. In contrast, the Scandinavian capitals Stockholm and Copenhagen are roughly in line with the German level at EUR 11.80 per sqm. Rents for new build apartments also increased in 2009 Major divergence in size of markets

Rent levels in Berlin still comparatively low

RENTS FOR NEW APARTMENTS ALSO INCREASED IN 2009

13 12 11 10 9 8 7 6 1998 2000 2002 2004 2006 2008 2010e

RESIDENTIAL RENTS IN BERLIN CLEARLY BELOW AVERAGE

13 12 11 10 9

Top-6-locations Hamburg

Berlin

Top-6-locations Frankf urt

Munich

8 7 6 1998 2000 2002 2004 2006 2008 2010e

Source: Feri, DZ BANK Research, rents in Euro per sqm

Source: Feri, DZ BANK Research, rents in Euro per sqm

13

Real Estate Market Germany 2010 | 1

RENTS NEW APARTMENTS IN INTERNATIONAL COMPARISON 2009

32,5

20,9

2009
1 2,2 1 2,2 1 ,9 1 1 ,2 1 1 0,1 9,4 8,3

Outer Lo ndo n

P aris

A msterdam

M unich

Frankfurt

Hamburg

M adrid

Ro me

Vienna

Source: Feri, in Euro per sqm

From 1998 to 2008, growth in rents for new build apartments in Germany averaged only around 0.9 per cent annually, while consumer prices in this period increased by 1.6 per cent. In the previous year, rent increases in the major commercial centres had already exceeded the inflation rate, which was however distorted downwards significantly by a basis effect relating to energy prices. However, we expect the increase in rents to remain slightly above the average rise in the cost of living in 2010. Outlook Construction activity declined again in Germany 2009, resulting in a new historical low of only 160,000 housing units. Although the number of completed dwellings should increase again slightly this year, we nevertheless expect rents for new builds in the commercial centres to increase by around 2 per cent.

Growth in residential rents should remain above the inflation rate in 2010

Residential rents set to increase by around 2% in 2010 due to weak construction activity

MAJOR DIVERGENCE IN SIZE OF MARKETS

HIGHEST RENTS FOR EXISTING APARTMENTS IN MUNICH AND FRANKFURT

1 900

rent existing apartment

number of private households in 1.000
B erlin D sseldo rf
770

rent new apartment

7,00 5,70 9,50 7,50 10,60 8,50 10,60 7,50 11,50 9,00 12,00 10,10

1 000

Stuttgart H am burg
320 31 4

380

Frankfurt a. M . M nchen

B erlin

Hamburg

M unich

Frankfurt

Dsseldo rf

Stuttgart

Source: Feri, estimated for 2009

Source: Feri, rents in Euro per sqm

14

Real Estate Market Germany 2010 | 1

LOGISTICS
As expected, the logistics sector has been severely affected by the recent recession throughout Europe: the volume of goods transported in Germany in 2009 was probably about 14 per cent lower than in the previous year, after a slight decline had already been recorded in 2008. The main factors responsible for the negative trend were the sharp fall in industrial production but also declining retail sales (see graph). Another major contributory factor was that neighbouring countries were also in the grip of recession up to mid-year. According to estimates by experts, Germany has the largest stock of logistics properties in Europe ahead of the UK and France and thus also the largest market for these specialist properties. Given the central geographic location of Germany and its size, this is not surprising. In this report we define logistics properties as warehouses and transhipment halls, special warehouses, goods distribution centres, industrial estates with a small proportion of offices and warehouses which provide simple assembly functions. Situation and trends The main function of a logistics property is the distribution of goods. Generally a location is therefore selected where a break in the transport chain already occurs, i.e. where the method of transportation is changed. In some cases this simply means a switch from the full loading to the part loading of trucks. Regional or central warehouses containing goods required for retail purposes are usually situated close to a conurbation. For goods required for use in production by industrial companies, the warehouse is generally close to the production site. In this segment in particular, loading capacity has increased significantly in recent years as on-demand production has become increasingly widespread. According to a study by the logistics working group of the Fraunhofer-Institute, in terms of infrastructure, a quarter of logistics properties still need access to at least two means of transport, and a direct link or close proximity to a motorway is now an absolutely basic requirement for a logistics property. On-demand production has boosted loading capacity Volume of goods transported down by 14% in 2009

Germany the largest European market for logistics properties

Motorway link now an absolute pre-requisite

ECONOMY INFLUENCES TRANSPORT VOLUME

1 5 1 0 5 0 -5 -1 0 -1 5 1 992 1 994 1 996 1 998 2000 2002 2004 2006 2008 201 0e

AND TURNOVER OF LOGISTICS SPACE

25 20 1 5 1 0 5 0

industrial production in % yoy transport of goods in % yoy

-5 -1 0 -1 5 -20 2004

logistic area turnover in % yoy transport of goods in % yoy

2005

2006

2007

2008

2009e

201 0e

Source: destatis, DZ BANK Research forecast

Source: DZ BANK Research

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Real Estate Market Germany 2010 | 1

According to estate agents, sales of space in logistics properties were down by about 10 per cent on the previous year in 2009, after a visible decline of 7 per cent had already been reported in 2008. Despite this steep downward trend, a similarly large volume of space was bought and sold as in 2006. Properties in one of the five major metropolitan areas (Rhine/Main region, the Ruhr, Hamburg, Greater Berlin, Greater Munich) have been less affected by the recent recession and the associated slowdown in the logistics sector than properties outside these regions. However, in recent years, sales in these conurbations have also fluctuated very sharply, as can be seen from the graph below. The reasons for this diverged in individual years, with, for example, the opening of a huge industrial estate in one region having a major fundamental impact on sales of floor space within one year. The comparatively weak growth in floor space in the metropolitans in the years 2005 and 2007 is likely to have been the consequence of migration to logistics regions outside the major urban areas, since these areas have provided the incentive of very favourable rents. This effect is likely to continue to have a negative impact on growth in the major urban areas in future years, since, for example, modern logistics centres have been set up in North Hessen and in the Leipzig area which are benefiting strongly from their central location within Europe. However, proximity to an airport and/or a sea port will remain a crucial advantage for floor space in major urban areas, which we expect to become more important in future years given the growing significance of the Asian market for German exports. In terms of competition for tenants or investors for which these location-related factors are important whether in relation to exports to distant countries, or the supply of pre-products for manufacturing logistics space with no links to the corresponding method of transport may not be able to remain viable.

Space turnover was down in 2008 and in 2009

Robust growth in metropolitan areas in 2009

, but migration to less expensive regions having a negative impact

However, growing importance of the Asian market is supporting conurbations

SHARP FLUCTUATIONS IN METROPOLITAN AREAS

50 40 30 20 1 0 0 -1 0 -20 2004 2005 2006 2007 2008 2009e 201 0e

AND ROBUST TURNOVER

space turnover in 1.000 sqm

thereof: metropolitan area yoy space turnover yoy
3231 3883

turnover metropolitan area in 1.000 sqm

3610 3250 3350

1531

1275

1409

1300

1350

2006

2007

2008

2009e

2010e

Source: Jones Lang LaSalle, forecast DZ BANK Research

Source: Jones Lang LaSalle, forecast DZ BANK Research

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Real Estate Market Germany 2010 | 1

WIDE RANGE OF RENTS FOR LOGISTICS SPACE

5,60 3,00 5,70 2,50 6,50 4,50 6,00 3,00 5,50 2,00

D sseldo rf

H am burg

M unich

Frankfurt

B erlin

Source: Feri, monthly rents in Euro per sqm Q4 2009

However, after two weak years, we already expect a slight recovery in the market for logistics properties in 2010. The main factor here is likely to be weak growth in industrial production in Germany and the Eurozone. Virtually no positive impetus is likely to come from the retail sector, since we expect turnover to stagnate or at best increase very modestly there. We therefore expect turnover per space in the logistics sector to increase by around 3 per cent this year compared to last year. Our view is supported by the trend in the ZEW transport market barometer a survey of 300 experts from the transport sector and the cargo industry. At the end of 2009, 40 per cent of those surveyed still took the view that the volume of goods transported by road would increase this year and another 50 per cent expected it to stagnate. The survey of combined transport and the prospects for mail, express and package services showed a similarly positive picture. An additional survey on the importance of individual transport carriers has highlighted three important trends, with which the operators of logistics properties will have to grapple in future: the trend away from transportation via inland waterways to road haulage, from rail to road haulage, and from local trucks to trucks from outside the region. Outlook Although the market for logistics properties should recover again slightly this year, we do not expect any scope for rent increases. We expect competition between locations within Germany but also from other European countries to intensify further, since, despite a slight increase in demand for space from all companies following the recession, cost-saving potential is still being sought. New rental contracts are likely to have a medium-term duration of around 5 years. In our view, turnover will increase both in conurbations and non-conurbations, since the former will benefit from their proximity to airports and ports, while less populated areas offer greater cost-saving potential.

Sales per floor space could increase slightly in 2010

ZEW transport market barometer shows positive outlook for road haulage

Road haulage likely to become more important

No scope for rent increases as competition for logistics sites intensifies

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Imprint
Published by: DG HYP Deutsche Genossenschafts-Hypothekenbank AG, Rosenstrasse 2, 20095 Hamburg Management Board: Dr. Georg Reutter (Spokesman of the Management Board), Manfred Salber Authors: Responsible: Author: Klaus Holschuh, Head of Research and Volkswirtschaft Dr. Hans Jckel, Head of Volkswirtschaft and Content Management Dr. Christine Schfer, Senior Economist All DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main 2010 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 of 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 regulationsapplicable in the relevant country. Anyone gaining possession of this information or material must inform themselves of theapplicable laws and regulations and observe said laws and regulations. Nothing contained herein constitutes a public offer to buy securities or 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, veri 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 nancial instruments on this document, but rather on personal discussions with an adviser and the relevant sales prospectus or information memorandum. Depending on the speci c investment objectives, investment horizon, and 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 con 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 becomeobsolete as a result of future developments, without this document being amended accordingly.

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Real Estate Market Germany 2010 | 1

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DG HYP Deutsche Genossenschafts-Hypothekenbank AG Rosenstrasse 2 | 20095 Hamburg | Germany Phone: +49 40 33 34-0 | Fax: +49 40 33 34-11 11 www.dghyp.de