Real Estate Market Germany 2014 | 2015

REAL ESTATE MARKET GERMANY 2014 | 2015 A RESEARCH PuBLICATION BY DG HYP OCTOBER 2014 RETAIL, OFFICE AND RESIDENTIAL PROPERTY: POSITIVE OuTLOOK WITH SLOWING MOMENTuM Real Estate Market Germany 2014 | 2015 Table of Contents Preface ___________________________________________________________________ 2 Summary _________________________________________________________________ 3 Economic Conditions in Germany ____________________________________________ 5 Germany’s Major Cities – The Place to be ____________________________________ 6 Retail Properties ___________________________________________________________ 8 Office Properties __________________________________________________________ 23 Residential Properties ______________________________________________________ 35 Overview of Forecasts _____________________________________________________ 39 Imprint ___________________________________________________________________ 40 Disclaimer _________________________________________________________________ 40 DG HYP Offices ____________________________________________________________ 41 1 Real Estate Market Germany 2014 | 2015 Preface As a commercial real estate bank, we support our business divisions and risk manage- ment teams with their credit and lending decisions through regular analysis of the markets we actively cover. We publish the results of our analyses in commercial real estate market reports, targeting investors as well as our partners within the Coopera- tive Financial Services Network: these are German cooperative banks, with whom we jointly originate financings in the various regions. The present report continues our series of studies concerning the German real estate market, published in the autumn of each year. This research study looks at market developments for retail, office and residential real estate during 2014, and provides an outlook for 2015. The real estate market for retail, office and residential property in the prime locations the report covers – Hamburg, Berlin, Cologne, Dusseldorf, Frankfurt, Stuttgart and Munich – has benefited from continued investor demand, even though the momentum is likely to fade somewhat, given high prevailing valuation levels. Thanks to strong consumer sentiment and rising sales, the uptrend in top rents for good retail locations in the German metropolitan areas continues unabated, supported by ongoing demand for high-quality retail floorspace. The outlook for the office market is positive as well. However, increased office construction activity is likely to widen supply, which would slightly slow down the increase in top rents. The residential real estate market shows similar prospects, even though the situation for this market segment remains tense. This is due to the marked increase in maintenance costs, which represent an additional burden for tenants. On top of this, the low interest rate environment makes buying a flat an attractive alternative. Hence, rent increases expected for 2014 are likely to be somewhat subdued. The German real estate market report is of course also available in German. All pre viously published DG HYP market reports can be downloaded from our website (on www.dghyp.de/en/unternehmen/market-research); contact us if you prefer a hard copy. Deutsche Genossenschafts-Hypothekenbank AG October 2014 2 Real Estate Market Germany 2014 | 2015 SUMMARY » The commercial property markets in the top seven German locations - Berlin, Dusseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart – have per- formed very well in the last two years. Rents in the market segments covered in this report - office, retail and residential - have increased sharply. And this has been achieved against the background of macroeconomic growth of only slightly above zero. » There are many reasons why demand for offices, retail space and homes remains buoyant: the urbanisation trend is drawing people into the cities. The retail sector, as well as many companies from other sectors, are following poten- tial customers and the staff they need. However, the robust labour market, rising wages, a positive consumer climate and the prospect of Germany gaining strong momentum again as the engine of economic growth in Europe, have stimulated demand. » By the summer of this year, it also looked as if German economic output would grow strongly in 2014 and 2015. However, geopolitical risks, for example relat- ing to the crisis in Ukraine, are currently having a very adverse impact, causing growth expectations to be slashed by almost half. » This is removing some of the momentum from demand for commercial properties. The visible increase in, and in some cases already high rents are in any case having a dampening effect. The supply of space is also increasing, be- cause an increasing number of new construction projects were initiated under prosperous market conditions. However, below the line, the prospects are not bad at all; in principle, the upward movement remains intact. Rents should therefore generally increase further, albeit at a slightly more moderate pace. FORECAST FOR RETAIL PROPERTIES Retail sector: trend for Change in rents Rents prime locations shopping in the city in % y-o-y in EUR pro m² 2013 2014e 2015e 2013 2014e 2015e Berlin 12.5 0.0 1.9 270 270 275 Cologne 2.1 1.3 1.2 240 243 246 Dusseldorf 9.1 1.3 1.6 240 243 247 Frankfurt 5.7 1.1 1.8 280 283 288 Hamburg 6.1 1.9 1.9 260 265 270 Munich 3.3 1.6 1.6 315 320 325 Stuttgart 4.4 0.0 0.0 235 235 235 Average for top locations 7.8 0.9 1.6 268 270 274 Source: BulwienGesa. Feri. DZ BANK Research forecast » Retail sales - which had been stagnating for a long time - are growing, the consumer climate is positive despite the recent setback, and shopping in the high streets of large cities and city centre shopping centres is a very popular pastime for consumers. The number of high-spending visitors from abroad is also increasing. Sound economic conditions are also attracting international chain stores to Germany, mainly to prime locations. » The demand for first-class sales space is correspondingly high. This is increasing almost everywhere due to projects under development, however the supply is not sufficiently large. There are nevertheless signs that tenants are becoming 3 Real Estate Market Germany 2014 | 2015 less willing to accept even higher prime rents; these have increased by more than 40 per cent to an average of almost EUR 270 per sqm within ten years. A deterioration in economic prospects could also lead to a more cautious ap- proach. We therefore expect only slight growth in prime rents in 2014 and 2015. FORECAST FOR OFFICE PROPERTIES Office: Positive job market leading Change in rents to high demand in % y-o-y Vacancy rate in % 2013 2014e 2015e 2013 2014e 2015e Berlin 2.3 2.2 1.3 8.0 7.8 7.7 Cologne 2.9 1.2 1.4 7.5 7.2 7.0 Dusseldorf 6.4 0.0 1.0 10.8 10.9 11.0 Frankfurt 6.1 0.0 1.4 12.5 12.3 12.3 Hamburg 0.0 1.3 1.6 7.6 7.4 7.3 Munich 5.0 4.8 1.5 6.8 6.4 6.2 Stuttgart -1.1 2.7 1.6 5.2 4.9 4.7 Average for top locations 3.4 2.0 1.5 8.4 8.2 8.1 Source: BulwienGesa, Feri, DZ BANK Research forecast » The positive trend in employment figures supports the high demand for first- class office space in the major cities. In addition, virtually no new projects were started as a result of the recent economic crisis. Consequently, the volume of available space is in increasingly short supply. Prime rents have increased visi- bly, while vacancy rates have fallen sharply. » However, the pace is likely to slacken over the rest of this year. On the one hand, more office space is now coming onto the market, and on the other hand, the economic prospects have deteriorated. The upward movement in prime rents should therefore slow this year and next year. FORECAST FOR RESIDENTIAL PROPERTIES Residential: Housing shortage in Average first occupancy Average first occupancy major cities, markets remain under rents in % y-o-y rents in EUR pro m² pressure 2013 2014e 2015e 2013 2014e 2015e Berlin 8.0 3.7 1.8 10.8 11.2 11.4 Cologne 1.8 1.8 1.8 11.2 11.4 11.6 Dusseldorf 2.6 2.5 1.6 12.0 12.3 12.5 Frankfurt 5.4 2.0 2.3 12.8 13.0 13.3 Hamburg 0.8 2.3 1.5 13.0 13.3 13.5 Munich 3.7 5.0 2.0 14.0 14.7 15.0 Stuttgart 2.9 1.9 1.8 10.8 11.0 11.2 Average for top locations 4.3 3.1 1.8 11.9 12.3 12.5 Source: BulwienGesa, Feri, DZ BANK Research forecast » Housing markets in prime locations remain under pressure. Although more construction is taking place, it will not be sufficient to meet the demands of strong population growth in the major cities. A substantial supply shortfall has also ac- cumulated in recent years. However, rent growth is likely to slow further. This trend has already been evident since 2013. » Finally, tenants are carrying the additional burden of a visible increase in additional housing costs. Budget restrictions on households are likely to force people to relocate to cheaper districts of cities or to the surrounding area. Buying a home is often still an attractive alternative to renting due to low interest rates. 4 Real Estate Market Germany 2014 | 2015 ECONOMIC CONDITIONS IN GERMANY ECONOMIC FORECAST GERMANY in % y-o-y 2012 2013 2014 2015 GDP 0.4 0.1 1.5 1.3 Private consumption 0.8 0.9 1.2 1.4 Public consumption 1.0 0.2 1.0 1.3 Investment -2.1 -0.9 5.3 4.3 Exports 3.2 0.9 5.1 6.7 Imports 1.4 1.5 6.7 7.3 Inflation rate (HICP) 2.1 1.6 0.9 1.9 Unemployment rate (in %) 6.8 6.9 6.7 6.7 Public budget balance (in % of GDP) 0.1 0.0 -0.2 -0.1 Source: DZ BANK Research After a very good start to the year for the German economy, growth contracted German economy contracted slightly by 0.2 per cent in the second quarter.

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