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

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 management 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 previously published DG HYP market reports can be downloaded from our website (on www.dghyp.de/en/unternehmen/market-research); contact us if you prefer a hard copy.

Deutsche Genossenschafts-Hypothekenbank AG

October 2014

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SUMMARY

» The commercial property markets in the top seven German locations - Berlin, Dusseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart – have performed 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 potential 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, because 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

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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 visibly, 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.

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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. Both foreign trade and investment by 0.2 per cent in Q2 were responsible for this trend. Good weather in the first quarter led to some of the construction investment planned for the second quarter being brought forward. The export-oriented German industry was also affected to some degree by the crisis in the Ukraine.

A slight increase in consumption has prevented an even weaker result. Both the government and private households have continued to increase their consumer spending. Consumption has thus once again acted as a stabilising factor for the German economy.

The economy will continue to revive slightly in the second half. However, growth of Robust domestic demand supports only 1.5 per cent is likely to be achieved in 2014. The pace of growth will weaken growth in 2014 and 2015 further slightly next year. Consumer spending is robust. However, negative factors associated with foreign trade will prevent a better result.

GDP GROWTH VS. PREVIOUS YEAR IN PER CENT UNEMPLOYMENT RATE IN PER CENT 6 13

12 4 11 2 10

0 9

8 -2 7 Germany -4 Germany 6 Eurozone Eurozone -6 5 2003 2005 2007 2009 2011 2013 2015e 2003 2005 2007 2009 2011 2013 2015e

Source: DZ BANK Source: DZ BANK

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GERMANY'S MAJOR CITIES – THE PLACE TO BE

One of the global developments which trend researchers have identified for the fu- Cities on trend: benefiting from ture is urbanisation. The renaissance of cities is also evident in many places in Ger- rural migration many. It is not very long since the "depopulation of city centres" was often a subject of discussion. Anyone who could afford to do so, bought a property in the countryside. Shoppers flocked to the spacious new shopping centres which were springing up outside city boundaries. In the cities themselves, there was little activity after office hours. Deserted towns and cities are today often located in so-called migration regions. "Rural migration" has already clearly left its mark on many structurally weak regions - not only in East Germany; populations are ageing because young people are moving away, no buyers are being found for houses, and kindergartens and schools are closing their doors. One example of this is the Werra-Meißner district in North Hessen, where the population has declined by almost 1 per cent annually in the last decade.

In contrast, many major cities are being literally overrun. The populations of all the Who does the city belong to? prime locations have increased significantly in recent years. Anyone who can afford to do so now moves into districts of cities which are "IN". Often these are former "alternative" residential areas, where it was possible only a few years ago to live in an old building at low cost: for example Prenzlauer Berg in Berlin, the Schanzenviertel in Hamburg or Bockenheim in Frankfurt. There are increasing protests in these "neighbourhoods" because longstanding residents feel they are being dislodged by the process of "gentrification". They often cannot afford the high rents and purchase prices, which have been driven up by demand from the high-earning new residents of the area.

PRIME LOCATIONS: POPULATION GROWING STEADILY … … AT THE EXPENSE OF THE REST OF THE COUNTRY

1993=100 106 14% 105 104 103 9% 102 6% 5% 101 5% 5% 4% 100 99 596 620 703 1.030 1.401 1.815 3.547 98 97 Dusseldorf Stuttgart Frankfurt Cologne Munich Hamburg Berlin 1993 1997 2001 2005 2009 2013 population in thousand growth rate from 2003 to 2013 Top-7 Germany

Source: Feri, own calculations Source: Feri, own calculations

It is not the case that Germans no longer want to live in their own houses or in a ru- Romantic image of country life ral idyll. This is evident from the major success of many magazines based around not borne out by reality the theme of "country life". However, when selecting a property becomes a reality, the advantages of the city prevail. And people who definitely want to live in the city, as well as those for whom the advantages predominate, are therefore responsible for the continuing high demand for houses and apartments in conurbations. And, in

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contrast to the situation only a few years ago, many people who moved to the city when they were young, stay there, even after they have had a family.

There are many reasons in favour of living in cities. Examples are a good public sec- Cities have much to tor infrastructure, good shopping opportunities and a wide range of cultural activities, recommend them … a favourable job market, with only a short journey to work, or better medical care. There is often also a more generous supply of childcare and a greater variety of different types of schools which, given the major importance of a good education today, is very important to many parents. The divergence between the attractions of the city and the countryside will increase further over time, because as migration increases, rural areas will have even less to offer.

On the other hand, the growth of major cities also has disadvantages and negative … but there are disadvantages too: effects. Housing markets are under increasing pressure and rents are high. Trans- high prices, traffic congestion, noise port infrastructures are also often overburdened. Negative environmental factors and exhaust fumes such as air and noise pollution also play a part.

The urbanisation trend also has far-reaching consequences for the economy. There Business and retail also moving is a direct impact on the retail sector, which follows the shift in purchasing power. into cities The pace of growth in city centre retail is correspondingly high. High demand for attractive sales space is ensuring strong growth in rents and the construction of new shopping centres, which for some years have been opened almost exclusively in cities. However, for companies in many other sectors too, locations in growing cities are increasingly important. Here they can still most easily hire the staff they need. As a result of population growth and the flourishing economy, the sales potential is greater here too. Customers outside the conurbation may also be reached rapidly via good transport infrastructure. For the growing number of globally active companies, major cities with an international airport are particularly interesting in order to shorten travel times to customers or foreign locations.

Urbanisation in conjunction with migration from rural areas is having far-reaching Far-reaching consequences for consequences for the property market: opportunities in growth regions are offsetting the property market: risks in rural risks in areas which are contracting. While demand for properties in many conurba- regions … tions exceeds supply, in other places there is insufficient demand. In the worst case scenario, existing properties cannot be sold or rented even with major price conces- sions.

In contrast, the prime locations on which we focus in this report, with their future po- … offsetting opportunities in tential, are on the winning side. The opposing trends in regions are likely to intensify, conurbations if the demographic trend leads to a decline in the population as forecast. The conurbations will probably remain largely unaffected by this negative trend. Property demand will therefore be concentrated on these "focal points". The expected above- average growth is resulting in massive demand from investors which has clearly driven up the prices of office and retail properties in the core sector, and of apartments. However, the achievable returns have fallen sharply as a consequence despite growth in rents.

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RETAIL PROPERTIES

Market development, trends and outlook

The EHI Retail Institute has written that "The retail sector follows its customers and Everyone wants to move they have re-discovered the city centre", thus summing up in a nutshell the retail into the city! trend of recent years. It is not therefore surprising that two thirds of the shopping centres built since the new millennium have been located in city centres, and from 2011 to 2013 the figure even exceeded three quarters. Conversely, only individual green field projects have been initiated. This is where the success story began for what are currently around 450 German shopping centres, since the opening, exactly 50 years ago, of the first German shopping centre - the Main-Taunus Centre - at the entrance to the city gates of Frankfurt.

The "back to the city" trend seems to be so sustainable that IKEA has opened its This even applies to those who first city branch this year in Hamburg-Altona. The Swedish furniture giant's business didn't really intend to do so model is in fact based on the availability of spacious greenfield sites needed for large-scale sales and parking space to display furniture, and for customers to transport their purchases themselves by car. However, habits change. Young people in large cities are potential customers for IKEA, however they regard having their own car as less important than was the case in the past. This makes it more difficult to transport heavy flat-pack furniture. On the other hand, online shopping and comfortable home delivery are very popular. IKEA has reacted to this trend. Other retailers, for example furniture or DIY stores, whose concepts are also based on "customers with cars", are likely to follow developments in Hamburg-Altona very closely. Even pure online retailers such as Zalando obviously regard it as beneficial to have a presence in the city. The online fashion retailer now operates two outlet stores in Berlin and Frankfurt.

CITY CENTRE SHOPPING CENTRES MEET THE TREND PRIME RETAIL RENTS ARE ONLY RISING IN CITY CENTRES

300

250

200

150

76% 100 64% 68% 47% 45% 50 25% 0 1964-1990 1991-1995 1996-2000 2001-2005 2006-2010 2011-2013 1993 1997 2001 2005 2009 2013 prime rent: city center in EUR/sqm greenfield site outside city center city center prime rent: outside city center in EUR/sqm

Source: EHI Retail Institute Source: BulwienGesa, own calculations

The two examples above of companies which - in a move away from their original Success of large cities has little im- business models - have decided to set up branches in the city, each selected a city pact on city districts district. This may of course change again, since the attractions of prime locations remain undiminished. Ultimately only 1A sales space has benefited so far from the

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boom in large cities with their ongoing strong demographic growth. Essentially, growth in the retail sector is focused on shopping streets several hundred metres long and on stylish new shopping centres. This is evident from the trend in rents shown overleaf. While prime rents in city districts have been stagnating for 20 years, they have been rising almost continuously in the 1A locations of city centres since the end of the last millennium.

However, city districts and secondary locations could be given a boost if retail giants 1A locations expanding such as IKEA and Zalando open branches there, thus leading to an increase in footfall. The "run" on city centre sales space is so great that the formerly strict geo- graphic division between 1A and secondary locations seems to be gradually eroding. In the major cities there are various examples involving either an extension of prime locations - e.g. Goethestraße in Frankfurt - or an upgrading of formerly secondary or city district sites -e.g. Hackescher Markt in Berlin. This can happen, for example, by means of skilful project development on the edges of prime locations, or simply by opening a branch of a popular label in a sidestreet. However, space is in increasingly short supply in 1A locations, not only because the number of national and international chains and brand producers seeking outlets here is increasing. Even su- permarkets and drugstores are no longer being deterred by the high rents and are moving into attractive city centre locations with city concepts. Examples are the Aldi on the "Kö" in Dusseldorf and the dm-Markt in the new "Zeil 123" building. Both outlets were opened in June this year.

RETAIL SPACE AND THE NUMBER OF … … SHOPPING CENTRES CONTINUE TO GROW

140 18 500 20 retail space in sqm m retail space in sqm m number (lhs) 130 17 change in units (rhs) 120 16 400 16 110 15 100 14 300 12 90 13 80 12 200 8 70 11 60 10 100 4 Germany (lhs) 50 9 Top-7 (rhs) 363 372 384 399 414 428 435 444 453 460 40 8 0 0 1993 1997 2001 2005 2009 2013 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e

Source: Feri, own calculations Source: Statistica, own calculations

While sales space in 1A locations is currently increasing as a result of stylish new Is demand increasing for smaller shopping centres, project developments and the upgrading of sites, the structure of shops in the city centre? demand may alter in future. The most promising prospects in the city recently have been hybrid concepts consisting of a combination of first-class goods presentation in-store and an attractive online shop. This provides an opportunity to more successfully integrate a "live" shopping experience with an internet shop and mail order logistics, and to operate from much smaller stores than the large-scale space often used in the past. Such "accessible online shops" which offer mainly bestselling products from a range, would result in a decline in rented space on the back of a static number of rental agreements.

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RETAIL SALES (EXCL VEHICLES) INCREASING RETAIL: CONSUMER AND BUSINESS CLIMATE DETERIORATING

in points balance of replies 2000 = 1000 12 115 30 10 20 110 8 10 6 105 0 4 -10 100 2 -20 0 95 -2 -30 real nominal GfK consumer climate (lhs) (6-month-average) ifo business climate retail (rhs) 90 -4 -40 2000 2002 2004 2006 2008 2010 2012 2014 2007 2008 2009 2010 2011 2012 2013 2014

Source: Bundesbank, own calculations Source: ifo, GfK

In addition to the "city" trend, three important developments for the German retail Stable trends: Increasing sales, sector - growing retail sales, a good consumer climate and growing online retail - are good consumer climate, growing continuing. Retail sales, which had been stagnating for many years in both nominal online retail and real terms, have maintained the upward trend which started in 2010 in 2014. Given the positive labour market conditions and solid wage agreements, this is likely to continue. Private consumers are thus continuing to support economic growth in Germany to a greater extent than the export sector which has been adversely affected by geopolitical crises. However, it is not possible for the retail trade to remain unaffected by the negative impact of international crises. This is evident from the graph above on the right. At the moment, the longstanding strong upward movement in the GfK consumer climate has however suffered a minor setback - at a high level. The ifo business climate had already shown a slight deterioration at an earlier stage.

ONLINE SHOPPING NOW ACCOUNTS FOR ALMOST 10% OF SALES AMAZON'S SALES CONTINUING TO GROW STRONGLY

50 10 80 retail sales in EUR bn (lhs) 9 share of total retail sales in % (rhs) 70 Amazon: net turnover in USD bn 40 8 60 7 30 6 50

5 40 20 4 30 3 20 10 2 1 10 0 0 0 2000 2002 2004 2006 2008 2010 2012 2014e 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Source: HDE, RHI Retail Institute Source: Amazon, EHI Retail Institute

However, high street retail can only benefit to a limited extent because an ever in- Online sales making life difficult for creasing proportion of total retail sales is being generated by rapid growth in online high street retail shopping. At the moment, around 9 per cent of total sales of approximately EUR 450bn is generated online. However, the proportion of internet sales is likely to reach

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double-digit percentages soon. For many product groups, such as telecommunica- tions or media, the proportion of sales generated via the internet already exceeds high street retail. The ongoing growth in retail sales space is not therefore ultimately underpinned by corresponding sales growth. Assuming constant rents, the average proportion of costs relative to rental costs is thus already increasing, and is denting profitability. The fact that rents in 1A sites in prime locations are nevertheless increasing underpins their major attractions and the desire to have a physical presence in shopping streets. Even major cities which rank below the prime locations - cities with a maximum population of 500,000 - are showing a marked decline in the pace of rent growth.

ONLY THE TOP LOCATIONS1 HEAD THE RETAIL STAKES FOREIGN VISITORS ARE OFTEN HIGH-SPENDING

prime rent in EUR/sqm average amount of TaxFree-purchases in EUR (2013) 300 280 Top-7 Regional-12 260 240 220 200 180 160 140 120

100 287 327 362 376 428 463 562 80 1995 1999 2003 2007 2011 2015e Stuttgart Berlin Cologne Hamburg Munich Dusseldorf Frankfurt

Source: BulwienGesa, own calculations Source: Global Blue

The "multi-class" society in the retail sector is also partly attributable to the large International guests are good number of visitors from home and abroad. Foreign guests in particular, who are of retail customers course mainly interested in the capital city and the other most important cities in a country, spend large amounts. The highest levels relate to average tax free purchases by the Chinese, which reached around EUR 580 in 2013. US Americans spent on average EUR 317, and Russians a slightly higher amount of EUR 336. More than 40 per cent of tax free purchases relate to clothing and fashion goods, and around 25 per cent to watches and jewellery. Of the seven prime locations, tax free purchases are highest in Frankfurt thanks to the airport, with travellers tending to spend large amounts at the end of a trip, before flying home.

1 Top 7: Index of cities of Berlin, Dusseldorf, Frankfurt, Hamburg, Cologne, Munich and Stutt- gart; Regional 12: Index of cities Augsburg, Bremen, Darmstadt, Dresden, Essen, Hannover, Karlsruhe, Leipzig, Mainz, Mannheim, Munster and Nuremberg

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Retail: Comparison of prime locations

The longstanding strong upward trend in prime rents remains intact in all seven loca- Upward trend in prime rents tions. The trend is being driven by steady demand for first-class sales space in 1A remains unbroken locations. The growth rate is so high that even the recession in the German economy in 2008 and 2009 did not lead to a decline in rents, but only a temporary stag- nation. However, the overall picture has altered slightly in recent years: in the past, Munich occupied peak position alone, and was followed by a "close-run pack". To- day Munich is still well ahead with prime rents of EUR 320 per sqm, but the line-up of locations which follows has divided into two. While Berlin, Frankfurt and Hamburg show average prime rents of around EUR 270 per sqm, Dusseldorf, Cologne and Stuttgart come in at around EUR 240.

PRIME RENTS CONTINUE TO RISE … … BUT UPWARD TREND LIKELY TO SLOW

prime rent in EUR/sqm prime rent in EUR/sqm 340 Berlin 340 320 Cologne 320 300 Dusseldorf 300 280 Frankfurt 260 280 Hamburg 240 260 Munich 220 240 200 Stuttgart 180 Top-7 220 160 200 140 Berlin Cologne Dussel- Frank- Ham- Munich Stutt- Top-7 dorf furt burg gart 120 1995 1999 2003 2007 2011 2015e 2012 2013 2014e 2015e

Source: BulwienGesa, own calculations Source: BulwienGesa, own calculations

The high expansion rate in the retail sector in Berlin has been the main factor driving Berlin the best "performer" in the strong growth in space-weighted average prime rents in the last two years; how- 2012 and 2013 ever, prime rents in Dusseldorf, Frankfurt and Hamburg have also increased sharply. The upward trend should continue this year, although the first-half trend indicates that the growth rate is likely to be significantly lower. At the levels now achieved, Forecast: Signs of subdued rent prime rents are obviously now more often reaching the pain threshold of what ten- growth in 2014 and 2015 ants are prepared to pay.

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PRIME RENTS Y-O-Y IN PER CENT CHANGE IN PRIME RENTS SINCE 2003 IN PER CENT

13 47 48 43 44 9 40 37 8 34 7 33 6 6 28 26 4 4 5 24 4 4 21 21 22 3 3 20 19 20 19 17 17 2 2 2 15 2 1 2 2 2 2 2 14 11 1 1 1 9 0 0 0 0 7

Berlin Cologne Dussel- Frank- Ham- Munich Stutt- Top-7 Stutt- Munich Dussel- Cologne Top-7 Ham- Frank- Berlin dorf furt burg gart gart dorf burg furt 2012 2013 2014e 2015e from 2003 to 2008 from 2008 to 2013 from 2003 bis 2013

Source: BulwienGesa, own calculations Source: BulwienGesa, own calculations

However, on closer scrutiny, the major differences in rent trends between the vari- Fairly homogenous long-term ous locations in individual years have been largely balanced out. On average, prime trend in locations rents have risen by just over 40 per cent in the last ten years. The growth rate is marginally higher in Berlin and Frankfurt, but slightly lower in Dusseldorf and Co- logne. The upward trend in Munich and Stuttgart is slightly slower. Very high rents in Munich are likely to dampen the upward momentum. In Stuttgart, as in Cologne, rents have shown virtually no growth in the last five years, thus leading to a slightly more negative overall result. Conversely, rent trends in the other five locations have been broadly similar in the five-year periods from 2003 to 2008 and from 2008 to 2013.

Total retail space in the seven top locations ranges from just over one million sqm in Sales space continues to grow, but Stuttgart to just over six million sqm in Berlin. The proportion of city centre sales has slowed consistently space ranges from just over 10 per cent to almost 40 per cent. Overall, total sales space has expanded by around 30 per cent in the last ten years. In Dusseldorf and Frankfurt the figure has exceeded 40 per cent. In contrast, Cologne has shown growth of less than 10 per cent. It is therefore surprising that the growth in prime rents in Cologne has not been more marked. On average for the seven locations, total sales space has grown by around 2.5 per cent annually. In the last three years the growth in space has however been visibly weaker than in the previous decade.

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RETAIL SPACE IN THE SEVEN TOP LOCATIONS … …CONTINUES TO GROW (GROWTH OVER THREE YEARS IN PER CENT)

7.000 70 21 retail space in thousand sqm (lhs) 6.000 60 thereof inner-city-area (lhs) 15 15 12 13 5.000 share of inner-city retail space in % (rhs) 50 11 11 10 11 10 1010 10 9 9 9 4.000 40 8 6 6 5 5 5 5 5 3.000 30 4 4 5 3 2 2 2.000 20 0

1.000 10 0 Berlin Cologne Dussel- Frank- Ham- Munich Stutt- Top-7 0 0 dorf furt burg gart Stutt- Dussel- Cologne Frank- Munich Ham- Berlin gart dorf furt burg 2002-2004 2005-2007 2008-2010 2011-2013

Source: Feri, Comfort, own calculations Source: Feri, own calculations

One important factor which adds to the major attractions of the top locations for re- 1A locations benefit from high tailers is high purchasing power. With the exception of Berlin - where the purchasing purchasing power of Top 7 power indicator is below the average of 100 for Germany as a whole - the locations show very good levels of purchasing power, ranging from 10 (Hamburg) to 30 per cent (Munich), thus exceeding the German "benchmark". City dwellers can afford to purchase "special" items more often in addition to everyday necessities, and are keen to do so in the 1A locations. In addition to the top locations, very few major cities show such positive levels of purchasing power. The above-average "centrality" of the attractive cities is not surprising. However, levels fall short of the significantly higher figures reported for some major regional centres. This nevertheless seems logical because everyday necessities, which account for a large proportion of consumer spending, are purchased directly where people live.

ABOVE-AVERAGE FIGURES FOR PURCHASING POWER … … AND CENTRALITY

140 140

120 120

100 100

80 80 60 60 40 40 purchasing power 20 centrality 20 German average German average 0 0 Berlin Frank- Ham- Munich Dussel- Stutt- Cologne Berlin Ham- Cologne Stutt- Frank- Dussel- Munich furt burg dorf gart burg gart furt dorf

Source: Comfort, own calculations Source: Comfort, own calculations

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European retail - comparison of top locations

On a European comparison, prime rents in top German locations are higher than Prime rents in top locations slightly average. However, there is a major divergence from the most expensive cities - rela- above European average tive to retail rents. In Zurich, prime rents are almost double the level in Munich as Germany's most expensive major city. However, even Zurich lags far behind the European frontrunners London and Paris.

PRIME RETAIL RENTS IN EUROPE IN EUR PER SQM - TOP GERMAN LOCATIONS ARE SLIGHTLY ABOVE-AVERAGE

1.000 average 800

600

400

200

Source: CBRE, own calculations Per: Q2/2014

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Berlin: Retail properties

PRIME RETAIL RENTS IN EURO PER SQM PER CAPITA RETAIL SPACE IN SQM

300 2,2

250 2,0

200 1,8

150 1,6

100 1,4 Berlin Top-7 Regional-12 Berlin Top-7 Regional-12 50 1,2 2005 2007 2009 2011 2013 2015e 2005 2007 2009 2011 2013 2015e

Source: BulwienGesa, Feri, DZ BANK Research forecast Source: Feri

Berlin has developed very positively, both in overall terms and as a shopping desti- Berlin has developed very nation, and is attracting growing interest from retailers and investors. As a result of successfully as a location the stable economic trend in Germany, the focus has shifted more strongly to the capital city of the largest economy in Europe. There is also a positive trend in the fairly under-developed economy of Berlin, and a high and growing number of visitors, who contribute a quarter of retail sales - thus balancing out the below-average purchasing power of the local population. The Berlin retail sector can thus extend its Test market for Germany role as a test market for the German retail sector and draw benefit from the international retail chains which are surging into the German market. The most recent example is the Japanese fashion chain Uniqlo, which has opened a large store of 2,700 sqm in Tauentzienstraße. As a result of buoyant demand, trendy locations such as Hackesher Markt are developing into 1A locations. And prime rents have risen at the fastest rate among the top 7 since 2009, by almost 5 per cent annually. However, there is little scope for further growth this year based on the fact that levels After dynamic rent growth, space have risen to EUR 270 per sqm and given the strong expansion of space. Despite expansion limits further rises the existence of more than 60 shopping centres already, another 120,000 sqm will be added by Bikini Berlin and the Mall of Berlin.

RETAIL PROPERTIES IN BERLIN

2012 2013 2014e 2015e Demand Per capita disp. income in EUR/month 1,193 1,204 1,219 1,234 Per capita disp. income in % y-o-y 0.7 0.9 1.3 1.2 Unemployment rate (BA) In % 12.3 11.7 11.1 10.8 Retail sales in % y-o-y 1.9 2.4 2.6 1.6 Supply Retail space in million m² 6.0 6.1 6.3 6.4 Retail space in % y-o-y 1.6 2.8 2.5 2.5 Retail rents Prime / secondary locations in EUR/m² 240 / 14.0 270 / 14.0 270 / 14.0 275 / 14.0 Prime / secondary locations in % y-o-y 6.7 / 0.0 12.5 / 0.0 0.0 / 0.0 1.9 / 0.0

Source: Feri. BulwienGesa, DZ BANK Research forecast

16 Real Estate Market Germany 2014 | 2015

Cologne: Retail properties

PRIME RETAIL RENTS IN EURO PER SQM PER CAPITA RETAIL SPACE IN SQM

300 2,4 Cologne Top-7 Regional-12 250 2,2

2,0 200 1,8 150 1,6

100 1,4 Cologne Top-7 Regional-12 50 1,2 2005 2007 2009 2011 2013 2015e 2005 2007 2009 2011 2013 2015e

Source: BulwienGesa, Feri, DZ BANK Research forecast Source: Feri

The city of Cologne, which has a population of one million, is the second major in- Consumer-oriented shopping ternational shopping destination in the West. While the luxury segment is more sig- destination in the West nificant in Dusseldorf, Cologne is geared more to "mainstream consumption". The city has two of the German consumer locations with the highest footfall. However, many trendy shops are also situated in the city, particularly in Ehrenstraße. The supply is rounded off with the luxury location at Wallraffplatz. In conjunction with population growth, the large hinterland and high number of tourists from all over the world, Cologne is an interesting location for the retail trade. This ensures good demand for space in 1A locations, although the rate at which rents have increased in recent years has been weaker than in most other top locations. The willingness of customers seeking retail space to pay seems to have largely reached its limits at the Potential for prime rents seems current level. We anticipate at best further moderate growth in rents. However, posi- limited tive demand could lead to an upgrading of secondary locations. The low per capita sales space is striking. This is unlikely to change much in the top locations for the time being. No large projects are planned in the city of Cologne following the completed revitalisation of the Neumarkt-Galerie. Following the opening of a 8,000 sqm Primark flagship store here in 2014, the location is now benefiting from this "crowd puller".

RETAIL PROPERTIES IN COLOGNE

2012 2013 2014e 2015e Demand Per capita disp. income in EUR/month 1,557 1,570 1,587 1,604 Per capita disp. income in % y-o-y 1.5 0.8 1.1 1.1 Unemployment rate (BA) in % 9.5 9.4 9.8 9.5 Retail sales in % y-o-y 2.8 2.4 2.4 1.6 Supply Retail space in million m² 1.4 1.4 1.4 1.4 Retail space in % y-o-y 0.0 0.2 0.4 0.3 Retail rents Prime / secondary locations in EUR/m² 235 / 12.0 240 / 12.5 243 / 0.0 246 / 0.0 Prime / secondary locations in % y-o-y 4.4 / 0.0 2.1 / 4.2 1.3 / 0.0 1.2 / 0.0

Source: Feri, BulwienGesa, DZ BANK Research forecast

17 Real Estate Market Germany 2014 | 2015

Dusseldorf: Retail properties

PRIME RETAIL RENTS IN EURO PER SQM PER CAPITA RETAIL SPACE IN SQM

300 2,2

250 2,0

200 1,8

150 1,6

100 1,4 Dusseldorf Top-7 Regional-12 Dusseldorf Top-7 Regional-12 50 1,2 2005 2007 2009 2011 2013 2015e 2005 2007 2009 2011 2013 2015e

Source: BulwienGesa, Feri, DZ BANK Research forecast Source: Feri

Dusseldorf is in demand as a retail location due to its high purchasing power and the Urban development measures, large population of the Rhine-Ruhr region. The luxury shopping street "Kö" is also revitalisation of centres and new well known as a shopping destination outside the region. The sales space in 1A lo- build projects make locations cations in Dusseldorf, which include Schadowstraße and Flingerstraße, has been even more attractive extended with the architecturally successful and recently completed Kö-Bogen. The city has also become more attractive as a shopping destination due to the revitalisation and linking up of Sevens and the Kö-Galerie. The progress with the western side of the Königsallee, for example as a result of the reconstruction of the Trinkaus- Passage, is also positive. There is also a prospect of the location's attractions being enhanced by urban development measures, such as the demolition of the "Tausend- füßler" elevated road, the new car tunnel, and the U-Bahn link to Schadowstraße. However, at the moment, retail activity in the city centre is still being adversely affected by the construction work. In conjunction with the growth in sales space and the 20 per cent increase in rents between 2008 and 2013, prime rents are likely to However, construction work stagnate this year. Nor are any major surges expected in 2015. However, sooner or currently hitting retail sector later, there will be "upward" potential as the location is upgraded, and based on the generally positive demand for first-class retail space. Dusseldorf remains well posi- tioned in terms of competing with other large cities and centres in the vicinity.

RETAIL PROPERTIES IN DUSSELDORF

2012 2013 2014e 2015e Demand Per capita disp. income in EUR/month 1,745 1,770 1,796 1,821 Per capita disp. income in % y-o-y 1.7 1.4 1.5 1.4 Unemployment rate (BA) in % 8.9 8.8 9.0 8.7 Retail sales in % y-o-y 3.1 3.5 3.1 2.1 Supply Retail space in million m² 1.2 1.2 1.2 1.3 Retail space in % y-o-y 0.3 2.4 1.2 1.3 Retail rents Prime / secondary locations in EUR/m² 220 / 13.5 240 / 14.0 243 / 0.0 247 / 0.0 Prime / secondary locations in % y-o-y 1.4 / 0.0 9.1 / 3.7 1.3 / 0.0 1.6 / 0.0

Source: Feri, BulwienGesa, DZ BANK Research forecast

18 Real Estate Market Germany 2014 | 2015

Frankfurt: Retail properties

PRIME RETAIL RENTS IN EURO PER SQM PER CAPITA RETAIL SPACE IN SQM

300 2,2

250 2,0

200 1,8

150 1,6

100 1,4 Frankfurt Top-7 Regional-12 Frankfurt Top-7 Regional-12 50 1,2 2005 2007 2009 2011 2013 2015e 2005 2007 2009 2011 2013 2015e

Source: BulwienGesa, Feri, DZ BANK Research forecast Source: Feri

Frankfurt is growing strongly: for years the numbers of inhabitants, the working Frankfurt is growing and attracting population, and visitors from elsewhere in Germany and abroad have been increas- retailers and investors alike ing. The city is also becoming more attractive as a shopping destination, and is drawing in both retailers and investors alike. As a result of the buoyant demand, the significant expansion of sales space has been absorbed without any problem. 2013 saw the opening of the Skyline Plaza, a large city centre shopping centre with 170 shops. It was followed this year by One Goethe Plaza, which has increased the sales space in the luxury location of Goethestraße by 5,000 sqm. The shortage of 1A sales space is also now benefiting secondary locations: the Italian label Brioni has opened an outlet in Alte Rothofstraße, which is a side street of Goethestraße. The range of products on offer is also becoming more diverse. Last year a store was opened by the smaller MA*, whose trendy shops successfully complement the city's chain stores. There is also a new development on Zeil: a new building is replacing the former Hako-Haus near the Hauptwache. However, despite a successful up- grade, the fortunes of the Zeilgalerie opposite have still not been reversed. The Space expansion and sharp rent search for a successful concept for the narrow, seven-floor building therefore contin- rise likely to dampen growth in ues. Following the expansion of space and a sharp rise in rents in recent years, prime rents prime rents are however likely to increase more slowly this year and next year.

RETAIL PROPERTIES IN FRANKFURT

2012 2013 2014e 2015e Demand Per capita disp. income in EUR/month 1,478 1,501 1,528 1,554 Per capita disp. income in % y-o-y 1.4 1.5 1.8 1.7 Unemployment rate (BA) in % 7.4 7.5 7.2 7.0 Retail sales in % y-o-y 2.7 1.4 1.7 2.4 Supply Retail space in million m² 1.4 1.5 1.5 1.5 Retail space in % y-o-y 0.7 4.3 2.3 1.2 Retail rents Prime / secondary locations in EUR/m² 265 / 18.0 280 / 18.0 283 / 0.0 288 / 0.0 Prime / secondary locations in % y-o-y 3.9 / 0.0 5.7 / 0.0 1.1 / 0.0 1.8 / 0.0

Source: Feri, BulwienGesa, DZ BANK Research forecast

19 Real Estate Market Germany 2014 | 2015

Hamburg: Retail properties

PRIME RETAIL RENTS IN EURO PER SQM PER CAPITA RETAIL SPACE IN SQM

300 2,4 Hamburg Top-7 Regional-12 2,2 250

2,0 200 1,8 150 1,6

100 1,4 Hamburg Top-7 Regional-12 50 1,2 2005 2007 2009 2011 2013 2015e 2005 2007 2009 2011 2013 2015e

Source: BulwienGesa, Feri, DZ BANK Research forecast Source: Feri

Hamburg, with its population of 1.8 million, is the second largest city in Germany and Outstanding shopping destination is also an outstanding shopping destination in the North of the country. The high in North Germany … purchasing power of the city's population is enhanced significantly by the large hinterland of Lower Saxony and Schleswig-Holstein. There is also a high volume of tourists and business travellers. This major purchasing potential makes Hamburg a sought-after location. Its broad supply structure - extending from classic shopping locations such as Spitalerstraße to distinctly luxury locations such as Neuer Wall - is … is of major interest to national also favourable. The city on the Elbe is thus interesting in terms of the expansion and international chains strategies of national and international chains, and demand for space is correspondingly high. Due to the small proportion of city centre sales space, 1A space is in short supply, and is far from sufficient to meet demand. The last major expansion of space was in 2006 with the opening of the Europa Passage. Accordingly, prime rents have risen sharply in recent years. From 2008 to 2013 they rose by more than 20 per cent. Project developments in the top locations will create further sales space. However, 1A locations are also likely to grow as a result of the upgrading of Prime rents likely to rise by what are currently secondary locations. The gradual expansion of space is likely to around 2 per cent in 2014 and be accompanied by more moderate rent rises. We expect prime rents to increase by 2015 respectively around 2 per cent respectively in 2014 and 2015.

RETAIL PROPERTIES IN HAMBURG

2012 2013 2014e 2015e Demand Per capita disp. income in EUR/month 1,866 1,896 1,930 1,959 Per capita disp. income in % y-o-y 1.4 1.6 1.8 1.5 Unemployment rate (BA) in % 7.5 7.3 7.7 7.4 Retail sales in % y-o-y 1.8 2.4 2.6 2.5 Supply Retail space in million m² 2.9 3.0 3.0 3.0 Retail space in % y-o-y 0.7 1.3 1.5 1.4 Retail rents Prime / secondary locations in EUR/m² 245 / 40.0 260 / 40.0 265 / 0.0 270 / 0.0 Prime / secondary locations in % y-o-y 4.3 / 0.0 6.1 / 0.0 1.9 / 0.0 1.9 / 0.0

Source: Feri, BulwienGesa, DZ BANK Research forecast

20 Real Estate Market Germany 2014 | 2015

Munich: Retail properties

PRIME RETAIL RENTS IN EURO PER SQM PER CAPITA RETAIL SPACE IN SQM

350 2,4 Munich Top-7 Regional-12 300 2,2

250 2,0

200 1,8

150 1,6

100 1,4 Munich Top-7 Regional-12 50 1,2 2005 2007 2009 2011 2013 2015e 2005 2007 2009 2011 2013 2015e

Source: BulwienGesa, Feri, DZ BANK Research forecast Source: Feri

The Bavarian capital is by far the most expensive shopping destination in Germany. Munich's retail sector still unique Prime rents are 20 per cent above average for the Top 7. There are good reasons in Germany for this: the economically strong and high-earning area of Greater Munich, together with the very large number of visitors from Germany and abroad, result in exception- ally high purchasing power. The city's attractions as a shopping destination also benefit from the very diverse range of goods on offer. Munich stands out positively from other 1A locations which have a high volume of chain stores with a large number of shops managed by the owners themselves. And sales floor productivity in the city centre is the highest among the top locations at EUR 6,500 per sqm. Munich thus tops the list of desirable locations for virtually all chain stores. High demand for 1A space ensures that new retail projects - recent examples include the Hofstatt- Passage and the Palais an der Oper - can be absorbed by the market quickly and without any problem. However, retail activity in Munich also has its limits, although these are ultimately based on its own success. The already high level of prime rents of currently EUR 320 per sqm is slowing the growth rate: in Berlin, Dusseldorf, Frankfurt and Hamburg prime rents have risen faster in the last five years. This trend Weaker growth momentum based is likely to persist. We expect the level of rents in Munich to increase further, but at a on already very high rents more moderate pace.

RETAIL PROPERTIES IN MUNICH

2012 2013 2014e 2015e Demand Per capita disp. income in EUR/month 1,808 1,827 1,850 1,875 Per capita disp. income in % y-o-y 1.3 1.1 1.3 1.3 Unemployment rate (BA) in % 5.0 5.2 5.4 5.2 Retail sales in % y-o-y 2.4 1.8 2.0 2.6 Supply Retail space in million m² 2.0 2.0 2.0 2.1 Retail space in % y-o-y 2.5 2.2 2.0 1.9 Retail rents Prime / secondary locations in EUR/m² 305 / 35.0 315 / 35.0 320 / 0.1 325 / 0.1 Prime / secondary locations in % y-o-y 3.4 / 0.0 3.3 / 0.0 1.6 / 0.0 1.6 / 0.0

Source: Feri, BulwienGesa, DZ BANK Research forecast

21 Real Estate Market Germany 2014 | 2015

Stuttgart: Retail properties

PRIME RETAIL RENTS IN EURO PER SQM PER CAPITA RETAIL SPACE IN SQM

300 2,4 Stuttgart Top-7 Regional-12 250 2,2

2,0 200 1,8 150 1,6

100 1,4 Stuttgart Top-7 Regional-12 50 1,2 2005 2007 2009 2011 2013 2015e 2005 2007 2009 2011 2013 2015e

Source: BulwienGesa, Feri, DZ BANK Research forecast Source: Feri

Retail activity in the sixth largest German city benefits from a population of 2.5 mil- Attractive shopping location in lion and an economically strong hinterland. Many successful companies are based economically strong region in the region - for example the automotive sector has a strong presence there. Pur- chasing power is higher than average. Similar to Munich and Cologne, the proportion of chain stores is slightly lower, which has a positive impact on the diversity of supply. The city's major attractions as a retail destination are reflected in buoyant demand for 1A space, which cannot be covered by supply. However, in contrast to the top locations as a whole, the demand overhang has not led to a sharp rise in prime rents. The growth of 7 per cent over five years represents only a good third of the average for the Top 7. The political infighting concerning Stuttgart 21 may have had a negative impact here. The scope for rent growth is however likely to be se- verely limited this year and in the following years. The reason for this is three major Three large retail projects will cap retail projects which are extending sales space in the city by a total of 100,000 sqm rent growth in future years within a relatively short period of time. These are the Gerber, which opens in Sep- tember 2014 and is the smallest of the three projects with 25,000 sqm. A month later this will be followed by the much larger Milaneo with 43,000 sqm. The Dorotheen- Quartier should then follow in 2016 with 38,000 sqm and a direct link with the pedes- trian zone.

RETAIL PROPERTIES IN STUTTGART

2012 2013 2014e 2015e Demand Per capita disp. income in EUR/month 1,731 1,749 1,767 1,786 Per capita disp. income in % y-o-y 1.4 1.0 1.1 1.1 Unemployment rate (BA) in % 5.6 6.2 5.4 5.3 Retail sales in % y-o-y 2.0 1.8 1.7 1.7 Supply Retail space in million m² 1.0 1.0 1.0 1.1 Retail space in % y-o-y -0.1 1.7 2.8 4.2 Retail rents Prime / secondary locations in EUR/m² 225 / 14.0 235 / 14.0 235 / 0.0 235 / 0.0 Prime / secondary locations in % y-o-y 0.0 / 0.0 4.4 / 0.0 0.0 / 0.0 0.0 / 0.0

Source: Feri, BulwienGesa, DZ BANK Research forecast

22 Real Estate Market Germany 2014 | 2015

OFFICE PROPERTIES

Market development, trends and outlook

The German market for office properties has survived difficult times in the recent General conditions for the German past as a result of two severe economic crises. The first was triggered by the burst- office market are currently good ing of the dot-com-bubble in 2000, which was compounded by the 9/11 terrorist at- tacks. The second followed not quite ten years later in the wake of the global financial market crisis caused by the collapse of Lehman. Conversely, the current situation is much improved. The economy is likely to show solid growth of around 2 per cent this year. And the number of people in work has climbed to a record level of more than 42 million. The unemployment rate has almost halved within a decade. The continuing favourable conditions in the labour market are having a particularly positive impact on demand for office space.

However, the steady growth in employment since 2005 is not reflected in any visible New office space has more than expansion of the supply of office space in the top seven locations. While the volume halved since 2005 of new office space relative to the existing supply increased sharply by an average of more than 2 per cent from 1995 to 2004, since 2005 the figure has been less than half this level at 1 per cent per year. The recent expansion in activity with the development of new office projects this year will however at least ensure that the volume of new space will increase by more than 1 per cent again after three years.

DESPITE SOLID ECONOMIC GROWTH AND A POSITIVE LABOUR THE RATIO OF OFFICE SPACE AND OFFICE EMPLOYMENT IS BACK MARKET, OFFICE SPACE IS INCREASING ONLY MODERATELY AT THE LEVEL RECORDED TOWARDS THE END OF THE 1990S

5 12 130 Top 7: office workers, 2000=100 4 10 125 Top 7: office space, 2000=100

3 8 120

2 6 115

1 4 110

0 2 105 -1 effective -5,1% 0 1995 1998 2001 2004 2007 2010 2013 100 GDP YOY in % (lhs) Top7: growth of office space in % of the total office space (lhs) 95 unemployment rate in % (rhs) 1995 1998 2001 2004 2007 2010 2013

Source: BulwienGesa, Feri, DZ BANK Source: Feri

The moderate growth in office space and the much more dynamic expansion of of- Relative divergence between office fice employment have converged again closely - from a joint starting point in 1995. employment and office space has The widest divergence between the two figures occurred in 2005, when the con- contracted sharply struction of new office space fuelled by the dot-com-boom coincided with the peak of job-shedding caused by the recession. This led to a sharp increase in vacancy rates in the office market. In 2010 - after the next crisis - the vacancy rate was even higher. Prime rents fell below their 1995 levels. However, how does the situation look today? Have vacancy rates and prime rents - adjusted for inflation - also moved back towards the more positive levels of 1995?

23 Real Estate Market Germany 2014 | 2015

TOP LOCATIONS: PRIME RENTS AND VACANCY RATES SINCE 1995 OFFICE SPACE PER EMPLOYEE DECLINING

37 33 11 30 10 27 9 36 24 8

21 7 35 18 6 15 5 34 12 4 9 3 33 6 Top-7: prime rent in EUR/sqm (lhs) 2 office space per office worker without 3 Top-7: vacancy rate in % (rhs) 1 vacant office space in sqm 0 0 32 1995 1998 2001 2004 2007 2010 2013 1995 1998 2001 2004 2007 2010 2013

Source: BulwienGesa, Feri, own calculations Source: Feri, own calculations

The vacancy rate averaged 6.6 per cent in this top location in 1995, while prime Office space per job has slipped rents were slightly below EUR 25 per sqm. Adjusted for devaluation in the last 20 back to the 1995 level years, in current terms this would correspond to almost EUR 34 per sqm. Current prime rents are however some 20 per cent lower at just below EUR 27 per sqm. Relatively speaking, the divergence in the vacancy rate, which is currently just over 8 per cent, is of a similar magnitude. On the other hand, space per office job, calcu- lated on the basis of the actual volume of office space let, is almost back at its 1995 level at around 33.5 sqm.

IFO BUSINESS CLIMATE INDEX FALLING ECONOMIC UPTURN IN EUROZONE SLOWING

6 6 8 120

6 4 115 4 4 110 2 2 2 105 0 0 100 0 -2 -2 95 -4 -4 90 -2 -6 -6 85 EMU-GDP IFO business climate index -4 -8 80 Euro indicator -8 index points MOM (lhs) index (rhs) -10 75 -6 -10 2000 2002 2004 2006 2008 2010 2012 2014 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: IFO Institute Source: DZ BANK Figures vs. previous year in %

A brief glance at the past shows that - based on positive conditions - prime rents and Economic risks: vacancy rates have not reached a particularly high or low level. Accordingly, there Companies becoming more cautious should certainly still be potential for improvement. However, this presupposes that companies, as well as the public sector, continue to generate buoyant demand for

24 Real Estate Market Germany 2014 | 2015

office space. However, there are question marks over this. Despite high tax revenue, public sector coffers are not well filled, and generous spending is therefore not very likely. Companies are also expected to act more cautiously. On the one hand, the economies of many eurozone countries are still struggling with weak growth. On the other hand, the many international flash points carry the potential for economic set- backs which should not be underestimated. These include, for example, the crises in Ukraine, Israel/Gaza and Iraq. The ifo business climate index reflects the situation faced by companies: although the level of the index remains fairly high at well above 100 points, it has nevertheless fallen visibly.

Below the line, the economies of the top locations are likely to remain robust. How- However, demand for office ever, the pace of job creation will tend to slow. The growth in the construction of new space is likely to remain robust in office space will also lead to growth in the supply. Viewed overall, prime rents in the top locations top locations are therefore likely to continue to show positive rates of change. How- ever, in contrast to previous years, we anticipate more subdued growth. The scaling down of the vacancy rate is also likely to lose momentum.

PRIME RENTS - CHANGE VERSUS PREVIOUS YEAR IN PER CENT VACANCY RATE - IN PER CENT OF SUPPLY OF SPACE 12 12 Regional-12 Top-7 8 10 4 8 0 6 -4 4 -8

-12 2 Regional-12 Top-7 -16 0 1995 1999 2003 2007 2011 2015e 1995 1999 2003 2007 2011 2015e

Source: Feri, own calculations, DZ BANK Research forecast Source: DZ BANK Research forecast

Overall, prime rents should show reasonable growth of just under 3 per cent this Forecast for 2014 and 2015: slightly year, but will fall short of the 2013 level of 3.4 per cent. For the reasons referred to worse than 2013 but still good above, we expect a further slight weakening next year. We expect the average growth in prime rents to fall to just below 2 per cent. However, the weakest increase since 2011 is still almost twice as high as the average of the last ten years. The vacancy rate is likely to fall slightly again this year and next year. The rapid downward pace of recent years will not however be repeated.

25 Real Estate Market Germany 2014 | 2015

Office: Comparison of top locations

The office markets in all seven top locations have consistently performed well after Office markets continue to grow - the recession-driven downturn of the years 2009 and 2010. From 2011 to 2013, at different rates prime rents increased by a good 10 per cent on a cumulative basis. However, there are major differences between the locations. While Frankfurt, Hamburg and Cologne "managed" growth of only 6 per cent over the three-year period, benchmark rents in Dusseldorf, Munich and Stuttgart grew more than twice as fast by 14 to 16 per cent. In Berlin, Germany's largest location for office space, the rent growth was precisely in line with the average level. While the gap between the most expensive and the cheapest locations - Frankfurt and Stuttgart - remains relatively stable at around EUR 15 per sqm, the divergence from Munich, the second most expensive office location, has narrowed visibly. For many years prime rents in Frankfurt exceeded those in Munich by EUR 5 per sqm. At the moment this figure is only EUR 2. The Frankfurt office market - which is dominated by banks - has therefore survived the financial market crisis largely unscathed, but has however lost at least some of its edge over Munich.

PRIME RENTS: IN EURO PER SQM PRIME RENTS: CHANGE VERSUS PREVIOUS YEAR IN PER CENT

50 8 Berlin 7 8 6 45 Cologne 6 6 40 Dusseldorf 5 5 Frankfurt 35 4 3 Hamburg 3 2 3 2 30 2 2 2 2 Munich 2 2 2 1 1 2 2 2 1 1 1 1 1 25 Stuttgart 00 0 0 20 Top-7 0

15 2012 2013 2014e 2015e -2 -1 10 Berlin Cologne Dussel- Frank- Ham- Munich Stutt- Top-7 1995 1999 2003 2007 2011 2015e dorf furt burg gart

Source: BulwienGesa, own calculations, DZ BANK forecast Source: BulwienGesa, own calculations, DZ BANK forecast

Ultimately, the generally positive trend is attributable to a crisis-related moderate in- Good demand for space leads to crease in office space on the back of growth in the number of office jobs. 12 per cent sharp reduction in vacancies more people are currently employed in offices in the top locations than ten years ago. This growth has fuelled demand and led to an increasing shortage of available attractive office space. This has resulted in the abovementioned increase in rents and also the visible decline in vacancy rates. On average for the seven locations, the vacancy rate has fallen by almost 2 percentage points between 2010 and today. In Berlin and Dusseldorf, and in Stuttgart, the decline has been weakest at less than 1 percentage point. However, the trend in Stuttgart is relative to the fact that it has by far the lowest vacancy rate of the top locations at just over 5 per cent. The steepest decline in the vacancy rate - 3 percentage points in Munich - is in keeping with the strongest rent growth. Vacancy rates in Hamburg and Frankfurt have also fallen sharply. Although the banking centre does still show the highest vacancy rate of more than 12 per cent, the divergence compared to Dusseldorf, the location with the

26 Real Estate Market Germany 2014 | 2015

second largest proportion of unlet office space, has contracted from 5 to 2 percentage points.

TOP LOCATIONS: MAJOR DIFFERENCES IN GROWTH IN OFFICE VACANCY RATE NOT FALLING EVERYWHERE SPACE AND JOBS

18 16 14,7 2010 2011 2012 16 14 2013 2014e 2015e 14 12,3 12 11,3 11,0 12 9,6 9,8 10,0 10 10 8,6 8,9 7,7 8,1 8 8 7,0 7,3 6,2 6 5,9 6 4,7 4 4 2 0 2 Berlin Cologne Dussel- Frank- Ham- Munich Stutt- Top-7 dorf furt burg gart 0 Berlin Cologne Dussel- Frank- Ham- Munich Stutt- Top-7 office space 2003-2013 in % office workers 2003-2013 in % dorf furt burg gart

Source: Feri, own calculations Source: Feri, calculations

Comparison of top European locations

While prime rents in top retail locations are slightly above-average by European There are no leading economic cities standards - see graph on page 15 - a comparison of office markets shows that only in Germany - consequently office Frankfurt, the most expensive German office location, reaches the average rent rents are relatively cheap by Euro- level. This is surprising given the major economic importance of the Federal Repub- pean standards lic of Germany and the positive demand for office space. The reason is that, unlike many European countries, Germany does not have a dominant economic location such as London in the UK or Paris in France; the leading German office markets are spread over several major cities - the top locations. By European standards, prime rents in Germany therefore fall far short of the levels in these economic centres.

PRIME OFFICE RENTS IN EUROPE IN EURO PER SQM - GERMAN TOP LOCATIONS ARE AT BEST AVERAGE

125

100

50 average

Source: CBRE, own calculations Per: Q2/2014

27 Real Estate Market Germany 2014 | 2015

Berlin: Office properties

PRIME RENTS IN PER CENT COMPARED TO PREVIOUS YEAR VACANCY RATE IN PER CENT 8 11

10 4

9 0 8 -4 7

-8 6 Berlin Top-7 Regional-12 Berlin Top-7 Regional-12 -12 5 2005 2007 2009 2011 2013 2015e 2005 2007 2009 2011 2013 2015e

Source: BulwienGesa, DZ BANK Research forecast Source: Feri, DZ BANK Research forecast

The economic upturn in Berlin continued in the first half. It is being driven by young Office market achieves peak result companies with internet or E-commerce activities such as the online fashion com- in first half 2014 pany Zalando, but also by established companies. The positive trend led to a peak result for the office market in the first half - its highest half-year adjusted take-up in the last ten years of 295,000 sqm. The positive demand related to segments of all sizes equally. Many factors suggest that the solid market trend is continuing in the second half, leading to annual take-up of more than 600,000 sqm, i.e. significantly more than the figure of around 520,000 sqm in the previous year. Prime rents have been moving sideways since last autumn at EUR 22.50 per sqm. However, this is also the highest level since 2003. The positive market trend in Berlin is also reflected in its attractions for development projects and increasing construction activity. The volume of new space forecast for 2014 and 2015 of 180,000 sqm and 290,000 sqm Prime rents could increase further in respectively is thus well above the ten-year average of 140,000 sqm. Prime rents 2014, growth in supply could act as could increase further in the second half. Thereafter they are likely to initially stabi- a brake in 2015 lise given the level reached and the growth in supply.

OFFICE PROPERTIES IN BERLIN

2012 2013 2014e 2015e Demand GDP in % y-o-y 2.0 1.9 1.6 1.5 Per capita GDP in EUR '000 23.9 24.1 24.4 24.7 Per capita GDP in % y-o-y 0.8 1.1 1.0 1.3 Office employees in % y-o-y 2.7 1.4 1.5 1.5 Supply Office space in m m² 17.5 17.5 17.6 17.8 Office space in % y-o-y -0.1 0.3 0.6 1.2 Vacancy rate in % 7.5 8.0 7.8 7.7 Office rents Prime/secondary locations in EUR/m² 22.0 / 6.8 22.5 / 7.5 23.0 / 7.5 23.3 / 7.5 Prime/secondary locations in % y-o-y 2.3 / 4.6 2.3 / 10.3 2.2 / 0.0 1.3 / 0.0

Source: Feri, BulwienGesa, DZ BANK Research forecast

28 Real Estate Market Germany 2014 | 2015

Cologne: Office properties

PRIME RENTS IN PER CENT COMPARED TO PREVIOUS YEAR VACANCY RATE IN PER CENT 8 11

6 10 4 9 2

0 8

-2 7 -4 6 -6 Cologne Top-7 Regional-12 Cologne Top-7 Regional-12 -8 5 2005 2007 2009 2011 2013 2015e 2005 2007 2009 2011 2013 2015e

Source: BulwienGesa, DZ BANK Research forecast Source: Feri, DZ BANK Research forecast

Based on the size of its population, the Cologne office market of 7 million sqm is on City of one million has a relatively the small side. Even the much smaller Dusseldorf has more office space. In terms of small office market rental income in the first half, Cologne has slipped down into seventh position among the top locations with 112,000 sqm. As evident elsewhere, major transac- Lowest space take-up of the tions have been a rarity. In Cologne this is partly attributable to the lack of large in- 7 top locations terconnecting space. About a third of transactions were of a public sector nature. The declining trend in vacant properties evident since 2010 is continuing, but is gradually slowing. Prime rents, which climbed to EUR 21 at the end of last year, have since stabilised at this level. Completed space will probably only reach a third of the ten-year average this year. Construction activity could be stronger next year, but has remained far behind average historical levels. The second half should also therefore be better than the first half. Negotiations are also still ongoing concerning some large-scale office space. Prime rents could increase further over the course of the year, thus exceeding their pre-crisis levels. If the economic environment does Prime rents could increase slightly not deteriorate, prime rents could also increase next year, as indicated by the mod- in 2014 and 2015 est growth in supply.

OFFICE PROPERTIES IN COLOGNE

2012 2013 2014e 2015e Demand GDP in % y-o-y 1.9 1.9 1.9 1.9 Per capita GDP in EUR '000 40.2 40.6 41.2 41.8 Per capita GDP in % y-o-y 0.8 1.1 1.4 1.6 Office employees in % y-o-y 1.3 1.1 1.7 1.6 Supply Office space in m m² 7.1 7.2 7.3 7.3 Office space in % y-o-y 0.7 0.9 0.8 0.9 Vacancy rate in % 8.1 7.5 7.2 7.0 Office rents Prime/secondary locations in EUR/m² 20.5 / 8.0 21.1 / 8.0 21.4 / 8.0 21.7 / 8.0 Prime/secondary locations in % y-o-y 2.5 / 0.0 2.9 / 0.0 1.2 / 0.0 1.4 / 0.0

Source: Feri, BulwienGesa, DZ BANK Research forecast

29 Real Estate Market Germany 2014 | 2015

Dusseldorf: Office properties

PRIME RENTS IN PER CENT COMPARED TO PREVIOUS YEAR VACANCY RATE IN PER CENT 8 12

11 4 10

0 9

8 -4 7 -8 6 Dusseldorf Top-7 Regional-12 Dusseldorf Top-7 Regional-12 -12 5 2005 2007 2009 2011 2013 2015e 2005 2007 2009 2011 2013 2015e

Source: BulwienGesa, DZ BANK Research forecast Source: Feri, DZ BANK Research forecast

Based on space take-up, the Dusseldorf office market showed slightly weaker First-half 2014 was fairly muted growth in the first half. Half-year sales of around 120,000 sqm were 18 per cent below the fairly positive level of the previous year and 12 per cent lower than the ten- year average. The reason is a relatively low volume of major transactions. In contrast, demand in the medium-sized segment is fairly good. In order to achieve the positive level of the previous year of a total of 340,000 sqm, some major transactions would have to be booked, and there is no sign of this happening as yet. The declining trend in the vacancy rate, which had fallen to slightly below 11 per cent in 2013, is unlikely to continue for the time being. Since the volume of new office space is likely to be fairly moderate in 2014 and 2015 at a probable total of 150,000 sqm, the amount of space which becomes available in the near future due to relocations is likely to be fairly marginal. Prime rents, which have risen by 16 per cent to EUR 25 per sqm since 2010, are likely to remain stable under current market conditions. They have also therefore almost regained their level at the new millennium. How- Prime rents likely to consolidate ever, growth could be slightly lower next year partly due to the manageable volume at a high level in 2014 of additional space on offer.

OFFICE PROPERTIES IN DUSSELDORF

2012 2013 2014e 2015e Demand GDP in % y-o-y 2.4 2.5 2.1 2.0 Per capita GDP in EUR '000 67.0 68.3 69.6 70.9 Per capita GDP in % y-o-y 1.8 2.0 1.9 1.9 Office employees in % y-o-y 1.7 1.4 1.5 1.4 Supply Office space in m m² 7.5 7.5 7.6 7.7 Office space in % y-o-y 1.4 0.4 1.3 1.5 Vacancy rate in % 11.3 10.8 10.9 11.0 Office rents Prime/secondary locations in EUR/m² 23.5 / 9.2 25.0 / 9.3 25.0 / 9.3 25.3 / 9.3 Prime/secondary locations in % y-o-y 6.8 / -1.1 6.4 / 1.1 0.0 / 0.0 1.0 / 0.0

Source: Feri, BulwienGesa, DZ BANK Research forecast

30 Real Estate Market Germany 2014 | 2015

Frankfurt: Office properties

PRIME RENTS IN PER CENT COMPARED TO PREVIOUS YEAR VACANCY RATE IN PER CENT 12 16

8 14

4 12

0 10

-4 8

-8 6 Frankfurt Top-7 Regional-12 Frankfurt Top-7 Regional-12 -12 4 2005 2007 2009 2011 2013 2015e 2005 2007 2009 2011 2013 2015e

Source: BulwienGesa, DZ BANK Research forecast Source: Feri, DZ BANK Research forecast

In terms of the relative trend in space take-up, the Frankfurt office market has shown Lack of major transactions the weakest performance of the top 7. Compared to the previous half-year, rented "hampers" first half in Frankfurt space declined by 23 per cent to 155,000 sqm. Compared to the ten-year average, office market the figure has fallen by a fifth. The reason for this is the broad absence of major transactions which are otherwise very important for the market. In the segment above 5,000 sqm, only Deutsche Bank was active, completing contracts for around 30,000 sqm in two properties. Given the solid economic environment and growing number of office employees - including 1,000 new bank regulators - there is a high Office space needed for 1,000 bank probability that market growth will gain momentum in the second half. The current regulators prime rental figure of around EUR 35 per sqm could then increase again slightly. The volume of space completed this year will be high due to the new ECB building. Conversely, the volume completed will be lower than average. Given continuing buoyant demand, prime rents could reach EUR 36 per sqm in 2015, thus exceeding Prime rents likely to top pre-crisis their pre-crisis level. The vacancy rate is likely to fall again slightly, but without level in 2015 matching the sharp reduction in vacancies in the last two years.

OFFICE PROPERTIES IN FRANKFURT

2012 2013 2014e 2015e Demand GDP in % y-o-y 2.6 2.4 2.1 2.1 Per capita GDP in EUR '000 71.4 72.6 73.8 75.1 Per capita GDP in % y-o-y 0.7 1.6 1.7 1.8 Office employees in % y-o-y 1.2 1.1 1.3 1.3 Supply Office space in m m² 12.0 12.1 12.4 12.6 Office space in % y-o-y 0.3 1.0 2.0 1.4 Vacancy rate in % 13.7 12.5 12.3 12.3 Office rents Prime/secondary locations in EUR/m² 33.0 / 9.5 35.0 / 9.4 35.0 / 9.5 35.5 / 9.5 Prime/secondary locations in % y-o-y 0.0 / 0.0 6.1 / -1.1 0.0 / 1.1 1.4 / 0.0

Source: Feri, BulwienGesa, DZ BANK Research forecast

31 Real Estate Market Germany 2014 | 2015

Hamburg: Office properties

PRIME RENTS IN PER CENT COMPARED TO PREVIOUS YEAR VACANCY RATE IN PER CENT 8 11

10 4 9

0 8

7 -4 Hamburg Top-7 6 Regional-12 Hamburg Top-7 Regional-12 -8 5 2005 2007 2009 2011 2013 2015e 2005 2007 2009 2011 2013 2015e

Source: BulwienGesa, DZ BANK Research forecast Source: Feri, DZ BANK Research forecast

In 2013, rental income in Hamburg was almost exactly in line with the longstanding First half slightly above average average level in the first half, and this year the result was about 3 per cent higher at 225,000 sqm. However, the size of properties in demand has shifted. A number of transactions from 10,000 sqm - Telekom 32,000, Marquard & Bahls 15,000 and Jungheinrich 10,000 - were offset in the first half by a decline in medium-sized office space. The vacancy rate fell towards 7 per cent, which is 2 percentage points down on 2010. However, the rate at which vacancies are being reduced has slowed. So far, the declining volume of empty office space has not however been reflected in growth in prime rents, which have been EUR 24 per sqm since mid-2012. The prospects for the Hamburg office market are good in the second half, and also for 2015. On the one hand, the domestic economy is likely to grow more strongly in 2014 and 2015 than in the two previous years, and on the other hand, this important logistics location with the third largest European sea port is benefiting as the global economy Further upward potential for prime gains momentum. Space completed this year is slightly lower than the long-term av- rents which have been stable since erage, and only two thirds of this level is expected to be achieved in 2015. There is a 2012: they could increase in 2014 good chance of prime rents now increasing again given the positive conditions for and 2015 Hamburg. OFFICE PROPERTIES IN HAMBURG

2012 2013 2014e 2015e Demand GDP in % y-o-y 1.5 2.3 2.4 2.2 Per capita GDP in EUR '000 45.2 45.9 46.8 47.7 Per capita GDP in % y-o-y 0.7 1.7 1.9 1.9 Office employees in % y-o-y 1.8 1.9 1.6 1.5 Supply Office space in m m² 13.6 13.7 13.8 14.0 Office space in % y-o-y 1.2 0.8 0.7 1.0 Vacancy rate in % 7.8 7.6 7.4 7.3 Office rents Prime/secondary locations in EUR/m² 24.0 / 9.0 24.0 / 9.5 24.3 / 9.5 24.7 / 9.5 Prime/secondary locations in % y-o-y 2.1 / 9.8 0.0 / 5.6 1.3 / 0.0 1.6 / 0.0

Source: Feri, BulwienGesa, DZ BANK Research forecast

32 Real Estate Market Germany 2014 | 2015

Munich: Office properties

PRIME RENTS IN PER CENT COMPARED TO PREVIOUS YEAR VACANCY RATE IN PER CENT 8 11

10 4

9 0 8 -4 7

-8 6 Munich Top-7 Regional-12 Munich Top-7 Regional-12 -12 5 2005 2007 2009 2011 2013 2015e 2005 2007 2009 2011 2013 2015e

Source: BulwienGesa, DZ BANK Research forecast Source: Feri, DZ BANK Research forecast

Space take-up of 240,000 sqm in the Munich office market in the first half was Supply shortage brakes market broadly in line with the ten-year average. In contrast to previous years, there were growth few major transactions; the two largest were 19,000 sqm respectively for Brainlab and BayWa. The supply shortage is the main factor which is hampering market growth. Further transactions, also of a large-scale nature, would be possible if sufficient space were available. The high demand has led to a marked reduction in vacancy rates in recent years. Among the top locations, only Stuttgart shows a slightly lower vacancy rate. As a result of the high demand for space in the dynamic location of Munich, the volume of new office space completions is increasing. However, the probable volume of around 130,000 sqm this year and next year respectively falls short of the average figure of 160,000 sqm reported in the last ten years. Against this background, prime rents are likely to increase to well above EUR 33 per sqm, Munich - with its high rate of rent i.e. a good EUR 2 more than at the end of 2013. The positive trend in rents should growth - hot on the heels of also continue next year. The Munich rental market has aready exceeded its pre- Frankfurt as the most expensive crisis levels. And Frankfurt's edge as the most expensive office market has been office location eroded.

OFFICE PROPERTIES IN MUNICH

2012 2013 2014e 2015e Demand GDP in % y-o-y 1.3 1.9 2.1 1.9 Per capita GDP in EUR '000 51.9 52.4 53.2 54.0 Per capita GDP in % y-o-y -0.5 1.0 1.4 1.5 Office employees in % y-o-y 1.0 0.9 1.2 1.2 Supply Office space in m m² 13.0 13.1 13.3 13.5 Office space in % y-o-y 0.6 0.9 1.5 1.2 Vacancy rate in % 7.9 6.8 6.4 6.2 Office rents Prime/secondary locations in EUR/m² 30.0 / 11.3 31.5 / 12.0 33.0 / 12.0 33.5 / 12.0 Prime/secondary locations in % y-o-y 1.7 / 2.7 5.0 / 6.2 4.8 / 0.0 1.5 / 0.0

Source: Feri, BulwienGesa, DZ BANK Research forecast

33 Real Estate Market Germany 2014 | 2015

Stuttgart: Office properties

PRIME RENTS IN PER CENT COMPARED TO PREVIOUS YEAR VACANCY RATE IN PER CENT 10 11 8 10 6 9 4 2 8

0 7 -2 6 -4 5 -6 Stuttgart Top-7 Regional-12 Stuttgart Top-7 Regional-12 -8 4 2005 2007 2009 2011 2013 2015e 2005 2007 2009 2011 2013 2015e

Source: BulwienGesa, DZ BANK Research forecast Source: Feri, DZ BANK Research forecast

The smallest office market among the top 7 continues to show dynamic growth. In Positive market trend in the first half, office space rentals in Stuttgart scored their third best result so far - af- first-half 2014 ter the peak years of 2011 and 2012 - at 116,000 sqm. Space take-up was thus one third above the ten-year first-half average of 85,000 sqm. Some large transactions in excess of 10,000 sqm - for example for Daimler Financial Services and the Land of Baden-Württemberg - also contributed to the positive result. The already low vacancy rate continues to decline, and is likely to fall below 5 per cent this year on the back of likely continuing positive market growth. The comparatively low level of prime rents should thus also increase, having fallen slightly in 2013 after the strong growth of previous years. There are no signs of strong growth in supply. In 2014 and 2015 jointly, the probable volume of completed office space could be slightly below Prime rents likely to be in the region the ten-year average at 110,000 sqm. Prime rents could therefore increase again of EUR 20 per sqm in 2015 next year, approaching a level of EUR 20 per sqm.

OFFICE PROPERTIES IN STUTTGART

2012 2013 2014e 2015e Demand GDP in % y-o-y 2.0 2.0 1.9 1.8 Per capita GDP in EUR '000 52.2 52.9 53.6 54.5 Per capita GDP in % y-o-y 0.8 1.3 1.4 1.6 Office employees in % y-o-y 1.4 1.0 1.6 1.4 Supply Office space in m m² 7.1 7.1 7.2 7.2 Office space in % y-o-y 0.4 0.6 0.7 0.7 Vacancy rate in % 5.5 5.2 4.9 4.7 Office rents Prime/secondary locations in EUR/m² 18.9 / 8.8 18.7 / 8.7 19.2 / 8.7 19.5 / 8.7 Prime/secondary locations in % y-o-y 8.0 / 1.1 -1.1 / -1.1 2.7 / 0.0 1.6 / 0.0

Source: Feri, BulwienGesa, DZ BANK Research forecast

34 Real Estate Market Germany 2014 | 2015

RESIDENTIAL PROPERTIES

"Beggars can't be choosers" - in any case conditions in the housing markets of the Conditions remain strained in the major cities are resulting in developments which virtually no-one would have antici- housing markets in major cities pated some years ago. Although housebuilding has picked up sharply, the volume of units being completed is not sufficient to meet the high demand for housing in rapidly growing large cities. Prefabricated housing, which was not previously regarded as an acceptable option, is thus in demand again. Some years ago, high-rise buildings in large housing estates were struggling with persistent vacancy rates. However, investment was often made here, improving the quality of the housing and the dreary character of high-rise buildings. Another example is the creation of low-cost housing. Because this is now virtually impossible to achieve in Frankfurt, the city administra- tion is building social housing in Offenbach - a location which is much maligned by Frankfurters. However, the Frankfurt housing company ABG is also active in other districts in the surrounding area, for example Friedberg and Mörfelden-Walldorf.

TOP LOCATIONS: HOUSEBUILDING HAS GROWN STRONGLY. … … BUT STILL LAGS FAR BEHIND DEMAND

completed dwellings per thousand inhabitants 7 80 70 6 60 5 50 40 4 30 3 20 2 10 0 1 -10 0 -20 Berlin Cologne Dussel- Frank- Ham- Munich Stutt- Top-7 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014e dorf furt burg gart annual change of the number of households in thousand (3Y-average) 2006/2007 2008/2009 2010/2011 2012/2013 2014/2015e dwelling permits in thousand

Source: Feri, own calculations, DZ BANK Research forecast Source: Feri, own calculations cumulative data for top locations

Why is more construction simply not taking place? Ultimately, investors are seeking Virtually no building land available solid alternatives to low capital market yields such as those provided by housebuilding in major cities. There is a shortage of suitable building land. Large areas are re- quired to resolve the five-digit housing shortage - and virtually none is available. And in areas where space is becoming available or where "housing density is to be increased", there are often vigorous protests by residents anxious to preserve both the value of their homes and also green space in the city. A more recent example is the development of the site of the former Tempelhof airport, which was rejected by Ber- liners in a referendum. The shortage of building land means that the number of building permits - which had continued to rise sharply in prime locations since 2011 - is likely to fall again this year. Housebuilding will not therefore increase either and the housing shortage will thus remain virtually unchanged.

Current conditions in the housing market are also likely to be due to the miscalcula- Problem underestimated in the past tion of trends in the past when the issue of housebuilding was not given a very high priority. After the construction boom of the 1990s, conditions in the housing markets of major cities were fairly comfortable. The number of private households stagnated

35 Real Estate Market Germany 2014 | 2015

or fell, and the supply/demand ratio thus permitted virtually no rent increases up to 2005. After the new millennium, the number of private households increased and demand for housing thus also grew: as a result of demographic change - leading to the dominance of single households - demand for housing is increasing faster than the size of the population. This led to a gradual shortage of housing, which had initially still been in good supply, causing rents to increase sharply since the middle of the last decade. Today the issue of "affordable housing" is of major importance. However, as a delayed reaction to the trend in the housing market, a housing shortage has now been created - in contrast to the housing surplus of the 1990s - and this is likely to increase further given the number of newly constructed units and demographic growth.

HOUSING RENTS CONTINUE TO RISE. … … BUT PACE IS SLACKENING

rent in EUR/sqm rent YOY in % 18 7 6 16 5 14 4 12 3 10 2 1 8 0 6 -1 first time use maximum existing flats maximum first time use maximum existing flats maximum 4 -2 first time use average existing flats average first time use average existing flats average market trend 2 -3 1993 1997 2001 2005 2009 2013 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: BulwienGesa Source: BulwienGesa, own calculations

However, the growth in rents has slowed. This trend is likely to continue in 2014 and Growth in rents slowing 2015, even though rent growth is currently still significantly higher than the low inflation rate of around 1 per cent. The fact that high demand is not leading to higher rent growth on the back of a supply shortage, is likely to be mainly attributable to the high level of rents and budget restrictions on households, which are limiting the scope for rent payments. Also, as a result of low interest rates, buying a property is often the more favourable option in terms of the ongoing cost, and a proportion of rental demand is therefore shifting toward property purchases. This is leading to local over- valuations in the conurbations, which are increasingly being held up as proof of a German property bubble.

Tenants are also not only being negatively affected by the sharp rise in "cold" rents. Tenants adversely affected by The additional costs of housing - the "second rent" - have also risen considerably in rising rents, but also by spiralling recent years: for increases in the cost of heating, electricity, water, waste disposal additional costs and local rates are accumulating. This is compounded by an increasing number of new regulations, which although they certainly make sense, also generate costs which are passed on to tenants and which make housing even more expensive. Ex- amples are the monitoring of water pipes for legionella, energy consumption certifi- cates, and smoke detectors.

36 Real Estate Market Germany 2014 | 2015

TOP LOCATIONS: ARE TENANTS MOVING TO CHEAPER … …NEIGHBOURING CITIES?

existing flats: rent in EUR/sqm existing flats: rent in EUR/sqm 13 13 12 Frankfurt 12 Munich 11 Offenbach 11 Augsburg 10 10 9 9 8 8 7 7 6 6 5 5 4 4 3 3 1993 1997 2001 2005 2009 2013 1993 1997 2001 2005 2009 2013

Source: BulwienGesa Source: BulwienGesa

However, what will happen next in the housing markets in the top locations? As al- Some demand is shifting to ready described, we expect a further, but more moderate increase in rents. This ap- surrounding areas plies in any case to first occupancy rents and rents for attractive existing housing, especially in particularly sought-after districts of cities. Housing demand will in principle remain high, however after the strong growth in rents which has already taken place and the currently high rent levels, potential tenants will focus more strongly on cheaper districts of cities or the surrounding area. The diagrams above show that, based on the examples of Frankfurt/Offenbach and Munich/Augsburg, housing demand from cities and local authority areas surrounding major cities is increasing. It will become evident in the longer term whether it will be possible to create more housing in large cities. However, the extent to which it will also be possible to realise alternative options, in addition to the difficult process of designating building land, will also depend ultimately on levels of acceptance and costs. Some concepts already exist, for example increasing the density in some areas of towns and cities, high-rise homes, micro apartments or converting unused office space.

CHANGE IN AVERAGE FIRST OCCUPANCY RENTS SINCE 2003 AVERAGE FIRST OCCUPANCY RENTS Y-O-Y IN PER CENT IN PER CENT

10 11 48 45 46 10 9 8 8 8 36 7 7 28 38 6 5 5 33 5 5 22 22 4 28 27 27 4 4 4 14 3 3 3 3 3 2 2 2 2 17 2 2 2 2 2 2 2 2 2 2 14 16 11 1 2 7 4 0 7 8 5 0 0

Stutt- Cologne Munich Frank- Top-7 Dussel- Berlin Ham- Berlin Cologne Dussel- Frank- Ham- Munich Stutt- Top-7 gart furt dorf burg dorf furt burg gart from 2003 to 2008 from 2008 to 2013 from 2003 to 2013 2011 2012 2013 2014e 2015e

Source: BulwienGesa, own calculations Source: BulwienGesa, own calculations, DZ BANK Research forecast

37 Real Estate Market Germany 2014 | 2015

The table below contains our evaluations for the housing markets in the seven top Outlook for 2014 and 2015 locations. While average first occupancy rents are likely to increase by around 3 and 2 per cent respectively in 2014 and 2015, we anticipate slightly weaker growth in the prime segment.

FORECAST "HOUSING" UP TO 2015

Dussel- Frank- Ham- Stutt- Year Berlin Cologne dorf furt burg Munich gart Top-7 Demand Population in thoausand 2013 3,547 1,030 596 703 1,815 1,401 620 9,712 5-year change in % 2008-2013 3.6 3.3 2.4 6.0 2.6 6.5 3.7 3.9 Private households in thousand 2013 2,067 564 333 421 1,014 852 331 5,583 5-year change in % 2008-2013 4.9 4.5 3.8 9.1 4.5 9.9 5.0 5.8 Unemployment rate in % 2013 11.7 9.4 8.8 7.5 7.3 5.2 6.2 9.0 5-year change in percentage points 2008-2013 -2.1 -1.4 -0.8 -1.0 -0.8 -0.2 0.9 -1.2 Disposable income per capita (Euro) 2013 1,204 1,570 1,770 1,501 1,896 1,827 1,748.7 1,553 5-year change in % 2008-2013 3.5 2.6 3.2 1.9 3.7 1.9 1.7 2.9 Supply 0 0 0 0 0 0 0 0 0 Dwelling units in thousand 2013 1,912 533 330 370 905 766 302 5,119 5-year change in % 2008-2013 1.1 2.2 1.2 3.5 2.1 3.1 2.1 1.9 Completions p.a. (5-year average) 2008-2013 1.5 2.9 1.5 3.9 2.4 4.0 2.6 2.4 per 1000 inhabitants 2013/14e 2.9 2.9 2.4 6.2 4.7 4.8 3.0 3.7 Rent 0 0 0 0 0 0 0 0 0 First occupancy, average rent 2013 10.8 11.2 12.0 12.8 13.0 14.0 10.8 11.9 in Euro/sqm 2014e 11.2 11.4 12.3 13.0 13.3 14.7 11.0 12.3 2015e 11.4 11.6 12.5 13.3 13.5 15.0 11.2 12.5 2013 8.0 1.8 2.6 5.4 0.8 3.7 2.9 4.3 YOY change in % 2014e 3.7 1.8 2.5 2.0 2.3 5.0 1.9 3.1 2015e 1.8 1.8 1.6 2.3 1.5 2.0 1.8 1.8 5-year change in % 2008-2013 First occupancy, maximum rent 2013 10.8 11.2 12.0 12.8 13.0 14.0 10.8 11.9 in Euro/sqm 2014e 11.2 11.4 12.3 13.0 13.3 14.7 11.0 12.3 2015e 11.4 11.6 12.5 13.3 13.5 15.0 11.2 12.5 2013 8.0 1.8 2.6 5.4 0.8 3.7 2.9 4.3 YOY change in % 2014e 3.7 1.8 2.5 2.0 2.3 5.0 1.9 3.1 2015e 1.8 1.8 1.6 2.3 1.5 2.0 1.8 1.8 5-year change in % 2008-2013 15.4 14.5 15.5 18.5 18.8 21.0 14.6 16.9

RESIDENTIAL: FIRST OCCUPANCY RENTS, AVERAGE … … AND MAXIMUM – COMPARISON OF TOP LOCATIONS

average rent first time use in EUR/sqm maximum rent first time use in EUR/sqm Berlin 16 Berlin 22 Cologne 15 Cologne 20 Dusseldorf 14 Dusseldorf 13 18 Frankfurt Frankfurt 12 Hamburg Hamburg 16 11 Munich Munich 14 10 Stuttgart Stuttgart 9 12 Top-7 Top-7 8 10 7 6 8 1995 1999 2003 2007 2011 2015e 1995 1999 2003 2007 2011 2015e

Source: BA, BulwienGesa, Feri, own calculations, DZ BANK Research forecast

38 Real Estate Market Germany 2014 | 2015

OVERVIEW OF FORECASTS

Population Population GDP P.c. GDP P.c. disposable income Unemployment rate Structural data (per 2013) in 1,000 2003-2013 in % in EUR m in EUR in EUR/month in % Berlin 3,547 4.6 85.6 24,139 1,204 11.7 Cologne 1,030 6.5 41.8 40,613 1,570 9.4 Dusseldorf 596 4.2 40.7 68,339 1,770 8.8 Frankfurt 703 9.4 51.0 72,577 1,501 7.5 Hamburg 1,815 4.8 83.3 45,929 1,896 7.3 Munich 1,401 14.2 73.5 52,438 1,827 5.2 Stuttgart 620 5.4 32.8 52,913 1,749 6.2 Top locations 9,712 6.5 408.8 42,098 1,553 9.0

Retail space Rents in top locations Change in rent in % vs Retail sales in % vs.

Retail properties Per 2013 in EUR per m² previous year previous year 2003- per in- in 2013 habitant 2013 2014e 2015e 2013 2014e 2015e 2013 2014e 2015e 1000 m² in % in m² Berlin 6,130 30.7 1.7 270 270 275 12.5 0.0 1.9 2.4 2.6 1.6 Cologne 1,399 5.7 1.4 240 243 246 2.1 1.3 1.2 2.4 2.4 1.6 Dusseldorf 1,227 43.4 2.1 240 243 247 9.1 1.3 1.6 3.5 3.1 2.1 Frankfurt 1,492 42.6 2.1 280 283 288 5.7 1.1 1.8 1.4 1.7 2.4 Hamburg 2,954 30.4 1.6 260 265 270 6.1 1.9 1.9 2.4 2.6 2.5 Munich 2,004 29.7 1.4 315 320 325 3.3 1.6 1.6 1.8 2.0 2.6 Stuttgart 990 27.0 1.6 235 235 235 4.4 0.0 0.0 1.8 1.7 1.7 Top locations 16,195 29.5 1.7 268 270 274 7.8 0.9 1.6 2.3 2.4 2.1

Office space Rents top locations Change in rent Vacancy rate

Office properties Per 2013 in EUR pro m² in % vs previous year in % Per Per office in person worker in 2013 2014e 2015e 2013 2014e 2015e 2013 2014e 2015e 1000 m² in m² m² Berlin 17,526 4.9 35.4 22.5 23.0 23.3 2.3 2.2 1.3 8.0 7.8 7.7 Cologne 7,194 7.0 33.4 21.1 21.4 21.7 2.9 1.2 1.4 7.5 7.2 7.0 Dusseldorf 7,493 12.6 39.2 25.0 25.0 25.3 6.4 0.0 1.0 10.8 10.9 11.0 Frankfurt 12,135 17.3 44.7 35.0 35.0 35.5 6.1 0.0 1.4 12.5 12.3 12.3 Hamburg 13,746 7.6 34.9 24.0 24.3 24.7 0.0 1.3 1.6 7.6 7.4 7.3 Munich 13,105 9.4 36.0 31.5 33.0 33.5 5.0 4.8 1.5 6.8 6.4 6.2 Stuttgart 7,101 11.4 40.0 18.7 19.2 19.5 -1.1 2.7 1.6 5.2 4.9 4.7 Top locations 78,302 1.4 37.1 26.0 26.5 26.9 3.4 2.0 1.5 8.4 8.2 8.1

First occupancy aver- First occupancy aver- First occupancy rents Trend from age rents in EUR pro age rents in % vs pre- top locations in EUR Residential properties 2003 to 2013 in % m² vious year per m² House- Housing Single 2013 2014e 2015e 2013 2014e 2015e 2013 2014e 2015e holds stock Berlin 4.6 9.7 1.9 10.8 11.2 11.4 8.0 3.7 1.8 15.4 15.7 16.0 Cologne 6.5 9.3 4.6 11.2 11.4 11.6 1.8 1.8 1.8 14.5 14.8 15.0 Dusseldorf 4.2 7.0 2.7 12.0 12.3 12.5 2.6 2.5 1.6 15.5 15.8 16.0 Frankfurt 9.4 14.7 6.7 12.8 13.0 13.3 5.4 2.0 2.3 18.5 18.5 18.8 Hamburg 4.8 9.4 4.0 13.0 13.3 13.5 0.8 2.3 1.5 18.8 19.0 19.2 Munich 14.2 21.6 8.0 14.0 14.7 15.0 3.7 5.0 2.0 21.0 21.0 21.3 Stuttgart 5.4 7.9 3.7 10.8 11.0 11.2 2.9 1.9 1.8 14.6 14.9 15.2 Top locations 6.5 11.3 4.0 11.9 12.3 12.5 4.3 3.1 1.8 16.9 17.1 17.4 source: Feri, BulwienGesa, DZ BANK Research forecast

39 Real Estate Market Germany 2014 | 2015

Imprint Published by: DG HYP – Deutsche Genossenschafts-Hypothekenbank AG, Rosenstrasse 2, 20095 Hamburg Management Board: Dr. Georg Reutter (Chairman of the Management Board), Manfred Salber

Authors: Responsible: Stefan Bielmeier, Head of Research and Volkswirtschaft Dr. Michael Holstein, Head of Volkswirtschaft Author: Thorsten Lange, Analyst Real Estate Markets

All DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main 2014

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 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 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 becomeobsolete as a result of future developments, without this document being amended accordingly.

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40 Real Estate Market Germany 2014 | 2015

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