real estate market germany 2014 | 2015 · 2 real estate market germany 2014 | 2015 preface as a...

REAL ESTATE MARKET GERMANY 2014 | 2015

A RESEARCH PuBLICATION BY DG HYP OCTOBER 2014

RETAIL, OFFICE AND RESIDENTIAL PROPERTY: POSITIVE OuTLOOK WITH SLOWING MOMENTuM

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Real Estate Market Germany 2014 | 2015

Table of Contents

Preface ___________________________________________________________________ 2

Summary _________________________________________________________________ 3

Economic Conditions in Germany ____________________________________________ 5

Germany’s Major Cities – The Place to be ____________________________________ 6

Retail Properties ___________________________________________________________ 8

Office Properties __________________________________________________________ 23

Residential Properties ______________________________________________________ 35

Overview of Forecasts _____________________________________________________ 39

Imprint ___________________________________________________________________ 40

Disclaimer _________________________________________________________________ 40

DG HYP Offices ____________________________________________________________ 41

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Preface

As a commercial real estate bank, we support our business divisions and risk manage-ment teams with their credit and lending decisions through regular analysis of the markets we actively cover. We publish the results of our analyses in commercial real estate market reports, targeting investors as well as our partners within the Coopera-tive Financial Services Network: these are German cooperative banks, with whom we jointly originate financings in the various regions. The present report continues our series of studies concerning the German real estate market, published in the autumn of each year. This research study looks at market developments for retail, office and residential real estate during 2014, and provides an outlook for 2015.

The real estate market for retail, office and residential property in the prime locations the report covers – Hamburg, Berlin, Cologne, Dusseldorf, Frankfurt, Stuttgart and Munich – has benefited from continued investor demand, even though the momen-tum 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 loca-tions in the German metropolitan areas continues unabated, supported by ongoing demand for high-quality retail floorspace. The outlook for the office market is positive as well. However, increased office construction activity is likely to widen supply, which would slightly slow down the increase in top rents. The residential real estate market shows similar prospects, even though the situation for this market segment remains tense. This is due to the marked increase in maintenance costs, which represent an additional burden for tenants. On top of this, the low interest rate environment makes buying a flat an attractive alternative. Hence, rent increases expected for 2014 are likely to be somewhat subdued.

The German real estate market report is of course also available in German. All pre viously published DG HYP market reports can be downloaded from our website (on www.dghyp.de/en/unternehmen/market-research); contact us if you prefer a hard copy.

Deutsche Genossenschafts-Hypothekenbank AG

October 2014

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SUMMARY

» The commercial property markets in the top seven German locations - Berlin, Dusseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart – have per-formed very well in the last two years. Rents in the market segments covered in this report - office, retail and residential - have increased sharply. And this has been achieved against the background of macroeconomic growth of only slightly above zero.

» There are many reasons why demand for offices, retail space and homes re-mains buoyant: the urbanisation trend is drawing people into the cities. The re-tail sector, as well as many companies from other sectors, are following poten-tial customers and the staff they need. However, the robust labour market, rising wages, a positive consumer climate and the prospect of Germany gaining strong momentum again as the engine of economic growth in Europe, have stimulated demand.

» By the summer of this year, it also looked as if German economic output would grow strongly in 2014 and 2015. However, geopolitical risks, for example relat-ing to the crisis in Ukraine, are currently having a very adverse impact, causing growth expectations to be slashed by almost half.

» This is removing some of the momentum from demand for commercial proper-ties. The visible increase in, and in some cases already high rents are in any case having a dampening effect. The supply of space is also increasing, be-cause an increasing number of new construction projects were initiated under prosperous market conditions. However, below the line, the prospects are not bad at all; in principle, the upward movement remains intact. Rents should therefore generally increase further, albeit at a slightly more moderate pace.

FORECAST FOR RETAIL PROPERTIES

Change in rents in % y-o-y

Rents prime locations 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 con-sumer 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 in-creasing. 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 increas-ing almost everywhere due to projects under development, however the supply is not sufficiently large. There are nevertheless signs that tenants are becoming

Retail sector: trend for shopping in the city

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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

Change in rents in % y-o-y Vacancy rate in %

2013 2014e 2015e 2013 2014e 2015e

Berlin 2.3 2.2 1.3 8.0 7.8 7.7

Cologne 2.9 1.2 1.4 7.5 7.2 7.0

Dusseldorf 6.4 0.0 1.0 10.8 10.9 11.0

Frankfurt 6.1 0.0 1.4 12.5 12.3 12.3

Hamburg 0.0 1.3 1.6 7.6 7.4 7.3

Munich 5.0 4.8 1.5 6.8 6.4 6.2

Stuttgart -1.1 2.7 1.6 5.2 4.9 4.7

Average for top locations 3.4 2.0 1.5 8.4 8.2 8.1

Source: BulwienGesa, Feri, DZ BANK Research forecast

» The positive trend in employment figures supports the high demand for first-class office space in the major cities. In addition, virtually no new projects were started as a result of the recent economic crisis. Consequently, the volume of available space is in increasingly short supply. Prime rents have increased visi-bly, while vacancy rates have fallen sharply.

» However, the pace is likely to slacken over the rest of this year. On the one hand, more office space is now coming onto the market, and on the other hand, the economic prospects have deteriorated. The upward movement in prime rents should therefore slow this year and next year.

FORECAST FOR RESIDENTIAL PROPERTIES

Average first occupancy rents in % y-o-y

Average first occupancy rents in EUR pro m²

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 con-struction 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 addi-tional housing costs. Budget restrictions on households are likely to force peo-ple 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.

Office: Positive job market leading to high demand

Residential: Housing shortage in major cities, markets remain under pressure

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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 slightly by 0.2 per cent in the second quarter. Both foreign trade and investment 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 only 1.5 per cent is likely to be achieved in 2014. The pace of growth will weaken 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

Source: DZ BANK Source: DZ BANK

-6

-4

-2

0

2

4

6

2003 2005 2007 2009 2011 2013 2015e

Germany

Eurozone5

6

7

8

9

10

11

12

13

2003 2005 2007 2009 2011 2013 2015e

Germany

Eurozone

German economy contracted by 0.2 per cent in Q2

Robust domestic demand supports growth in 2014 and 2015

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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-ture is urbanisation. The renaissance of cities is also evident in many places in Ger-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 country-side. Shoppers flocked to the spacious new shopping centres which were springing up outside city boundaries. In the cities themselves, there was little activity after of-fice 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 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 "al-ternative" 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

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-ral idyll. This is evident from the major success of many magazines based around 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

596 620 703 1.030 1.401 1.815 3.547

4%5%

9%

6%

14%

5% 5%

Dusseldorf Stuttgart Frankfurt Cologne Munich Hamburg Berlin

population in thousand growth rate from 2003 to 2013

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106

1993 1997 2001 2005 2009 2013Top-7 Germany

1993=100

Cities on trend: benefiting from rural migration

Who does the city belong to?

Romantic image of country life not borne out by reality


7

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-tor infrastructure, good shopping opportunities and a wide range of cultural activities, 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 dif-ferent types of schools which, given the major importance of a good education to-day, 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 in-creases, rural areas will have even less to offer.

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

The urbanisation trend also has far-reaching consequences for the economy. There is a direct impact on the retail sector, which follows the shift in purchasing power. The pace of growth in city centre retail is correspondingly high. High demand for at-tractive 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 cit-ies. 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 compa-nies, 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 consequences for the property market: opportunities in growth regions are offsetting risks in areas which are contracting. While demand for properties in many conurba-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-tential, are on the winning side. The opposing trends in regions are likely to intensify, if the demographic trend leads to a decline in the population as forecast. The conur-bations will probably remain largely unaffected by this negative trend. Property de-mand 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 apart-ments. However, the achievable returns have fallen sharply as a consequence de-spite growth in rents.

Cities have much to recommend them …

… but there are disadvantages too: high prices, traffic congestion, noise and exhaust fumes

Business and retail also moving into cities

Far-reaching consequences for the property market: risks in rural regions …

… offsetting opportunities in conurbations


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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 they have re-discovered the city centre", thus summing up in a nutshell the retail 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 first city branch this year in Hamburg-Altona. The Swedish furniture giant's business 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 trans-port 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 comfort-able 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

Source: EHI Retail Institute Source: BulwienGesa, own calculations

The two examples above of companies which - in a move away from their original business models - have decided to set up branches in the city, each selected a city 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

47%25%

45%64% 68% 76%

1964-1990 1991-1995 1996-2000 2001-2005 2006-2010 2011-2013greenfield site outside city center city center

0

50

100

150

200

250

300

1993 1997 2001 2005 2009 2013prime rent: city center in EUR/sqmprime rent: outside city center in EUR/sqm

Everyone wants to move into the city!

This even applies to those who didn't really intend to do so

Success of large cities has little im-pact on city districts


9

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 such as IKEA and Zalando open branches there, thus leading to an increase in foot-fall. 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 increas-ingly short supply in 1A locations, not only because the number of national and in-ternational 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 out-lets were opened in June this year.

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

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

While sales space in 1A locations is currently increasing as a result of stylish new shopping centres, project developments and the upgrading of sites, the structure of 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 success-fully integrate a "live" shopping experience with an internet shop and mail order lo-gistics, 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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1993 1997 2001 2005 2009 2013

Germany (lhs)Top-7 (rhs)

retail space in sqm m retail space in sqm m

363 372 384 399 414 428 435 444 453 4600

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e

number (lhs)

change in units (rhs)

1A locations expanding

Is demand increasing for smaller shops in the city centre?


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

Source: Bundesbank, own calculations Source: ifo, GfK

In addition to the "city" trend, three important developments for the German retail sector - growing retail sales, a good consumer climate and growing online retail - are continuing. Retail sales, which had been stagnating for many years in both nominal 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 af-fected 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

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-creasing proportion of total retail sales is being generated by rapid growth in online 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

90

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2000 2002 2004 2006 2008 2010 2012 2014

real nominal

2000 = 1000

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2007 2008 2009 2010 2011 2012 2013 2014

GfK consumer climate (lhs)ifo business climate retail (rhs)

balance of repliesin points

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retail sales in EUR bn (lhs)share of total retail sales in % (rhs)

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1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Amazon: net turnover in USD bn

Stable trends: Increasing sales, good consumer climate, growing online retail

Online sales making life difficult for high street retail


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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 in-creasing underpins their major attractions and the desire to have a physical pres-ence 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

Source: BulwienGesa, own calculations Source: Global Blue

The "multi-class" society in the retail sector is also partly attributable to the large number of visitors from home and abroad. Foreign guests in particular, who are of 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 pur-chases 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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1995 1999 2003 2007 2011 2015e

Top-7 Regional-12

prime rent in EUR/sqm

287 327 362 376 428 463 562

Stuttgart Berlin Cologne Hamburg Munich Dusseldorf Frankfurt

average amount of TaxFree-purchases in EUR (2013)

International guests are good retail customers


12

Retail: Comparison of prime locations

The longstanding strong upward trend in prime rents remains intact in all seven loca-tions. The trend is being driven by steady demand for first-class sales space in 1A locations. The growth rate is so high that even the recession in the German econ-omy 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

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

The high expansion rate in the retail sector in Berlin has been the main factor driving the strong growth in space-weighted average prime rents in the last two years; how-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, prime rents are obviously now more often reaching the pain threshold of what ten-ants are prepared to pay.

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1995 1999 2003 2007 2011 2015e

Berlin

Cologne

Dusseldorf

Frankfurt

Hamburg

Munich

Stuttgart

Top-7


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340

Berlin Cologne Dussel-dorf

Frank-furt

Ham-burg

Munich Stutt-gart

Top-7

2012 2013 2014e 2015e


Upward trend in prime rents remains unbroken

Berlin the best "performer" in 2012 and 2013

Forecast: Signs of subdued rent growth in 2014 and 2015


13

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

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

However, on closer scrutiny, the major differences in rent trends between the vari-ous locations in individual years have been largely balanced out. On average, prime 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 Stuttgart to just over six million sqm in Berlin. The proportion of city centre sales 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, to-tal 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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Frank-furt

Ham-burg

Munich Stutt-gart

Top-7

2012 2013 2014e 2015e

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1714

28

19 19 2117

7

1520

9

20 21 2226

33 3437

4043 44

47 48

Stutt-gart

Munich Dussel-dorf

Cologne Top-7 Ham-burg

Frank-furt

Berlin

from 2003 to 2008 from 2008 to 2013 from 2003 bis 2013

Fairly homogenous long-term trend in locations

Sales space continues to grow, but has slowed consistently


14

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

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

One important factor which adds to the major attractions of the top locations for re-tailers is high purchasing power. With the exception of Berlin - where the purchasing 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 cit-ies 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 con-sumer spending, are purchased directly where people live.

ABOVE-AVERAGE FIGURES FOR PURCHASING POWER … … AND CENTRALITY

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

0

10

20

30

40

50

60

70

0

1.000

2.000

3.000

4.000

5.000

6.000

7.000

Stutt-gart

Dussel-dorf

Cologne Frank-furt

Munich Ham-burg

Berlin

retail space in thousand sqm (lhs)

thereof inner-city-area (lhs)

share of inner-city retail space in % (rhs) 11

3 2

11 10

5

13

9

12

0

5

9 10

6

15

98

5

21

15

10 11

4

10

5

0

10

54

6

2

5


Frank-furt

Ham-burg

Munich Stutt-gart

Top-7

2002-2004 2005-2007 2008-2010 2011-2013

0

20

40

60

80

100

120

140

Berlin Ham-burg

Cologne Stutt-gart

Frank-furt

Dussel-dorf

Munich

purchasing power

German average 0

20

40

60

80

100

120

140

Berlin Frank-furt

Ham-burg

Munich Dussel-dorf

Stutt-gart

Cologne

centralityGerman average

1A locations benefit from high purchasing power of Top 7


15

European retail - comparison of top locations

On a European comparison, prime rents in top German locations are higher than average. However, there is a major divergence from the most expensive cities - rela-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

Source: CBRE, own calculations Per: Q2/2014

0

200

400

600

800

1.000average

Prime rents in top locations slightly above European average


16

Berlin: Retail properties

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

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

Berlin has developed very positively, both in overall terms and as a shopping desti-nation, and is attracting growing interest from retailers and investors. As a result of 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 visi-tors, 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 role as a test market for the German retail sector and draw benefit from the interna-tional retail chains which are surging into the German market. The most recent ex-ample 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 have risen to EUR 270 per sqm and given the strong expansion of space. Despite 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

Berlin has developed very successfully as a location

After dynamic rent growth, space expansion limits further rises

Test market for Germany

1,2

1,4

1,6

1,8

2,0

2,2

2005 2007 2009 2011 2013 2015e

Berlin Top-7 Regional-12

50

100

150

200

250

300

2005 2007 2009 2011 2013 2015e



17

Cologne: Retail properties



The city of Cologne, which has a population of one million, is the second major in-ternational shopping destination in the West. While the luxury segment is more sig-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 de-mand 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 current level. We anticipate at best further moderate growth in rents. However, posi-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 com-pleted 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



Unemployment rate (BA) in % 9.5 9.4 9.8 9.5


Supply



Retail rents



Source: Feri, BulwienGesa, DZ BANK Research forecast

Consumer-oriented shopping destination in the West

Potential for prime rents seems limited

50

100

150

200

250

300

2005 2007 2009 2011 2013 2015e

Cologne Top-7 Regional-12

1,2

1,4

1,6

1,8

2,0

2,2

2,4

2005 2007 2009 2011 2013 2015e



18

Dusseldorf: Retail properties



Dusseldorf is in demand as a retail location due to its high purchasing power and the large population of the Rhine-Ruhr region. The luxury shopping street "Kö" is also well known as a shopping destination outside the region. The sales space in 1A lo-cations in Dusseldorf, which include Schadowstraße and Flingerstraße, has been extended with the architecturally successful and recently completed Kö-Bogen. The city has also become more attractive as a shopping destination due to the revitalisa-tion 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 af-fected 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 stagnate this year. Nor are any major surges expected in 2015. However, sooner or 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





Supply



Retail rents




Urban development measures, revitalisation of centres and new build projects make locations even more attractive

However, construction work currently hitting retail sector

50

100

150

200

250

300

2005 2007 2009 2011 2013 2015e

Dusseldorf Top-7 Regional-121,2

1,4

1,6

1,8

2,0

2,2

2005 2007 2009 2011 2013 2015e

Dusseldorf Top-7 Regional-12


19

Frankfurt: Retail properties



Frankfurt is growing strongly: for years the numbers of inhabitants, the working population, and visitors from elsewhere in Germany and abroad have been increas-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 search for a successful concept for the narrow, seven-floor building therefore contin-ues. Following the expansion of space and a sharp rise in rents in recent years, prime rents are however likely to increase more slowly this year and next year.

RETAIL PROPERTIES IN FRANKFURT

2012 2013 2014e 2015e

Demand





Supply



Retail rents




Frankfurt is growing and attracting retailers and investors alike

Space expansion and sharp rent rise likely to dampen growth in prime rents

1,2

1,4

1,6

1,8

2,0

2,2

2005 2007 2009 2011 2013 2015e

Frankfurt Top-7 Regional-12

50

100

150

200

250

300

2005 2007 2009 2011 2013 2015e



20

Hamburg: Retail properties



Hamburg, with its population of 1.8 million, is the second largest city in Germany and is also an outstanding shopping destination in the North of the country. The high purchasing power of the city's population is enhanced significantly by the large hin-terland 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 also favourable. The city on the Elbe is thus interesting in terms of the expansion strategies of national and international chains, and demand for space is correspond-ingly 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 what are currently secondary locations. The gradual expansion of space is likely to be accompanied by more moderate rent rises. We expect prime rents to increase by around 2 per cent respectively in 2014 and 2015.

RETAIL PROPERTIES IN HAMBURG

2012 2013 2014e 2015e

Demand





Supply



Retail rents




Outstanding shopping destination in North Germany …

… is of major interest to national and international chains

Prime rents likely to rise by around 2 per cent in 2014 and 2015 respectively

1,2

1,4

1,6

1,8

2,0

2,2

2,4

2005 2007 2009 2011 2013 2015e

Hamburg Top-7 Regional-12

50

100

150

200

250

300

2005 2007 2009 2011 2013 2015e



21

Munich: Retail properties



The Bavarian capital is by far the most expensive shopping destination in Germany. Prime rents are 20 per cent above average for the Top 7. There are good reasons 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 num-ber 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 is likely to persist. We expect the level of rents in Munich to increase further, but at a more moderate pace. RETAIL PROPERTIES IN MUNICH

2012 2013 2014e 2015e

Demand





Supply



Retail rents




Munich's retail sector still unique in Germany

Weaker growth momentum based on already very high rents

50

100

150

200

250

300

350

2005 2007 2009 2011 2013 2015e

Munich Top-7 Regional-121,2

1,4

1,6

1,8

2,0

2,2

2,4

2005 2007 2009 2011 2013 2015e

Munich Top-7 Regional-12


22

Stuttgart: Retail properties



Retail activity in the sixth largest German city benefits from a population of 2.5 mil-lion and an economically strong hinterland. Many successful companies are based 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 propor-tion 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 retail projects which are extending sales space in the city by a total of 100,000 sqm 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





Supply


Retail space in % y-o-y -0.1 1.7 2.8 4.2

Retail rents




Attractive shopping location in economically strong region

Three large retail projects will cap rent growth in future years

1,2

1,4

1,6

1,8

2,0

2,2

2,4

2005 2007 2009 2011 2013 2015e

Stuttgart Top-7 Regional-12

50

100

150

200

250

300

2005 2007 2009 2011 2013 2015e



23

OFFICE PROPERTIES

Market development, trends and outlook

The German market for office properties has survived difficult times in the recent past as a result of two severe economic crises. The first was triggered by the burst-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 finan-cial market crisis caused by the collapse of Lehman. Conversely, the current situa-tion 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 expansion of the supply of office space in the top seven locations. While the volume 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 devel-opment 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 MARKET, OFFICE SPACE IS INCREASING ONLY MODERATELY

THE RATIO OF OFFICE SPACE AND OFFICE EMPLOYMENT IS BACK AT THE LEVEL RECORDED TOWARDS THE END OF THE 1990S

Source: BulwienGesa, Feri, DZ BANK Source: Feri

The moderate growth in office space and the much more dynamic expansion of of-fice employment have converged again closely - from a joint starting point in 1995. The widest divergence between the two figures occurred in 2005, when the con-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?

0

2

4

6

8

10

12

-1

0

1

2

3

4

5

1995 1998 2001 2004 2007 2010 2013GDP YOY in % (lhs)Top7: growth of office space in % of the total office space (lhs)unemployment rate in % (rhs)

effective -5,1%

95

100

105

110

115

120

125

130

1995 1998 2001 2004 2007 2010 2013

Top 7: office workers, 2000=100

Top 7: office space, 2000=100

General conditions for the German office market are currently good

New office space has more than halved since 2005

Relative divergence between office employment and office space has contracted sharply


24

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

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 rents were slightly below EUR 25 per sqm. Adjusted for devaluation in the last 20 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

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 vacancy rates have not reached a particularly high or low level. Accordingly, there should certainly still be potential for improvement. However, this presupposes that companies, as well as the public sector, continue to generate buoyant demand for

0

1

2

3

4

5

6

7

8

9

10

11

0

3

6

9

12

15

18

21

24

27

30

33

1995 1998 2001 2004 2007 2010 2013

Top-7: prime rent in EUR/sqm (lhs)

Top-7: vacancy rate in % (rhs)32

33

34

35

36

37

1995 1998 2001 2004 2007 2010 2013

office space per office worker without vacant office space in sqm

75

80

85

90

95

100

105

110

115

120

-10

-8

-6

-4

-2

0

2

4

6

8

2000 2002 2004 2006 2008 2010 2012 2014

index points MOM (lhs) index (rhs)

IFO business climate index

-10

-8

-6

-4

-2

0

2

4

6

-6

-4

-2

0

2

4

6

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

EMU-GDP

Euro indicator

Office space per job has slipped back to the 1995 level

Economic risks: Companies becoming more cautious


25

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-ever, the pace of job creation will tend to slow. The growth in the construction of new office space will also lead to growth in the supply. Viewed overall, prime rents in the 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

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 year, but will fall short of the 2013 level of 3.4 per cent. For the reasons referred to 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 va-cancy rate is likely to fall slightly again this year and next year. The rapid downward pace of recent years will not however be repeated.

-16

-12

-8

-4

0

4

8

12

1995 1999 2003 2007 2011 2015e

Regional-12Top-7

0

2

4

6

8

10

12

1995 1999 2003 2007 2011 2015e

Regional-12 Top-7

However, demand for office space is likely to remain robust in top locations

Forecast for 2014 and 2015: slightly worse than 2013 but still good


26

Office: Comparison of top locations

The office markets in all seven top locations have consistently performed well after the recession-driven downturn of the years 2009 and 2010. From 2011 to 2013, 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 lo-cation, 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 fi-nancial 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

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-crease in office space on the back of growth in the number of office jobs. 12 per cent 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

10

15

20

25

30

35

40

45

50

1995 1999 2003 2007 2011 2015e

Berlin

Cologne

Dusseldorf

Frankfurt

Hamburg

Munich

Stuttgart

Top-7

2 2

7

0

22

8

223

6 6

0

5

-1

3

21

0 0

1

5

32

1 1 1 1 2 2 2 1

-2

0

2

4

6

8


Frank-furt

Ham-burg

Munich Stutt-gart

Top-7

2012 2013 2014e 2015e

Office markets continue to grow - at different rates

Good demand for space leads to sharp reduction in vacancies


27

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

TOP LOCATIONS: MAJOR DIFFERENCES IN GROWTH IN OFFICE SPACE AND JOBS

VACANCY RATE NOT FALLING EVERYWHERE

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 standards - see graph on page 15 - a comparison of office markets shows that only Frankfurt, the most expensive German office location, reaches the average rent level. This is surprising given the major economic importance of the Federal Repub-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

Source: CBRE, own calculations Per: Q2/2014

0

2

4

6

8

10

12

14

16

18


Frank-furt

Ham-burg

Munich Stutt-gart

Top-7

office space 2003-2013 in % office workers 2003-2013 in %

8,6 8,9

11,3

14,7

9,6 9,8

5,9

10,0

7,77,0

11,012,3

7,36,2

4,7

8,1

0

2

4

6

8

10

12

14

16


Frank-furt

Ham-burg

Munich Stutt-gart

Top-7

2010 2011 2012

2013 2014e 2015e

0

25

50

75

100

125

average

There are no leading economic cities in Germany - consequently office rents are relatively cheap by Euro-pean standards


28

Berlin: Office properties

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

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 companies with internet or E-commerce activities such as the online fashion com-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 respectively is thus well above the ten-year average of 140,000 sqm. Prime rents could increase further in the second half. Thereafter they are likely to initially stabi-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


-12

-8

-4

0

4

8

2005 2007 2009 2011 2013 2015e


6

7

8

9

10

11

2005 2007 2009 2011 2013 2015e


Office market achieves peak result in first half 2014

Prime rents could increase further in 2014, growth in supply could act as a brake in 2015


29

Cologne: Office properties



Based on the size of its population, the Cologne office market of 7 million sqm is on the small side. Even the much smaller Dusseldorf has more office space. In terms of 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-tions have been a rarity. In Cologne this is partly attributable to the lack of large in-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 not deteriorate, prime rents could also increase next year, as indicated by the mod-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




Supply


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




-8

-6

-4

-2

0

2

4

6

8

2005 2007 2009 2011 2013 2015e


6

7

8

9

10

11

2005 2007 2009 2011 2013 2015e


City of one million has a relatively small office market

Prime rents could increase slightly in 2014 and 2015

Lowest space take-up of the 7 top locations


30

Dusseldorf: Office properties



Based on space take-up, the Dusseldorf office market showed slightly weaker growth in the first half. Half-year sales of around 120,000 sqm were 18 per cent be-low 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 con-trast, 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 transac-tions 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-ever, growth could be slightly lower next year partly due to the manageable volume 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




Supply



Vacancy rate in % 11.3 10.8 10.9 11.0

Office rents


Prime/secondary locations in % y-o-y 6.8 / -1.1 6.4 / 1.1 0.0 / 0.0 1.0 / 0.0


-12

-8

-4

0

4

8

2005 2007 2009 2011 2013 2015e


6

7

8

9

10

11

12

2005 2007 2009 2011 2013 2015e


First-half 2014 was fairly muted

Prime rents likely to consolidate at a high level in 2014


31

Frankfurt: Office properties



In terms of the relative trend in space take-up, the Frankfurt office market has shown the weakest performance of the top 7. Compared to the previous half-year, rented space declined by 23 per cent to 155,000 sqm. Compared to the ten-year average, 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 probability that market growth will gain momentum in the second half. The current 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 their pre-crisis level. The vacancy rate is likely to fall again slightly, but without 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




Supply



Vacancy rate in % 13.7 12.5 12.3 12.3

Office rents


Prime/secondary locations in % y-o-y 0.0 / 0.0 6.1 / -1.1 0.0 / 1.1 1.4 / 0.0


-12

-8

-4

0

4

8

12

2005 2007 2009 2011 2013 2015e


6

8

10

12

14

16

2005 2007 2009 2011 2013 2015e


Lack of major transactions "hampers" first half in Frankfurt office market

Office space needed for 1,000 bank regulators

Prime rents likely to top pre-crisis level in 2015


32

Hamburg: Office properties



In 2013, rental income in Hamburg was almost exactly in line with the longstanding 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 pros-pects 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 gains momentum. Space completed this year is slightly lower than the long-term av-erage, and only two thirds of this level is expected to be achieved in 2015. There is a good chance of prime rents now increasing again given the positive conditions for Hamburg. OFFICE PROPERTIES IN HAMBURG

2012 2013 2014e 2015e

Demand

GDP in % y-o-y 1.5 2.3 2.4 2.2




Supply



Vacancy rate in % 7.8 7.6 7.4 7.3

Office rents




-8

-4

0

4

8

2005 2007 2009 2011 2013 2015e

HamburgTop-7Regional-12

5

6

7

8

9

10

11

2005 2007 2009 2011 2013 2015e


First half slightly above average

Further upward potential for prime rents which have been stable since 2012: they could increase in 2014 and 2015


33

Munich: Office properties



Space take-up of 240,000 sqm in the Munich office market in the first half was broadly in line with the ten-year average. In contrast to previous years, there were 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 suffi-cient space were available. The high demand has led to a marked reduction in va-cancy 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, i.e. a good EUR 2 more than at the end of 2013. The positive trend in rents should also continue next year. The Munich rental market has aready exceeded its pre-crisis levels. And Frankfurt's edge as the most expensive office market has been 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 % y-o-y -0.5 1.0 1.4 1.5


Supply



Vacancy rate in % 7.9 6.8 6.4 6.2

Office rents




-12

-8

-4

0

4

8

2005 2007 2009 2011 2013 2015e


6

7

8

9

10

11

2005 2007 2009 2011 2013 2015e


Supply shortage brakes market growth

Munich - with its high rate of rent growth - hot on the heels of Frankfurt as the most expensive office location


Stuttgart: Office properties



The smallest office market among the top 7 continues to show dynamic growth. In the first half, office space rentals in Stuttgart scored their third best result so far - af-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 va-cancy 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 the ten-year average at 110,000 sqm. Prime rents could therefore increase again 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




Supply



Vacancy rate in % 5.5 5.2 4.9 4.7

Office rents


Prime/secondary locations in % y-o-y 8.0 / 1.1 -1.1 / -1.1 2.7 / 0.0 1.6 / 0.0


-8

-6

-4

-2

0

2

4

6

8

10

2005 2007 2009 2011 2013 2015e


5

6

7

8

9

10

11

2005 2007 2009 2011 2013 2015e


Positive market trend in first-half 2014

Prime rents likely to be in the region of EUR 20 per sqm in 2015

34


35

RESIDENTIAL PROPERTIES

"Beggars can't be choosers" - in any case conditions in the housing markets of the major cities are resulting in developments which virtually no-one would have antici-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, in-vestment 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

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 solid alternatives to low capital market yields such as those provided by housebuild-ing 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 in-creased", 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-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

0

1

2

3

4

5

6

7


Frank-furt

Ham-burg

Munich Stutt-gart

Top-7

2006/2007 2008/2009 2010/2011 2012/2013 2014/2015e

completed dwellings per thousand inhabitants

-20-10

01020304050607080

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014e

annual change of the number of households in thousand (3Y-average)dwelling permits in thousand

Conditions remain strained in the housing markets in major cities

Virtually no building land available

Problem underestimated in the past


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 ini-tially 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 short-age 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

Source: BulwienGesa Source: BulwienGesa, own calculations

However, the growth in rents has slowed. This trend is likely to continue in 2014 and 2015, even though rent growth is currently still significantly higher than the low infla-tion 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 de-mand 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. The additional costs of housing - the "second rent" - have also risen considerably in recent years: for increases in the cost of heating, electricity, water, waste disposal 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.

2

4

6

8

10

12

14

16

18

1993 1997 2001 2005 2009 2013

first time use maximum existing flats maximumfirst time use average existing flats average

rent in EUR/sqm

-3

-2

-1

0

1

2

3

4

5

6

7

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

first time use maximum existing flats maximumfirst time use average existing flats averagemarket trend

rent YOY in %

Growth in rents slowing

Tenants adversely affected by rising rents, but also by spiralling additional costs

36


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

Source: BulwienGesa Source: BulwienGesa

However, what will happen next in the housing markets in the top locations? As al-ready described, we expect a further, but more moderate increase in rents. This ap-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 prin-ciple 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 de-mand 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 al-ready 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 IN PER CENT

AVERAGE FIRST OCCUPANCY RENTS Y-O-Y IN PER CENT

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

3

4

5

6

7

8

9

10

11

12

13

1993 1997 2001 2005 2009 2013

Frankfurt

Offenbach

existing flats: rent in EUR/sqm

3

4

5

6

7

8

9

10

11

12

13

1993 1997 2001 2005 2009 2013

Munich

Augsburg

existing flats: rent in EUR/sqm

2 7 4 0 7 8 5

1611

14 17

28 2733

38

2714

22 2228

36

45 46 48

Stutt-gart

Cologne Munich Frank-furt

Top-7 Dussel-dorf

Berlin Ham-burg

from 2003 to 2008 from 2008 to 2013 from 2003 to 2013

10

0

11

79

4

0

7

10

5

8

5

3

2

8

6

8

23

5

1

43

44

23 2 2

5

23

2 2 22

2 2 2 2


Frank-furt

Ham-burg

Munich Stutt-gart

Top-7

2011 2012 2013 2014e 2015e

Some demand is shifting to surrounding areas


37

The table below contains our evaluations for the housing markets in the seven top 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

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

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

Year Berlin CologneDussel-

dorfFrank-

furtHam-burg Munich

Stutt-gart Top-7

DemandPopulation in thoausand 2013 3,547 1,030 596 703 1,815 1,401 620 9,7125-year change in % 2008-2013 3.6 3.3 2.4 6.0 2.6 6.5 3.7 3.9Private households in thousand 2013 2,067 564 333 421 1,014 852 331 5,5835-year change in % 2008-2013 4.9 4.5 3.8 9.1 4.5 9.9 5.0 5.8Unemployment rate in % 2013 11.7 9.4 8.8 7.5 7.3 5.2 6.2 9.05-year change in percentage points 2008-2013 -2.1 -1.4 -0.8 -1.0 -0.8 -0.2 0.9 -1.2Disposable income per capita (Euro) 2013 1,204 1,570 1,770 1,501 1,896 1,827 1,748.7 1,5535-year change in % 2008-2013 3.5 2.6 3.2 1.9 3.7 1.9 1.7 2.9Supply 0 0 0 0 0 0 0 0 0Dwelling units in thousand 2013 1,912 533 330 370 905 766 302 5,1195-year change in % 2008-2013 1.1 2.2 1.2 3.5 2.1 3.1 2.1 1.9Completions p.a. (5-year average) 2008-2013 1.5 2.9 1.5 3.9 2.4 4.0 2.6 2.4per 1000 inhabitants 2013/14e 2.9 2.9 2.4 6.2 4.7 4.8 3.0 3.7Rent 0 0 0 0 0 0 0 0 0First occupancy, average rent 2013 10.8 11.2 12.0 12.8 13.0 14.0 10.8 11.9in 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 12.52013 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 3.12015e 1.8 1.8 1.6 2.3 1.5 2.0 1.8 1.8

5-year change in % 2008-2013First occupancy, maximum rent 2013 10.8 11.2 12.0 12.8 13.0 14.0 10.8 11.9in 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 12.52013 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 3.12015e 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

6

7

8

9

10

11

12

13

14

15

16

1995 1999 2003 2007 2011 2015e

Berlin

Cologne

Dusseldorf

Frankfurt

Hamburg

Munich

Stuttgart

Top-7

average rent first time use in EUR/sqm

8

10

12

14

16

18

20

22

1995 1999 2003 2007 2011 2015e

Berlin

Cologne

Dusseldorf

Frankfurt

Hamburg

Munich

Stuttgart

Top-7

maximum rent first time use in EUR/sqm

Outlook for 2014 and 2015

38


OVERVIEW OF FORECASTS

Structural data (per 2013) Population in 1,000 Population

2003-2013 in %GDP

in EUR mP.c. GDP

in EURP.c. disposable income

in EUR/month Unemployment rate 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 properties Retail space Per 2013

Rents in top locationsin EUR per m²

Change in rent in % vs previous year

Retail sales in % vs. previous year

in 1000 m²

2003-2013 in %

per in-habitant

in m² 2013 2014e 2015e 2013 2014e 2015e 2013 2014e 2015e

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 properties Office space Per 2013 Rents top locations

in EUR pro m² Change in rent in % vs previous year Vacancy rate

in %

in 1000 m²

Per person

in m²

Per office worker in

m² 2013 2014e 2015e 2013 2014e 2015e 2013 2014e 2015e

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

Residential properties Trend from 2003 to 2013 in %

First occupancy aver-age rents in EUR pro

m²

First occupancy aver-age rents in % vs pre-

vious year

First occupancy rents top locations in EUR

per m²

Single House-holds

Housing stock 2013 2014e 2015e 2013 2014e 2015e 2013 2014e 2015e

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

40


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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.

Competent supervisory authority

Bundesanstalt für Finanzdienstleistungsaufsicht (German Federal Financial Supervisory Authority), Lurgiallee 12, 60439 Frankfurt am Main, Germany

ImprintPublished 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

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DG HYP Regional Office Hanover Berliner Allee 5 30175 Hanover, Germany Phone +49 511 86643808 Fax +49 40 3334-782-3775

DG HYP Regional Office Kassel Rudolf-Schwander-Strasse 1 34117 Kassel, Germany Phone +49 561 602935-23 Fax +49 561 602935-24

DG HYP Regional Office LeipzigSchillerstraße 304109 Leipzig, Germany Phone +49 341 962822-92 Fax +49 341 962822-93

Institutional Clients

HamburgRosenstrasse 2 20095 Hamburg, Germany Phone +49 40 33 34-21 59Fax +49 40 33 34-12 60

DG HYP Offices

Deutsche Genossenschafts-Hypothekenbank AG 20095 Hamburg, Germany Rosenstrasse 2 PO Box 10 14 4620009 Hamburg Phone +49 40 33 34-0Fax +49 40 33 34-11 11Internet: www.dghyp.de

DG HYP Real Estate Centre Berlin Pariser Platz 3 10117 Berlin, Germany Phone +49 30 31993-5101 Fax +49 30 31993-5036

DG HYP Real Estate Centre Dusseldorf Steinstrasse 1340212 Dusseldorf, Germany Phone +49 211 220499-10 Fax +49 211 220499-40

DG HYP Real Estate Centre Frankfurt CITY-HAuS 1, Platz der Republik 6 60325 Frankfurt/Main, Germany Phone +49 69 750676-21 Fax +49 69 750676-99

DG HYP Real Estate Centre Hamburg Rosenstrasse 2 20095 Hamburg, Germany Phone +49 40 3334-3778 Fax +49 40 3334-1102

DG HYP Real Estate Centre Munich Türkenstrasse 16 80333 Munich, Germany Phone +49 89 512676-10 Fax +49 89 512676-30

DG HYP Real Estate Centre Stuttgart Heilbronner Strasse 41 70191 Stuttgart, Germany Phone +49 711 120938-0 Fax +49 711 120938-30

Real Estate Centres

Regional Offices

DG HYPDeutsche Genossenschafts-Hypothekenbank AGRosenstrasse 2 | 20095 Hamburg | Germany

Phone: +49 40 33 34-0 | Fax: +49 40 33 34-11 11www.dghyp.de As

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