Germany Real Estate Market Overview

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Leo Parrish
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2 Agenda 1. German real estate in a global context 2. Variations within Germany

3 The 6% return in 2014 was the best performance since the inception of the German real estate index (DIX) GERMANY TOTAL RETURNS STANDING INVESTMENTS % pa ,4 5,4 3,8 3,0 1,4 0,7 1,6 4,5 2,9 2,0 4,2 5,3 4,2 5,2 CAPITAL GROWTH INCOME RETURN TOTAL RETURN 15 YEAR ANNUALIZED TOTAL RETURN 6,0 5,2 5,0 3,7 3, Source: MSCI YEARS 5 YEARS 10 YEARS 15 YEARS 3

4 Strong performance is being driven by good fundamentals and the investment appetite for Germany INVESTMENT TURNOVER ACROSS GLOBAL MARKETS, AND GERMANY,

5 Part of a more general, global, trend for improving performance % pa 2013 TOTAL RETURNS BY COUNTRY REPORTING SO FAR (so far) South Africa Ireland New Zealand USA Canada UK Australia South Korea Sweden Switzerland Japan Austria Norway Germany France Poland Finland Czech Republic Belgium Denmark Italy Hungary Portugal Netherlands Spain Source: MSCI; KTI 5

6 and particularly strong Listed Real Estate markets MULTI ASSET CLASS RETURNS AS OF YEAR END GLOBAL GERMANY SWEDEN UNITED KINGDOM Equities Listed property Unlisted property Bonds Equities Listed property Unlisted property Bonds Equities Listed property Unlisted property Bonds Equities Listed property Unlisted property Bonds +10,4 +19,5 +10,9 +2,8 +48,3 +6,0 +12,8 +13,9 +36,0 +8,1 +15,8 +0,5 +24,3 +17,9 +11,8 Source: MSCI; JP Morgan USA Equities Listed property Unlisted property Bonds +13,4 +28,1 +11,5 +8,6 6

7 Germany as a stable market in the global context

8 The DIX, and the SFIX, are based on an important group of large and sophisticated managers and investors 8

9 The indexes reflect local valuation practices and involve varying degrees of smoothing % 25 Valuation and transaction based volatility, 10 years to end 2013 Transaction linked index volatility 22.5 Valuation based index volatility Ireland UK Norway Sweden France Netherlands Denmark Germany Switzerland 9

10 The smoothing of German valuations is far greater than non German valuations, as demonstrated at the level of the fund Annual Return (%) Annualized Returns for PEPFI and SFIX Europea Funds to end 2014 Note: PEPFI represents the Pan European Funds Index, and SFIX the funds with European exposure in the SFIX Index Source: MSCI 10

11 and the asset Direct real estate performance based on assets in the Pan European Fund Index Source: MSCI

12 But even when adjusting for this smoothing, Germany is a relatively stable market Historic (10 Year) average returns and PRE2 Volatility Across IPD Covered Markets Historic Returns 14% 12% Canada HK 10% 8% NZ Australia France Sweden US Thailand Korea China 6% Switzlerand UK 4% NL Japan Spain Germany 2% 0% 2% 4% 6% 8% 10% 12% 14% PRE2 Volatility Note: 10 year historic returns. Excludes South Africa (Return 18%, Risk 8%). Some Asian countries (China, Korea, Malaysia, HK, Singapore, Taiwan and Thailand have returns over 5years. 12

13 Far more so than, say, the USA wider IPD PRICING INDICATOR FOR USA Q prior years 10 year avg. spread 10 year avg. inc. return SPREADS narrower Source: MSCI; OECD low INCOME RETURN high 13

14 or parts of the UK IPD Pricing Indicator for UK All Property, London West End Offices, wider IPD PRICING INDICATOR FOR LONDON WEST END OFFICES Q prior years 10 year avg. spread 10 year avg. inc. return SPREADS narrower Source: MSCI; OECD low INCOME RETURN high wider IPD PRICING INDICATOR FOR UK 2014 Q prior years 10 year avg. spread 10 year avg. inc. return SPREADS 2004 narrower Source: MSCI; OECD low INCOME RETURN high

15 On these metrics, Germany seems less aggressively priced than other markets

16 Agenda 1. German real estate in a global context 2. Variations within Germany

17 Large variations in fund returns raising questions over the reasons for over/underperformance Median: 50% of all funds achieve 4.1% or more Index: Market achives 1.2% Upper quarter: 25% of German funds achieve 6.4% or more Lower quarter: 25% of German funds achieve 2.7% or less Higher return spreads between individual funds within sub indexes than spreads between sub indexes Return distribution of Germany and retail funds relatively homogeneous Wide return spreads among Europen funds Wide gap between median and index: few very negative performing funds drag down the index, left skewed return distribution 17

18 Industrial has tended to outperform, in Germany and most other markets 2014 RETURNS FOR MAIN PROPERTY TYPES ACROSS KEY MARKETS Source: MSCI 18

19 Big return differences between segments GERMANY TOTAL RETURNS IN 2014 BY PROPERTY SECTOR AND GEOGRAPHIC SEGMENT All Industrial All Residential All Retail All Office 2014 TOTAL RETURNS (%) 12,2 7,9 7,2 4,2 ANNUAL TRENDS Residential: Munich Residential: Berlin Retail: Major Cities Retail: Other Cities Office: Munich Residential: Rhine Main region Office: Hamburg Office: Cologne Office: Berlin Office: Stuttgart Office: Frankfurt Office: Düsseldorf 9,5 7,6 7,5 6,9 6,4 5,9 5,1 4,4 4,0 4,0 3,8 2,4 Source: MSCI ALL PROPERTY TOTAL 6,0 negative returns flat to marginal returns high returns RANGE 19

20 Office income return has tended to be higher than residential, until recently Office and residential income return, Income return in % p.a : IR office 4.9% p.a. IR residential 4.3% p.a. Avg. outp. office: 0.6% IR p.a. 0.0 IR office IR residential 20

21 But residential capital growth significantly higher Office and residential, income return and capital growth IR and CG in % p.a CG office 1.8% p.a. IR residential 1.0% p.a. Avg. outp. residential: 2.7% CG p.a IR office IR residential CG office CG residential 21

22 Offices have undergone significant depreciation over the past 18 years Office and residential income return and capital growth indexed, Index CG (1996=100) CG office index CG residential index IR office IR residential Income return in % p.a. 22

23 Retail has tended to outperform All Property in Germany Total Return by Sector (Standing Investments) Retail Office Residential Industrial Other All Property 10 8 (% pa) % 3.7% ø 10 yr Source: MSCI

24 With High Street retail being the strongest performer Total Return (including Transactions and Developments) Ø 5 yr Ø 10 yr 8 6 (% pa) Income Return Capital Return Total Return Source: MSCI

25 Super/Hypermarkets have tended to underperform Return and risk profiles by retail segment: (% pa) Total Return (% pa) Shopping Center High Street Top7 Retail Retail Warehouse Super/Hypermarket All Property Risk (Stdev) Income Return Capital Return Total Return Source: MSCI

26 New segments are emerging, such as Nursing Homes Benchmarking service starts 2015 Sample 2015: 76 properties of four portfolios, worth EUR 750m. CV Avg. floor space: 5,700 sqm EUR Millions Capital value Avg. CV: EUR 9.9m Avg. CV/sqm: EUR 1,800 Avg. ec. building year: Capital value Economic building year CV/sqm EUR Econo. building year CV/sqm

27 Nursing Homes standing investment performance 2013 and Total return 6,3% 7,1% 12 8 Total return Income return 6,9% 6,8% in % 4 Capital growth 0,6% 0,3% TR 2014 TR Income return 12 Capital growth in % in % IR 2014 IR CG 2014 CG

28 Conclusions Germany is a large and sophisticated real estate investment market, with considerable experience of international investing The market has tended to generate relatively low but stable returns, even when adjusted for valuation methodology Compared with other global markets, Germany seems less aggressively priced Significant variations exist within Germany, by property type, by geography and by portfolio 28

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