Residential Market Berlin

Residential Market Berlin jo

The Residential Market Berlin The interest in residential property in Germany and especially in Berlin remains strong and is still steadily increasing. Only in the first six months of 2005 more than 175.000 apartments have changed hands within portfolio transactions (please see table at the end of this presentation). The average price paid per m² has increased within these portfolio deals in the last two years. The main concentration of the investors remains Berlin. Not only because it is the capital of Germany but also as conditions in terms of low rents and still moderate purchase prices attract foreign investors to this market. Portfolio Size in m² Seller Buyer Year Price ( million) Price per Apartment in Location TEFAG 1.400 Immofinanz 2005 70 50.000 Berlin Viterra 138.000 E.ON Deutsche Annington 2005 7.000 50.725 Div. HPE 4.400 Peabody GERE 2005 Berlin GEHAG 18.000 Nordbank Oaktree 2005 1.000 55.556 Berlin DAL 13.500 DAL Babcock & Brown 2005 RWE 4.500 RWE Deutsche Annington 2004 225 50.000 Ruhr Jade 8.200 Dt. Bank Cerberus 2004 Kiel WCM 31.000 WCM Blackstone 2004 1.390 44.839 Northern Germany Gagfah 82.000 BfA Fortress 2004 ca.3.500 42.683 Berlin GSW 66.000 Land Berlin Cerberus/Goldman Sachs 2004 ca.2.105 31.894 Berlin Thyssenkrupp 48.000 Thyssenkrupp Corpus/Morgan Stanley 2004 ca.2.100 43.750 Ruhrgebiet DAL 13.500 DAL Babcock & Brown, Barg 2004 Salzgitter Jade 2.700 Mira Wohnprojekt GmbH, Essen 2004 Ruhrgebiet Degewo 2.652 Degewo, Kowoge Cerberus 2004 Berlin (East mostly) Teil der GSW- Cerberus Vivacon bzw. German Real 1.529 Wohnungen GSW/Whitehall Estate Opportunities GmbH 2004 Berlin Mira 1.500 Viterra Bochumer Hausser-Bau GmbH 2004 Ruhrgebiet Deutsche Wohnen 1.011 Wohnstadt Deutsche Wohnen AG 2004 Nordhessen Vivacon 886 Vivacon Conwert-Invest 2004 39 44.018 Berlin Corpus 550 WestLB Corpus 2004 Düsseldorf Petruswerk 2.300 Petruswerk Avila Management 2003 98 42.609 Berlin BIG-Heimbau AG 10.000 DZ Bank, HSH Bank (76%) Deutsche Annington Immobilien GmbH 2003 Kiel Volksfürsorge 2.627 Volksfürsorge GWH 2003 Cities in Hessen, Frankfurt, Kassel, Bad Homburg Bellaform 1.534 Viterra Bellaform Maschinenbau 2003 Essener Grundstücksgesellschaft 1.502 Viterra Essener Grundstücksgesellschaft 2003 Essen Allianz Portfolio 1.048 Allianz Wohnbau GmbH, HPE Hausbau 2003 Düsseldorf, Wuppertal, München, Bonn, Köln

Investors seeking for these kind of portfolio deals are even willing to pay a portfolio premium at the moment in order to dispose of a substantial amount of apartments big enough to allow them to set up an own management structure as soon as possible. These portfolio transactions mainly conducted by Anglo-Saxon private-equity funds attract a lot of attention. The strategy of these funds is followed by many private individuals in a smaller scale by buying regular apartment buildings. The strong interest is not only based on the lack of alternatives because of over heated markets in Europe. There are several reasons that set the scenario for a good risk-return relationship in the German residential market. The development of the number of households, the demanded space per capita and the construction volume lead and will lead to a scenario of increasing demand and decreasing supply for residential space. Number of Households The number of households will increase to 41.3 Mio. by 2020 due to an increasing number of single and seniorhouseholds. Moreover the average size of the households will decrease. 42 41 40 39 38 37 36 35 34 33 32 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 45 40 35 30 25 20 15 10 5 0 Number of Households (in million) Share of Households over 65 (in %)

Living Area per Capita A higher standard of living will lead to an increasing living area per capita. The household size is expected to increase by 14% until 2030. The demand for living space will rise faster in the east part of Germany and is expected to reach the level of the West German demand by 2050. Living Area per Capita 50 45 40 35 30 25 West German Area (in m²) East German Area (m²) Germany (in m²) 20 2000 2010 2020 2030 2040 2050

Construction Completion The adjacent graph shows the estimated development of the amount of accomplished apartments and the amount of demanded apartments in Germany in the coming years. Since demand exceeds the completion of apartments in the next few years, a shortage of appropriate apartments can be expected in partial markets. Accomplished Apartments vs. Demand in 000 Accomplished Apartments vs Demand in 000 Accomplished Appartments 1000 Bedarf 900 800 700 600 500 400 300 200 100 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 The development of the residential market in Berlin reflects the situation in Germany. After the booming years that followed the breakdown of the wall, the construction volume decreased sharply. Today, only very few areas are provided with new accomplished apartments. number of accomplished apartments Construction Completion 35000 30000 25000 20000 15000 10000 5000 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Considering the expected development of the number of households, living area per capita and the construction completion there is a good chance that rents as well as purchase prices will pick up in Germany over the next years. The following section shows the development of rents and purchase prices in Germany:

Rent and Purchase Prices During the last ten years average rents increased only slightly in Germany. The prices for apartments even went down in this period of time. Although rental limitations due to governmental restrictions apply these low rent levels offer residential investors the possibility to increase their return by improving the rental level. In some areas of the German market as well as in some areas of Berlin increased rents might not be accepted by the tenants. But the risk of lower rents than today is very limited. Purchase Prices vs. Rents Price Apartm. (stock) Rent (new building) Rent (stock) Source: BulwienGesa, DB Research 3 rd May 2005 The adjacent graph shows the flat development of rents and purchase prices in Germany compared to the strong increases in other European markets. The residential markets in Spain, the UK, Denmark and the Netherlands experienced strong price increases. House Prices Abroad Source: Nationwide, Nat. Stat. Ämter, BulwienGesa, NVM 3 rd May 2005

Compared to the other markets the low rent and purchase price levels in Germany enable investors to enter the market without having a foreseeable downside risk. Considering this attractive risk-return ratio the market still offers reasonable yields that compare favorably to the historically low level of interest rates. Long-term Interests 10-years Loans Mortgage Interests The residential investors in the market follow various strategies. Due to the historically low level of interest rates the traditionally lower yielding and less risky residential market offers investors a chance to achieve high returns on equity at a comparably low risk level even if they don t manage the portfolio actively or conduct condominium conversion. At the same time other players in the market will drive rents and purchase prices resulting in an increasing running yield and property value for the buyand-hold investor-type. Source: Bundesbank, EZB, DB Research 3 rd May 2005 In the face of one of the lowest ownership rates in Europe condominium conversion is another strategy that is followed by residential investors in Germany. The ownership rate in Germany amounts to approximately 43% compared to approximately 57% in France 66% in the UK or 85% in Spain or Norway. Compared to this figures the ownership rate of approximately 13% in Berlin seems to invite investors to follow up on condominium conversion strategy. The low interest rates also support the condominium conversion strategy. Taking all factors into consideration this strategy seems to salvage a lot of potential in Germany and especially in Berlin.

The Deutsche Bank publishes a so-called affordability index with regards to the residential market. This index measures the relationship between mortgage rates, purchase prices and rent levels. The message from this analysis is quite obvious. During the last fifteen years there has never been a more favourable environment than today for buying instead of renting. Affordability Index, Example: Frankfurt/Main Mortgage Interests Income per Capita Apartment Price Affordability Index Source: Bundesbank, EZB, DB Research 3 rd May 2005

Conclusion The strong demand from foreign investors is not only based on the lack of alternatives in their own countries. Considering the supply and demand side of the residential market in Germany the next years should create a healthy environment for investors. The risk-return relation in the market remains very attractive especially as long as interest rates are seen at historical low levels. Next to a buy-and-hold strategy condominium conversion may become a very interesting exit strategy and yield driver due to the low ownership rate in Germany and especially in Berlin.