Real Estate Investments in Germany An Overview for Chinese Investors

Real Estate Investments in Germany An Overview for Chinese Investors

List of Abbreviations CIT CPI GDP German PE GIT G-REIT LT N NN NNN RETT SME TT VAT WHT Corporate Income Tax Consumer Price Index Gross Domestic Product German Permanent Establishment German Income Tax German REIT Land Tax Single Net Lease Double Net Lease Triple Net Lease Real Estate Transfer Tax Small- and Medium-Size Enterprise Trade Tax Value Added Tax Withholding Tax Disclaimer Nothing in this Document should be construed as legal, tax, accounting or investment advice. We are not obliged to update or correct any information set out in this Document. Neither we nor any of our shareholders, associates, affiliates, subsidiaries nor their respective directors, officers and employees accept any responsibility or liability for (and no representation or warranty or assurance of any kind, express or implied, is or will be made as to or in relation to), the accuracy or completeness of the information used, or the comment or opinion contained, in this Document, or any action taken or omitted by the addressee as a result of receiving it. The addressee should make his own independent evaluation of any transaction and of the relevance and adequacy of the information in this Document and should make such other investigations as he deems necessary to determine whether to participate in any transaction.

1. Investment Market Germany Germany possesses a very strong economy, displaying the highest figures in Europe regarding the GDP ( 2.90bn in 2014) and the population size (80.8m). In addition to being one of the three largest global exporters along with China and the US, Germany also offers a high degree of economic diversity due to its large manufacturing and service sectors. The economy benefits from the considerable share of successful small- and medium-size enterprises (SMEs) that employ approx. 60% of the country s total workforce, one of the lowest unemployment rates on an European and global scale, as well as highly educated and qualified labour. Germany s highly developed and stable political legislation in combination with the necessary legal framework provides a secure environment for both national and international investment. Due to its federal structure, the country has a large number of strong cities, including four cities with more than 1 million and 70 cities with more than 100,000 inhabitants. From a real estate perspective and with reference to the figure on page 2, Germany has seven A-class investment markets (Berlin, Cologne, Dusseldorf, Frankfurt, Hamburg, Munich, and Stuttgart) as well as a large variety of B-locations (e.g. Dresden, Hannover, Leipzig, or Nuremberg). Germany EU-28 Population 80.8m 507.4m Population Growth +3.2% +3.4% GDP per Capita 34,200 26,600 Economic Growth +0.1% +0.0% Inflation Rate +0.8% +0.6% Unemployment Rate (20-64 years) 5.3% 10.6% Unemployment Rate (55-64 years) 7.9% 23.4% Source: Statistisches Bundesamt, Data from 2013/2014

Investment Markets Germany Sale in Frankfurt Sale in Munich

2. Acquisition of German Real Estate Forms of Investment In order to invest in German real estate, both direct and indirect acquisition opportunities are available to investors. In addition to the direct acquisition of property (i.e. asset deal) and the purchase of shares in a corporation holding such real estate (i.e. share deal), investors may employ other indirect investment vehicles such as open- and close-end funds or German REITS (G-REIT), which offer the opportunity of pure financial investments without the responsibility for property management. Ownership In accordance with the German constitution, ownership is a fundamental right that grants the legal right to possess, use, and dispose or bequeath assets, such as real estate. The right to own real estate is applicable to any private individual and any legal entity with legal capacity, irrespective of its original citizenship. In Germany, there are three different forms of ownership for real estate assets: (i) Full freehold ownership, (ii) condominium ownership (Wohneigentum), as well as (iii) hereditary building rights (Erbbaurechte) and usufruct rights (Nießbrauch). Every ownership title is registered in the land register (Grundbuch) along with important encumbrances related to the specific property such as mortgages. Sale in Leipzig Sale in Frankfurt

Full freehold ownership (i) describes the ownership over a piece of land and, furthermore, all property attached thereto, e.g. buildings. The full freehold ownership can be attributed with mortgages for financing aspects as well as liens to grant or restrain certain utilization of the respective land such as right of way. Although also being rated as freehold ownership, condominium ownership (ii) is of lesser status than full freehold ownership and indicates the ownership over individual units in a multi-unit residential property. In contrast to commercial properties, which are almost exclusively subject to full freehold ownership, condominium ownership is common for residential properties in Germany s larger cities. Sub-divided into the ownership of a unit itself (Sondereigentum) and the co-ownership of common areas of the building, such as staircases, along with the other condominium owners (Gemeinschaftseigentum), the latter is contractually settled to manage the whole property and to divide costs accordingly. In order to obtain the full freehold ownership over a property or condominium ownership over a residential unit acquired, the ownership title is to be transferred from the seller to the buyer in the land register through a registration of the ownership title. This registration of the ownership title is subject to the conclusion of a sales and purchase agreement between the two parties, which must be notarized by a certified notary. Under German law, an un-notarized sales agreement is void and a registration and, therefore, a transfer of ownership title is excluded. Hereditary building rights and usufruct rights (iii) incorporate the third type of ownership and are seen as quasi-ownership. They serve purpose in case that a full freehold owner is not willing to abandon full ownership of land. Hereditary ownership rights are granted by the initial full freehold owner of a plot of land in exchange for annual interest payments and entitle the corresponding beneficiary to temporarily use the land as full freehold, including the rights to build, sell, bequeath, and so forth. The general maturity for hereditary building rights ranges between 30 and 99 years, after which full ownership is returned to the initiator, i.e. the original freeholder. The terms of a hereditary building right are subject to an agreement between the full freehold owner and the beneficiary and, inter alia, include duration, financial terms, and restoration arrangements (e.g. compensation for the buildings of the former beneficiary). Similar to the other ownership titles, the hereditary building right has to be registered in the land register in order to become legally binding. In this regard, the register provides an additional page to account for all changes conducted during the right s execution.

Taxation In Germany, the direct acquisition of real estate through an asset deal as well as the indirect acquisition through a share deal, i.e. the purchase of shares in a company that owns real estate, is subject to German Real Estate Transfer Tax (RETT). The respective RETT rate depends on the individual German Federal States and currently ranges from 3.5% to 6.5% of the transaction volume. It is general practice, that the buyer bears the tax liability; however, the parties may negotiate other arrangements as part of the sales and purchase agreement. In a share deal, RETT applies if a single buyer directly or indirectly acquires 95% or more of the shares of a respective entity or holds an economical participation of equal amount in the same. In partnerships, RETT becomes due if at least 95% of the shares are transferred to a new partner within a 5 year period. In principle, the sale of leased German real estate or shares in a company that holds correspondent property is exempt from Value Added Tax (VAT), currently amounting to 19%. This is, if the purchaser assumes the ongoing leasing business of the previous owner and, therefore, acquires an ongoing business with a predetermined VAT position. However, opportunities to opt to VAT might be available. 3. Management of Real Estate Lease Agreements As opposed to the Anglo-American legal principles, German leases are categorised as contracts rather than estates and are, therefore, not included in the land register. The German Civil Code governs basic rules of leases; however, deviating terms concerning single aspects of the contract may be negotiated by the parties upon conclusion. In Germany, one distinguishes between commercial and residential leases, which, in accordance with their denomination, indicate a lease of premises that are used for business purposes and a lease of premises that are used for reasons of accommodation respectively. Here, the latter is subject to stricter legal regulations in order to protect the interests of the residential lessee. German lease agreements generally include clear definitions of the (i) rentable premises, (ii) ma-

turity of the lease, (iii) terms of rental payments, (iv) responsibility for maintenance and repairs, and (v) right to sublet. (i) The rentable premise or area requires a clear definition in terms of location and space in order to provide a basis for all subsequent agreements and to avoid any prospective disputes in respect thereof. (ii) In accordance with German law, the term of commercial leases is subject to an agreement between the parties and may either be fixed or unspecified; the latter agreement can be terminated with 6-9 months notice. In case of a fixed term, the maturity of leases is commonly tied to market standard, which in general counts 5-10 years for office space and 10-15 years for retail space, and is, furthermore, often subject to renewal options that must be established by both parties. Regardless of any contractual agreements, a commercial lease must not exceed a period of 30 years and may be terminated with statutory period of notice by either party thereafter. Lease agreements legally require written form, if they exceed a maturity of one year. The lease terms of agreements with a duration of less than one year, may be concluded verbally. (iii) In Germany, all common types of rent, such as fixed rents, turnover rents, and so forth, as well as incentives (e.g. rent free periods, rental reduction, etc.) are available for commercial leases. The parties are, furthermore, free to negotiate and set any rental level. Rent is usually measured in / m² / month and payable monthly in advance. Sale in Berlin Sale in Hamburg

The payable rent for the tenant generally reflects the actual reimbursement for the utilisation of rental space as well as the prepayment of costs the landlord owes to third parties (e.g. water, waste, ground tax, insurance, and so forth). Originally, the latter expenditures are to be borne by the landlord, however, in practice they are frequently passed on to the tenant through explicit provisions in the lease agreement (recoverable costs). Expenses that cannot be handed to the tenant are referred to as non-recoverable costs (compare paragraph (iv)). In practice, commercial lease agreements usually provide for an annual indexation of rent to account for inflation. In this context, rent is adjusted in accordance to changes of a previously determined index, most commonly the Consumer Price Index (CPI) (Verbraucherpreisindex, VPI). This rental adjustment is commonly subject to a specified hurdle rate (e.g. a 5% increase/decrease in CPI) and is to be applied to the passing rent by a previously settled percentage that can amount to up to 100%. Contrary to, for instance, the UK, an upward-only review of rents is not admissible under German law; however, a predetermined rent step-up plan may be agreed upon and incorporated. (iv) The responsibility of cost coverage for maintenance and repairs initially lies with the landlord. In accordance with the negotiated terms of a lease agreement however, it is common practice for the tenant to assume the financial position for certain rental area related maintenance and repair issues, whereas the landlords commit themselves to cover structural works (Dach und Fach). Although rather uncommon, German law also allows for the landlord to render the costs of these structural works to the lessee. In German commercial leases there are three net leases which determine a tenant s financial obligation beyond the basic rent payment: A single net lease (N) requires the tenant to additionally cover the property taxes, the double net lease (NN) includes both property taxes and building insurance, and the triple net lease (NNN) covers property taxes, building insurance, as well as structural maintenance and repairs. NNN is usually applied to freestanding or single-tenant properties only. (v) German law generally allows for tenants to sublet their leased premises to third parties, however, requires a correspondent and mutually agreed upon position in the lease agreement. Should the parties fail to include such a provision, the landlord may, if applicable, give his written consent at a later point in time.

Taxation Whilst owning real estate in Germany, the respective corporations or individuals may be exposed to the following taxes to different degrees: (i) (ii) (iii) (iv) (v) Income Tax, subdivided into Corporate Income Tax (CIT) and German Income Tax (GIT) Withholding Tax (WHT) Trade Tax (TT) VAT Land Tax (LT) 4. Sale of Real Estate Legal Basis Please refer to Section 2.2 as the same regulatory basis applies for sales and acquisitions. Taxation If the direct sale of German real estate (i.e. asset deal) generates capital gains for the seller, this surplus is generally subject to CIT or GIT. Furthermore, if the capital gain is raised in association with a German PE or a German permanent representative it is additionally subject to TT. In case of the disposal of German property through a share deal, 95% of the respective capital gains from the sale of the respective shares are exempt from CIT, if the seller is a corporation. For individuals, on the other hand, capital gains are subject to a flat GIT of 26.275% (incl. solidarity surcharge) if the shares are held privately. If the shares are held as business assets, there is a GIT exemption for 40% of the capital gain, whereas the residual 60% are subject to the individual s correspondent income tax rate. Again, TT is applicable if the capital gains are related to a German PE. For non-german residents double taxation treaties between Germany and the resident s native country may exist in which case the tax liability to the German authorities from capital gains might be void.

5. Contact Information Angermann Angermann Investment Advisory AG is represented with offices in Hamburg (headquarters), Berlin, Frankfurt, and Stuttgart in Germany as well as with an overseas office in Stockholm (SE) and a China desk in Shanghai (CN). With 33 employees and its affiliated companies within the Angermann Group the company is able to provide a broad range of services with regard to (i) real estate investments, (ii) office letting activities, (iii) valuation, (iv) retail properties, and (v) real estate auctioning processes. Frank Shao Phone +49 (0)40-3 49 14-120 Mail frank.shao@angermann.de Dr. Jens Noritz Phone +49 (0) 40-3 49 14-135 Mail jens.noritz@angermann.de ANGERMANN Investment Advisory AG Shanghai Office 1805A, 256 South Pudong RD. Huaxia Bank Building 200120 Shanghai ANGERMANN Investment Advisory AG Headquarter ABC-Straße 35 20354 Hamburg Germany Phone +49 (0)40 349 14 0 Fax +49 (0)40 349 14 148 Mail aia-hamburg@angermann.de www.angermann-immo.de