Light and shadow on the office leasing market No sign of a summer slump on the. investment market

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1 Germany Letting and Investment Q MARKET REPORT Light and shadow on the office leasing market No sign of a summer slump on the investment market ANDREAS TRUMPP MRICS Head of Research Germany > Take-up totaling at almost 1.9 million square meters Trends vary in top cities > Shrinking supply leads to rent hikes (almost) throughout Germany > Modest expectations for coming months > New lease transactions remain sluggish, conditions continue to foster average results > Transaction volume up by 33 % to EUR 25.5 billion > International investors continue to extend market share > Ongoing low interest rates drive high activity levels Take-up of office space in the top six cities (in 1,000 m²) Commercial transaction volume in Germany (in billions of euros)

2 The top six German centers recorded almost 1.9 million square meters in take-up at the end of Q3. This reflects a year-on-year decrease of around 5 % and a similar decrease compared to the ten-year average. The German commercial investment market recorded a transaction volume of almost EUR 25.5 billion at the end of Q The results indicate that investors poured one third more into Germany year over year. Spurred by geopolitical events and associated uncertainties about the economic development, sentiment on the German office leasing market has become more bleak since the end of the first half of the year. This development has led to increased hesitation on the part of many potential tenants, something that has been apparent for some time now. However, different trends have emerged. While Berlin and Hamburg generated high take-up results, Frankfurt, Düsseldorf and Munich recorded a significant drop. However, net leasing performance, i.e., excluding owner-occupiers, experienced a slight drop in Hamburg and a significant increase in Munich. Trends vary in top cities As we saw at the end of the first half of the year, the top German office markets experienced different trends. The capital Berlin has been the only city to continue to thrive in this sector, leading the ranks with 427,700 square meters in take-up. Spurred particularly by the information and telecommunications industry, which generated a 23% market share in Berlin, the city recorded a year-on-year increase of slightly more than 6%. The Bavarian capital Munich, which typically enjoys a place in the sun, came in second with 405,100 square meters in take-up. Even though these results point to a 6 % drop year over year, we also have some positive results to report. Net leasing performance in Munich increased by more than 12 %, a welcome development for landlords. However, large-scale tenants noticeably continued to hold back. Take-up results in Hamburg were mixed. Take-up in the city on the Elbe River experienced a 17 % increase to a total of 380,000 square meters. The fly in the soup is the large share of owner-occupiers, who have little importance for the leasing market. Without their high level of activity, including 22,000 square meters of space taken up by VGB and 15,000 square meters taken CONTACT Peter Bigelmaier Head of Letting peter.bigelmaier@colliers.com Investment Ignaz Trombello MRICS Head of Investment ignaz.trombello@colliers.com Research Andreas Trumpp MRICS Head of Research andreas.trumpp@colliers.com 2 Market Report Q Letting and Investment Colliers International

3 Comparison of vacancy rates (in %) Speculative project developments on the rise due to ongoing drop in vacancy space available for immediate tenancy was down year over year by almost half a million square meters at the end of Q3. A total of almost 5.7 million square meters reflects an average vacancy rate of 7.0 %. Although take-up levels have been average for several quarters now, vacancy in the top cities experienced another drop. This might sound contradictory at first, but this development can be attributed to the fact that, on the one hand, several vacated properties were renovated and therefore were not available for immediate tenancy and, on the other, vacant space was taken off the market because of repurposing or tear-down and rebuild projects. In addition, tenants consistently snapped up the vacant space that was available. up by Marquard & Bahls, net leasing performance fell just short of previous year levels. Results in Stuttgart were similar. Owner-occupiers like Daimler were responsible for the city generating take-up levels similar to the previous year at 193,300 square meters; without them, the city would have recorded a year-on-year drop. Comparison of average rents (in /m²) Comparison of prime rents (in /m²) Completion volumes in the top cities remain low at a projected volume of slightly less than 2.6 million square meters by the end of However, we are seeing a slow rise in the number of active project developers who are starting to take more chances with speculative project developments without preleasing due to the scarcity of available high-quality office space in some submarkets. Although there is a number of larger-scale potential tenants looking for space on the Düsseldorf and Frankfurt office markets, considerably fewer than in the previous year had decided to actually sign a new lease agreement by the end of Q3, particularly in the large space segment. Owner-occupiers held back as well. Altogether, this translates into a 20 % decrease in Frankfurt with 263,200 square meters in take-up and an even more significant 30 % drop in Düsseldorf to 186,000 square meters. Rent trends on the rise in almost all top cities With one exception, prime and average rent in the German hubs recorded a year-on-year increase, which was significant in some cities. This development can be attributed to high-priced leases in central locations combined with a scarcity of such space in those areas. The hesitation of potential 3 Market Report Q Letting and Investment Colliers International

4 tenants in the high-priced segment in Düsseldorf led to a 4 % decrease in prime rent to EUR per square meter. However, supply for this category of office space in the Düsseldorf CBD is limited to only a few properties, which are already well-leased. In the other cities surveyed, prime rent was up considerably in some cities (Hamburg up 4 % to EUR per square meter, Stuttgart up 6 % to EUR per square meter and Munich up 8 % to EUR per square meter) and less so in others (Berlin up 2 % to EUR per square meter and Frankfurt up 3 % to EUR per square meter). Results for average rent were similar. In terms of average rent, Düsseldorf recorded a year-on-year decrease of around 7 % at EUR per square meter. Berlin remained consistent year over year at EUR per square meter, while Hamburg (EUR per square meter) and Munich (EUR per square meter) experienced a year-on-year increase slightly more than 5 %. Frankfurt (EUR per square meter) and Stuttgart (EUR per square meter) both recorded slightly higher increases, up 6 % and 7 %, respectively. New lease transactions remain sluggish, conditions continue to foster average results The growth engine that is IT companies, which have leased the most office space to date and will continue to have a major impact on the market in 2014, was not enough to make up for the hesitation in other industries. The geopolitical uncertainties and their impact on economic conditions also lead us to expect many businesses to continue to be hesitant to move or make long-term lease decisions for the time being. In addition, lease agreements in the top six hubs have a term of more than five years on average. Because of this, we will continue to see the aftermath of weak take-up following the economic and financial crisis of 2008 throughout 2014 and most likely 2015 as well. 4 Market Report Q Letting and Investment Colliers International

5 Commercial transaction volume up by one third We re definitely not seeing any signs of a summer slump. The ongoing favorable interest rates and continued increase in capital flow used for profitable investment opportunities are both driving factors. International investors have been very active, purchasing property valued at almost EUR 11 billion and extending their market share year over year from 30 to 43 %. The majority of international capital at slightly more than EUR 6 billion came from the EMEA region, i.e., Europe, the Middle East and Africa. EUR 3.7 billion were invested in Germany by investors from North, Central and South America and another EUR 1.1 billion came from the Asia-Pacific region. by retail property with almost EUR 5.9 billion and a 23 % market share. Ongoing investor demand for logistics and hotel properties deserves particular mention. Considerably higher investments had been made in both property types by the end of Q3 than a year ago. Around EUR 2.4 billion was invested in logistics properties, reflecting slightly more than 9 % of total transaction volume, and almost EUR 2.1 billion went into hotel properties, reflecting an 8 % market share. More and more investors appear to be expanding their investment profile to include more profitable property types to add to the property mix of their portfolios. Transaction volume according to buyer groups (in millions of euros) Commercial transaction volume in the top six cities (in billions of euros) The purchase of the Theresie complex in Munich by Deka Immobilen for EUR 257 million was one of the largest single transactions of Q3. The complex, which features around 77,000 square meters and is located at Theresienwiese, was completed in 2003 and includes 55,000 square meters of office space. The sale of the office and hotel property, Upper West, in Berlin to a family office generated a similar transaction volume. We also saw a portfolio sale for EUR 221 million. The South Korean pension fund POBA (Public Officials Benefit Association), purchased 50 % of a total of seven properties located in the top German cities within the scope of a share deal. There s no ignoring office Considerably more office properties were sold in Q3 than in previous months. This led to an increase in the share of total transaction volume for office property to almost 47 % by the end of September, reflecting an investment volume of slightly more than EUR 11.8 billion. was followed very active Open-ended and special were the clear leaders at the end of Q3 with an investment volume of almost EUR 5.8 billion. This development was particularly supported by a number of national and international special. Asset/fund managers came in second with EUR 3.1 billion, beating out a quartet comprised of project developers (EUR 2.2 billion), private investors and family offices (EUR 2.1 billion), corporates and owner-occupiers (EUR 2.1 billion) and opportunity and private equity (EUR 2.0 billion). 5 Market Report Q Letting and Investment Colliers International

6 More than 50 % of investment volume poured into top six cities Almost EUR 13 billion of capital invested so far this year was invested in the German hubs of Berlin, Düsseldorf, Frankfurt, Hamburg, Munich and Stuttgart, which were surveyed in detail. That s almost EUR 2.4 billion or 23 % more than a year ago, with the six top cities extending their market share once again to their usual level of over 50 %. Gross initital yield office (in %) Munich continues to defend its leading position among the hubs. Almost EUR 3.7 billion has been invested in commercial in the Bavarian capital so far this year, a year-on-year increase of almost 47 %. Larger single transactions like the Theresie complex within city limits and the Allianz corporate headquarters in Unterföhring on the city periphery were responsible for a large share of total investment volume. The insurance group bought back the property, which features around 82,000 square meters and which the group originally sold to Whitehall in 2007, for more than EUR 200 million. Several large-volume sales during the summer months gave Berlin a transaction volume of EUR 2.5 billion, a year-on-year increase of around 12 %. In addition to the sale of the Upper West complex, transactions like the sale of the Quartier am Tacheles district development for around EUR 145 million to Perella Weinberg contributed to a very lively Q3. Hamburg came in third, recording a transaction volume of EUR 2.4 billion so far this year, up 33 % year over year. Prominent properties were also sold in the past months in the city on the Elbe River. The Tanzende Türme, two highrises featuring a total of around 35,000 square meters of usable space, were sold for around EUR 165 million to a Hansainvest special fund within the scope of a share deal. The Swedish pension fund Cityhold purchased the Atlantic Haus property, an 88-meter high office property in the St. Pauli district, for around EUR 130 million. Frankfurt am Main is currently the only location to record a slight year-on-year decrease of 3 % with a transaction volume of slightly less than EUR 2.2 billion. Because several large-volume transactions are scheduled to be finalized in the next few weeks, these figures are only a snapshot of current activity and will have changed by the end of the year. The largest sale in Germany s financial center in Q3 was the sale of the Westend Carree office building to two IVG special. Transaction volume in Düsseldorf recorded a year-on-year increase of 27 % to almost EUR 1.5 billion, even though activity in Q3 was slower than the two previous quarters where we saw the sale of the Kö-Galerie and Herzogterrassen complexes, the two largest transactions of the year so far. Stuttgart completes the picture of the top cities with a commercial transaction volume of EUR 757 million, a yearon-year increase of 16 %. The largest purchases during the lively third quarter were made by Cordea Savills, who purchased the Friedrichs-Carré for more than EUR 60 million from Bayerische Versorgungskammer, and by Dream Global REIT. The Canadian REIT purchased the 25,000 square meter Officium office property in the Vaihingen district for around EUR 47 million. Ongoing high demand is leaving its mark on prime rents. The weighted average gross initial yield for prime office property throughout Germany fell by nine basis points compared to the first half of the year and by 26 basis points year over year to a current 4.57 %. Munich played a significant role here, where we saw the largest jump since the end of the first half of the year. Prime yields fell 25 basis points to 4.00 %. All other locations remained stable, ranging between 4.50 % in Hamburg and 5.10 % in Düsseldorf and Stuttgart Impressive development in Q4 The negotiations that are currently underway and the lively activity on the commercial investment market in Germany mean we can expect to see an impressive development in Q4. In Frankfurt alone the volume of transactions about to be finalized comes to considerably more than EUR 1 billion. And other cities are expecting to see a few large-volume transactions take place before the end of the year as well. As long as interest levels remain at their current level and no negative events impact Germany as an investment location, supply will continue to be the only limiting factor when it comes to generating higher transaction volumes. However, we are still expecting this year s results to once again top previous year results and to see a transaction volume of more than EUR 35 billion. 6 Market Report Q Letting and Investment Colliers International

7 Key facts letting and investment market Germany (figures for Q1-3) GERMANY BERLIN DUSSELDORF FRANKFURT HAMBURG MUNICH STUTTGART OFFICE LETTING MARKET stock in million m² Take-up, 2014, in m² 1,855, , , , , , ,300 Take-up, 2013, in m² 1,945, , , , , , ,800 Percentage change y-o-y -4.6% 6.1% -29.8% -19.5% 16.9% -6.0% -0.8% Prime rent, 2014, in /m² Prime rent, 2013, in /m² Percentage change y-o-y 0.0% 2.3% -3.6% 2.7% 4.3% 8.1% 6.2% Average rent, 2014, in /m² Average rent, 2013, in /m² Percentage change y-o-y 1.6% 0.0% -7.2% 5.6% 5.1% 5.2% 7.7% Vacancy, 2014, in m² 5,682, , ,000 1,490, ,900 1,261, ,800 Vacancy, 2013, in m² 6,179,200 1,110, ,000 1,575, ,500 1,416, ,000 Vacancy rate in % 7.0% 5.3% 10.5% 13.0% 6.3% 5.5% 4.2% COMMERCIAL INVESTMENT MARKET Transaction volume in millions of euros, , , , , , , Transaction volume in millions of euros, , , , , , , Percentage change y-o-y 33% 12% 27% -3% 33% 47% 16% Largest group of investors 22% 34% Asset Managers/ Fund Managers Opportunity Private Equity Funds 30% 35% 34% 23% 46% Largest group of sellers Most important type of Property developers 20% 47% 25% 61% Property developers Opportunity Private Equity Funds 36% 62% 26% 75% Property developers 33% 68% 17% 59% Property developers 31% Prime yields office 4.57% 4.75% 5.10% 4.85% 4.50% 4.00% 5.10% Prime yields retail 4.21% 4.50% 4.25% 4.20% 4.60% 3.50% 4.20% Prime yields logistics 6.83% 7.30% 6.70% 6.40% 6.90% 6.75% 7.00% Sources: Colliers International Deutschland, Grossmann & Berger GmbH (Hamburg) 67% 7 Market Report Q Letting and Investment Colliers International

8 485 offices in 63 countries on 6 continents United States: 146 Canada: 44 Latin America: 25 Asia Pacific: 186 EMEA: 84 Author: Andreas Trumpp MRICS Head of Research Germany andreas.trumpp@colliers.com Colliers International Deutschland Holding GmbH Dachauer Str. 65 D Munich billion in annual revenue 57 billion in transaction volume with more than 80,000 investment and leasing deals 136 million square meter under management 15,800 professionals worldwide About Colliers International Colliers International is a global leader in commercial services, with 15,800 professionals operating out of more than 485 offices in 63 countries. A subsidiary of FirstService Corporation,Colliers International delivers a full range of services to users, owners and investors worldwide, including global corporate solutions, brokerage, property and asset management, hotel investment sales and consulting, valuation, consulting and appraisal services, mortgage banking and insightful research. The latest annual survey by the Lipsey Company ranked Colliers International as the second-most recognized commercial firm in the world. colliers.com Photo credit: BIKINI BERLIN, Berlin, Bayerische Hausbau Copyright 2014 Colliers International Deutschland Holding GmbH. This document has been prepared by Colliers International for advertising and general information only. Colliers International makes no guarantees, representations or warranties of any kind, expressed or implied, regarding the information including, but not limited to, warranties of content, accuracy and reliability. Any interested party should undertake their own inquiries as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes all liability for loss and damages arising there from. This publication is the copyrighted property of Colliers International and/or its licensor(s) All rights reserved.