Economic conditions in the industry

Retail sector

According to provisional figures from the Federal Statistical Office, German retail sales rose by 2.3% in nominal terms in 2010 and by 1.2% in real terms (after adjustment for prices). Thus retailers were able to increase their revenue once more after the financial and economic crisis of 2009 (-3.7% in nominal terms, -3.1% in real terms). The retail sector’s declining share of private consumer spending which has been an ongoing trend for decades seems to have come to a halt for the time being, rising to over 28%. At €406.7 billion, sales in the retail sector in the narrower sense (excluding vehicle sales, service stations, fuels and pharmacies) were up (1.8%) on the previous year (€399.5 billion).

Breaking the retail sector down into individual segments, it is evident that, compared to the previous year, food retailers (-0.6% in real terms) fared less well than the non-food segment (+2.6% in real terms). On the non-food side, “textiles, clothing, footwear and leather goods” performed best (+3.7% in real terms), followed by “cosmetic, pharmaceutical and medical products” (+3.6% in real terms) and “furnishings, household appliances and building materials” (+3.0% in real terms). “Other retail (such as books and jewellery)” closed the year with growth of 2.4% in real terms. However, online and mail order business saw a fall of 1.3% in real terms, as did “other retail involving goods of various types (such as department stores)” (-0-2% in real terms).

According to information from CB Richard Ellis, retail space in shopping centers was in high demand among retailers in 2010. Interest was greatest in retail spaces in the 150 m² to 349 m² size category (approx. 22%). The second most popular categories (0 m² to 149 m² and 500 m² to 999 m²) accounted for 38% (19% each). Larger spaces were also in demand: One third of leases were in the over 1,000 m² category. Overall, there is a trend towards larger-scale stores as new product group and shop interior concepts require more space. Retailers are moving away from the traditional functional structure of their sales area and are choosing concepts that are more strongly characterised by promotional aspects.

According to CB Richard Ellis, the highest proportion of floor space in leases in 2010 was attributable to clothing (31%), supermarkets / hypermarkets / beverage stores (9%), catering (8%) and footwear / leather goods (8%). Other important sectors in prime locations were chemists and perfumeries in the health / beauty segment (5%).

Real estate market

According to research conducted by Jones Lang LaSalle, the transaction volume for investments in retail property (shopping centers, retail parks and factory outlets) across continental Europe shot up in 2010 by 68% over the previous year to €20.7 billion (2009: €12.3 billion).

With a 64% (€13.2 billion) share of the transaction volume, shopping centers remained the focus of investors in mainland Europe in 2010 as they continued to seek defensive investment opportunities in the core area. They prefer stable market segments and favour prime locations, secure, long-term leases and high-quality tenants.

The German market maintained its leading position with respect to retail property investments in Europe. At €4.7 billion, the volume in Germany represented a share of just under 23%. According to Jones Lang LaSalle, shopping centers were the main area of interest in Germany: the transaction volume totalled €3.2 billion, corresponding to 68% of total transaction volume for retail property (excluding office buildings). The strongest group of investors was comprised of listed real estate companies such as Deutsche EuroShop, closely followed by asset and fund managers and open-ended property funds. The sales side was dominated by developers who represented almost half of all sales volume.

The yields from retail property decreased further over the course of the year. However, longer marketing times are required than before the financial crisis, which leads us to conclude that investors have become more risk-aware. Arranging external financing also takes more time now than it did a few years ago. High-equity investors such as sovereign funds, pension funds and some German open-ended property funds can act more rapidly, however, and are also prepared to accept lower returns because this is the only way that they can invest cash inflows promptly. At the end of 2010, the yield for German shopping centers in prime locations, according to information provided by Cushman & Wakefield, was at 5.15%. This is not far removed from the peak value of the last ten years (5.0%).

Share price performance

Deutsche EuroShop shares began 2010 with a price of €23.67. At first, the price hovered around this level until April. when the atmosphere on the stock exchanges became somewhat tougher and the second quarter was characterised by falling prices on most real estate shares. The share recorded its lowest price of the year at the start of the third quarter, reaching €21.72 on the basis of the Xetra closing price on 1 July 2010. From that point onwards, a rally ensued that saw the share price gain around 33% to reach €28.98 on the last trading day of the year. The share closed 2010 at an annual high with a performance of +28.1% (including dividend, 2009: +2.1%). Thus 2010 was the best year for shareholders in the ten-year history of Deutsche Euro-Shop AG since 2005 (28.7%).

Shareholders who invested in Deutsche EuroShop in January 2001 at the issue price of €19.20 and who participated in the rights issues last year have seen an average yield of 11% p.a. after tax over ten years. 4.7 percentage points are attributable to the dividends paid over the last ten years, and 6.3 percentage points to price gains. Over a fiveyear period which saw both share-price boom and financial crisis, the overall performance stood at 50.6%, which corresponds to an average yield of 8.5% p.a.

Evaluation of the fi nancial year

The Executive Board of Deutsche EuroShop is satisfied with the past financial year. Thanks to the good development of the business, we again lived up to our forecasts. The A 10 Center, which was acquired in February 2010 and was included in our results for the first time, made a significant contribution in this regard.

Revenue was planned at between €139 million and €142 million and totalled €144.2 million (2009: €127.6 million) as of the reporting date, corresponding to an increase of 13%. Earnings before interest and taxes (EBIT) of between €1118 million and €121 million were planned; ultimately these increased by almost 12%, amounting to €124.0 million (2009: €110.7 million). We expected earnings before taxes (EBT) excluding measurement gains/losses of between €58 million and €60 million. They rose by 17%, totalling €63.9 million (2009: €54.9 million).

As in the previous year, we exceeded earnings forecasts. Deutsche EuroShop has proven once again that it has an outstanding shopping center portfolio and is well positioned even for difficult periods in the economy and on the real estate market.

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