HSH Nordbank lowers its forecast of REIT potential

G-REIT structure too restrictive Real estate corporation without REIT status more flexible

Hamburg/Kiel, June 19, 2007 - In its current study titled “Deutsche Immobilienunternehmen am Kapitalmarkt” [“German real estate companies on the capital market”], HSH Nordbank AG has reduced its projection of market potential for G-REITs through 2010 from between EUR 30 and 60 billion (forecast at end-2005) to between EUR 15 and 40 billion. Apart from the decision to exclude residential properties, this was also attributable to the numerous statutory restrictions of the G-REIT.

“By limiting the flexibility of real estate corporations that would be eligible to switch to REIT status, the potential stock-market capitalization of G-REITs is likely to be diminished,” commented Peter Rieck, deputy Chairman of HSH Nordbank. Since G-REITs are particularly suitable for non-German and tax-exempt investors wishing to invest in German real estate and since new REIT issuers will enter the market in the shape of fund initiators, HSH Nordbank nevertheless expects an appreciable market volume.

Only a small number of existing companies will switch to REIT status Under the current underlying conditions, the real estate companies eligible for a switch to G-REIT status are those investing in commercial real estate in Germany, not providing third parties with services and whose gearing is modest to conservative. At present, only a small number of companies are eligible for a switch to REIT status, such as Polis Immobilien AG or Alstria Office AG. HSH Nordbank expects a large number of existing real estate corporations that are looking into the possibility of converting to REIT status to decide not to switch. This is due to the following reasons:

- their entrepreneurial flexibility is curtailed, especially for foreign and service operations and for financing against the backdrop of the current business models; - the corporate tax reform. As corporate taxes are reduced, the tax burden on corporations will fall in any event; - loss carryforwards can, in practice, not be utilized following a switch, and reserves are fully taxable pursuant to paragraph 6 b) of the German Income Tax Act following a switch. Many real estate corporations today take advantage of the option afforded by § 6 b) of the Income Tax Act to avoid the taxation of gains on the disposal of real estate
by acquiring new properties. These reserves would be written back in the event of a switch to a REIT.

The majority of REITs will be newly established Rather than converting their own status, a more interesting, less complicated and thus faster option for real estate corporations is to issue subsidiaries as G-REITs. This is what IVG Immobilien, DIC Asset and TAG, to name but a new, have plans to do. These subsidiaries are not weighed down by group operations and tax problems and are able to focus on investments in commercial real estate in Germany.

These REIT subsidiaries would find it easier to acquire corporate real estate, as the sellers are eligible for the reduced exit tax rate. Several initiators of closed-end funds, such as IC Immobilien AG and Hannover Leasing, have also announced plans to issue REITs. Opportunity for conventional property stocks The large number of statutory restrictions to which REITs are subject, such as those imposed on the borrowing of funds, on trading in real estate and other services also provide opportunities for conventional property companies that is not transparent from a tax aspect. Over the past three years, the growing interest in real estate equities has led to a threefold increase in market capitalization of stocks listed in the German Property Stock Index (DIMAX). HSH Nordbank expects this growth to slowed down in the wake of the launch of REITs.

“Further growth of the segment involving conventional real estate corporations is suggested by the fact that a large number of real estate corporations plan not to switch to REIT status in order to continue their business strategy without their stockholders suffering any tax drawbacks," commented Claudio Lagemann, Head of HSH Nordbank AG’s real estate business.

Many property stocks trading at high multiples Over the past three years, the average annual performance of property stocks including dividend has totaled approx. 30 percent worldwide, while the figure for Germany is even higher. As prices have soared, however, volatility and investment risk have also risen. The main reasons for this strong performance are the recovery of real estate markets in the wake of the uptrend in the economy along with historically low interest rates.

Moreover, the launch of REITs in France and corresponding plans in the U.K. and Germany have exerted a favorable impact in Europe. These new underlying conditions have strengthened the sector of listed property stocks.

“A good performance similar to that seen over the past three years cannot be expected, however, as the uptrend on the real estate market and the launch of REITs has largely been priced in already,” according to the authors of the study. By contrast, individual stocks do provide some earnings potential. A premium on the net asset value is justified in some cases, and their stock price is below fair value. Investors have to be far more selective with respect to property stocks this year than was the case in the past few years, when the entire sector enjoyed huge gains.

Alternative finance tools So far, German real estate corporations have mostly resorted to traditional bank finance. As their size grows, however, they are increasingly resorting to forms of financing with borrowed funds that are geared to the capital market. In the medium term, HSH Nordbank expects German real estate corporations to issue an increasing number of conventional listed bonds as well as convertible and hybrid bonds to supplement traditional financing. “We have been observing this trend among other large European real estate corporations for some time now. Medium term, we also expect German corporations to use capital-market finance tools to an increasing extent,” said Lagemann.

HSH Nordbank AG is a strong regional bank in Northern Europe with total assets of € 200 billion. Some 4,400 of the bank’s employees provide corporate and high net-worth clients around the globe with premium bank products and services. In its core region of Hamburg and Schleswig-Holstein, it is the market leader in the corporate customer segment. HSH Nordbank is an acknowledged partner of the capital markets and international sector specialist. Its main focus is on transportation and real estate. In fact, HSH Nordbank is the world’s largest provider of ship finance and covers the entire value chain in the transportation segment. In the area of real estate, HSH Nordbank is one of the strongest banks in Germany, acting as a provider of services relating to all aspects of real estate. For more information please visit our website at www.hsh-nordbank.com.