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Deutsche EuroShop - Annual Report 2006


Significant Accounting Policies

Investment property

Under IAS 40, investment property must initially be measured at cost at the date of acquisition. Subsequently, all properties must be measured at their fair value, and the annual net changes recognised in income in net finance costs. Investment property is property held to earn rentals or for capital appreciation. Under IAS 40, investment property measured using the fair value model is not depreciated.

The fair values of the property in the period under review were determined by recognised independent external appraisers using the discounted cash flow method. Fair value is the amount that a purchaser would be willing to pay to the seller at the time the property is valued. The purchaser would also be required to bear additional transaction costs, such as real estate transfer tax or estate agent’s fees.

The fair values correspond to the present value of future net income discounted back to the reporting date. Net income is the rental income from the property less the management costs of administration, operation, maintenance and rent loss. In the case of the expert appraisals prepared in 2006, average management costs of 13.6% (previous year: 13.5%) were applied.

The average interest rate of 6.44% (previous year: 6.54%) used for discounting future net income is based on the expected yield of 10-year bunds, which was forecast by the experts at an average of 4.73% (previous year: 4.70%) compared with the current 3.93% (as at 31 December 2006). Risk premiums for the individual properties are added to this. The level of the risk premium depends on trends for a large number of individual indicators. Assessment of regional economic development plays a decisive role here.

This assessment includes a long-term forecast of population development, the level of employment and the associated effects on retail demand, a forecast of the development of the competitive environment and also of construction activity. The experts applied average risk premiums of 1.71% (previous year: 1.84%).

On the basis of the expert appraisals, the real estate portfolio has a theoretical initial net yield of 5.39% for the 2007 financial year, compared with 5.46% in the previous year.

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