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Deutsche EuroShop - Annual Report 2006


Report on expected developments

The German economy grew by 2.7 % in the past year. Fears that the value added tax increase by three percentage points at 1 January 2007 could derail this trend have proven to be unfounded to date. Additionally, there have been no significant price increases to date. Although growth is expected to be slow during the first quarter of 2007 as a result of pull-forward effects in capital expenditure and private spending in 2006, the federal government expects economic development to remain stable and is anticipating that the economy will grow by approximately 1.7 % in 2007 overall.

International investors have been anticipating such a development for some time and expect this to positively impact their industrial and real estate investments in Germany.

Economic forecasts for 2007

Forecasts for 2007 in Germany by German economic research institutes

SVR = German Council of Economic Advisors
OECD = Organisation for Economic Cooperation and Development
ifo = ifo Institute for Economic Research
DIW = German Institute for Economic Research
IWH = Halle Institute for Economic Research
IfW = Kiel Institute for World Economics
RWI = RWI Essen
EC = European Commission
GDP, real 1.8 2.6 1.9 2.2 1.4 2.8 2.3 1.8

Our investment focus remains on Germany, our most important market. In addition, we continue to pursue our previous strategy of the long-term, conservative holding and letting of a portfolio of shopping centers.

Three shopping centers to open in 2007 and 2008

The construction measures for our three shopping centers Stadt-Galerie Hameln, Stadt-Galerie Passau and Galeria Baltycka in Gdansk, Poland are progressing as planned. Galeria Baltycka is already fully let and will open in autumn 2007. The property should therefore at least partially offset reductions in rental income in financial year 2007 resulting from the sale of our French and Italian shopping centers. The opening of Stadt-Galerie Hameln in spring 2008 and Stadt-Galerie Passau in fall 2008 will also contribute to the Deutsche EuroShop Group’s results of operations.

The two shopping centers are over 75% and 70% let, respectively, although it is still approximately twelve months and one and a half years, respectively, until they open their doors. In addition, financial year 2008 will be the first full year of operation for Galeria Baltycka - which will lead to a corresponding increase in rental income to our Group.

Price increases impede portfolio expansion

We aim to expand our portfolio by €100 million to €150 million on average per year. Given the sustained investor interest in shopping centers in Germany and Europe, we are anticipating further price increases for existing properties and new construction projects. In addition, over the past few months we have seen significant price increases for construction services, which are further increasing price expectations among sellers of new construction projects. For this reason, our expected returns of more than 5% on new investments are almost impossible to achieve.

After having invested or entered into investment obligations totalling approximately €410 million in 2005 and 2006, we are relatively cautious regarding investments in further shopping centers at this time. We will, however, take advantage of favourable opportunities.

The expansion of the Main-Taunus-Zentrum by approximately 13,000 m2 of leasable space could prove to be an attractive investment opportunity. Provisional planning permission has already been granted. We are currently working at full steam on the planning permission application. We do not anticipate this to be completed before the end of this year, however.

Agreed transactions are the foundation for revenue and earnings planning

The Deutsche EuroShop Group’s revenue and earnings planning for 2007 and 2008 does not include the purchase or sale of any properties. Likewise, the results of the annual appraisal of our shopping centers and exchange rate factors are not included in our planning, since they are not foreseeable. It must be borne in mind that, in 2006, the Company sold two shopping centers that no longer contribute rental income to revenue and earnings. Forecasts about the future revenue and earnings situation of our Group are thus based on:

  1. the development of revenue and earnings of the existing shopping centers,
  2. the construction activities described above for the shopping centers in Gdansk, Hameln and Passau as well as the resulting revenue and earnings performances following their opening, and the construction activities for the Main-Taunus-Zentrum and its effects.

2007 revenue similar to previous year, 2008 revenue expected to rise approximately 18%

We anticipate revenue in financial year 2007 to remain on a level with the previous year (between €92 million and €94 million) as a result of the sales in the previous year. We expect that the Galeria Baltycka, which will open in fall 2007, will be able to partially offset the revenue losses caused by the sale of the two shopping centers (4.2% of 2006 revenue).

Beginning in 2008, the shopping centers in Hameln and Passau will contribute to revenue and earnings for the first time. In addition, Galeria Baltycka will be in operation for its first full financial year. We therefore expect revenue to climb to between €108 million and €112 million in 2008.

Clear earnings growth anticipated in 2008

Adjusted for one-time proceeds from the disposal of the two shopping centers, earnings before income and taxes (EBIT) amounted to €73.6 million in 2006. According to our forecast, EBIT will amount to between €71 million and €73 million in the current financial year. In 2008, once all properties currently under construction have opened, this is expected to increase to between €87 million and €90 million.

Earnings before tax (EBT) adjusted for proceeds from disposals and excluding measurement gains and losses amounted to €32.7 million during the year under review. We expect the corresponding figure to be between €30 million and €32 million for financial year 2007 and between €42 million and €44 million for financial year 2008.

Hamburg, March 2007

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