DES GB2015 Englisch

Online retail advanced by 12% to €41.7 billion in 2015. Online sales now account for about 9% of all retail volume, and the trend is up. The German Retail Federation anticipates another substantial 11% rise in 2016 to €46.3 billion. As such, the dynamic trend of recent years con- tinued in 2015. One in two Germans now regularly shop online. How- ever, their behaviour varies considerably from sector to sector. Many customers now prefer to shop online for books, entertainment elec- tronics and telecommunications. Medication, jewellery and watches, and groceries still tend to be bought in person. The rising share of total German retail sales accounted for by online business is mainly causing increased competition for small and me- dium-sized bricks-and-mortar retailers. This trend is linked to the increasing interconnection between the offline and online worlds, and to the emphasis on leisure, experience and place-to-meet aspects when rethinking the design of shopping centers. Improving personalised advice and contact when shopping is another key component. Deutsche EuroShop AG is not wholly immune to longer-term trends such as the rise of online retail for physical stores. Past experience has demonstrated that by locating our shopping centers in prime locations and by ensuring broad sector diversification within the centers, we can achieve commercial success even during periods of stagnation.We minimise market and sector risks by closely monitoring the market, by adjusting the mix of tenants and sectors at our centers on an ongoing, individualised basis, and by concluding long-term con- tracts with tenants with strong credit ratings in all retail segments. Risk of rent loss It is possible that tenants may be unable to meet their obligations under existing leases or that the previous rents may no longer be obtained in the case of new and follow-on rentals. As a result, income would turn out to be less than budgeted, and distributions to shareholders might have to be reduced. If the rental income for a property company is no longer sufficient to meet its interest and repayment obligations, this could lead to the loss of the entire property. Tenants’ revenue trends and the accounts receivable trends are regularly analysed in this re- spect, and measures to find new tenants are initiated at an early stage if there are signs of any negative developments. The tenants generally provide corresponding security deposits against the risk of default. In addition, write-downs are recognised in the accounts in individual cases. Cost risk Expenditure on current maintenance or investment projects can turn out higher than budgeted on the basis of experience.We minimise risks from cost overruns in current investment projects by taking cost mod- els for all identifiable risks into account in our calculations as a pre- cautionary measure at the planning stage. In addition, construction contracts are normally only awarded on a fixed-price basis to general contractors with strong credit ratings. During the building phase, pro- fessional project management is assured by the companies we com- mission. However, it is impossible to completely avoid cost overruns in ongoing construction projects in individual cases. Valuation risk The value of a property is essentially determined by its capitalised earn- ings value, which in turn depends on factors such as the level of annual rental income, the underlying location risk, the evolution of long-term capital market rates and the general condition of the property. A re- duction in rental income or a deterioration in the location risk generally has a downward effect on the capitalised earnings value.What is more, the appreciation of property values is also significantly influenced by a variety of macroeconomic or regional factors as well as developments specific to the property that cannot be foreseen or influenced by the Company. The factors described are taken into account in the annual market valuations of our portfolio properties by independent apprais- ers. Changes in value are recognised in the income statement of the consolidated financial statements in accordance with the requirements of IAS 40 and may thus increase the volatility of the consolidated profit. Currency risk Deutsche EuroShop AG’s activities are limited exclusively to the Eu- ropean economic area. Manageable currency risks arise in the case of the Eastern European investment companies. These risks are not hedged because this is purely an issue of translation at the reporting date and is therefore not associated with any cash flow risks. The cur- rency risk from operations is largely hedged by linking rents and loan liabilities to the euro. A risk could arise if the Hungarian forint or the Polish zloty were to plummet against the euro such that tenants were no longer able to pay what would then be considerably higher rents denominated in a foreign currency. Financing and interest rate risks We minimise the interest rate risk for new property financing as far as possible by entering into long-term loans with fixed-interest periods of up to 20 years. There is a risk that refinancing may only be available at higher interest rates than before. The interest rate level is materially determined by the underlying macroeconomic and political conditions and therefore cannot be predicted by us. MANAGEMENT REPORT 131

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