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MARKET AND SECTOR RISKS There has been a structural change in the retail trade in recent years, caused by shifts in demand patterns and new product formats. The greatest success has been enjoyed by large-scale retail operations that are able to offer customers a wide range of goods. Thanks to its busi- ness model, Deutsche EuroShop benefits from this development, especially as the experience aspect of shopping has gained in impor- tance and a trend towards shopping as a recreational and lifestyle activity has become apparent. We regard this development as more of an opportunity than a risk, as a decline in consumer spending at the macroeconomic level would not necessarily have a negative impact on retailers’ revenue in our shopping centers. Particular attention should, however, be given to the online retail sector. Revenue generated by online business rose 13% to €29.5 bil- lion in 2012. The Handelsverband Deutschland (HDE – German Retail Association) expects revenue to grow by another 12% in 2013. Along with these changes in distribution channels, tenants are also expected to increasingly switch to so-called multi-channel concepts that allow the integration of online and offline channels (Internet and stationary retailing). Revenue in the retail sector saw nominal growth of 1.9% in 2012 (-0.3% in real terms) and thus fell short of the previous year (+2.7% in nominal terms, +1.1% in real terms) The HDE expects revenue to grow by 1.0% to €432.1 billion. We also believe that domestic demand will remain strong. We minimise market and sector risks by closely monitoring the mar- ket and by concluding long-term contracts 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 share- holders 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. Ten- ants’ revenue trends and the accounts receivable trends are regularly analysed in this respect, and measures to find new tenants are initi- ated at an early stage if there are signs of any negative developments. The tenants furnish 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 costing in all identifiable risks in the planning stage as a precautionary meas- ure. In addition, construction contracts are only awarded on a fixed- price basis to general contractors with strong credit ratings. During the building phase, professional project management is assured by the companies we commission. However, it is impossible to com- pletely avoid cost overruns in ongoing construction projects in indi- vidual cases. VALUATION RISK The value of a property is essentially determined by its capitalised earnings 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 prop- erty. A reduction in rental income or a deterioration of the location risk necessarily involves a lower capitalised earnings value. The appre- ciation of the properties is therefore also significantly influenced by a variety of macroeconomic or regional factors as well as developments specific to the property that can neither be foreseen nor influenced by the Company. The factors described are taken into account in the annual market valuations of our portfolio properties by independ- ent appraisers. Changes in value are recognised in the income state- ment of the consolidated financial statements in accordance with the requirements of IAS 40 and may thus increase the volatility of the consolidated profit. However, this generally has no effect on the Group’s solvency. CURRENCY RISK Deutsche EuroShop AG’s activities are limited exclusively to the Euro- pean economic area. Manageable currency risks arise in the case of the Eastern European investees. These risks are not hedged because this is purely an issue of translation at the reporting date and is there- fore not associated with any cash flow risks. The currency 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 denomi- nated in foreign currency. { 135 } DES ANNUAL REPORT 2012 GROUP MANAGEMENT REPORT Risks and opportunities management, internal control system

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